Loans and Leases and the Allowance for Loan and Lease Losses

Loans and Leases

The Company’s loan and lease portfolio was comprised of the following as of September 30, 2015 and December 31, 2014:



(dollars in thousands)	September 30, 2015		December 31, 2014
Commercial
Commercial and Industrial	$	1,169,817	$	1,055,243
Commercial Mortgage	1,622,119		1,437,513
Construction	129,254		109,183
Lease Financing	202,055		226,189
Total Commercial	3,123,245		2,828,128
Consumer
Residential Mortgage	2,875,605		2,571,090
Home Equity	993,817		866,688
Automobile	367,640		323,848
Other ¹	329,465		307,835
Total Consumer	4,566,527		4,069,461
Total Loans and Leases	$	7,689,772	$	6,897,589


¹	Comprised of other revolving credit, installment, and lease financing.

The majority of the Company's lending activity is with customers located in the State of Hawaii. A substantial portion of the Company's real estate loans are secured by real estate in Hawaii.

Net gains related to sales of residential mortgage loans, recorded as a component of mortgage banking income were $1.8 million and $0.3 million for the three months ended September 30, 2015 and 2014, respectively, and $4.1 million and $1.6 million for the nine months ended September 30, 2015 and 2014, respectively.

Allowance for Loan and Lease Losses (the “Allowance”)

The following presents by portfolio segment, the activity in the Allowance for the three and nine months ended September 30, 2015 and 2014. The following also presents by portfolio segment, the balance in the Allowance disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans and leases as of September 30, 2015 and 2014.



(dollars in thousands)	Commercial			Consumer			Total
Three Months Ended September 30, 2015
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	67,005		$	39,001		$	106,006
Loans and Leases Charged-Off	(160		)	(4,233		)	(4,393		)
Recoveries on Loans and Leases Previously Charged-Off	504			1,921			2,425
Net Loans and Leases Recovered (Charged-Off)	344			(2,312		)	(1,968		)
Provision for Credit Losses	(2,708		)	2,708			—
Balance at End of Period	$	64,641		$	39,397		$	104,038
Nine Months Ended September 30, 2015
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	64,551		$	44,137		$	108,688
Loans and Leases Charged-Off	(650		)	(11,327		)	(11,977		)
Recoveries on Loans and Leases Previously Charged-Off	1,726			5,601			7,327
Net Loans and Leases Recovered (Charged-Off)	1,076			(5,726		)	(4,650		)
Provision for Credit Losses	(986		)	986			—
Balance at End of Period	$	64,641		$	39,397		$	104,038
As of September 30, 2015
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	1,977		$	3,336		$	5,313
Collectively Evaluated for Impairment	62,664			36,061			98,725
Total	$	64,641		$	39,397		$	104,038
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	29,016		$	39,013		$	68,029
Collectively Evaluated for Impairment	3,094,229			4,527,514			7,621,743
Total	$	3,123,245		$	4,566,527		$	7,689,772

Three Months Ended September 30, 2014
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	71,886		$	41,952		$	113,838
Loans and Leases Charged-Off	(229		)	(3,432		)	(3,661		)
Recoveries on Loans and Leases Previously Charged-Off	1,202			1,648			2,850
Net Loans and Leases Recovered (Charged-Off)	973			(1,784		)	(811		)
Provision for Credit Losses	(6,619		)	3,954			(2,665		)
Balance at End of Period	$	66,240		$	44,122		$	110,362
Nine Months Ended September 30, 2014
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	71,446		$	44,008		$	115,454
Loans and Leases Charged-Off	(1,863		)	(9,833		)	(11,696		)
Recoveries on Loans and Leases Previously Charged-Off	4,299			7,169			11,468
Net Loans and Leases Recovered (Charged-Off)	2,436			(2,664		)	(228		)
Provision for Credit Losses	(7,642		)	2,778			(4,864		)
Balance at End of Period	$	66,240		$	44,122		$	110,362
As of September 30, 2014
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	2,449		$	3,653		$	6,102
Collectively Evaluated for Impairment	63,791			40,469			104,260
Total	$	66,240		$	44,122		$	110,362
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	26,061		$	39,886		$	65,947
Collectively Evaluated for Impairment	2,702,863			3,837,540			6,540,403
Total	$	2,728,924		$	3,877,426		$	6,606,350

Credit Quality Indicators

The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company uses an internal credit risk rating system that categorizes loans and leases into pass, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans and leases that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans and leases to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans and leases that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk-rated and monitored collectively. These are typically loans and leases to individuals in the classes which comprise the consumer portfolio segment.

The following are the definitions of the Company’s credit quality indicators:


Pass:	Loans and leases in all classes within the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan or lease agreement. Management believes that there is a low likelihood of loss related to those loans and leases that are considered pass.

Special Mention:

Loans and leases in the classes within the commercial portfolio segment that have potential weaknesses that deserve management’s close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease. The special mention credit quality indicator is not used for classes of loans and leases that are included in the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans and leases that are considered special mention.

Classified:

Loans and leases in the classes within the commercial portfolio segment that are inadequately protected by the sound worth and paying capacity of the borrower or of the collateral pledged, if any. Classified loans and leases are also those in the classes within the consumer portfolio segment that are past due 90 days or more as to principal or interest. Residential mortgage loans that are past due 90 days or more as to principal or interest may be considered pass if the Company is in the process of collection and the current loan-to-value ratio is 60% or less. Home equity loans that are past due 90 days or more as to principal or interest may be considered pass if the Company is in the process of collection, the first mortgage is with the Company, and the current combined loan-to-value ratio is 60% or less. Residential mortgage and home equity loans may be current as to principal and interest, but may be considered classified for a period of generally up to six months following a loan modification. Following a period of demonstrated performance in accordance with the modified contractual terms, the loan may be removed from classified status. Management believes that there is a distinct possibility that the Company will sustain some loss if the deficiencies related to classified loans and leases are not corrected in a timely manner.

The Company’s credit quality indicators are periodically updated on a case-by-case basis. The following presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of September 30, 2015 and December 31, 2014.



	September 30, 2015
(dollars in thousands)	Commercial and Industrial		Commercial Mortgage		Construction		Lease Financing		Total Commercial
Pass	$	1,122,454	$	1,551,159	$	127,541	$	201,473	$	3,002,627
Special Mention	20,726		31,145		88		85		52,044
Classified	26,637		39,815		1,625		497		68,574
Total	$	1,169,817	$	1,622,119	$	129,254	$	202,055	$	3,123,245

(dollars in thousands)	Residential Mortgage		Home Equity		Automobile		Other ¹		Total Consumer
Pass	$	2,859,438	$	989,433	$	367,009	$	328,873	$	4,544,753
Classified	16,167		4,384		631		592		21,774
Total	$	2,875,605	$	993,817	$	367,640	$	329,465	$	4,566,527
Total Recorded Investment in Loans and Leases									$	7,689,772



	December 31, 2014
(dollars in thousands)	Commercial and Industrial		Commercial Mortgage		Construction		Lease Financing		Total Commercial
Pass	$	1,001,474	$	1,358,812	$	107,381	$	225,783	$	2,693,450
Special Mention	17,364		45,082		—		17		62,463
Classified	36,405		33,619		1,802		389		72,215
Total	$	1,055,243	$	1,437,513	$	109,183	$	226,189	$	2,828,128

(dollars in thousands)	Residential Mortgage		Home Equity		Automobile		Other¹		Total Consumer
Pass	$	2,556,140	$	862,258	$	323,232	$	307,123	$	4,048,753
Classified	14,950		4,430		616		712		20,708
Total	$	2,571,090	$	866,688	$	323,848	$	307,835	$	4,069,461
Total Recorded Investment in Loans and Leases									$	6,897,589


¹	Comprised of other revolving credit, installment, and lease financing.

Aging Analysis

The following presents by class, an aging analysis of the Company’s loan and lease portfolio as of September 30, 2015 and December 31, 2014.



(dollars in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		Past Due 90 Days or More		Non-Accrual		Total Past Due and Non-Accrual		Current		Total Loans and Leases		Non-Accrual Loans and Leases that are Current ²
As of September 30, 2015
Commercial
Commercial and Industrial	$	4,830	$	1,361	$	—	$	8,532	$	14,723	$	1,155,094	$	1,169,817	$	571
Commercial Mortgage	—		29		—		1,058		1,087		1,621,032		1,622,119		833
Construction	—		—		—		—		—		129,254		129,254		—
Lease Financing	—		—		—		—		—		202,055		202,055		—
Total Commercial	4,830		1,390		—		9,590		15,810		3,107,435		3,123,245		1,404
Consumer
Residential Mortgage	6,023		1,526		5,060		14,749		27,358		2,848,247		2,875,605		2,419
Home Equity	2,331		2,345		1,396		3,814		9,886		983,931		993,817		1,683
Automobile	7,827		1,612		631		—		10,070		357,570		367,640		—
Other ¹	2,273		1,454		1,058		—		4,785		324,680		329,465		—
Total Consumer	18,454		6,937		8,145		18,563		52,099		4,514,428		4,566,527		4,102
Total	$	23,284	$	8,327	$	8,145	$	28,153	$	67,909	$	7,621,863	$	7,689,772	$	5,506

As of December 31, 2014
Commercial
Commercial and Industrial	$	992	$	356	$	2	$	9,088	$	10,438	$	1,044,805	$	1,055,243	$	7,819
Commercial Mortgage	458		—		—		745		1,203		1,436,310		1,437,513		—
Construction	—		—		—		—		—		109,183		109,183		—
Lease Financing	—		—		—		—		—		226,189		226,189		—
Total Commercial	1,450		356		2		9,833		11,641		2,816,487		2,828,128		7,819
Consumer
Residential Mortgage	4,907		2,107		4,506		14,841		26,361		2,544,729		2,571,090		632
Home Equity	3,461		2,661		2,596		3,097		11,815		854,873		866,688		375
Automobile	7,862		1,483		616		—		9,961		313,887		323,848		—
Other ¹	2,416		1,049		941		—		4,406		303,429		307,835		—
Total Consumer	18,646		7,300		8,659		17,938		52,543		4,016,918		4,069,461		1,007
Total	$	20,096	$	7,656	$	8,661	$	27,771	$	64,184	$	6,833,405	$	6,897,589	$	8,826


¹	Comprised of other revolving credit, installment, and lease financing.


²	Represents non-accrual loans that are not past due 30 days or more; however, full payment of principal and interest is still not expected.

Impaired Loans

The following presents by class, information related to impaired loans as of September 30, 2015 and December 31, 2014.



(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance for Loan Losses
September 30, 2015
Impaired Loans with No Related Allowance Recorded:
Commercial
Commercial and Industrial	$	14,131	$	24,605	$	—
Commercial Mortgage	7,337		7,337		—
Construction	1,626		1,626		—
Total Commercial	23,094		33,568		—
Total Impaired Loans with No Related Allowance Recorded	$	23,094	$	33,568	$	—

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	5,922	$	12,523	$	1,977
Total Commercial	5,922		12,523		1,977
Consumer
Residential Mortgage	30,253		36,046		3,169
Home Equity	1,191		1,191		13
Automobile	6,238		6,238		117
Other ¹	1,331		1,331		37
Total Consumer	39,013		44,806		3,336
Total Impaired Loans with an Allowance Recorded	$	44,935	$	57,329	$	5,313

Impaired Loans:
Commercial	$	29,016	$	46,091	$	1,977
Consumer	39,013		44,806		3,336
Total Impaired Loans	$	68,029	$	90,897	$	5,313

December 31, 2014
Impaired Loans with No Related Allowance Recorded:
Commercial
Commercial and Industrial	$	9,763	$	15,013	$	—
Commercial Mortgage	6,480		6,480		—
Construction	1,689		1,689		—
Total Commercial	17,932		23,182		—
Total Impaired Loans with No Related Allowance Recorded	$	17,932	$	23,182	$	—

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	7,184	$	13,784	$	2,387
Total Commercial	7,184		13,784		2,387
Consumer
Residential Mortgage	32,331		37,989		3,445
Home Equity	1,012		1,012		16
Automobile	5,375		5,375		66
Other ¹	913		913		34
Total Consumer	39,631		45,289		3,561
Total Impaired Loans with an Allowance Recorded	$	46,815	$	59,073	$	5,948

Impaired Loans:
Commercial	$	25,116	$	36,966	$	2,387
Consumer	39,631		45,289		3,561
Total Impaired Loans	$	64,747	$	82,255	$	5,948

¹ Comprised of other revolving credit and installment financing.

The following presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2015 and 2014.



	Three Months Ended September 30, 2015				Three Months Ended September 30, 2014
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired Loans with No Related Allowance Recorded:
Commercial
Commercial and Industrial	$	13,368	$	96	$	10,161	$	96
Commercial Mortgage	7,155		67		7,046		56
Construction	1,637		26		2,024		28
Total Commercial	22,160		189		19,231		180
Consumer
Other ¹	—		—		9		—
Total Consumer	—		—		9		—
Total Impaired Loans with No Related Allowance Recorded	$	22,160	$	189	$	19,240	$	180

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	6,105	$	24	$	7,345	$	25
Total Commercial	6,105		24		7,345		25
Consumer
Residential Mortgage	30,719		265		31,989		269
Home Equity	1,191		9		1,029		13
Automobile	6,013		104		5,345		114
Other ¹	1,218		28		576		12
Total Consumer	39,141		406		38,939		408
Total Impaired Loans with an Allowance Recorded	$	45,246	$	430	$	46,284	$	433

Impaired Loans:
Commercial	$	28,265	$	213	$	26,576	$	205
Consumer	39,141		406		38,948		408
Total Impaired Loans	$	67,406	$	619	$	65,524	$	613

	Nine Months Ended September 30, 2015				Nine Months Ended September 30, 2014
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired Loans with No Related Allowance Recorded:
Commercial
Commercial and Industrial	$	12,074	$	304	$	11,518	$	254
Commercial Mortgage	6,799		198		9,041		167
Construction	1,658		80		1,540		66
Total Commercial	20,531		582		22,099		487
Consumer
Other ¹	—		—		7		—
Total Consumer	—		—		7		—
Total Impaired Loans with No Related Allowance Recorded	$	20,531	$	582	$	22,106	$	487

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	6,401	$	78	$	8,260	$	80
Total Commercial	6,401		78		8,260		80
Consumer
Residential Mortgage	31,374		796		31,915		749
Home Equity	1,149		28		952		27
Automobile	5,737		319		5,235		327
Other ¹	1,082		77		471		30
Total Consumer	39,342		1,220		38,573		1,133
Total Impaired Loans with an Allowance Recorded	$	45,743	$	1,298	$	46,833	$	1,213

Impaired Loans:
Commercial	$	26,932	$	660	$	30,359	$	567
Consumer	39,342		1,220		38,580		1,133
Total Impaired Loans	$	66,274	$	1,880	$	68,939	$	1,700


¹	Comprised of other revolving credit and installment financing.

For the three and nine months ended September 30, 2015 and 2014, the amounts of interest income recognized by the Company within the periods that the loans were impaired were primarily related to loans modified in a troubled debt restructuring that remained on accrual status. For the three and nine months ended September 30, 2015 and 2014, the amount of interest income recognized using a cash-basis method of accounting during the periods that the loans were impaired was not material.

Modifications

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. Loans modified in a TDR were $66.3 million and $60.2 million as of September 30, 2015 and December 31, 2014, respectively. There were no commitments to lend additional funds on loans modified in a TDR as of September 30, 2015 and December 31, 2014.

The Company offers various types of concessions when modifying a loan or lease. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a co-borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. Residential mortgage loans modified in a TDR generally include a lower interest rate and the loan being fully amortized for up to 40 years from the modification effective date. In some cases, the Company may forbear a portion of the unpaid principal balance with a balloon payment due upon maturity or pay-off of the loan. Land loans are also included in the class of residential mortgage loans. Land loans are typically structured as interest-only monthly payments with a balloon payment due at maturity. Land loan modifications usually involve extending the interest-only monthly payments up to an additional five years with a balloon payment due at maturity, or re-amortizing the remaining balance over a period up to 360 months. Interest rates are not changed for land loan modifications. Home equity modifications are made infrequently and uniquely designed to meet the specific needs of each borrower. Automobile loans modified in a TDR are primarily comprised of loans where the Company has lowered monthly payments by extending the term.

Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR may have the financial effect of increasing the specific Allowance associated with the loan. An Allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates.

The following presents by class, information related to loans modified in a TDR during the three and nine months ended September 30, 2015 and 2014.



	Loans Modified as a TDR for the Three Months Ended September 30, 2015							Loans Modified as a TDR for the Three Months Ended September 30, 2014
			Recorded			Increase in				Recorded			Increase in
Troubled Debt Restructurings	Number of		Investment			Allowance		Number of		Investment			Allowance
(dollars in thousands)	Contracts	(as of period end)¹			(as of period end)			Contracts	(as of period end)¹			(as of period end)
Commercial
Commercial and Industrial	13		$	6,551		$	—	4		$	1,203		$	155
Total Commercial	13		6,551			—		4		1,203			155
Consumer
Residential Mortgage	2		749			—		6		1,581			56
Home Equity	1		168			2		—		—			—
Automobile	47		1,172			22		35		774			10
Other ²	50		344			9		35		255			8
Total Consumer	100		2,433			33		76		2,610			74
Total	113		$	8,984		$	33	80		$	3,813		$	229

	Loans Modified as a TDR for the Nine Months Ended September 30, 2015							Loans Modified as a TDR for the Nine Months Ended September 30, 2014
			Recorded			Increase in				Recorded			Increase in
Troubled Debt Restructurings	Number of		Investment			Allowance		Number of		Investment			Allowance
(dollars in thousands)	Contracts	(as of period end)¹			(as of period end)			Contracts	(as of period end)¹			(as of period end)
Commercial
Commercial and Industrial	27		$	8,438		$	4	16		$	5,416		$	156
Commercial Mortgage	2		1,179			—		1		332			—
Total Commercial	29		9,617			4		17		5,748			156
Consumer
Residential Mortgage	12		4,211			84		15		4,886			183
Home Equity	3		370			4		2		158			3
Automobile	119		2,723			51		112		2,213			29
Other ²	102		702			20		53		414			13
Total Consumer	236		8,006			159		182		7,671			228
Total	265		$	17,623		$	163	199		$	13,419		$	384


¹	The period end balances reflect all paydowns and charge-offs since the modification date. TDRs fully paid-off, charged-off, or foreclosed upon by period end are not included.


²	Comprised of other revolving credit and installment financing.

The following presents by class, all loans modified in a TDR that defaulted during the three and nine months ended September 30, 2015 and 2014, and within twelve months of their modification date. A TDR is considered to be in default once it becomes 60 days or more past due following a modification.



	Three Months Ended September 30, 2015			Three Months Ended September 30, 2014
TDRs that Defaulted During the Period,		Recorded		Recorded
Within Twelve Months of their Modification Date	Number of	Investment		Number of	Investment
(dollars in thousands)	Contracts	(as of period end)¹		Contracts	(as of period end)¹
Commercial
Commercial and Industrial	—	$	—	1	$	22
Total Commercial	—	—		1	22

Consumer
Residential Mortgage	2	1,069		—	—
Automobile	3	52		5	64
Other ²	10	56		1	16
Total Consumer	15	1,177		6	80
Total	15	$	1,177	7	$	102

	Nine Months Ended September 30, 2015			Nine Months Ended September 30, 2014
TDRs that Defaulted During the Period,		Recorded		Recorded
Within Twelve Months of their Modification Date	Number of	Investment		Number of	Investment
(dollars in thousands)	Contracts	(as of period end)¹		Contracts	(as of period end)¹
Commercial
Commercial and Industrial	1	$	4,341	3	$	723
Total Commercial	1	4,341		3	723

Consumer
Residential Mortgage	3	1,374		2	509
Automobile	6	108		7	110
Other ²	19	98		3	27
Total Consumer	28	1,580		12	646
Total	29	$	5,921	15	$	1,369


¹	The period end balances reflect all paydowns and charge-offs since the modification date. TDRs fully paid-off, charged-off, or foreclosed upon by period end are not included.


²	Comprised of other revolving credit and installment financing.

Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The specific Allowance associated with the loan may be increased, adjustments may be made in the allocation of the Allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $7.0 million as of September 30, 2015.