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 March 31, 2017 and December 31, 2016:



(dollars in thousands)	March 31, 2017		December 31, 2016
Commercial
Commercial and Industrial	$	1,250,006	$	1,249,791
Commercial Mortgage	1,909,064		1,889,551
Construction	262,660		270,018
Lease Financing	208,765		208,332
Total Commercial	3,630,495		3,617,692
Consumer
Residential Mortgage	3,224,206		3,163,073
Home Equity	1,411,489		1,334,163
Automobile	468,078		454,333
Other ¹	379,541		380,524
Total Consumer	5,483,314		5,332,093
Total Loans and Leases	$	9,113,809	$	8,949,785


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 $1.3 million and $1.8 million for the three months ended March 31, 2017 and 2016, respectively.

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

The following presents by portfolio segment, the activity in the Allowance for the three months ended March 31, 2017 and 2016. 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 March 31, 2017 and 2016.



(dollars in thousands)	Commercial			Consumer			Total
Three Months Ended March 31, 2017
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	65,680		$	38,593		$	104,273
Loans and Leases Charged-Off	(174		)	(5,530		)	(5,704		)
Recoveries on Loans and Leases Previously Charged-Off	336			1,759			2,095
Net Loans and Leases Recovered (Charged-Off)	162			(3,771		)	(3,609		)
Provision for Credit Losses	1,051			3,349			4,400
Balance at End of Period	$	66,893		$	38,171		$	105,064
As of March 31, 2017
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	38		$	3,912		$	3,950
Collectively Evaluated for Impairment	66,855			34,259			101,114
Total	$	66,893		$	38,171		$	105,064
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	20,902		$	39,429		$	60,331
Collectively Evaluated for Impairment	3,609,593			5,443,885			9,053,478
Total	$	3,630,495		$	5,483,314		$	9,113,809

Three Months Ended March 31, 2016
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	60,714		$	42,166		$	102,880
Loans and Leases Charged-Off	(257		)	(4,630		)	(4,887		)
Recoveries on Loans and Leases Previously Charged-Off	6,905			1,779			8,684
Net Loans and Leases Recovered (Charged-Off)	6,648			(2,851		)	3,797
Provision for Credit Losses	(5,552		)	3,552			(2,000		)
Balance at End of Period	$	61,810		$	42,867		$	104,677
As of March 31, 2016
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	157		$	3,406		$	3,563
Collectively Evaluated for Impairment	61,653			39,461			101,114
Total	$	61,810		$	42,867		$	104,677
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	22,986		$	39,028		$	62,014
Collectively Evaluated for Impairment	3,233,267			4,770,329			8,003,596
Total	$	3,256,253		$	4,809,357		$	8,065,610

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 March 31, 2017 and December 31, 2016.



	March 31, 2017
(dollars in thousands)	Commercial and Industrial		Commercial Mortgage		Construction		Lease Financing		Total Commercial
Pass	$	1,204,150	$	1,811,871	$	256,962	$	208,253	$	3,481,236
Special Mention	18,915		73,225		4,209		4		96,353
Classified	26,941		23,968		1,489		508		52,906
Total	$	1,250,006	$	1,909,064	$	262,660	$	208,765	$	3,630,495

(dollars in thousands)	Residential Mortgage		Home Equity		Automobile		Other ¹		Total Consumer
Pass	$	3,212,370	$	1,404,974	$	467,405	$	378,785	$	5,463,534
Special Mention	—		2,464		—		—		2,464
Classified	11,836		4,051		673		756		17,316
Total	$	3,224,206	$	1,411,489	$	468,078	$	379,541	$	5,483,314
Total Recorded Investment in Loans and Leases									$	9,113,809



	December 31, 2016
(dollars in thousands)	Commercial and Industrial		Commercial Mortgage		Construction		Lease Financing		Total Commercial
Pass	$	1,203,025	$	1,792,119	$	264,287	$	207,386	$	3,466,817
Special Mention	20,253		66,734		4,218		5		91,210
Classified	26,513		30,698		1,513		941		59,665
Total	$	1,249,791	$	1,889,551	$	270,018	$	208,332	$	3,617,692

(dollars in thousands)	Residential Mortgage		Home Equity		Automobile		Other¹		Total Consumer
Pass	$	3,149,294	$	1,327,676	$	453,439	$	379,793	$	5,310,202
Special Mention	—		2,964		—		—		2,964
Classified	13,779		3,523		894		731		18,927
Total	$	3,163,073	$	1,334,163	$	454,333	$	380,524	$	5,332,093
Total Recorded Investment in Loans and Leases									$	8,949,785


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 March 31, 2017 and December 31, 2016.



(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 March 31, 2017
Commercial
Commercial and Industrial	$	6,275	$	161	$	—	$	228	$	6,664	$	1,243,342	$	1,250,006	$	162
Commercial Mortgage	639		675		—		973		2,287		1,906,777		1,909,064		404
Construction	—		—		—		—		—		262,660		262,660		—
Lease Financing	—		—		—		—		—		208,765		208,765		—
Total Commercial	6,914		836		—		1,201		8,951		3,621,544		3,630,495		566
Consumer
Residential Mortgage	3,259		1,169		2,313		11,756		18,497		3,205,709		3,224,206		1,517
Home Equity	2,342		1,012		1,133		3,517		8,004		1,403,485		1,411,489		1,300
Automobile	9,128		1,266		673		—		11,067		457,011		468,078		—
Other ¹	2,663		1,650		1,738		—		6,051		373,490		379,541		—
Total Consumer	17,392		5,097		5,857		15,273		43,619		5,439,695		5,483,314		2,817
Total	$	24,306	$	5,933	$	5,857	$	16,474	$	52,570	$	9,061,239	$	9,113,809	$	3,383

As of December 31, 2016
Commercial
Commercial and Industrial	$	10,698	$	1,016	$	—	$	151	$	11,865	$	1,237,926	$	1,249,791	$	—
Commercial Mortgage	128		17		—		997		1,142		1,888,409		1,889,551		416
Construction	—		—		—		—		—		270,018		270,018		—
Lease Financing	—		—		—		—		—		208,332		208,332		—
Total Commercial	10,826		1,033		—		1,148		13,007		3,604,685		3,617,692		416
Consumer
Residential Mortgage	6,491		106		3,127		13,780		23,504		3,139,569		3,163,073		1,628
Home Equity	3,063		2,244		1,457		3,147		9,911		1,324,252		1,334,163		1,015
Automobile	11,692		2,162		894		—		14,748		439,585		454,333		—
Other ¹	3,200		1,532		1,592		—		6,324		374,200		380,524		—
Total Consumer	24,446		6,044		7,070		16,927		54,487		5,277,606		5,332,093		2,643
Total	$	35,272	$	7,077	$	7,070	$	18,075	$	67,494	$	8,882,291	$	8,949,785	$	3,059


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 March 31, 2017 and December 31, 2016.



(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance for Loan Losses
March 31, 2017
Impaired Loans with No Related Allowance Recorded:
Commercial
Commercial and Industrial	$	9,217	$	16,179	$	—
Commercial Mortgage	9,165		12,665		—
Construction	1,489		1,489		—
Total Commercial	19,871		30,333		—
Total Impaired Loans with No Related Allowance Recorded	$	19,871	$	30,333	$	—

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	689	$	689	$	14
Commercial Mortgage	342		342		24
Total Commercial	1,031		1,031		38
Consumer
Residential Mortgage	24,349		29,338		3,325
Home Equity	1,507		1,507		263
Automobile	10,916		10,916		248
Other ¹	2,657		2,657		76
Total Consumer	39,429		44,418		3,912
Total Impaired Loans with an Allowance Recorded	$	40,460	$	45,449	$	3,950

Impaired Loans:
Commercial	$	20,902	$	31,364	$	38
Consumer	39,429		44,418		3,912
Total Impaired Loans	$	60,331	$	75,782	$	3,950

December 31, 2016
Impaired Loans with No Related Allowance Recorded:
Commercial
Commercial and Industrial	$	9,556	$	16,518	$	—
Commercial Mortgage	9,373		12,873		—
Construction	1,513		1,513		—
Total Commercial	20,442		30,904		—
Total Impaired Loans with No Related Allowance Recorded	$	20,442	$	30,904	$	—

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	765	$	765	$	24
Commercial Mortgage	365		365		21
Total Commercial	1,130		1,130		45
Consumer
Residential Mortgage	25,625		30,615		3,224
Home Equity	1,516		1,516		15
Automobile	9,660		9,660		206
Other ¹	2,325		2,325		65
Total Consumer	39,126		44,116		3,510
Total Impaired Loans with an Allowance Recorded	$	40,256	$	45,246	$	3,555

Impaired Loans:
Commercial	$	21,572	$	32,034	$	45
Consumer	39,126		44,116		3,510
Total Impaired Loans	$	60,698	$	76,150	$	3,555

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 months ended March 31, 2017 and 2016.



	Three Months Ended March 31, 2017				Three Months Ended March 31, 2016
(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	$	9,387	$	81	$	12,360	$	106
Commercial Mortgage	9,269		85		10,231		69
Construction	1,501		24		1,593		26
Total Commercial	20,157		190		24,184		201
Total Impaired Loans with No Related Allowance Recorded	$	20,157	$	190	$	24,184	$	201

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	727	$	11	$	1,285	$	20
Commercial Mortgage	354		4		—		—
Total Commercial	1,081		15		1,285		20
Consumer
Residential Mortgage	24,987		212		28,606		251
Home Equity	1,512		17		1,303		17
Automobile	10,288		169		7,198		122
Other ¹	2,491		53		1,781		39
Total Consumer	39,278		451		38,888		429
Total Impaired Loans with an Allowance Recorded	$	40,359	$	466	$	40,173	$	449

Impaired Loans:
Commercial	$	21,238	$	205	$	25,469	$	221
Consumer	39,278		451		38,888		429
Total Impaired Loans	$	60,516	$	656	$	64,357	$	650


¹	Comprised of other revolving credit and installment financing.

For the three months ended March 31, 2017 and 2016, 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 months ended March 31, 2017 and 2016, 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 $59.5 million and $60.0 million as of March 31, 2017 and December 31, 2016, respectively. As of March 31, 2017, there were $0.3 million commitments to lend additional funds on loans modified in a TDR. As of December 31, 2016, there were $0.4 million of commitments to lend additional funds on loans modified in a TDR.

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 months ended March 31, 2017 and 2016.



	Loans Modified as a TDR for the Three Months Ended March 31, 2017							Loans Modified as a TDR for the Three Months Ended March 31, 2016
			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	5		$	3,858		$	1	17		$	2,988		$	—
Commercial Mortgage	1		404			—		—		—			—
Total Commercial	6		4,262			1		17		2,988			—
Consumer
Residential Mortgage	1		98			—		3		1,166			197
Home Equity	—		—			—		1		478			6
Automobile	113		2,303			52		53		1,123			24
Other ²	90		643			18		62		450			13
Total Consumer	204		3,044			70		119		3,217			240
Total	210		$	7,306		$	71	136		$	6,205		$	240


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 months ended March 31, 2017 and 2016, 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 March 31, 2017			Three Months Ended March 31, 2016
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	2	$	148	—	$	—
Commercial Mortgage	1	404		—	—
Total Commercial	3	552		—	—

Consumer
Residential Mortgage	—	—		2	1,031
Home Equity	—	—		1	165
Automobile	11	224		5	116
Other ²	27	199		18	111
Total Consumer	38	423		26	1,423
Total	41	$	975	26	$	1,423


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 $7.7 million as of March 31, 2017.