Loans and Leases

The Company’s loan and lease portfolio was comprised of the following as of December 31, 2017 and 2016:



	December 31,
(dollars in thousands)	2017		2016
Commercial
Commercial and Industrial	$	1,279,347	$	1,249,791
Commercial Mortgage	2,103,967		1,889,551
Construction	202,253		270,018
Lease Financing	180,931		208,332
Total Commercial	3,766,498		3,617,692
Consumer
Residential Mortgage	3,466,773		3,163,073
Home Equity	1,585,455		1,334,163
Automobile	528,474		454,333
Other¹	449,747		380,524
Total Consumer	6,030,449		5,332,093
Total Loans and Leases	$	9,796,947	$	8,949,785

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

Total loans and leases were reported net of unearned income of $20.2 million and $36.3 million as of December 31, 2017 and 2016, respectively.

Commercial loans and residential mortgage loans of $1.0 billion and $1.1 billion were pledged to secure an undrawn FRB line of credit as of December 31, 2017 and 2016, respectively.

As of December 31, 2017 and 2016, residential mortgage loans of $2.9 billion and $2.3 billion, respectively, were pledged under a blanket pledge arrangement to secure FHLB advances. See Note 10 Other Debt for FHLB advances outstanding as of December 31, 2017 and 2016.

Net gains related to sales of residential mortgage loans, recorded as a component of mortgage banking income, were $4.9 million, $11.8 million, and $5.9 million for the years ended December 31, 2017, 2016, and 2015, respectively. Net gains on sales of commercial loans were not material for the years ended December 31, 2017, 2016, and 2015.

Substantially all of the Company’s lending activity is with customers located in Hawaii. A substantial portion of the Company’s real estate loans are secured by real estate in Hawaii.

Allowance for Loan and Lease Losses

The following presents by portfolio segment, the activity in the Allowance for the years ended December 31, 2017, 2016, and 2015. 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 December 31, 2017, 2016, and 2015.



(dollars in thousands)	Commercial			Consumer			Total
For the Year Ended December 31, 2017
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	65,680		$	38,593		$	104,273
Loans and Leases Charged-Off	(1,408		)	(21,847		)	(23,255		)
Recoveries on Loans and Leases Previously Charged-Off	1,485			7,943			9,428
Net Loans and Leases Recovered (Charged-Off)	77			(13,904		)	(13,827		)
Provision for Credit Losses	65			16,835			16,900
Balance at End of Period	$	65,822		$	41,524		$	107,346
As of December 31, 2017
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	141		$	3,775		$	3,916
Collectively Evaluated for Impairment	65,681			37,749			103,430
Total	$	65,822		$	41,524		$	107,346
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	20,216		$	41,002		$	61,218
Collectively Evaluated for Impairment	3,746,282			5,989,447			9,735,729
Total	$	3,766,498		$	6,030,449		$	9,796,947

For the Year Ended December 31, 2016
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	60,714		$	42,166		$	102,880
Loans and Leases Charged-Off	(865		)	(17,644		)	(18,509		)
Recoveries on Loans and Leases Previously Charged-Off	8,137			7,015			15,152
Net Loans and Leases Recovered (Charged-Off)	7,272			(10,629		)	(3,357		)
Provision for Credit Losses	(2,306		)	7,056			4,750
Balance at End of Period	$	65,680		$	38,593		$	104,273
As of December 31, 2016
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	45		$	3,510		$	3,555
Collectively Evaluated for Impairment	65,635			35,083			100,718
Total	$	65,680		$	38,593		$	104,273
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	21,572		$	39,126		$	60,698
Collectively Evaluated for Impairment	3,596,120			5,292,967			8,889,087
Total	$	3,617,692		$	5,332,093		$	8,949,785

For the Year Ended December 31, 2015
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	64,551		$	44,137		$	108,688
Loans and Leases Charged-Off	(954		)	(15,485		)	(16,439		)
Recoveries on Loans and Leases Previously Charged-Off	2,173			7,458			9,631
Net Loans and Leases Recovered (Charged-Off)	1,219			(8,027		)	(6,808		)
Provision for Credit Losses	(5,056		)	6,056			1,000
Balance at End of Period	$	60,714		$	42,166		$	102,880
As of December 31, 2015
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	205		$	3,373		$	3,578
Collectively Evaluated for Impairment	60,509			38,793			99,302
Total	$	60,714		$	42,166		$	102,880
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	27,950		$	38,747		$	66,697
Collectively Evaluated for Impairment	3,125,902			4,686,386			7,812,288
Total	$	3,153,852		$	4,725,133		$	7,878,985

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 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. 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 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 December 31, 2017 and 2016.



	December 31, 2017
(dollars in thousands)	Commercial and Industrial		Commercial Mortgage		Construction		Lease Financing		Total Commercial
Pass	$	1,234,738	$	2,046,745	$	198,926	$	180,522	$	3,660,931
Special Mention	15,394		35,762		6		11		51,173
Classified	29,215		21,460		3,321		398		54,394
Total	$	1,279,347	$	2,103,967	$	202,253	$	180,931	$	3,766,498



(dollars in thousands)	Residential Mortgage		Home Equity		Automobile		Other ¹		Total Consumer
Pass	$	3,457,531	$	1,580,917	527,587		$	449,008	$	6,015,043
Classified	9,242		4,538		887		739		15,406
Total	$	3,466,773	$	1,585,455	$	528,474	$	449,747	$	6,030,449
Total Recorded Investment in Loans and Leases									$	9,796,947



	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		Other ¹		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 December 31, 2017 and 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 December 31, 2017
Commercial
Commercial and Industrial	$	4,196	$	641	$	—	$	448	$	5,285	$	1,274,062	$	1,279,347	$	313
Commercial Mortgage	187		404		—		1,398		1,989		2,101,978		2,103,967		465
Construction	—		—		—		—		—		202,253		202,253		—
Lease Financing	—		—		—		—		—		180,931		180,931		—
Total Commercial	4,383		1,045		—		1,846		7,274		3,759,224		3,766,498		778
Consumer
Residential Mortgage	7,815		2,008		2,703		9,243		21,769		3,445,004		3,466,773		806
Home Equity	2,532		2,736		1,624		3,991		10,883		1,574,572		1,585,455		1,312
Automobile	11,728		2,232		886		—		14,846		513,628		528,474		—
Other ¹	3,007		1,639		1,934		—		6,580		443,167		449,747		—
Total Consumer	25,082		8,615		7,147		13,234		54,078		5,976,371		6,030,449		2,118
Total	$	29,465	$	9,660	$	7,147	$	15,080	$	61,352	$	9,735,595	$	9,796,947	$	2,896

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		—
Other¹	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

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

²Represents 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 December 31, 2017 and 2016.



(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance for Loan Losses
December 31, 2017
Impaired Loans with No Related Allowance Recorded:
Commercial
Commercial and Industrial	$	8,094	$	15,747	$	—
Commercial Mortgage	8,696		12,196		—
Construction	1,415		1,415		—
Total Commercial	18,205		29,358		—
Total Impaired Loans with No Related Allowance Recorded	$	18,205	$	29,358	$	—

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	811	$	811	$	21
Commercial Mortgage	1,200		1,200		120
Total Commercial	2,011		2,011		141
Consumer
Residential Mortgage	21,581		26,324		3,118
Home Equity	1,965		1,965		276
Automobile	14,811		14,811		305
Other ¹	2,645		2,645		76
Total Consumer	41,002		45,745		3,775
Total Impaired Loans with an Allowance Recorded	$	43,013	$	47,756	$	3,916

Impaired Loans:
Commercial	$	20,216	$	31,369	$	141
Consumer	41,002		45,745		3,775
Total Impaired Loans	$	61,218	$	77,114	$	3,916

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

¹Comprised 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 years ended December 31, 2017 and 2016.



	Year Ended December 31, 2017				Year Ended December 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	$	8,810	$	351	$	10,760	$	463
Commercial Mortgage	9,251		299		9,906		339
Construction	1,464		94		1,559		101
Total Commercial	19,525		744		22,225		903
Total Impaired Loans with No Related Allowance Recorded	$	19,525	$	744	$	22,225	$	903

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	709	$	42	$	939	$	72
Commercial Mortgage	690		54		151		9
Total Commercial	1,399		96		1,090		81
Consumer
Residential Mortgage	22,981		845		27,436		962
Home Equity	1,707		82		1,395		66
Automobile	12,235		825		7,974		522
Other ¹	2,571		215		2,003		174
Total Consumer	39,494		1,967		38,808		1,724
Total Impaired Loans with an Allowance Recorded	$	40,893	$	2,063	$	39,898	$	1,805

Impaired Loans:
Commercial	$	20,924	$	840	$	23,315	$	984
Consumer	39,494		1,967		38,808		1,724
Total Impaired Loans	$	60,418	$	2,807	$	62,123	$	2,708

¹ Comprised of other revolving credit and installment financing.

For the year ended December 31, 2015, the average recorded investment in impaired loans was $66.4 million and the interest income recognized on impaired loans was $2.6 million. For the years ended December 31, 2017, 2016, and 2015, the amount of interest income recognized by the Company within the period that the loans were impaired were primarily related to loans modified in a troubled debt restructuring that were on accrual status. For the years ended December 31, 2017, 2016, and 2015, the amount of interest income recognized using a cash-basis method of accounting during the time within that period 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 $60.1 million and $60.0 million as of December 31, 2017 and 2016, respectively. As of December 31, 2017, there were $1.5 million commitments to lend additional funds on loans modified in a TDR. As of December 31, 2016, there were $0.4 million 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 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 commercial and consumer 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 years ended December 31, 2017 and 2016.



	Loans Modified as a TDR for the Year Ended December 31, 2017					Loans Modified as a TDR for the Year Ended December 31, 2016
Troubled Debt Restructurings (dollars in thousands)	Number of Contracts	Recorded Investment (as of period end)¹		Increase in Allowance (as of period end)		Number of Contracts	Recorded Investment (as of period end)¹		Increase in Allowance (as of period end)
Commercial
Commercial and Industrial	13	$	7,299	$	11	6	$	3,525	$	21
Commercial Mortgage	4	2,336		93		1	204		20
Total Commercial	17	9,635		104		7	3,729		41
Consumer
Residential Mortgage	2	368		1		10	3,146		522
Home Equity	4	604		13		2	651		7
Automobile	424	8,623		177		267	5,451		116
Other ²	171	1,395		35		199	1,404		37
Total Consumer	601	10,990		226		478	10,652		682
Total	618	$	20,625	$	330	485	$	14,381	$	723


¹	The period end balances reflect all partial 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, loans modified in a TDR that defaulted during the year ended December 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.



	Year Ended December 31, 2017			Year Ended December 31, 2016
TDRs that Defaulted During the Period, Within Twelve Months of their Modification Date (dollars in thousands)	Number of Contracts	Recorded Investment (as of period end) ¹		Number of Contracts	Recorded Investment (as of period end) ¹
Commercial
Commercial and Industrial	1	$	48	—	$	—
Commercial Mortgage	1	341		—	—
Total Commercial	2	389		—	—
Consumer
Residential Mortgage	1	94		4	1,445
Home Equity	1	237		1	157
Automobile	28	515		19	373
Other ²	36	208		40	278
Total Consumer	66	1,054		64	2,253
Total	68	$	1,443	64	$	2,253

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.

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 $6.2 million as of December 31, 2017.