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, 2018 and December 31, 2017:



(dollars in thousands)	March 31, 2018		December 31, 2017
Commercial
Commercial and Industrial	$	1,329,096	$	1,279,347
Commercial Mortgage	2,097,339		2,103,967
Construction	186,530		202,253
Lease Financing	179,771		180,931
Total Commercial	3,792,736		3,766,498
Consumer
Residential Mortgage	3,505,239		3,466,773
Home Equity	1,601,698		1,585,455
Automobile	558,468		528,474
Other ¹	458,487		449,747
Total Consumer	6,123,892		6,030,449
Total Loans and Leases	$	9,916,628	$	9,796,947


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 $0.3 million and $1.3 million for the three months ended March 31, 2018 and 2017, 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, 2018 and 2017. 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, 2018 and 2017.



(dollars in thousands)	Commercial			Consumer			Total
Three Months Ended March 31, 2018
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	65,822		$	41,524		$	107,346
Loans and Leases Charged-Off	(206		)	(5,782		)	(5,988		)
Recoveries on Loans and Leases Previously Charged-Off	328			2,127			2,455
Net Loans and Leases Recovered (Charged-Off)	122			(3,655		)	(3,533		)
Provision for Credit Losses	(1,834		)	5,959			4,125
Balance at End of Period	$	64,110		$	43,828		$	107,938
As of March 31, 2018
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	59		$	3,783		$	3,842
Collectively Evaluated for Impairment	64,051			40,045			104,096
Total	$	64,110		$	43,828		$	107,938
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	21,095		$	40,727		$	61,822
Collectively Evaluated for Impairment	3,771,641			6,083,165			9,854,806
Total	$	3,792,736		$	6,123,892		$	9,916,628

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

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 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, 2018 and December 31, 2017.



	March 31, 2018
(dollars in thousands)	Commercial and Industrial		Commercial Mortgage		Construction		Lease Financing		Total Commercial
Pass	$	1,289,103	$	2,041,154	$	183,240	$	179,401	$	3,692,898
Special Mention	22,506		36,431		—		10		58,947
Classified	17,487		19,754		3,290		360		40,891
Total	$	1,329,096	$	2,097,339	$	186,530	$	179,771	$	3,792,736

(dollars in thousands)	Residential Mortgage		Home Equity		Automobile		Other ¹		Total Consumer
Pass	$	3,498,291	$	1,597,383	$	558,135	$	457,702	$	6,111,511
Classified	6,948		4,315		333		785		12,381
Total	$	3,505,239	$	1,601,698	$	558,468	$	458,487	$	6,123,892
Total Recorded Investment in Loans and Leases									$	9,916,628



	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		Other¹		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


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, 2018 and December 31, 2017.



(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, 2018
Commercial
Commercial and Industrial	$	1,611	$	301	$	—	$	986	$	2,898	$	1,326,198	$	1,329,096	$	735
Commercial Mortgage	423		—		—		1,367		1,790		2,095,549		2,097,339		801
Construction	—		—		—		—		—		186,530		186,530		—
Lease Financing	—		—		—		—		—		179,771		179,771		—
Total Commercial	2,034		301		—		2,353		4,688		3,788,048		3,792,736		1,536
Consumer
Residential Mortgage	4,325		2,677		2,927		6,725		16,654		3,488,585		3,505,239		790
Home Equity	2,768		1,255		3,013		3,890		10,926		1,590,772		1,601,698		1,036
Automobile	9,172		1,577		333		—		11,082		547,386		558,468		—
Other ¹	2,896		1,587		1,895		—		6,378		452,109		458,487		—
Total Consumer	19,161		7,096		8,168		10,615		45,040		6,078,852		6,123,892		1,826
Total	$	21,195	$	7,397	$	8,168	$	12,968	$	49,728	$	9,866,900	$	9,916,628	$	3,362

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


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, 2018 and December 31, 2017.



(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance for Loan Losses
March 31, 2018
Impaired Loans with No Related Allowance Recorded:
Commercial
Commercial and Industrial	$	8,982	$	12,596	$	—
Commercial Mortgage	9,498		12,998		—
Construction	1,399		1,399		—
Total Commercial	19,879		26,993		—
Total Impaired Loans with No Related Allowance Recorded	$	19,879	$	26,993	$	—

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	968	$	1,659	$	34
Commercial Mortgage	248		248		25
Total Commercial	1,216		1,907		59
Consumer
Residential Mortgage	20,399		25,142		3,080
Home Equity	1,953		1,953		276
Automobile	15,627		15,627		337
Other ¹	2,748		2,748		90
Total Consumer	40,727		45,470		3,783
Total Impaired Loans with an Allowance Recorded	$	41,943	$	47,377	$	3,842

Impaired Loans:
Commercial	$	21,095	$	28,900	$	59
Consumer	40,727		45,470		3,783
Total Impaired Loans	$	61,822	$	74,370	$	3,842

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

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, 2018 and 2017.



	Three Months Ended March 31, 2018				Three Months Ended March 31, 2017
(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	$	8,538	$	113	$	9,387	$	81
Commercial Mortgage	9,097		87		9,269		85
Construction	1,407		23		1,501		24
Total Commercial	19,042		223		20,157		190
Total Impaired Loans with No Related Allowance Recorded	$	19,042	$	223	$	20,157	$	190

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	890	$	10	$	727	$	11
Commercial Mortgage	724		3		354		4
Total Commercial	1,614		13		1,081		15
Consumer
Residential Mortgage	20,990		212		24,987		212
Home Equity	1,959		25		1,512		17
Automobile	15,219		261		10,288		169
Other ¹	2,697		52		2,491		53
Total Consumer	40,865		550		39,278		451
Total Impaired Loans with an Allowance Recorded	$	42,479	$	563	$	40,359	$	466

Impaired Loans:
Commercial	$	20,656	$	236	$	21,238	$	205
Consumer	40,865		550		39,278		451
Total Impaired Loans	$	61,521	$	786	$	60,516	$	656


¹	Comprised of other revolving credit and installment financing.

For the three months ended March 31, 2018 and 2017, 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, 2018 and 2017, 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 $60.2 million and $60.1 million as of March 31, 2018 and December 31, 2017, respectively. There were $1.3 million and $1.5 million commitments to lend additional funds on loans modified in a TDR as of March 31, 2018 and December 31, 2017, respectively.

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 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 three months ended March 31, 2018 and 2017.



	Loans Modified as a TDR for the Three Months Ended March 31, 2018							Loans Modified as a TDR for the Three Months Ended March 31, 2017
			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	1		$	503		$	—	5		$	3,858		$	1
Commercial Mortgage	—		—			—		1		404			—
Total Commercial	1		503			—		6		4,262			1
Consumer
Residential Mortgage	1		112			—		1		98			—
Automobile	98		2,179			47		113		2,303			52
Other ²	80		547			14		90		643			18
Total Consumer	179		2,838			61		204		3,044			70
Total	180		$	3,341		$	61	210		$	7,306		$	71


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, 2018 and 2017, 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, 2018			Three Months Ended March 31, 2017
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	$	29	2	$	148
Commercial Mortgage	1	341		1	404
Total Commercial	2	370		3	552

Consumer
Home Equity	1	236		—	—
Automobile	25	435		11	224
Other ²	32	215		27	199
Total Consumer	58	886		38	423
Total	60	$	1,256	41	$	975


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 $3.9 million as of March 31, 2018.