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, 2019 and December 31, 2018:



(dollars in thousands)	March 31, 2019		December 31, 2018
Commercial
Commercial and Industrial	$	1,331,345	$	1,331,149
Commercial Mortgage	2,381,213		2,302,356
Construction	132,775		170,061
Lease Financing	154,919		176,226
Total Commercial	4,000,252		3,979,792
Consumer
Residential Mortgage	3,702,553		3,673,796
Home Equity	1,698,666		1,681,442
Automobile	676,730		658,133
Other ¹	470,408		455,611
Total Consumer	6,548,357		6,468,982
Total Loans and Leases	$	10,548,609	$	10,448,774


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 $0.5 million and $0.3 million for the three months ended March 31, 2019 and 2018, 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, 2019 and 2018. 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, 2019 and 2018.



(dollars in thousands)	Commercial			Consumer			Total
Three Months Ended March 31, 2019
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	66,874		$	39,819		$	106,693
Loans and Leases Charged-Off	(1,986		)	(4,842		)	(6,828		)
Recoveries on Loans and Leases Previously Charged-Off	501			2,657			3,158
Net Loans and Leases Recovered (Charged-Off)	(1,485		)	(2,185		)	(3,670		)
Provision for Credit Losses	2,138			862			3,000
Balance at End of Period	$	67,527		$	38,496		$	106,023
As of March 31, 2019
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	181		$	3,448		$	3,629
Collectively Evaluated for Impairment	67,346			35,048			102,394
Total	67,527			38,496			106,023
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	15,627		$	42,369		$	57,996
Collectively Evaluated for Impairment	3,984,625			6,505,988			10,490,613
Total	$	4,000,252		$	6,548,357		$	10,548,609

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

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, 2019 and December 31, 2018.



	March 31, 2019
(dollars in thousands)	Commercial and Industrial		Commercial Mortgage		Construction		Lease Financing		Total Commercial
Pass	$	1,296,226	$	2,309,833	$	131,481	$	153,911	$	3,891,451
Special Mention	18,080		56,233		—		4		74,317
Classified	17,039		15,147		1,294		1,004		34,484
Total	$	1,331,345	$	2,381,213	$	132,775	$	154,919	$	4,000,252

(dollars in thousands)	Residential Mortgage		Home Equity		Automobile		Other ¹		Total Consumer
Pass	$	3,696,769	$	1,695,120	$	675,996	$	469,375	$	6,537,260
Classified	5,784		3,546		734		1,033		11,097
Total	$	3,702,553	$	1,698,666	$	676,730	$	470,408	$	6,548,357
Total Recorded Investment in Loans and Leases									$	10,548,609



	December 31, 2018
(dollars in thousands)	Commercial and Industrial		Commercial Mortgage		Construction		Lease Financing		Total Commercial
Pass	$	1,302,278	$	2,256,128	$	168,740	$	175,223	$	3,902,369
Special Mention	17,688		30,468		—		5		48,161
Classified	11,183		15,760		1,321		998		29,262
Total	$	1,331,149	$	2,302,356	$	170,061	$	176,226	$	3,979,792

(dollars in thousands)	Residential Mortgage		Home Equity		Automobile		Other¹		Total Consumer
Pass	$	3,668,475	$	1,677,193	$	657,620	$	454,697	$	6,457,985
Classified	5,321		4,249		513		914		10,997
Total	$	3,673,796	$	1,681,442	$	658,133	$	455,611	$	6,468,982
Total Recorded Investment in Loans and Leases									$	10,448,774


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, 2019 and December 31, 2018.



(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, 2019
Commercial
Commercial and Industrial	$	7,123	$	10	$	66	$	393	$	7,592	$	1,323,753	$	1,331,345	$	265
Commercial Mortgage	2,674		—		—		5,911		8,585		2,372,628		2,381,213		5,911
Construction	200		—		—		—		200		132,575		132,775		—
Lease Financing	—		—		—		—		—		154,919		154,919		—
Total Commercial	9,997		10		66		6,304		16,377		3,983,875		4,000,252		6,176
Consumer
Residential Mortgage	5,270		183		903		5,599		11,955		3,690,598		3,702,553		986
Home Equity	3,791		917		3,381		2,797		10,886		1,687,780		1,698,666		787
Automobile	9,585		1,640		734		—		11,959		664,771		676,730		—
Other ¹	2,161		1,160		1,033		—		4,354		466,054		470,408		—
Total Consumer	20,807		3,900		6,051		8,396		39,154		6,509,203		6,548,357		1,773
Total	$	30,804	$	3,910	$	6,117	$	14,700	$	55,531	$	10,493,078	$	10,548,609	$	7,949

As of December 31, 2018
Commercial
Commercial and Industrial	$	3,653	$	118	$	10	$	542	$	4,323	$	1,326,826	$	1,331,149	$	515
Commercial Mortgage	561		—		—		2,040		2,601		2,299,755		2,302,356		2,040
Construction	—		—		—		—		—		170,061		170,061		—
Lease Financing	—		—		—		—		—		176,226		176,226		—
Total Commercial	4,214		118		10		2,582		6,924		3,972,868		3,979,792		2,555
Consumer
Residential Mortgage	5,319		638		2,446		5,321		13,724		3,660,072		3,673,796		1,203
Home Equity	3,323		1,581		2,684		3,671		11,259		1,670,183		1,681,442		765
Automobile	12,372		2,240		513		—		15,125		643,008		658,133		—
Other ¹	2,913		1,245		914		—		5,072		450,539		455,611		—
Total Consumer	23,927		5,704		6,557		8,992		45,180		6,423,802		6,468,982		1,968
Total	$	28,141	$	5,822	$	6,567	$	11,574	$	52,104	$	10,396,670	$	10,448,774	$	4,523


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, 2019 and December 31, 2018.



(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance for Loan Losses
March 31, 2019
Impaired Loans with No Related Allowance Recorded:
Commercial
Commercial and Industrial	$	5,171	$	5,171	$	—
Commercial Mortgage	5,856		10,972		—
Construction	1,294		1,294		—
Total Commercial	12,321		17,437		—
Total Impaired Loans with No Related Allowance Recorded	$	12,321	$	17,437	$	—

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	1,514	$	1,745	$	102
Commercial Mortgage	1,792		1,792		79
Total Commercial	3,306		3,537		181
Consumer
Residential Mortgage	19,313		23,195		2,777
Home Equity	3,281		3,281		350
Automobile	17,784		17,784		273
Other ¹	1,991		1,991		48
Total Consumer	42,369		46,251		3,448
Total Impaired Loans with an Allowance Recorded	$	45,675	$	49,788	$	3,629

Impaired Loans:
Commercial	$	15,627	$	20,974	$	181
Consumer	42,369		46,251		3,448
Total Impaired Loans	$	57,996	$	67,225	$	3,629

December 31, 2018
Impaired Loans with No Related Allowance Recorded:
Commercial
Commercial and Industrial	$	4,587	$	4,587	$	—
Commercial Mortgage	2,712		6,212		—
Construction	1,321		1,321		—
Total Commercial	8,620		12,120		—
Total Impaired Loans with No Related Allowance Recorded	$	8,620	$	12,120	$	—

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	1,856	$	2,099	$	130
Commercial Mortgage	1,822		1,822		92
Total Commercial	3,678		3,921		222
Consumer
Residential Mortgage	19,753		23,635		3,051
Home Equity	3,359		3,359		350
Automobile	17,117		17,117		296
Other ¹	2,098		2,098		57
Total Consumer	42,327		46,209		3,754
Total Impaired Loans with an Allowance Recorded	$	46,005	$	50,130	$	3,976

Impaired Loans:
Commercial	$	12,298	$	16,041	$	222
Consumer	42,327		46,209		3,754
Total Impaired Loans	$	54,625	$	62,250	$	3,976

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, 2019 and 2018.



	Three Months Ended March 31, 2019				Three Months Ended March 31, 2018
(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	$	4,879	$	85	$	8,538	$	113
Commercial Mortgage	4,284		16		9,097		87
Construction	1,308		21		1,407		23
Total Commercial	10,471		122		19,042		223
Total Impaired Loans with No Related Allowance Recorded	$	10,471	$	122	$	19,042	$	223

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	1,685	$	21	$	890	$	10
Commercial Mortgage	1,807		2		724		3
Total Commercial	3,492		23		1,614		13
Consumer
Residential Mortgage	19,533		196		20,990		212
Home Equity	3,320		38		1,959		25
Automobile	17,451		295		15,219		261
Other ¹	2,045		42		2,697		52
Total Consumer	42,349		571		40,865		550
Total Impaired Loans with an Allowance Recorded	$	45,841	$	594	$	42,479	$	563

Impaired Loans:
Commercial	$	13,963	$	145	$	20,656	$	236
Consumer	42,349		571		40,865		550
Total Impaired Loans	$	56,312	$	716	$	61,521	$	786


¹	Comprised of other revolving credit and installment financing.

For the three months ended March 31, 2019 and 2018, 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, 2019 and 2018, 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 $57.6 million and $54.0 million as of March 31, 2019 and December 31, 2018, respectively. There were $0.1 million and $0.2 million commitments to lend additional funds on loans modified in a TDR as of March 31, 2019 and December 31, 2018, 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, 2019 and 2018.



	Loans Modified as a TDR for the Three Months Ended March 31, 2019							Loans Modified as a TDR for the Three Months Ended March 31, 2018
			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	3		$	111		$	5	1		$	503		$	—
Commercial Mortgage	1		3,907			—		—		—			—
Total Commercial	4		4,018			5		1		503			—
Consumer
Residential Mortgage	—		—			—		1		112			—
Automobile	117		2,240			34		98		2,179			47
Other ²	39		229			6		80		547			14
Total Consumer	156		2,469			40		179		2,838			61
Total	160		$	6,487		$	45	180		$	3,341		$	61


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, 2019 and 2018, 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, 2019			Three Months Ended March 31, 2018
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
Commercial Mortgage	—	—		1	341
Total Commercial	—	—		2	370

Consumer
Home Equity	—	$	—	1	$	236
Automobile	14	266		25	435
Other ²	19	125		32	215
Total Consumer	33	391		58	886
Total	33	$	391	60	$	1,256


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 $1.2 million as of March 31, 2019.