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 June 30, 2017 and December 31, 2016:



(dollars in thousands)	June 30, 2017		December 31, 2016
Commercial
Commercial and Industrial	$	1,241,953	$	1,249,791
Commercial Mortgage	2,009,886		1,889,551
Construction	248,030		270,018
Lease Financing	205,043		208,332
Total Commercial	3,704,912		3,617,692
Consumer
Residential Mortgage	3,317,179		3,163,073
Home Equity	1,473,123		1,334,163
Automobile	484,092		454,333
Other ¹	408,307		380,524
Total Consumer	5,682,701		5,332,093
Total Loans and Leases	$	9,387,613	$	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 $1.8 million and $4.4 million for the three months ended June 30, 2017 and 2016, respectively, and $3.2 million and $6.2 million for the six months ended June 30, 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 and six months ended June 30, 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 June 30, 2017 and 2016.



(dollars in thousands)	Commercial			Consumer			Total
Three Months Ended June 30, 2017
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	66,893		$	38,171		$	105,064
Loans and Leases Charged-Off	(124		)	(5,363		)	(5,487		)
Recoveries on Loans and Leases Previously Charged-Off	266			2,260			2,526
Net Loans and Leases Recovered (Charged-Off)	142			(3,103		)	(2,961		)
Provision for Credit Losses	(853		)	5,103			4,250
Balance at End of Period	$	66,182		$	40,171		$	106,353
Six Months Ended June 30, 2017
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	65,680		$	38,593		$	104,273
Loans and Leases Charged-Off	(298		)	(10,893		)	(11,191		)
Recoveries on Loans and Leases Previously Charged-Off	602			4,019			4,621
Net Loans and Leases Recovered (Charged-Off)	304			(6,874		)	(6,570		)
Provision for Credit Losses	198			8,452			8,650
Balance at End of Period	$	66,182		$	40,171		$	106,353
As of June 30, 2017
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	45		$	3,792		$	3,837
Collectively Evaluated for Impairment	66,137			36,379			102,516
Total	$	66,182		$	40,171		$	106,353
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	20,197		$	38,528		$	58,725
Collectively Evaluated for Impairment	3,684,715			5,644,173			9,328,888
Total	$	3,704,912		$	5,682,701		$	9,387,613

Three Months Ended June 30, 2016
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	61,810		$	42,867		$	104,677
Loans and Leases Charged-Off	(204		)	(3,551		)	(3,755		)
Recoveries on Loans and Leases Previously Charged-Off	418			1,592			2,010
Net Loans and Leases Recovered (Charged-Off)	214			(1,959		)	(1,745		)
Provision for Credit Losses	5			995			1,000
Balance at End of Period	$	62,029		$	41,903		$	103,932
Six Months Ended June 30, 2016
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	60,714		$	42,166		$	102,880
Loans and Leases Charged-Off	(461		)	(8,181		)	(8,642		)
Recoveries on Loans and Leases Previously Charged-Off	7,323			3,371			10,694
Net Loans and Leases Recovered (Charged-Off)	6,862			(4,810		)	2,052
Provision for Credit Losses	(5,547		)	4,547			(1,000		)
Balance at End of Period	$	62,029		$	41,903		$	103,932
As of June 30, 2016
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	7		$	3,195		$	3,202
Collectively Evaluated for Impairment	62,022			38,708			100,730
Total	$	62,029		$	41,903		$	103,932
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	22,271		$	38,691		$	60,962
Collectively Evaluated for Impairment	3,283,571			4,986,936			8,270,507
Total	$	3,305,842		$	5,025,627		$	8,331,469

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 June 30, 2017 and December 31, 2016.



	June 30, 2017
(dollars in thousands)	Commercial and Industrial		Commercial Mortgage		Construction		Lease Financing		Total Commercial
Pass	$	1,197,264	$	1,937,447	$	246,283	$	204,572	$	3,585,566
Special Mention	16,752		53,046		282		—		70,080
Classified	27,937		19,393		1,465		471		49,266
Total	$	1,241,953	$	2,009,886	$	248,030	$	205,043	$	3,704,912

(dollars in thousands)	Residential Mortgage		Home Equity		Automobile		Other ¹		Total Consumer
Pass	$	3,307,841	$	1,466,847	$	483,553	$	407,468	$	5,665,709
Special Mention	—		1,764		—		—		1,764
Classified	9,338		4,512		539		839		15,228
Total	$	3,317,179	$	1,473,123	$	484,092	$	408,307	$	5,682,701
Total Recorded Investment in Loans and Leases									$	9,387,613



	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 June 30, 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 June 30, 2017
Commercial
Commercial and Industrial	$	310	$	68	$	—	$	175	$	553	$	1,241,400	$	1,241,953	$	78
Commercial Mortgage	12		—		—		1,460		1,472		2,008,414		2,009,886		899
Construction	—		—		—		—		—		248,030		248,030		—
Lease Financing	—		—		—		—		—		205,043		205,043		—
Total Commercial	322		68		—		1,635		2,025		3,702,887		3,704,912		977
Consumer
Residential Mortgage	3,486		869		2,269		9,337		15,961		3,301,218		3,317,179		733
Home Equity	2,331		524		2,343		3,405		8,603		1,464,520		1,473,123		1,006
Automobile	11,184		1,397		539		—		13,120		470,972		484,092		—
Other ¹	2,886		1,597		1,859		—		6,342		401,965		408,307		—
Total Consumer	19,887		4,387		7,010		12,742		44,026		5,638,675		5,682,701		1,739
Total	$	20,209	$	4,455	$	7,010	$	14,377	$	46,051	$	9,341,562	$	9,387,613	$	2,716

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 June 30, 2017 and December 31, 2016.



(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance for Loan Losses
June 30, 2017
Impaired Loans with No Related Allowance Recorded:
Commercial
Commercial and Industrial	$	8,216	$	15,178	$	—
Commercial Mortgage	9,573		13,073		—
Construction	1,465		1,465		—
Total Commercial	19,254		29,716		—
Total Impaired Loans with No Related Allowance Recorded	$	19,254	$	29,716	$	—

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	624	$	624	$	13
Commercial Mortgage	319		319		32
Total Commercial	943		943		45
Consumer
Residential Mortgage	21,947		26,686		3,167
Home Equity	1,735		1,735		267
Automobile	12,178		12,178		279
Other ¹	2,668		2,669		79
Total Consumer	38,528		43,268		3,792
Total Impaired Loans with an Allowance Recorded	$	39,471	$	44,211	$	3,837

Impaired Loans:
Commercial	$	20,197	$	30,659	$	45
Consumer	38,528		43,268		3,792
Total Impaired Loans	$	58,725	$	73,927	$	3,837

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 and six months ended June 30, 2017 and 2016.



	Three Months Ended June 30, 2017				Three Months Ended June 30, 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	$	8,717	$	61	$	10,032	$	112
Commercial Mortgage	9,369		77		10,059		93
Construction	1,477		24		1,570		25
Total Commercial	19,563		162		21,661		230
Total Impaired Loans with No Related Allowance Recorded	$	19,563	$	162	$	21,661	$	230

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	657	$	9	$	968	$	12
Commercial Mortgage	331		4		—		—
Total Commercial	988		13		968		12
Consumer
Residential Mortgage	23,148		214		27,995		250
Home Equity	1,621		20		1,511		18
Automobile	11,547		195		7,422		125
Other ¹	2,663		57		1,932		43
Total Consumer	38,979		486		38,860		436
Total Impaired Loans with an Allowance Recorded	$	39,967	$	499	$	39,828	$	448

Impaired Loans:
Commercial	$	20,551	$	175	$	22,629	$	242
Consumer	38,979		486		38,860		436
Total Impaired Loans	$	59,530	$	661	$	61,489	$	678

	Six Months Ended June 30, 2017				Six Months Ended June 30, 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	$	8,996	$	142	$	11,571	$	218
Commercial Mortgage	9,370		162		10,175		162
Construction	1,489		48		1,581		51
Total Commercial	19,855		352		23,327		431
Total Impaired Loans with No Related Allowance Recorded	$	19,855	$	352	$	23,327	$	431

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	693	$	20	$	1,075	$	32
Commercial Mortgage	342		8		—		—
Total Commercial	1,035		28		1,075		32
Consumer
Residential Mortgage	23,974		426		28,323		501
Home Equity	1,586		37		1,370		35
Automobile	10,918		364		7,285		247
Other ¹	2,550		110		1,843		82
Total Consumer	39,028		937		38,821		865
Total Impaired Loans with an Allowance Recorded	$	40,063	$	965	$	39,896	$	897

Impaired Loans:
Commercial	$	20,890	$	380	$	24,402	$	463
Consumer	39,028		937		38,821		865
Total Impaired Loans	$	59,918	$	1,317	$	63,223	$	1,328


¹	Comprised of other revolving credit and installment financing.

For the three and six months ended June 30, 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 and six months ended June 30, 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 $57.5 million and $60.0 million as of June 30, 2017 and December 31, 2016, respectively. As of June 30, 2017, there were no 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 are 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 six months ended June 30, 2017 and 2016.



	Loans Modified as a TDR for the Three Months Ended June 30, 2017							Loans Modified as a TDR for the Three Months Ended June 30, 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	6		$	4,191		$	11	16		$	2,955		$	—
Commercial Mortgage	1		700			—		—		—			—
Total Commercial	7		4,891			11		16		2,955			—
Consumer
Residential Mortgage	—		—			—		1		440			—
Home Equity	1		4			4		—		—			—
Automobile	99		2,115			49		53		977			22
Other ²	40		304			8		40		271			8
Total Consumer	140		2,423			61		94		1,688			30
Total	147		$	7,314		$	72	110		$	4,643		$	30

	Loans Modified as a TDR for the Six Months Ended June 30, 2017							Loans Modified as a TDR for the Six Months Ended June 30, 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	11		$	7,235		$	11	18		$	3,102		$	2
Commercial Mortgage	2		1,096			—		—		—			—
Total Commercial	13		8,331			11		18		3,102			2
Consumer
Residential Mortgage	—		—			—		4		1,610			15
Home Equity	1		239			4		1		478			6
Automobile	209		4,315			99		108		2,008			48
Other ²	114		891			24		99		684			19
Total Consumer	324		5,445			127		212		4,780			88
Total	337		$	13,776		$	138	230		$	7,882		$	90


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 six months ended June 30, 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 June 30, 2017			Three Months Ended June 30, 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
Consumer
Residential Mortgage	—	$	—	1	$	43
Automobile	12	267		3	21
Other ²	18	137		9	70
Total Consumer	30	404		13	134
Total	30	$	404	13	$	134

	Six Months Ended June 30, 2017			Six Months Ended June 30, 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	1	$	49	—	$	—
Total Commercial	1	49		—	—

Consumer
Residential Mortgage	—	—		3	1,056
Home Equity	—	—		1	162
Automobile	17	390		4	57
Other ²	36	255		22	142
Total Consumer	53	645		30	1,417
Total	54	$	694	30	$	1,417


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 $6.2 million as of June 30, 2017.