Loans and Leases and the Allowance for Loan and Lease Losses | 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, 2019 and December 31, 2018 : (dollars in thousands) June 30, December 31, Commercial Commercial and Industrial $ 1,408,729 $ 1,331,149 Commercial Mortgage 2,411,289 2,302,356 Construction 119,228 170,061 Lease Financing 163,070 176,226 Total Commercial 4,102,316 3,979,792 Consumer Residential Mortgage 3,785,006 3,673,796 Home Equity 1,694,577 1,681,442 Automobile 703,523 658,133 Other 1 473,707 455,611 Total Consumer 6,656,813 6,468,982 Total Loans and Leases $ 10,759,129 $ 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 $1.1 million and $0.5 million for the three months ended June 30, 2019 and 2018 , respectively, and $1.6 million and $0.8 million for the six months ended June 30, 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 and six months ended June 30, 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 June 30, 2019 and 2018 . (dollars in thousands) Commercial Consumer Total Three Months Ended June 30, 2019 Allowance for Loan and Lease Losses: Balance at Beginning of Period $ 67,527 $ 38,496 $ 106,023 Loans and Leases Charged-Off (206 ) (4,923 ) (5,129 ) Recoveries on Loans and Leases Previously Charged-Off 401 2,377 2,778 Net Loans and Leases Recovered (Charged-Off) 195 (2,546 ) (2,351 ) Provision for Credit Losses 1,546 2,454 4,000 Balance at End of Period $ 69,268 $ 38,404 $ 107,672 Six Months Ended June 30, 2019 Allowance for Loan and Lease Losses: Balance at Beginning of Period $ 66,874 $ 39,819 $ 106,693 Loans and Leases Charged-Off (2,192 ) (9,765 ) (11,957 ) Recoveries on Loans and Leases Previously Charged-Off 902 5,034 5,936 Net Loans and Leases Recovered (Charged-Off) (1,290 ) (4,731 ) (6,021 ) Provision for Credit Losses 3,684 3,316 7,000 Balance at End of Period $ 69,268 $ 38,404 $ 107,672 As of June 30, 2019 Allowance for Loan and Lease Losses: Individually Evaluated for Impairment $ 716 $ 3,327 $ 4,043 Collectively Evaluated for Impairment 68,552 35,077 103,629 Total $ 69,268 $ 38,404 $ 107,672 Recorded Investment in Loans and Leases: Individually Evaluated for Impairment $ 20,791 $ 41,971 $ 62,762 Collectively Evaluated for Impairment 4,081,525 6,614,842 10,696,367 Total $ 4,102,316 $ 6,656,813 $ 10,759,129 Three Months Ended June 30, 2018 Allowance for Loan and Lease Losses: Balance at Beginning of Period $ 64,110 $ 43,828 $ 107,938 Loans and Leases Charged-Off (485 ) (5,176 ) (5,661 ) Recoveries on Loans and Leases Previously Charged-Off 366 2,045 2,411 Net Loans and Leases Recovered (Charged-Off) (119 ) (3,131 ) (3,250 ) Provision for Credit Losses (279 ) 3,779 3,500 Balance at End of Period $ 63,712 $ 44,476 $ 108,188 Six Months Ended June 30, 2018 Allowance for Loan and Lease Losses: Balance at Beginning of Period $ 65,822 $ 41,524 $ 107,346 Loans and Leases Charged-Off (691 ) (10,958 ) (11,649 ) Recoveries on Loans and Leases Previously Charged-Off 694 4,172 4,866 Net Loans and Leases Recovered (Charged-Off) 3 (6,786 ) (6,783 ) Provision for Credit Losses (2,113 ) 9,738 7,625 Balance at End of Period $ 63,712 $ 44,476 $ 108,188 As of June 30, 2018 Allowance for Loan and Lease Losses: Individually Evaluated for Impairment $ 100 $ 3,827 $ 3,927 Collectively Evaluated for Impairment 63,612 40,649 104,261 Total $ 63,712 $ 44,476 $ 108,188 Recorded Investment in Loans and Leases: Individually Evaluated for Impairment $ 12,184 $ 41,981 $ 54,165 Collectively Evaluated for Impairment 3,804,088 6,195,070 9,999,158 Total $ 3,816,272 $ 6,237,051 $ 10,053,323 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 June 30, 2019 and December 31, 2018 . June 30, 2019 (dollars in thousands) Commercial and Industrial Commercial Mortgage Construction Lease Financing Total Commercial Pass $ 1,374,994 $ 2,341,245 $ 117,961 $ 162,081 $ 3,996,281 Special Mention 17,730 50,098 — — 67,828 Classified 16,005 19,946 1,267 989 38,207 Total $ 1,408,729 $ 2,411,289 $ 119,228 $ 163,070 $ 4,102,316 (dollars in thousands) Residential Mortgage Home Equity Automobile Other 1 Total Consumer Pass $ 3,779,877 $ 1,691,560 $ 702,916 $ 472,744 $ 6,647,097 Classified 5,129 3,017 607 963 9,716 Total $ 3,785,006 $ 1,694,577 $ 703,523 $ 473,707 $ 6,656,813 Total Recorded Investment in Loans and Leases $ 10,759,129 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 Other 1 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 June 30, 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 June 30, 2019 Commercial Commercial and Industrial $ 2,908 $ 105 $ — $ 552 $ 3,565 $ 1,405,164 $ 1,408,729 $ 355 Commercial Mortgage 749 202 — 11,310 12,261 2,399,028 2,411,289 11,310 Construction — — — — — 119,228 119,228 — Lease Financing — — — — — 163,070 163,070 — Total Commercial 3,657 307 — 11,862 15,826 4,086,490 4,102,316 11,665 Consumer Residential Mortgage 4,688 396 1,859 4,697 11,640 3,773,366 3,785,006 338 Home Equity 3,059 1,751 2,981 2,486 10,277 1,684,300 1,694,577 443 Automobile 11,727 1,663 607 — 13,997 689,526 703,523 — Other 1 2,528 1,578 963 — 5,069 468,638 473,707 — Total Consumer 22,002 5,388 6,410 7,183 40,983 6,615,830 6,656,813 781 Total $ 25,659 $ 5,695 $ 6,410 $ 19,045 $ 56,809 $ 10,702,320 $ 10,759,129 $ 12,446 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 June 30, 2019 and December 31, 2018 . (dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance for Loan Losses June 30, 2019 Impaired Loans with No Related Allowance Recorded: Commercial Commercial and Industrial $ 4,844 $ 4,844 $ — Commercial Mortgage 5,721 10,837 — Construction 1,267 1,267 — Total Commercial 11,832 16,948 — Total Impaired Loans with No Related Allowance Recorded $ 11,832 $ 16,948 $ — Impaired Loans with an Allowance Recorded: Commercial Commercial and Industrial $ 1,682 $ 1,913 $ 111 Commercial Mortgage 7,277 7,277 605 Total Commercial 8,959 9,190 716 Consumer Residential Mortgage 19,045 22,926 2,681 Home Equity 3,495 3,495 350 Automobile 17,626 17,626 251 Other 1 1,805 1,806 45 Total Consumer 41,971 45,853 3,327 Total Impaired Loans with an Allowance Recorded $ 50,930 $ 55,043 $ 4,043 Impaired Loans: Commercial $ 20,791 $ 26,138 $ 716 Consumer 41,971 45,853 3,327 Total Impaired Loans $ 62,762 $ 71,991 $ 4,043 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 and six months ended June 30, 2019 and 2018 . Three Months Ended Three Months Ended (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 $ 5,008 $ 78 $ 7,540 $ 83 Commercial Mortgage 5,789 16 6,351 30 Construction 1,281 21 1,386 22 Total Commercial 12,078 115 15,277 135 Total Impaired Loans with No Related Allowance Recorded $ 12,078 $ 115 $ 15,277 $ 135 Impaired Loans with an Allowance Recorded: Commercial Commercial and Industrial $ 1,598 $ 22 $ 1,128 $ 10 Commercial Mortgage 4,535 2 236 3 Total Commercial 6,133 24 1,364 13 Consumer Residential Mortgage 19,179 199 20,509 215 Home Equity 3,388 42 2,221 26 Automobile 17,705 298 15,819 278 Other 1 1,898 39 2,806 56 Total Consumer 42,170 578 41,355 575 Total Impaired Loans with an Allowance Recorded $ 48,303 $ 602 $ 42,719 $ 588 Impaired Loans: Commercial $ 18,211 $ 139 $ 16,641 $ 148 Consumer 42,170 578 41,355 575 Total Impaired Loans $ 60,381 $ 717 $ 57,996 $ 723 Six Months Ended Six Months Ended (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 $ 4,867 $ 163 $ 7,724 $ 196 Commercial Mortgage 4,763 32 7,132 117 Construction 1,294 42 1,396 45 Total Commercial 10,924 237 16,252 358 Total Impaired Loans with No Related Allowance Recorded $ 10,924 $ 237 $ 16,252 $ 358 Impaired Loans with an Allowance Recorded: Commercial Commercial and Industrial $ 1,684 $ 43 $ 1,022 $ 20 Commercial Mortgage 3,630 4 557 6 Total Commercial 5,314 47 1,579 26 Consumer Residential Mortgage 19,370 395 20,866 427 Home Equity 3,378 80 2,135 51 Automobile 17,509 593 15,483 539 Other 1 1,965 81 2,752 108 Total Consumer 42,222 1,149 41,236 1,125 Total Impaired Loans with an Allowance Recorded $ 47,536 $ 1,196 $ 42,815 $ 1,151 Impaired Loans: Commercial $ 16,238 $ 284 $ 17,831 $ 384 Consumer 42,222 1,149 41,236 1,125 Total Impaired Loans $ 58,460 $ 1,433 $ 59,067 $ 1,509 1 Comprised of other revolving credit and installment financing. For the three and six months ended June 30, 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 (“TDR”) that remained on accrual status. For the three and six months ended June 30, 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 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 $56.7 million and $54.0 million as of June 30, 2019 and December 31, 2018 , respectively. There were $0.3 million and $0.2 million commitments to lend additional funds on loans modified in a TDR as of June 30, 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 and six months ended June 30, 2019 and 2018 . Loans Modified as a TDR for the Loans Modified as a TDR for the 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 $ 99 $ 10 6 $ 712 $ 48 Total Commercial 1 99 10 6 712 48 Consumer Residential Mortgage 1 57 — 2 455 30 Home Equity 2 247 — 3 545 — Automobile 79 1,488 21 72 1,521 31 Other 2 29 179 5 63 468 14 Total Consumer 111 1,971 26 140 2,989 75 Total 112 $ 2,070 $ 36 146 $ 3,701 $ 123 Loans Modified as a TDR for the Loans Modified as a TDR for the 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 4 $ 205 $ 14 7 $ 1,233 $ 48 Commercial Mortgage 1 3,836 — — — — Total Commercial 5 4,041 14 7 1,233 48 Consumer Residential Mortgage 1 57 — 2 455 30 Home Equity 2 247 — 3 545 — Automobile 191 3,596 51 170 3,654 75 Other 2 66 385 10 138 967 28 Total Consumer 260 4,285 61 313 5,621 133 Total 265 $ 8,326 $ 75 320 $ 6,854 $ 181 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, 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 Three Months Ended 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 $ 58 — $ — Total Commercial 1 58 — — Consumer Automobile 9 186 14 289 Other 2 11 63 21 167 Total Consumer 20 249 35 456 Total 21 $ 307 35 $ 456 Six Months Ended Six Months Ended 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 $ 58 — $ — Total Commercial 1 58 — — Consumer Home Equity — — 1 236 Automobile 19 353 32 606 Other 2 20 109 41 295 Total Consumer 39 462 74 1,137 Total 40 $ 520 74 $ 1,137 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 $2.7 million as of June 30, 2019 . |