Loans Receivable and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2020

Loans Receivable and Allowance for Loan Losses

Loans Receivable and Allowance for Loan Losses

(6)      Loans Receivable and Allowance for Loan Losses

The components of loans receivable are as follows:

	June 30,		December 31,
(Dollars in thousands)	2020		2019
Real estate loans:
First mortgages:
One- to four-family residential	$	1,491,552	$	1,536,781
Multi-family residential		8,987		9,965
Construction, commercial and other		22,161		23,382
Home equity loans and lines of credit		9,992		10,084
Total real estate loans		1,532,692		1,580,212
Other loans:
Loans on deposit accounts		276		235
Consumer and other loans		11,105		9,484
Total other loans		11,381		9,719
Less:
Net unearned fees and discounts		(2,250)		(2,435)
Allowance for loan losses		(4,256)		(2,712)
Total unearned fees, discounts and allowance for loan losses		(6,506)		(5,147)
Loans receivable, net	$	1,537,567	$	1,584,784

The table below presents the activity in the allowance for loan losses by portfolio segment:

			Construction,		Home
			Commercial		Equity
			and Other		Loans and
	Residential		Mortgage		Lines of		Consumer
(Dollars in thousands)	Mortgage		Loans		Credit		and Other		Unallocated		Totals
Three months ended June 30, 2020:
Balance, beginning of period	$	1,863	$	452	$	1	$	172	$	430	$	2,918
Provision (reversal of provision) for loan losses		1,157		7		(10)		92		149		1,395
		3,020		459		(9)		264		579		4,313
Charge-offs		—		—		—		(68)		—		(68)
Recoveries		—		—		10		1		—		11
Net recoveries (charge-offs)		—		—		10		(67)		—		(57)
Balance, end of period	$	3,020	$	459	$	1	$	197	$	579	$	4,256
Six months ended June 30, 2020:
Balance, beginning of period	$	1,741	$	511	$	1	$	54	$	405	$	2,712
Provision (reversal of provision) for loan losses		1,279		(52)		(10)		221		174		1,612
		3,020		459		(9)		275		579		4,324
Charge-offs		—		—		—		(80)		—		(80)
Recoveries		—		—		10		2		—		12
Net recoveries (charge-offs)		—		—		10		(78)		—		(68)
Balance, end of period	$	3,020	$	459	$	1	$	197	$	579	$	4,256

			Construction,		Home
			Commercial		Equity
			and Other		Loans and
	Residential		Mortgage		Lines of		Consumer
(Dollars in thousands)	Mortgage		Loans		Credit		and Other		Unallocated		Totals
Three months ended June 30, 2019:
Balance, beginning of period	$	1,800	$	454	$	1	$	45	$	359	$	2,659
Provision (reversal of provision) for loan losses		(31)		(43)		—		(9)		32		(51)
		1,769		411		1		36		391		2,608
Charge-offs		—		—		—		(9)		—		(9)
Recoveries		—		—		—		17		—		17
Net recoveries		—		—		—		8		—		8
Balance, end of period	$	1,769	$	411	$	1	$	44	$	391	$	2,616
Six months ended June 30, 2019:
Balance, beginning of period	$	1,797	$	443	$	1	$	47	$	354	$	2,642
Provision (reversal of provision) for loan losses		(46)		(32)		—		(5)		37		(46)
		1,751		411		1		42		391		2,596
Charge-offs		—		—		—		(16)		—		(16)
Recoveries		18		—		—		18		—		36
Net recoveries		18		—		—		2		—		20
Balance, end of period	$	1,769	$	411	$	1	$	44	$	391	$	2,616

Management considers the allowance for loan losses at June 30, 2020 to be at an appropriate level to provide for probable losses that can be reasonably estimated based on general and specific conditions at that date. While the Company uses the best information it has available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. To the extent actual outcomes differ from the estimates, additional provisions for credit losses may be required that would reduce future earnings. In addition, as an integral part of their examination process, the bank regulators periodically review the allowance for loan losses and may require the Company to increase the allowance based on their analysis of information available at the time of their examination.

The loan loss provision for the three months ended June 30, 2020 was $1.4 million compared to a $51,000 reversal for the three months ended June 30, 2019. The increase in the loan loss provision occurred primarily from an increase in the qualitative factors used to calculate the allowance for loan losses. The qualitative factors increased because Hawaii’s unemployment rate increased due to layoffs that resulted from government mandates to minimize the spread of COVID-19.

The table below presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method:

			Construction,		Home
			Commercial		Equity
			and Other		Loans and
	Residential		Mortgage		Lines of		Consumer
(Dollars in thousands)	Mortgage		Loans		Credit		and Other		Unallocated		Totals
June 30, 2020:
Allowance for loan losses:
Ending allowance balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		3,020		459		1		197		579		4,256
Total ending allowance balance	$	3,020	$	459	$	1	$	197	$	579	$	4,256
Loans:
Ending loan balance:
Individually evaluated for impairment	$	1,310	$	—	$	24	$	—	$	—	$	1,334
Collectively evaluated for impairment		1,497,016		22,109		9,969		11,395		—		1,540,489
Total ending loan balance	$	1,498,326	$	22,109	$	9,993	$	11,395	$	—	$	1,541,823
December 31, 2019:
Allowance for loan losses:
Ending allowance balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		1,741		511		1		54		405		2,712
Total ending allowance balance	$	1,741	$	511	$	1	$	54	$	405	$	2,712
Loans:
Ending loan balance:
Individually evaluated for impairment	$	1,224	$	—	$	89	$	—	$	—	$	1,313
Collectively evaluated for impairment		1,543,125		23,326		9,997		9,735		—		1,586,183
Total ending loan balance	$	1,544,349	$	23,326	$	10,086	$	9,735	$	—	$	1,587,496

The table below presents the balance of impaired loans individually evaluated for impairment by class of loans:

			Unpaid
	Recorded		Principal
(Dollars in thousands)	Investment		Balance
June 30, 2020:
With no related allowance recorded:
One- to four-family residential mortgages	$	1,310	$	1,726
Home equity loans and lines of credit		24		32
Total	$	1,334	$	1,758
December 31, 2019:
With no related allowance recorded:
One- to four-family residential mortgages	$	1,224	$	1,615
Home equity loans and lines of credit		89		178
Total	$	1,313	$	1,793

The table below presents the average recorded investment and interest income recognized on impaired loans by class of loans:

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognized		Investment		Recognized
2020:
With no related allowance recorded:
One- to four-family residential mortgages	$	1,321	$	9	$	1,334	$	17
Home equity loans and lines of credit		25		—		25		—
Total	$	1,346	$	9	$	1,359	$	17
2019:
With no related allowance recorded:
One- to four-family residential mortgages	$	1,390	$	8	$	1,404	$	17
Home equity loans and lines of credit		100		—		103		—
Total	$	1,490	$	8	$	1,507	$	17

There were no loans individually evaluated for impairment with a related allowance for loan loss as of June 30, 2020 or December 31, 2019. Loans individually evaluated for impairment do not have an allocated allowance for loan loss because they are written down to fair value at the time of impairment.

The Company had seven nonaccrual loans with a book value of $763,000 as of June 30, 2020 and six nonaccrual loans with a book value of $736,000 as of December 31, 2019. The Company collected interest on nonaccrual loans of $26,000 and $34,000 during the six months ended June 30, 2020 and 2019, respectively, but due to accounting and regulatory requirements, the Company recorded the interest as a reduction of principal. The Company would have recognized additional interest income of $27,000 and $34,000 during the six months ended June 30, 2020 and 2019, respectively, had the loans been accruing interest. The Company had one loan for $29,000 that was 90 days or more past due and still accruing interest as of June 30, 2020. At December 31, 2019, the Company had one loan for $1,000 that was 90 days or more past due and still accruing interest.

The table below presents the aging of loans and accrual status by class of loans:

															Loans
															90 Days
															or More
	30 - 59		60 - 89		90 Days or										Past Due
	Days Past		Days Past		More		Total Past		Loans Not		Total		Nonaccrual		and Still
(Dollars in thousands)	Due		Due		Past Due		Due		Past Due		Loans		Loans		Accruing
June 30, 2020:
One- to four-family residential mortgages	$	232	$	164	$	135	$	531	$	1,488,824	$	1,489,355	$	739	$	—
Multi-family residential mortgages		—		—		—		—		8,971		8,971		—		—
Construction, commercial and other mortgages		—		—		—		—		22,109		22,109		—		—
Home equity loans and lines of credit		—		24		—		24		9,969		9,993		24		—
Loans on deposit accounts		—		—		—		—		276		276		—		—
Consumer and other		1		—		29		30		11,089		11,119		—		29
Total	$	233	$	188	$	164	$	585	$	1,541,238	$	1,541,823	$	763	$	29
December 31, 2019:
One- to four-family residential mortgages	$	—	$	959	$	—	$	959	$	1,533,446	$	1,534,405	$	647	$	—
Multi-family residential mortgages		—		—		—		—		9,944		9,944		—		—
Construction, commercial and other mortgages		—		—		—		—		23,326		23,326		—		—
Home equity loans and lines of credit		—		26		—		26		10,060		10,086		89		—
Loans on deposit accounts		—		—		—		—		235		235		—		—
Consumer and other		33		1		1		35		9,465		9,500		—		1
Total	$	33	$	986	$	1	$	1,020	$	1,586,476	$	1,587,496	$	736	$	1

The Company primarily uses the aging of loans and accrual status to monitor the credit quality of its loan portfolio. When a mortgage loan becomes seriously delinquent (90 days or more contractually past due), it displays weaknesses that may result in a loss. As a loan becomes more delinquent, the likelihood of the borrower repaying the loan decreases and the loan becomes more collateral-dependent. A mortgage loan becomes collateral-dependent when the proceeds for repayment can be expected to come only from the sale or operation of the collateral and not from borrower repayments. Generally, appraisals are obtained after a loan becomes collateral-dependent or is four months delinquent. The carrying value of collateral-dependent loans is adjusted to the fair value of the collateral less selling costs. Any commercial real estate, commercial, construction or equity loan that has a loan balance in excess of a specified amount is also periodically reviewed to determine whether the loan exhibits any weaknesses and is performing in accordance with its contractual terms.

There were no loans modified in a troubled debt restructuring during the six months ended June 30, 2020 or 2019. There were no new troubled debt restructurings within the 12 months ended June 30, 2020 or 2019 that subsequently defaulted.

The table below summarizes troubled debt restructurings by class of loans:

	Number of		Accrual		Number of		Nonaccrual
(Dollars in thousands)	Loans		Status		Loans		Status		Total
June 30, 2020:
One- to four-family residential mortgages		3	$	571		2	$	495	$	1,066
Total		3	$	571		2	$	495	$	1,066
December 31, 2019:
One- to four-family residential mortgages		3	$	577		2	$	525	$	1,102
Home equity loans and lines of credit		—		—		1		64		64
Total		3	$	577		3	$	589	$	1,166

There were no delinquent restructured loans as of June 30, 2020 or December 31, 2019. Restructurings include deferrals of interest and/or principal payments and temporary or permanent reductions in interest rates due to the financial difficulties of the borrowers. At June 30, 2020, we had no commitments to lend any additional funds to these borrowers.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress and signed into law by the President on March 27, 2020. The CARES Act provides relief to financial institutions from categorizing eligible loan modifications as troubled debt restructurings over the remaining life of the modified loan. In addition, Interagency Statements were issued on March 22, 2020 and April 7, 2020 by bank regulatory agencies to encourage financial institutions to work prudently with borrowers. The agencies confirmed with the FASB that loans that were not more than 30 days past due and receive short-term modifications of six months or less are not considered to be delinquent or troubled debt restructurings and are not reported as nonaccrual. The Company will be using the provisions of the CARES Act and the Interagency Statements to account for the loans receiving forbearance.

The Company received requests for assistance from borrowers who have been affected by COVID-19. As of June 30, 2020, the Company received loan forbearance requests totaling $167.1 million, or 10.9% of total loans receivable. $160.9 million of these loan forbearance requests consist of one- to four-family residential mortgage loans and represent 10.5% of the total loans receivable. These loans are currently well secured as the ratio of the current loan balance to the current tax-assessed value of the property securing these mortgage loans averages 55.8%. One- to four-family residential mortgage loans represent 97.0% of the Company’s total loan portfolio balance. All of our residential mortgage loans are secured by real estate in Hawaii. Total one- to four-family residential mortgage loans are also well-secured as the ratio of the current loan balance to the current tax-assessed value of the property securing these loans averages 48.8%. The Company has also received forbearance requests of $6.2 million on other loans, which represent 0.4% of the total balance of loans receivable. The loans on which the Company has received forbearance requests are included in the ALLL calculation. Loans performing under a forbearance agreement are not contractually past due and are excluded from the past due statistics above.

The Company had no real estate owned as of June 30, 2020 or December 31, 2019. There were no loans in the process of foreclosure at June 30, 2020 and December 31, 2019.

Nearly all of our real estate loans are collateralized by real estate located in the State of Hawaii. Loan-to-value ratios on these real estate loans generally do not exceed 80% at the time of origination.

During the six months ended June 30, 2020 and 2019, the Company sold mortgage loans held for sale with principal balances of $12.3 million and $2.5 million, respectively, and recognized gains of $289,000 and $6,000, respectively. The Company had six loans held for sale totaling $2.8 million at June 30, 2020 and one loan held for sale for $470,000 at December 31, 2019.

During the six months ended June 30, 2020, the Company securitized fixed-rate first mortgage loans with a book value of $9.4 million and received mortgage-backed securities with a fair market value of $9.8 million. The Company

retained the servicing of these loans and recorded mortgage servicing assets with a fair market value of $78,000. A net gain of $377,000 was recognized on the transaction.

The Company serviced loans for others with principal balances of $69.1 million at June 30, 2020 and $65.1 million at December 31, 2019. Of these amounts, $43.7 million and $37.8 million of loan balances relate to securitizations for which the Company continues to hold the related mortgage-backed securities at June 30, 2020 and December 31, 2019, respectively. The amount of contractually specified servicing fees earned for the six months ended June 30, 2020 and 2019 was $90,000 and $40,000, respectively. The amount of contractually specified servicing fees earned for the three months ended June 30, 2020 and 2019 was $46,000 and $20,000, respectively. The fees are reported in service fees on loan and deposit accounts in the consolidated statements of income.