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Loans and Leases and the Allowance for Loan and Lease Losses
 3 Months Ended
Mar. 31, 2020
Loans and Leases and Allowance for Loan and Lease Losses [Abstract]  
Loans and Leases and the Allowance for Loan and Lease Losses Loans and Leases and the Allowance for Credit Losses

Loans and Leases

The Company’s loan and lease portfolio was comprised of the following as of March 31, 2020, and December 31, 2019:

(dollars in thousands)
March 31,
2020

 
December 31,
2019

Commercial
 

 
 

Commercial and Industrial
$
1,558,232

 
$
1,379,152

Commercial Mortgage
2,616,243

 
2,518,051

Construction
245,390

 
194,170

Lease Financing
110,704

 
122,454

Total Commercial
4,530,569

 
4,213,827

Consumer
 

 
 

Residential Mortgage
3,928,183

 
3,891,100

Home Equity
1,692,154

 
1,676,073

Automobile
716,214

 
720,286

Other 1
485,660

 
489,606

Total Consumer
6,822,211

 
6,777,065

Total Loans and Leases
$
11,352,780

 
$
10,990,892

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 $3.2 million and $0.5 million for the three months ended March 31, 2020, and March 31, 2019, respectively.

The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of loans disclosed throughout this footnote. As of March 31, 2020, and December 31, 2019, AIR for loans totaled $30.9 million and $30.7 million, respectively, and is included in the “accrued interest receivable” line item on the Company’s consolidated statements of condition.

Allowance for Credit Losses (the “Allowance”)

As previously mentioned in Note 1 Summary of Significant Accounting Policies, the Company’s January 1, 2020, adoption of ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments,” resulted in a significant change to our methodology for estimating the Allowance since December 31, 2019. As a result of this adoption, the Company recorded a $1.7 million decrease to the Allowance as a cumulative-effect adjustment on January 1, 2020.

The following presents by portfolio segment, the activity in the Allowance for the three months ended March 31, 2020, and March 31, 2019. 

(dollars in thousands)
Commercial

 
Consumer

 
Total

Three Months Ended March 31, 2020
 

 
 

 
 

Allowance for Credit Losses:
 

 
 

 
 

Balance at Beginning of Period (December 31, 2019)
$
73,801

 
$
36,226

 
$
110,027

CECL Adoption (Day 1) Impact
(18,789
)
 
17,052

 
(1,737
)
Balance at Beginning of Period (January 1, 2020)
55,012

 
53,278

 
108,290

Loans and Leases Charged-Off
(693
)
 
(6,484
)
 
(7,177
)
Recoveries on Loans and Leases Previously Charged-Off
329

 
3,108

 
3,437

Net Loans and Leases Recovered (Charged-Off)
(364
)
 
(3,376
)
 
(3,740
)
Provision for Credit Losses
13,339

 
20,261

 
33,600

Balance at End of Period
$
67,987

 
$
70,163

 
$
138,150

 
 
 
 
 
 
Three Months Ended March 31, 2019
 

 
 

 
 

Allowance for Credit 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


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 all 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. Management believes that there is a moderate likelihood of some loss related to those loans and leases that are considered Special Mention. The Special Mention credit quality indicator is not used for the consumer portfolio segment.

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 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 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.

For pass rated credits, risk ratings are certified at a minimum annually. For special mention or classified credits, risk ratings are reviewed for appropriateness on an ongoing basis monthly or at a minimum quarterly.  The following presents by credit quality indicator, loan class, and year of origination, the amortized cost basis of the Company’s loans and leases as of March 31, 2020.

 
Term Loans by Origination Year
 
 
 
 
 
 
(dollars in thousands)
YTD
March 31, 2020

 
2019

 
2018

 
2017

 
2016

 
Prior

 
Revolving
Loans

 
Revolving Loans Converted to Term Loans

 
Total Loans and Leases

March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and Industrial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
160,663

 
$
253,285

 
$
212,901

 
$
93,614

 
$
87,982

 
$
108,952

 
$
557,732

 
$
1,122

 
$
1,476,251

Special Mention
62

 
508

 
2,087

 
700

 
116

 
152

 
19,345

 
—

 
22,970

Classified
605

 
22,117

 
1,678

 
1,455

 
440

 
20,479

 
12,069

 
168

 
59,011

Total Commercial and Industrial
$
161,330

 
$
275,910

 
$
216,666

 
$
95,769

 
$
88,538

 
$
129,583

 
$
589,146

 
$
1,290

 
$
1,558,232

Commercial Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
209,933

 
$
591,055

 
$
396,239

 
$
302,711

 
$
329,045

 
$
602,337

 
$
81,036

 
$
—

 
$
2,512,356

Special Mention
3,961

 
820

 
19,919

 
13,176

 
7,359

 
7,884

 
—

 
—

 
53,119

Classified
11,464

 
5,413

 
8,453

 
1,405

 
704

 
23,329

 
—

 
—

 
50,768

Total Commercial Mortgage
$
225,358

 
$
597,288

 
$
424,611

 
$
317,292

 
$
337,108

 
$
633,550

 
$
81,036

 
$
—

 
$
2,616,243

Construction
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
54,220

 
$
81,985

 
$
45,600

 
$
20,336

 
$
—

 
$
1,936

 
$
40,152

 
$
—

 
$
244,229

Classified
—

 
—

 
—

 
—

 
—

 
1,161

 
—

 
—

 
1,161

Total Construction
$
54,220

 
$
81,985

 
$
45,600

 
$
20,336

 
$
—

 
$
3,097

 
$
40,152

 
$
—

 
$
245,390

Lease Financing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
2,785

 
$
23,324

 
$
16,762

 
$
5,767

 
$
12,007

 
$
48,527

 
$
—

 
$
—

 
$
109,172

Special Mention
—

 
—

 
—

 
2

 
34

 
—

 
—

 
—

 
36

Classified
38

 
80

 
1,206

 
59

 
113

 
—

 
—

 
—

 
1,496

Total Lease Financing
$
2,823

 
$
23,404

 
$
17,968

 
$
5,828

 
$
12,154

 
$
48,527

 
$
—

 
$
—

 
$
110,704

Total Commercial
$
443,731


$
978,587


$
704,845


$
439,225


$
437,800


$
814,757


$
710,334


$
1,290


$
4,530,569

Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
212,313

 
$
704,271

 
$
445,511

 
$
625,159

 
$
678,049

 
$
1,258,545

 
$
—

 
$
—

 
$
3,923,848

Classified
—

 
—

 
—

 
932

 
—

 
3,403

 
—

 
—

 
4,335

Total Residential Mortgage
$
212,313

 
$
704,271

 
$
445,511

 
$
626,091

 
$
678,049

 
$
1,261,948

 
$
—

 
$
—

 
$
3,928,183

Home Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
6,245

 
$
1,637,082

 
$
43,589

 
$
1,686,916

Classified
—

 
—

 
—

 
—

 
—

 
103

 
3,973

 
1,162

 
5,238

Total Home Equity
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
6,348

 
$
1,641,055

 
$
44,751

 
$
1,692,154

Automobile
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
63,914

 
$
265,516

 
$
208,273

 
$
98,987

 
$
51,746

 
$
26,912

 
$
—

 
$
—

 
$
715,348

Classified
—

 
182

 
166

 
257

 
179

 
82

 
—

 
—

 
866

Total Automobile
$
63,914

 
$
265,698

 
$
208,439

 
$
99,244

 
$
51,925

 
$
26,994

 
$
—

 
$
—

 
$
716,214

Other1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
45,414

 
$
181,911

 
$
123,803

 
$
68,751

 
$
17,783

 
$
6,098

 
$
39,053

 
$
1,643

 
$
484,456

Classified
—

 
326

 
326

 
302

 
119

 
44

 
79

 
8

 
1,204

Total Other
$
45,414

 
$
182,237

 
$
124,129

 
$
69,053

 
$
17,902

 
$
6,142

 
$
39,132

 
$
1,651

 
$
485,660

Total Consumer
$
321,641

 
$
1,152,206

 
$
778,079

 
$
794,388

 
$
747,876

 
$
1,301,432

 
$
1,680,187

 
$
46,402

 
$
6,822,211

Total Loans and Leases
$
765,372

 
$
2,130,793


$
1,482,924


$
1,233,613


$
1,185,676


$
2,116,189


$
2,390,521


$
47,692


$
11,352,780

1 
Comprised of other revolving credit, installment, and lease financing.

For the three months ended March 31, 2020, $0.6 million revolving loans were converted to term loans.

The following presents by loan class and credit quality indicator, the recorded investment in the Company’s loans and leases as of December 31, 2019.
 
December 31, 2019
(dollars in thousands)
Commercial
and Industrial

 
Commercial
Mortgage

 
Construction

 
Lease
Financing

 
Total
Commercial

Pass
$
1,306,040

 
$
2,463,858

 
$
188,832

 
$
120,933

 
$
4,079,663

Special Mention
37,722

 
16,453

 
4,148

 
—

 
58,323

Classified
35,390

 
37,740

 
1,190

 
1,521

 
75,841

Total
$
1,379,152

 
$
2,518,051

 
$
194,170

 
$
122,454

 
$
4,213,827

 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Residential
Mortgage

 
Home
Equity

 
Automobile

 
Other 1

 
Total
Consumer

Pass
$
3,886,389

 
$
1,671,468

 
$
719,337

 
$
488,113

 
$
6,765,307

Classified
4,711

 
4,605

 
949

 
1,493

 
11,758

Total
$
3,891,100

 
$
1,676,073

 
$
720,286

 
$
489,606

 
$
6,777,065

Total Recorded Investment in Loans and Leases
 
 

 
 

 
 

 
$
10,990,892

1 
Comprised of other revolving credit, installment, and lease financing.
Aging Analysis

Loans and leases are considered to be past due once becoming 30 days delinquent. For the consumer portfolio, this generally represents two missed monthly payments. The following presents by class, an aging analysis of the Company’s loan and lease portfolio as of March 31, 2020, and December 31, 2019.
(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, 2020
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and Industrial
$
3,596

 
$
255

 
$
—

 
$
634

 
$
4,485

 
$
1,553,747

 
$
1,558,232

 
$
429

Commercial Mortgage
4,637

 
—

 
—

 
9,048

 
13,685

 
2,602,558

 
2,616,243

 
9,048

Construction
720

 
—

 
—

 
—

 
720

 
244,670

 
245,390

 
—

Lease Financing
23

 
—

 
—

 
—

 
23

 
110,681

 
110,704

 
—

Total Commercial
8,976

 
255

 
—

 
9,682

 
18,913

 
4,511,656

 
4,530,569

 
9,477

Consumer
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential Mortgage
3,935

 
2,342

 
3,024

 
4,330

 
13,631

 
3,914,552

 
3,928,183

 
1,104

Home Equity
4,367

 
2,819

 
3,426

 
4,086

 
14,698

 
1,677,456

 
1,692,154

 
839

Automobile
14,590

 
4,096

 
866

 
—

 
19,552

 
696,662

 
716,214

 
—

Other 1
3,648

 
1,905

 
1,205

 
—

 
6,758

 
478,902

 
485,660

 
—

Total Consumer
26,540

 
11,162

 
8,521

 
8,416

 
54,639

 
6,767,572

 
6,822,211

 
1,943

Total
$
35,516

 
$
11,417

 
$
8,521

 
$
18,098

 
$
73,552

 
$
11,279,228

 
$
11,352,780

 
$
11,420

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2019
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and Industrial
$
12,534

 
$
148

 
$
—

 
$
830

 
$
13,512

 
$
1,365,640

 
$
1,379,152

 
$
421

Commercial Mortgage
2,998

 
—

 
—

 
9,244

 
12,242

 
2,505,809

 
2,518,051

 
9,244

Construction
101

 
51

 
—

 
—

 
152

 
194,018

 
194,170

 
—

Lease Financing
720

 
—

 
—

 
—

 
720

 
121,734

 
122,454

 
—

Total Commercial
16,353


199


—

 
10,074

 
26,626

 
4,187,201

 
4,213,827

 
9,665

Consumer
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential Mortgage
6,097

 
2,070

 
1,839

 
4,125

 
14,131

 
3,876,969

 
3,891,100

 
1,429

Home Equity
3,949

 
2,280

 
4,125

 
3,181

 
13,535

 
1,662,538

 
1,676,073

 
412

Automobile
16,067

 
4,154

 
949

 
—

 
21,170

 
699,116

 
720,286

 
—

Other 1
3,498

 
2,074

 
1,493

 
—

 
7,065

 
482,541

 
489,606

 
—

Total Consumer
29,611

 
10,578

 
8,406

 
7,306

 
55,901

 
6,721,164

 
6,777,065

 
1,841

Total
$
45,964

 
$
10,777

 
$
8,406

 
$
17,380

 
$
82,527

 
$
10,908,365

 
$
10,990,892

 
$
11,506

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.
Non-Accrual Loans and Leases

The following presents the non-accrual loans and leases as of March 31, 2020, and December 31, 2019.

 
March 31, 2020
 
December 31, 2019

(dollars in thousands)
Nonaccrual loans with a related ACL

 
Nonaccrual loans without a related ACL

 
Total Nonaccrual loans

 
Total Nonaccrual loans

Commercial
 
 
 
 
 
 
 
Commercial and Industrial
$
634

 
$
—

 
$
634

 
$
830

Commercial Mortgage
3,543

 
5,505

 
9,048

 
9,244

Total Commercial
4,177

 
5,505

 
9,682

 
10,074

Consumer
 
 
 
 
 
 
 
Residential Mortgage
3,399

 
931

 
4,330

 
4,125

Home Equity
4,086

 
—

 
4,086

 
3,181

Total Consumer
7,485

 
931

 
8,416

 
7,306

Total
$
11,662

 
$
6,436

 
$
18,098

 
$
17,380


All payments received while on non-accrual status are applied against the principal balance of the loan or lease. The Company does not recognize interest income while loans or leases are on non-accrual status.

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 $67.1 million as of March 31, 2020, and $69.1 million as of December 31, 2019.  There were $0.2 million and $0.3 million commitments to lend additional funds on loans modified in a TDR as of March 31, 2020, and December 31, 2019, 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 fully amortizing the loan 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, 2020, and March 31, 2019.
 
Loans Modified as a TDR for the
Three Months Ended March 31, 2020
 
Loans Modified as a TDR for the
Three Months Ended March 31, 2019
 
 

 
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
2

 
$
99

 
$
2

 
3

 
$
111

 
$
5

Commercial Mortgage
—

 
—

 
—

 
1

 
3,907

 
—

Total Commercial
2

 
99

 
2

 
4

 
4,018

 
5

Consumer
 

 
 

 
 

 
 

 
 

 
 

Automobile
52

 
893

 
14

 
117

 
2,240

 
34

Other 2
31

 
240

 
10

 
39

 
229

 
6

Total Consumer
83

 
1,133

 
24

 
156

 
2,469

 
40

Total
85

 
$
1,232

 
$
26

 
160

 
$
6,487

 
$
45

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, 2020, and March 31, 2019, 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, 2020
 
Three Months Ended
March 31, 2019
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
 
 
 

 
 

 
 

Automobile
18

 
$
176

 
14

 
$
266

Other 2
5

 
50

 
19

 
125

Total Consumer
23

 
226


33

 
391

Total
23

 
$
226

 
33

 
$
391


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.

Modifications in response to COVID-19

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The CARES Act along with a joint agency statement issued by banking agencies, provides that short-term modifications made in response to COVID-19 does not need to be accounted for as a TDR. Accordingly, the Company does not account for such loan modifications as TDRs. See Note 1 Summary of Significant Accounting Policies for more information.
Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $1.9 million as of March 31, 2020.