Loans and Leases and the Allowance for Loan and Lease Losses

6 Months Ended

Jun. 30, 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 June 30, 2020, and December 31, 2019:



(dollars in thousands)	June 30, 2020		December 31, 2019
Commercial
Commercial and Industrial	$	1,956,939	$	1,379,152
Commercial Mortgage	2,707,534		2,518,051
Construction	245,099		194,170
Lease Financing	113,187		122,454
Total Commercial	5,022,759		4,213,827
Consumer
Residential Mortgage	3,989,393		3,891,100
Home Equity	1,640,887		1,676,073
Automobile	700,702		720,286
Other ¹	451,629		489,606
Total Consumer	6,782,611		6,777,065
Total Loans and Leases	$	11,805,370	$	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 $2.4 million and $1.1 million for the three months ended June 30, 2020, and June 30, 2019, respectively, and $5.6 million and $1.6 million for the six months ended June 30, 2020, and June 30, 2019, respectively.

The Company elected to exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this footnote. As of June 30, 2020, and December 31, 2019, accrued interest receivable for loans totaled $36.1 million and $30.7 million, respectively, and is included in the “accrued interest receivable” line item on the Company’s consolidated statements of condition.

As previously mentioned in Note 1 Summary of Significant Accounting Policies, the CARES Act established the PPP, administered directly by the U.S. SBA. The PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. As of June 30, 2020, the Company had 4,482 PPP loans outstanding, with an outstanding principal balance of $543.3 million. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. PPP loans are included in the Commercial and Industrial loan class.

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 and six months ended June 30, 2020, and June 30, 2019.



(dollars in thousands)	Commercial			Consumer			Total
Three Months Ended June 30, 2020
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	67,987		$	70,163		$	138,150
Loans and Leases Charged-Off	(656		)	(7,627		)	(8,283		)
Recoveries on Loans and Leases Previously Charged-Off	1,524			1,648			3,172
Net Loans and Leases Recovered (Charged-Off)	868			(5,979		)	(5,111		)
Provision for Credit Losses	3,667			36,733			40,400
Balance at End of Period	$	72,522		$	100,917		$	173,439
Six Months Ended June 30, 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	(1,349		)	(14,111		)	(15,460		)
Recoveries on Loans and Leases Previously Charged-Off	1,853			4,756			6,609
Net Loans and Leases Recovered (Charged-Off)	504			(9,355		)	(8,851		)
Provision for Credit Losses	17,006			56,994			74,000
Balance at End of Period	$	72,522		$	100,917		$	173,439

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 Credit 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

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 June 30, 2020.



	Term Loans by Origination Year
(dollars in thousands)	YTD June 30, 2020		2019		2018		2017		2016		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total Loans and Leases
June 30, 2020
Commercial
Commercial and Industrial
Pass	$	755,648	$	221,992	$	199,600	$	78,712	$	83,437	$	101,529	$	431,950	$	1,163	$	1,874,031
Special Mention	1,358		126		2,046		—		114		194		7,131		—		10,969
Classified	23,031		838		1,620		1,111		1,649		20,163		23,424		103		71,939
Total Commercial and Industrial	$	780,037	$	222,956	$	203,266	$	79,823	$	85,200	$	121,886	$	462,505	$	1,266	$	1,956,939
Commercial Mortgage
Pass	$	433,742	$	568,350	$	385,977	$	280,736	$	319,128	$	543,951	$	73,922	$	—	$	2,605,806
Special Mention	4,543		—		21,517		13,160		1,261		5,453		—		—		45,934
Classified	33,168		4,368		2,789		1,405		4,791		9,273		—		—		55,794
Total Commercial Mortgage	$	471,453	$	572,718	$	410,283	$	295,301	$	325,180	$	558,677	$	73,922	$	—	$	2,707,534
Construction
Pass	$	66,853	$	87,978	$	33,825	$	11,356	$	—	$	1,915	$	42,020	$	—	$	243,947
Special Mention	1,152		—		—		—		—		—		—		—		1,152
Total Construction	$	68,005	$	87,978	$	33,825	$	11,356	$	—	$	1,915	$	42,020	$	—	$	245,099
Lease Financing
Pass	$	9,492	$	22,039	$	15,672	$	5,390	$	11,303	$	47,828	$	—	$	—	$	111,724
Classified	36		75		1,169		54		129		—		—		—		1,463
Total Lease Financing	$	9,528	$	22,114	$	16,841	$	5,444	$	11,432	$	47,828	$	—	$	—	$	113,187
Total Commercial	$	1,329,023	$	905,766	$	664,215	$	391,924	$	421,812	$	730,306	$	578,447	$	1,266	$	5,022,759
Consumer
Residential Mortgage
Pass	$	529,394	$	666,174	$	404,470	$	569,995	$	650,609	$	1,162,732	$	—	$	—	$	3,983,374
Classified	—		—		—		932		—		5,087		—		—		6,019
Total Residential Mortgage	$	529,394	$	666,174	$	404,470	$	570,927	$	650,609	$	1,167,819	$	—	$	—	$	3,989,393
Home Equity
Pass	$	—	$	—	$	—	$	—	$	—	$	5,563	$	1,587,454	$	41,957	$	1,634,974
Classified	—		—		—		—		—		72		4,701		1,140		5,913
Total Home Equity	$	—	$	—	$	—	$	—	$	—	$	5,635	$	1,592,155	$	43,097	$	1,640,887
Automobile
Pass	$	104,123	$	248,977	$	191,876	$	88,540	$	45,333	$	21,721	$	—	$	—	$	700,570
Classified	—		—		14		49		65		4		—		—		132
Total Automobile	$	104,123	$	248,977	$	191,890	$	88,589	$	45,398	$	21,725	$	—	$	—	$	700,702
Other¹
Pass	$	51,410	$	169,940	$	113,204	$	59,637	$	14,852	$	5,078	$	35,615	$	1,596	$	451,332
Classified	—		33		50		92		—		—		83		39		297
Total Other	$	51,410	$	169,973	$	113,254	$	59,729	$	14,852	$	5,078	$	35,698	$	1,635	$	451,629
Total Consumer	$	684,927	$	1,085,124	$	709,614	$	719,245	$	710,859	$	1,200,257	$	1,627,853	$	44,732	$	6,782,611
Total Loans and Leases	$	2,013,950	$	1,990,890	$	1,373,829	$	1,111,169	$	1,132,671	$	1,930,563	$	2,206,300	$	45,998	$	11,805,370


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

For the six months ended June 30, 2020, $1.3 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		Other¹		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 June 30, 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 June 30, 2020
Commercial
Commercial and Industrial	$	293	$	82	$	—	$	459	$	834	$	1,956,105	$	1,956,939	$	373
Commercial Mortgage	—		—		—		8,672		8,672		2,698,862		2,707,534		8,672
Construction	—		—		—		—		—		245,099		245,099		—
Lease Financing	617		—		—		—		617		112,570		113,187		—
Total Commercial	910		82		—		9,131		10,123		5,012,636		5,022,759		9,045
Consumer
Residential Mortgage	4,736		1,921		4,937		5,888		17,482		3,971,911		3,989,393		657
Home Equity	914		703		3,519		5,176		10,312		1,630,575		1,640,887		1,351
Automobile	2,027		299		133		—		2,459		698,243		700,702		—
Other ¹	1,946		1,064		296		—		3,306		448,323		451,629		—
Total Consumer	9,623		3,987		8,885		11,064		33,559		6,749,052		6,782,611		2,008
Total	$	10,533	$	4,069	$	8,885	$	20,195	$	43,682	$	11,761,688	$	11,805,370	$	11,053

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 June 30, 2020, and December 31, 2019.



	June 30, 2020						December 31, 2019
(dollars in thousands)	Non-accrual loans with a related ACL		Non-accrual loans without a related ACL		Total Non-accrual loans		Total Non-accrual loans
Commercial
Commercial and Industrial	$	459	$	—	$	459	$	830
Commercial Mortgage	3,543		5,129		8,672		9,244
Total Commercial	4,002		5,129		9,131		10,074
Consumer
Residential Mortgage	5,422		466		5,888		4,125
Home Equity	5,176		—		5,176		3,181
Total Consumer	10,598		466		11,064		7,306
Total	$	14,600	$	5,595	$	20,195	$	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 $65.0 million as of June 30, 2020, and $69.1 million as of December 31, 2019. There were $0.3 million commitments to lend additional funds on loans modified in a TDR as of June 30, 2020, and December 31, 2019.

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 and six months ended June 30, 2020, and June 30, 2019.



	Loans Modified as a TDR for the Three Months Ended June 30, 2020							Loans Modified as a TDR for the Three Months Ended June 30, 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	—		$	—		$	—	1		$	99		$	10
Construction	1		1,152			—		—		—			—
Total Commercial	1		1,152			—		1		99			10
Consumer
Residential Mortgage	—		—			—		1		57			—
Home Equity	—		—			—		2		247			—
Automobile	19		305			5		79		1,488			21
Other ²	5		52			2		29		179			5
Total Consumer	24		357			7		111		1,971			26
Total	25		$	1,509		$	7	112		$	2,070		$	36

	Loans Modified as a TDR for the Six Months Ended June 30, 2020							Loans Modified as a TDR for the Six Months Ended June 30, 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		$	98		$	2	4		$	205		$	14
Commercial Mortgage	—		—			—		1		3,836			—
Construction	1		1,152			—		—		—			—
Total Commercial	3		1,250			2		5		4,041			14
Consumer
Residential Mortgage	—		—			—		1		57			—
Home Equity	—		—			—		2		247			—
Automobile	70		1,172			19		191		3,596			51
Other ²	35		274			11		66		385			10
Total Consumer	105		1,446			30		260		4,285			61
Total	108		$	2,696		$	32	265		$	8,326		$	75


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, 2020, and June 30, 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 June 30, 2020			Three Months Ended June 30, 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
Commercial
Commercial and Industrial	—	$	—	1	$	58
Total Commercial	—	—		1	58

Consumer
Automobile	19	331		9	186
Other ²	2	14		11	63
Total Consumer	21	345		20	249
Total	21	$	345	21	$	307

	Six Months Ended June 30, 2020			Six Months Ended June 30, 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
Commercial
Commercial and Industrial	—	$	—	1	$	58
Total Commercial	—	—		1	58

Consumer
Automobile	34	636		19	353
Other ²	6	40		20	109
Total Consumer	40	676		39	462
Total	40	$	676	40	$	520


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. These modifications generally involve principal and/or interest payment deferrals for up to six months. Interest continues to legally accrue, and the Company continues to record interest income, during the forbearance period. The Company offers several repayment options such as immediate repayment, repayment over a designated time period, or as a balloon payment at maturity. These modifications generally do not involve forgiveness or interest rate reductions. The CARES Act, along with a joint agency statement issued by banking agencies, provide that short-term modifications made in response to COVID-19 do 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.

The Company, as lessor, also granted short-term lease concessions on some of its sales-type finance leases for equipment and automobiles. The concessions primarily consists of six-month extension programs whereby lease payments currently due are deferred and shifted to the end of the lease term. Interest income continues to accrue during the deferral period. See Note 1 Summary of Significant Accounting Policies for more information.

As of June 30, 2020, these COVID-19 related short-term loan and lease concessions totaled $1.1 billion (886 loans and leases) for the commercial segment and $795.5 million (16,414 loans and leases) for the consumer segment.

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $1.8 million as of June 30, 2020.