Basis of presentation (Policies)

3 Months Ended

Mar. 31, 2020

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Credit losses. In June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology with an expected loss methodology. The new methodology is referred to as the current expected credit loss (CECL) methodology and will apply to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. This includes, but is not limited to loans, loan commitments and held-to-maturity securities. In addition, ASU No. 2016-13 amends the accounting for credit losses on available-for-sale (AFS) debt securities and purchased financial assets with credit deterioration. The other-than-temporary impairment model of accounting for credit losses on AFS debt securities will be replaced with an estimate of expected credit losses only when the fair value is below the amortized cost of the asset. The length of time the fair value of an AFS debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists. The AFS debt security model requires the use of an allowance to record the estimated losses (and subsequent recoveries).

The Company adopted ASU No. 2016-13 on January 1, 2020 using the modified retrospective method with the cumulative effect of initially applying the amendments recognized in retained earnings as of January 1, 2020. The CECL models use a probability-of-default, loss given default and exposure at default methodology to estimate the expected credit losses. Within each model or calculation, loans are further segregated based on additional risk characteristics specific to that loan type, such as risk rating, FICO score, bankruptcy score, age of loan and collateral. The Company uses both internal and external historical data, as appropriate, and a blend of economic forecasts to estimate credit losses over a reasonable and supportable forecast period and then reverts to a longer-term historical loss experience to arrive at lifetime expected credit losses. The reversion period incorporates forward-looking expectations about repayments (including prepayments) as determined by the Company’s asset liability management system. The Company elected not to measure an allowance for credit losses for accrued interest as it reverses uncollectible accrued interest through interest income in a timely manner and to continue to report accrued interest within other assets in the balance sheets with the adoption of ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” See Codification Improvements below for a description of ASU No. 2019-04.

The allowance for credit losses (ACL) is a material estimate of the Company. As a result of the change from an incurred loss model to a methodology that considers the credit loss over the expected life of the loan, on January 1, 2020, the Company recorded an adjustment of $21 million to increase the ACL, including a $2 million increase in the allowance for loan commitments, with a corresponding adjustment to reduce retained earnings by $15 million on an after tax basis. The ACL is based on the composition, characteristics and quality of the loans and off balance sheet credit exposures as well as the prevailing economic conditions as of the adoption date. The increase in the ACL primarily relates to required reserves for residential mortgages and consumer loans, due to the requirement to estimate lifetime expected credit losses, with lower ACL requirements for commercial and commercial real estate loans due to their short-term nature. Based on the credit quality of the Company’s existing held-to-maturity and AFS investment securities portfolio, the Company did not recognize an ACL at adoption for those investments. The adoption of the new standard did not have a material impact to the Utilities’ customer and other accounts receivables and accrued unbilled revenue. Results for reporting periods beginning after January 1, 2020 are presented under ASU No. 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

The table below summarizes the impact of the Company’s adoption of ASU No. 2016-13.


	January 1, 2020
(in thousands)	Pre-ASU No. 2016-13 adoption		Impact of ASU No. 2016-13		As reported under ASU No. 2016-13
HEI consolidated
Loans held for investments, net¹	$	5,067,821	$	(19,441)	$	5,048,380
Total assets	$	13,745,251	$	(19,441)	$	13,725,810
Deferred income taxes	$	379,324	$	(5,628)	$	373,696
Other¹	583,545		1,559		585,104
Total liabilities	11,430,698		(4,069)		11,426,629
Retained earnings	622,042		(15,372)		606,670
Total shareholders’ equity	2,280,260		(15,372)		2,264,888
Total liabilities and shareholders’ equity	$	13,745,251	$	(19,441)	$	13,725,810

¹ The allowance for credit losses is classified in “Loans held for investments, net,” and the allowance for loan commitments is classified in “Other” liabilities in the Company’s condensed consolidated balance sheets.

Codification Improvements. In April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” which is intended to clarify certain issues related to the accounting for financial instruments.

•With respect to Topic 326, Financial Instruments - Credit Losses, ASU No. 2019-04 allows entities to measure the allowance for credit losses on accrued interest receivable balances separately from other components of the amortized cost basis of associated financial assets, or to make an accounting policy election not to measure an allowance for credit losses on accrued interest receivable amounts if an entity writes off the uncollectible accrued interest receivable balance in a timely manner and makes certain disclosures. ASU No. 2019-04 also allows an entity to make an accounting policy election regarding the presentation and disclosure of accrued interest receivables and the related allowance for credit losses for those accrued interest receivables. ASU No. 2019-04 also clarifies certain issues related to transfers between classifications or categories for loans and debt securities, recoveries, variable interest rates and prepayments, vintage disclosures, and contractual extensions and renewal options.

•With respect to Topic 815, Derivatives and Hedging, ASU No. 2019-04 provides amendments, among others, that address partial-term fair value hedges, fair value hedge basis adjustments, and certain transition requirements.

•With respect to Topic 825, Financial Instruments, ASU No. 2019-04 clarifies the scope of the guidance and disclosure requirements with respect to recognizing and measuring financial instruments.

The amended guidance in ASU No. 2019-04 is effective for fiscal years and interim periods beginning after December 15, 2019, with early adoption permitted. The Company adopted ASU No. 2019-04 in the first quarter of 2020 and elected not to measure an allowance for credit losses for accrued interest as it reverses uncollectible accrued interest through interest income in a timely manner and to continue to report accrued interest within other assets in the balance sheets. The impact of the ASU on the Company’s consolidated financial statements was not material.

Troubled debt restructurings

Troubled debt restructurings. A loan modification is deemed to be a TDR when the borrower is determined to be experiencing financial difficulties and ASB grants a concession it would not otherwise consider.

The allowance for credit losses on TDR loans that do not share risk characteristics are individually evaluated based on the present value of expected future cash flows discounted at the loan’s effective original contractual rate or based on the fair value of collateral less cost to sell. The financial impact of the estimated loss is an increase to the allowance associated with the modified loan. When available information confirms that specific loans or portions thereof are uncollectible (confirmed losses), these amounts are charged off against the allowance for credit losses.