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FHB First Hawaiian

Filed: 8 May 20, 4:24pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

or

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to               

Commission File Number  001-14585

FIRST HAWAIIAN, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware

99-0156159

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

999 Bishop Street, 29th Floor

Honolulu, HI

96813

(Address of Principal Executive Offices)

(Zip Code)

(808) 525-7000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Trading Symbol(s)

Name of each exchange on which registered:

Common Stock, par value $0.01 per share

FHB

NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No .

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No .

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 129,827,968 shares of Common Stock, par value $0.01 per share, were outstanding as of April 30, 2020.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

Three Months Ended

March 31, 

(dollars in thousands, except per share amounts)

2020

  

2019

Interest income

Loans and lease financing

$

134,971

$

144,406

Available-for-sale securities

21,210

24,486

Other

2,351

3,669

Total interest income

158,532

172,561

Interest expense

Deposits

15,600

23,197

Short-term and long-term borrowings

4,249

4,275

Total interest expense

19,849

27,472

Net interest income

138,683

145,089

Provision for credit losses

41,200

5,680

Net interest income after provision for credit losses

97,483

139,409

Noninterest income

Service charges on deposit accounts

8,950

8,060

Credit and debit card fees

14,949

16,655

Other service charges and fees

8,539

9,129

Trust and investment services income

9,591

8,618

Bank-owned life insurance

2,260

3,813

Investment securities gains (losses), net

85

(2,613)

Other

4,854

3,410

Total noninterest income

49,228

47,072

Noninterest expense

Salaries and employee benefits

44,829

44,860

Contracted services and professional fees

16,055

13,645

Occupancy

7,243

6,986

Equipment

4,708

4,284

Regulatory assessment and fees

1,946

1,447

Advertising and marketing

1,823

1,966

Card rewards program

7,015

6,732

Other

12,847

12,703

Total noninterest expense

96,466

92,623

Income before provision for income taxes

50,245

93,858

Provision for income taxes

11,380

23,934

Net income

$

38,865

$

69,924

Basic earnings per share

$

0.30

$

0.52

Diluted earnings per share

$

0.30

$

0.52

Basic weighted-average outstanding shares

129,895,706

134,879,336

Diluted weighted-average outstanding shares

130,351,585

135,198,345

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

2

FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

Three Months Ended

March 31, 

(dollars in thousands)

2020

  

2019

Net income

$

38,865

  

$

69,924

Other comprehensive income, net of tax:

Net change in pensions and other benefits

(96)

Net change in investment securities

35,974

53,441

Other comprehensive income

35,878

53,441

Total comprehensive income

$

74,743

$

123,365

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

3

FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

March 31, 

December 31, 

(dollars in thousands, except share amount)

  

2020

  

2019

Assets

Cash and due from banks

$

353,908

$

360,375

Interest-bearing deposits in other banks

698,924

333,642

Investment securities, at fair value (amortized cost: $4,014,397 as of March 31, 2020 and $4,080,663 as of December 31, 2019)

4,058,457

4,075,644

Loans held for sale

8,180

904

Loans and leases

13,380,270

13,211,650

Less: allowance for credit losses

166,013

130,530

Net loans and leases

13,214,257

13,081,120

Premises and equipment, net

321,254

316,885

Other real estate owned and repossessed personal property

238

319

Accrued interest receivable

43,552

45,239

Bank-owned life insurance

455,226

453,873

Goodwill

995,492

995,492

Mortgage servicing rights

11,979

12,668

Other assets

594,424

490,573

Total assets

$

20,755,891

$

20,166,734

Liabilities and Stockholders' Equity

Deposits:

Interest-bearing

$

11,274,463

$

10,564,922

Noninterest-bearing

5,745,539

5,880,072

Total deposits

17,020,002

16,444,994

Short-term borrowings

400,000

400,000

Long-term borrowings

200,019

200,019

Retirement benefits payable

138,396

138,222

Other liabilities

332,789

343,241

Total liabilities

18,091,206

17,526,476

Commitments and contingent liabilities (Note 13)

Stockholders' equity

Common stock ($0.01 par value; authorized 300,000,000 shares; issued/outstanding: 140,092,172 / 129,827,968 as of March 31, 2020; issued/outstanding: 139,917,150 / 129,928,479 as of December 31, 2019)

1,401

1,399

Additional paid-in capital

2,506,477

2,503,677

Retained earnings

429,323

437,072

Accumulated other comprehensive income (loss), net

4,129

(31,749)

Treasury stock (10,264,204 shares as of March 31, 2020 and 9,988,671 shares as of December 31, 2019)

(276,645)

(270,141)

Total stockholders' equity

2,664,685

2,640,258

Total liabilities and stockholders' equity

$

20,755,891

$

20,166,734

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

4

FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

Three Months Ended March 31, 2020

Accumulated

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

Treasury

(dollars in thousands, except share amounts)

  

Shares

  

Amount

  

Capital

  

Earnings

  

Income (Loss)

  

Stock

  

Total

Balance as of December 31, 2019

  

129,928,479

$

1,399

  

$

2,503,677

  

$

437,072

  

$

(31,749)

  

$

(270,141)

  

$

2,640,258

Cumulative-effect adjustment of a change in accounting principle, net of tax: ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments

(12,517)

(12,517)

Net income

38,865

38,865

Cash dividends declared ($0.26 per share)

(33,782)

(33,782)

Equity-based awards

117,248

2

2,800

(315)

(1,504)

983

Common stock repurchased

(217,759)

(5,000)

(5,000)

Other comprehensive income, net of tax

35,878

35,878

Balance as of March 31, 2020

129,827,968

$

1,401

$

2,506,477

$

429,323

$

4,129

$

(276,645)

$

2,664,685

Three Months Ended March 31, 2019

Accumulated

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

Treasury

(dollars in thousands, except share amounts)

  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Stock

  

Total

Balance as of December 31, 2018

134,874,302

$

1,397

$

2,495,853

$

291,919

$

(132,195)

$

(132,135)

$

2,524,839

Net income

69,924

69,924

Cash dividends declared ($0.26 per share)

(35,067)

(35,067)

Equity-based awards

137,713

2

1,917

(325)

(1,529)

65

Other comprehensive income, net of tax

53,441

53,441

Balance as of March 31, 2019

135,012,015

$

1,399

$

2,497,770

$

326,451

$

(78,754)

$

(133,664)

$

2,613,202

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

5

FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Three Months Ended

March 31, 

(dollars in thousands)

  

2020

  

2019

Cash flows from operating activities

Net income

$

38,865

$

69,924

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Provision for credit losses

41,200

5,680

Depreciation, amortization and accretion, net

17,121

14,588

Deferred income taxes

6,624

16,461

Stock-based compensation

2,802

1,594

Other gains

(15)

(26)

Originations of loans held for sale

(41,062)

(745)

Proceeds from sales of loans held for sale

35,435

1,199

Net gains on sales of loans originated for investment and held for sale

(2,459)

(22)

Net (gains) losses on investment securities

(85)

2,613

Change in assets and liabilities:

Net increase in other assets

(22,164)

(1,293)

Net decrease in other liabilities

(128,111)

(46,569)

Net cash (used in) provided by operating activities

(51,849)

63,404

Cash flows from investing activities

Available-for-sale securities:

Proceeds from maturities and principal repayments

259,447

142,954

Proceeds from calls and sales

78,472

863,053

Purchases

(272,324)

(927,606)

Other investments:

Proceeds from sales

8,492

2,063

Purchases

(9,196)

(2,211)

Loans:

Net increase in loans and leases resulting from originations and principal repayments

(276,113)

(51,823)

Proceeds from sales of loans originated for investment

132,011

Purchases of loans

(30,244)

(76,451)

Proceeds from bank-owned life insurance

906

1,953

Purchases of premises, equipment and software

(14,728)

(9,571)

Proceeds from sales of premises and equipment

185

Proceeds from sales of other real estate owned

69

653

Other

(1,035)

(768)

Net cash used in investing activities

(124,058)

(57,754)

Cash flows from financing activities

Net increase (decrease) in deposits

575,008

(354,824)

Dividends paid

(33,782)

(35,067)

Stock tendered for payment of withholding taxes

(1,504)

(1,529)

Common stock repurchased

(5,000)

Net cash provided by (used in) financing activities

534,722

(391,420)

Net increase (decrease) in cash and cash equivalents

358,815

(385,770)

Cash and cash equivalents at beginning of period

694,017

1,003,637

Cash and cash equivalents at end of period

$

1,052,832

$

617,867

Supplemental disclosures

Interest paid

$

24,163

$

27,398

Income taxes paid, net of income tax refunds

5,165

4,883

Noncash investing and financing activities:

Transfers from loans and leases to loans held for sale

131,201

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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FIRST HAWAIIAN, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Basis of Presentation

First Hawaiian, Inc. (“FHI” or the “Parent”), a bank holding company, owns 100% of the outstanding common stock of First Hawaiian Bank (“FHB” or the “Bank”), its only direct, wholly owned subsidiary. FHB offers a comprehensive suite of banking services to consumer and commercial customers including loans, deposit products, wealth management, insurance, trust, retirement planning, credit card and merchant processing services.  

The accompanying unaudited interim consolidated financial statements of First Hawaiian, Inc. and Subsidiary (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.

The accompanying unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

In the opinion of management, all adjustments, which consist of normal recurring adjustments necessary for a fair presentation of the interim period consolidated financial information, have been made. Results of operations for interim periods are not necessarily indicative of results to be expected for the entire year. Intercompany account balances and transactions have been eliminated in consolidation.

Use of Estimates in the Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events, actual results may differ from these estimates.

Investment Securities

As of March 31, 2020 and December 31, 2019, investment securities were comprised of debt, mortgage-backed securities and collateralized mortgage obligations issued by the U.S. Government, its agencies and government-sponsored enterprises. The Company amortizes premiums and accretes discounts using the interest method over the expected lives of the individual securities. Premiums on callable debt securities are amortized to their earliest call date. All investment securities transactions are recorded on a trade-date basis. All of the Company’s investment securities were categorized as available-for-sale as of March 31, 2020 and December 31, 2019. Available-for-sale investment securities are reported at fair value, with unrealized gains and losses reported in accumulated other comprehensive income. Gains and losses realized on sales of investment securities are determined using the specific identification method.

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Company evaluates at the individual security level whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the

7

amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses, if any, are recorded as a provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale investment security is confirmed or when either of the criteria regarding intent or requirement to sell is met. As noted above, as of March 31, 2020, the Company’s available-for-sale investment securities were comprised entirely of debt, mortgage-backed securities and collateralized mortgage obligations issued by the U.S. Government, its agencies and government-sponsored enterprises. Management has concluded that the long history with no credit losses from these issuers indicates an expectation that nonpayment of the amortized cost basis is 0. The Company’s available-for-sale investment securities are explicitly or implicitly fully guaranteed by the U.S. government. The U.S. government can print its own currency and its currency is routinely held by central banks and other major financial institutions. The dollar is used in international commerce, and commonly is viewed as a reserve currency, all of which qualitatively indicates that historical credit loss information should be minimally affected by current conditions and reasonable and supportable forecasts. Thus, the Company has not recorded an allowance for credit losses for its available-for-sale debt securities as of March 31, 2020.

Accrued interest receivable related to available-for-sale investment securities was $8.5 million as of March 31, 2020 and is recorded separately from the amortized cost basis of investment securities on the Company’s interim consolidated balance sheet.

Loans and Leases

Loans are reported at amortized cost which includes the principal amount outstanding, net of deferred loan fees and costs and cumulative net charge-offs. Interest income is recognized on an accrual basis. Loan origination fees, certain direct costs and unearned discounts and premiums, if any, are deferred and are generally accreted or amortized into interest income as yield adjustments using the interest method over the contractual life of the loan. Other credit-related fees are recognized as fee income, a component of noninterest income, when earned.

Direct financing leases are carried at the aggregate of lease payments receivable plus the estimated residual value of leased property, less unearned income. Unearned income on direct financing leases is amortized over the lease term by methods that approximate the interest method. Residual values on leased assets are periodically reviewed for impairment.

Accrued interest receivable related to loans and leases was $35.1 million as of March 31, 2020 and is recorded separately from the amortized cost basis of loans and leases on the Company’s interim consolidated balance sheet.

Nonaccrual Loans and Leases

The Company generally places a loan or lease on nonaccrual status when management believes that collection of principal or interest has become doubtful or when a loan or lease becomes 90 days past due as to principal or interest, unless it is well secured and in the process of collection. A full or partial charge-off is recorded in the period in which the loan or lease is deemed uncollectible. When the Company places a loan or lease on nonaccrual status, previously accrued and uncollected interest is concurrently reversed against interest income. When the Company receives an interest payment on a nonaccrual loan or lease, the payment is applied as a reduction of the principal balance. Nonaccrual loans and leases are generally returned to accrual status when they become current as to principal and interest and future payments are reasonably assured.

Allowance for Credit Losses

The allowance for credit losses for loans and leases (the “ACL”) is a valuation account that is deducted from the amortized cost basis of loans and leases to present the net amount expected to be collected from loans and leases. Loans and leases are charged-off against the ACL when management believes the uncollectibility of a loan or lease balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The Company’s ACL and the reserve for unfunded commitments under the Current Expected Credit Losses (“CECL”) approach utilizes both quantitative and qualitative components. The Company’s methodology utilizes a quantitative model based on a single forward-looking macroeconomic forecast. The quantitative estimation is overlaid with qualitative adjustments to account for current conditions and forward-looking events not captured in the quantitative

8

model. Qualitative adjustments that are considered include adjustments for regulatory determinants, model limitations, model maturity, and other current or forecasted events that are not captured in the Company’s historical loss experience.

The Company generally evaluates loans and leases on a collective or pool basis when similar risk characteristics exist. However, loans and leases that do not share similar risk characteristics are evaluated on an individual basis. Such loans and leases evaluated individually are excluded from the collective evaluation. Individually assessed loans are measured for estimated credit loss (“ECL”) based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, less estimated selling costs, if the loan is collateral-dependent.

Management reviews relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts about the future. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency levels, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.  

The Company utilizes a Probability of Default (“PD”)/Loss Given Default (“LGD”) framework to estimate the ACL and the reserve for unfunded commitments. The PD represents the percentage expectation to default, measured by assessing loans and leases that migrate to default status (i.e., nonaccrual status, troubled debt restructurings (“TDRs”), 90 days or more past due, partial or full charge-offs or bankruptcy). LGD is defined as the percentage of the exposure at default (“EAD”) lost at the time of default, net of any recoveries, and will be unique to each of the collateral types securing the Company’s loans. PD and LGD’s are based on  past experience of the Company and management’s expectations of the future. The ECL on loans and leases is calculated by taking the product of the credit exposure, lifetime default probability (“LDP”) and the LGD.  

The ECL model is applied to current credit exposures at the account level, using assumptions calibrated at the portfolio segment level using internal historical loan and lease level data. The Company estimates the default risk of a credit exposure over the remaining life of each account using a transition probability matrix approach which captures both the average rate of up/down-grade and default transitions, as well as withdrawal rates which capture the historical rate of exposure decline due to loan and lease amortization and prepayment. To apply the transition matrices, each credit exposure’s remaining life is split into two time segments. The first time segment is for the reasonable and supportable forecast period over which the transition matrices which are applied have been adjusted to incorporate current and forecasted conditions over that period. Management has determined that using a one year time horizon for the reasonable and supportable forecast period for all classes of loans and leases is a reasonable forecast horizon given the difficulty in predicting future economic conditions with a high degree of certainty. The second time segment is the reversion period from the end of the reasonable and supportable forecast period to the maturity of the exposure, over which long-run average transition matrices are applied. Management elected to use an immediate reversion to the mean approach. Lifetime loss rates are applied against the amortized cost basis of loans and leases and unfunded commitments to estimate the ACL and the reserve for unfunded commitments.

On a quarterly basis, management convenes the Bank’s forecasting team which is responsible for qualitatively forecasting the economic outlook over the reasonable and supportable forecast period within the context of forecasting credit losses. Management reviews local and national economic forecasts and other pertinent materials to inform the team in establishing their best estimate of the economic outlook over the reasonable and supportable forecast period. The team considers unemployment rates, gross domestic product, personal income per capita, visitor arrivals and expenditures and home prices along with other relevant information. The results from the Bank’s forecasting team dictates the direction of the economic forecast compared to current economic conditions (i.e., better or worse) and the magnitude of the forecast adjustment (e.g., mild, medium or severe). The direction of the economic forecast and magnitude are used to qualitatively adjust the modifier that is applied to the long-run default rates over the reasonable and supportable forecast period.  

The Company has identified three portfolio segments in estimating the ACL: commercial, residential real estate and consumer lending. The Company’s commercial portfolio segment is comprised of four distinct classes: commercial and industrial loans, commercial real estate loans, construction loans and lease financing. The key risk drivers  related to this portfolio segment include risk rating, collateral type, and remaining maturity. The Company’s residential real estate portfolio segment is comprised of two distinct classes: residential real estate loans and home equity lines of credit. Specific risk characteristics related to this portfolio include the value of the underlying collateral, credit score and remaining maturity. Finally, the Company’s consumer portfolio segment is not further segmented, but consists primarily of

9

automobile loans, credit cards and other installment loans.  Automobile loans constitute the majority of this segment and are monitored using credit scores, collateral values and remaining maturity. The remainder of the consumer portfolio is predominantly unsecured.

Reserve for Unfunded Commitments

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The reserve for unfunded commitments is adjusted through the provision for credit losses. The estimate includes consideration of the likelihood  that funding will occur and an estimate of  expected credit losses on commitments expected to be funded over its estimated life.

Accounting Standards Adopted in 2020

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This guidance eliminates the probable recognition threshold for credit losses on financial assets measured at amortized cost. For loans and held-to-maturity debt securities, this guidance requires a CECL approach to determine an ACL. CECL requires loss estimates for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. CECL also applies to off-balance sheet (“OBS”) credit exposures (e.g., unfunded loan commitments), except for unconditionally cancellable commitments. In addition, this guidance modifies the other-than-temporary-impairment model for available-for-sale debt securities to require an allowance for credit losses instead of a direct write-down, which allows for a reversal of credit losses in future periods. In April 2019, the FASB also issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. As it relates to CECL, this guidance amended certain provisions contained in ASU No. 2016-13, particularly with regards to the inclusion of accrued interest in the definition of amortized cost, as well as clarifying that extension and renewal options that are not unconditionally cancelable by the entity that are included in the original or modified contract should be considered in the entity’s determination of expected credit losses. As permitted by ASU No. 2016-13, the Company elected the practical expedient to use the fair value of collateral at the reporting date when recording the net carrying amount of the asset and determining the ACL for a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Company’s assessment as of the reporting date. Furthermore, as permitted by ASU No. 2019-04, the Company made accounting policy elections to not measure an ACL on accrued interest receivable, write-off accrued interest receivable by reversing interest income and present accrued interest receivable separately from the related financial asset on the balance sheet.

The implementation of CECL required significant operational changes, particularly in data collection and analysis. The Company formed a working group comprised of teams from different disciplines, including credit, finance and information technology, to evaluate the requirements of the new standard and the impact it will have on the Company’s existing processes. The Company also engaged a software vendor and had run several CECL parallel run productions during 2019. The Company adopted the provisions of ASU No. 2016-13 and related amendments by recording a cumulative effect adjustment to retained earnings as of January 1, 2020. Note that the Company did not opt to delay the implementation of CECL requirements as permitted under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which allows entities to delay implementation until the earlier of (1) the date on which the national emergency concerning the Coronavirus Disease 2019 (“COVID-19”) terminates, or (2) December 31, 2020.  

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The following table presents the impact of adopting ASC Topic 326 as of January 1, 2020:

Prior to the

Adjustment

Adoption of

to Adopt

After Adoption of

(dollars in thousands)

ASC Topic 326

ASC Topic 326

ASC Topic 326

Assets:

Allowance for Credit Losses - Loans and Leases

$

130,530

$

770

$

131,300

Liabilities:

Reserve for Unfunded Commitments(1)

600

16,300

16,900

Pretax Cumulative Effect Adjustment of a Change in Accounting Principle

17,070

Less: Income Taxes

(4,553)

Cumulative-Effect Adjustment of a Change in Accounting Principle, Net of Tax

$

12,517

(1)The reserve for unfunded commitments is included as a component of other liabilities in the Company's interim consolidated balance sheets.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. This guidance simplifies the subsequent measurement of goodwill by eliminating Step 2 from the current two-step goodwill impairment test. This guidance provides that a goodwill impairment test be conducted by comparing the fair value of a reporting unit with its carrying amount. Entities are to recognize an impairment charge for goodwill by the amount by which the carrying amount exceeds the reporting unit’s fair value. Entities will continue to have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company adopted the provisions of ASU No. 2017-04 on January 1, 2020 and it did not have a material impact on the Company’s consolidated financial statements.  

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This guidance is a part of the FASB’s disclosure framework project to improve disclosure effectiveness. This guidance eliminates certain disclosure requirements for fair value measurements: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, an entity’s policy for the timing of transfers between levels of the fair value hierarchy and an entity’s valuation processes for Level 3 fair value measurements. This guidance also adds new disclosure requirements for public entities: changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements, including how the weighted average is calculated. Furthermore, this guidance modifies certain requirements which will involve disclosing: transfers into and out of Level 3 of the fair value hierarchy, purchases and issuances of Level 3 assets and liabilities, and information about the measurement uncertainty of Level 3 fair value measurements as of the reporting date. The Company adopted the provisions of ASU No. 2018-13 on January 1, 2020 and it did not have a material impact on the Company’s consolidated financial statements. See “Note 17. Fair Value” for required disclosures related to this new guidance.

Recent Accounting Pronouncements

The following ASU has been issued by the FASB and is applicable to the Company in future reporting periods.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The relief provided by this guidance is elective and applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The guidance provides that changes in contract terms that are made to effect the reference rate reform transition are considered related to the replacement of a reference rate if they are not the result of a business decision that is separate from or in addition to changes to the terms of a contract to effect that transition. The guidance also provides an optional expedient for loans that would permit the Company to account for the modification as if it was only minor and not an extinguishment in accordance with GAAP. For leases, the guidance provides an optional expedient for modifications to not trigger reassessment of lease classification and the discount rate or require the entity to remeasure lease payments or perform the other reassessments or remeasurements that would otherwise be triggered by a modification under GAAP when the modification is not accounted for as a separate contract. The optional amendments in ASU No. 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. As of March 31, 2020, the Company did not

11

elect any of the optional expedients provided for by this guidance. The Company is in the process of evaluating the optional expedients and the impact that this new guidance may have on the Company’s consolidated financial statements.

2. Investment Securities

As of March 31, 2020 and December 31, 2019, investment securities consisted predominantly of the following investment categories:

U.S. Treasury and debt securities – includes U.S. Treasury notes and debt securities issued by agencies and government-sponsored enterprises.

Mortgage-backed securities – includes securities backed by notes or receivables secured by mortgage assets with cash flows based on actual or scheduled payments.

Collateralized mortgage obligations – includes securities backed by a pool of mortgages with cash flows distributed based on certain rules rather than pass through payments.

As of March 31, 2020 and December 31, 2019, all of the Company’s investment securities were classified as available-for-sale. Amortized cost and fair value of securities as of March 31, 2020 and December 31, 2019 were as follows:

March 31, 2020

December 31, 2019

Amortized

Unrealized

Unrealized

Fair

Amortized

Unrealized

Unrealized

Fair

(dollars in thousands)

  

Cost

  

Gains

  

Losses

  

Value

  

Cost

  

Gains

  

Losses

  

Value

U.S. Treasury securities

$

30,483

$

444

$

$

30,927

$

29,832

$

56

$

$

29,888

Government-sponsored enterprises debt securities

26,705

16

26,721

101,697

19

(277)

101,439

Mortgage-backed securities:

Residential - Government agency

269,947

9,016

278,963

290,131

2,224

(1,146)

291,209

Residential - Government-sponsored enterprises

403,682

14,289

(304)

417,667

395,039

6,126

(1,673)

399,492

Commercial - Government-sponsored enterprises

184,635

3,345

(1,196)

186,784

101,798

555

(634)

101,719

Collateralized mortgage obligations:

Government agency

2,304,803

21,408

(5,333)

2,320,878

2,390,143

7,483

(16,348)

2,381,278

Government-sponsored enterprises

794,142

5,965

(3,590)

796,517

772,023

2,505

(3,909)

770,619

Total available-for-sale securities

$

4,014,397

$

54,483

$

(10,423)

$

4,058,457

$

4,080,663

$

18,968

$

(23,987)

$

4,075,644

Proceeds from calls and sales of investment securities were $75.0 million and $3.5 million, respectively, for the three months ended March 31, 2020, and NaN and $863.1 million, respectively, for the three months ended March 31, 2019. The Company recorded gross realized gains of $0.1 million and gross realized losses of NaN for the three months ended March 31, 2020. The Company recorded gross realized gains of NaN and gross realized losses of $2.6 million for the three months ended March 31, 2019. The income tax benefit related to the Company’s net realized loss on the sale of investment securities was NaN and $0.7 million for three months ended March 31, 2020 and 2019, respectively. The income tax expense related to the net realized gains on the sale of investment securities was NaN during both the three months ended March 31, 2020 and 2019. Gains and losses realized on sales of securities are determined using the specific identification method.

Interest income from taxable investment securities was $21.2 million and $24.5 million for the three months ended March 31, 2020 and 2019, respectively. Interest income from non-taxable investment securities was NaN during both the three months ended March 31, 2020 and 2019.

The amortized cost and fair value of debt securities issued by the U.S. Treasury and government-sponsored enterprises as of March 31, 2020, by contractual maturity, are shown below. Mortgage-backed securities and collateralized mortgage obligations are disclosed separately in the table below as remaining expected maturities will differ from contractual maturities as borrowers have the right to prepay obligations.

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March 31, 2020

Amortized

Fair

(dollars in thousands)

  

Cost

  

Value

 

Due in one year or less

$

$

Due after one year through five years

57,188

57,648

Due after five years through ten years

Due after ten years

57,188

57,648

Mortgage-backed securities:

Residential - Government agency

269,947

278,963

Residential - Government-sponsored enterprises

403,682

417,667

Commercial - Government-sponsored enterprises

184,635

186,784

Total mortgage-backed securities

858,264

883,414

Collateralized mortgage obligations:

Government agency

2,304,803

2,320,878

Government-sponsored enterprises

794,142

796,517

Total collateralized mortgage obligations

3,098,945

3,117,395

Total available-for-sale securities

$

4,014,397

$

4,058,457

At March 31, 2020, pledged securities totaled $2.2 billion, of which $2.0 billion was pledged to secure public deposits and $246.8 million was pledged to secure other financial transactions. At December 31, 2019, pledged securities totaled $1.8 billion, of which $1.5 billion was pledged to secure public deposits and $242.3 million was pledged to secure other financial transactions.

The Company held 0 securities of any single issuer, other than debt securities issued by the U.S. government, government agencies and government-sponsored enterprises, taken in the aggregate, which were in excess of 10% of stockholders’ equity as of March 31, 2020 and December 31, 2019.

The following table presents the unrealized gross losses and fair values of securities in the available-for-sale portfolio by length of time that the 55 and 118 individual securities in each category have been in a continuous loss position as of March 31, 2020 and December 31, 2019, respectively. The unrealized losses on investment securities were attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. At March 31, 2020, the Company did not have any securities with the intent to sell and determined it was more likely than not that the Company would not be required to sell the securities prior to recovery of the amortized cost basis.

Time in Continuous Loss as of March 31, 2020

Less Than 12 Months

12 Months or More

Total

Unrealized

Unrealized

Unrealized

(dollars in thousands)

  

Losses

  

Fair Value

  

Losses

  

Fair Value

  

Losses

  

Fair Value

Mortgage-backed securities:

Residential - Government-sponsored enterprises

$

(211)

$

95,144

$

(93)

$

10,191

$

(304)

$

105,335

Commercial - Government-sponsored enterprises

(1,196)

95,097

(1,196)

95,097

Collateralized mortgage obligations:

Government agency

(3,979)

480,482

(1,354)

94,077

(5,333)

574,559

Government-sponsored enterprises

(1,242)

144,625

(2,348)

149,246

(3,590)

293,871

Total available-for-sale securities with unrealized losses

$

(6,628)

$

815,348

$

(3,795)

$

253,514

$

(10,423)

$

1,068,862

13

Time in Continuous Loss as of December 31, 2019

Less Than 12 Months

12 Months or More

Total

Unrealized

Unrealized

Unrealized

(dollars in thousands)

  

Losses

  

Fair Value

  

Losses

  

Fair Value

  

Losses

  

Fair Value

Government-sponsored enterprises debt securities

$

(277)

$

49,716

$

$

$

(277)

$

49,716

Mortgage-backed securities:

Residential - Government agency

(1,146)

109,614

(1,146)

109,614

Residential - Government-sponsored enterprises

(115)

76,481

(1,558)

109,025

(1,673)

185,506

Commercial - Government-sponsored enterprises

(634)

38,062

(634)

38,062

Collateralized mortgage obligations:

Government agency

(8,049)

969,762

(8,299)

565,764

(16,348)

1,535,526

Government-sponsored enterprises

(583)

180,785

(3,326)

209,752

(3,909)

390,537

Total available-for-sale securities with unrealized losses

$

(9,658)

$

1,314,806

$

(14,329)

$

994,155

$

(23,987)

$

2,308,961

Visa Class B Restricted Shares

In 2008, the Company received 394,000 Visa Class B restricted shares as part of Visa’s IPO. Visa Class B restricted shares are not currently convertible to publicly traded Visa Class A common shares, and only transferable in limited circumstances, until the settlement of certain litigation which are indemnified by Visa members, including the Company. As there are existing transfer restrictions and the outcome of the aforementioned litigation is uncertain, these shares were included in the consolidated balance sheets at their historical cost of $0.

In 2016, the Company recorded a $22.7 million net realized gain related to the sale of 274,000 Visa Class B restricted shares. Concurrent with the sale of the Visa Class B restricted shares, the Company entered into an agreement with the buyer that requires payment to the buyer in the event Visa reduces each member bank’s Class B conversion rate to unrestricted Class A common shares. On June 28, 2018, Visa additionally funded its litigation escrow account, thereby reducing each member bank’s Class B conversion rate to unrestricted Class A common shares. Accordingly, on July 5, 2018, Visa announced a decrease in conversion rate from 1.6483 to 1.6298, effective June 28, 2018. In July 2018, the Company made a payment of approximately $0.7 million to the buyer as a result of the reduction in the Visa Class B conversion rate.  On September 27, 2019, Visa additionally funded its litigation escrow account, thereby further reducing each member bank’s Class B conversion rate to unrestricted Class A common shares. Accordingly, on September 30, 2019, Visa announced a decrease in conversion rate from 1.6298 to 1.6228, effective September 27, 2019. In October 2019, the Company made a payment of approximately $0.3 million to the buyer as a result of the reduction in the Visa Class B conversion rate. See “Note 12. Derivative Financial Instruments” for more information.

The Company held approximately 120,000 Visa Class B restricted shares as of both March 31, 2020 and December 31, 2019. These shares continued to be carried at $0 cost basis during each of the respective periods.

3. Loans and Leases

As of March 31, 2020 and December 31, 2019, loans and leases were comprised of the following:

March 31, 

December 31, 

(dollars in thousands)

  

2020

  

2019

Commercial and industrial

$

3,025,345

$

2,743,242

Commercial real estate

3,413,014

3,463,953

Construction

572,062

519,241

Residential:

Residential mortgage

3,673,455

  

3,768,936

Home equity line

891,698

893,239

Total residential

  

4,565,153

4,662,175

Consumer

1,568,073

1,620,556

Lease financing

236,623

202,483

Total loans and leases

$

13,380,270

$

13,211,650

Outstanding loan balances are reported net of deferred loan costs and fees of $40.6 million and $41.0 million at March 31, 2020 and December 31, 2019, respectively.

As of March 31, 2020, residential real estate loans totaling $3.0 billion were pledged to collateralize the Company’s borrowing capacity at the Federal Home Loan Bank of Des Moines (“FHLB”), and consumer, commercial and industrial

14

and commercial real estate loans totaling $1.3 billion were pledged to collateralize the Company’s borrowing capacity at the Federal Reserve Bank of San Francisco (“FRB”). As of December 31, 2019, residential real estate loans totaling $2.9 billion were pledged to collateralize the Company’s borrowing capacity at the FHLB, and consumer, commercial and industrial and commercial real estate loans totaling $953.2 million were pledged to collateralize the Company’s borrowing capacity at the FRB. Residential real estate loans collateralized by properties that were in the process of foreclosure totaled $3.1 million and $4.1 million as of March 31, 2020 and December 31, 2019, respectively.

In the course of evaluating the credit risk presented by a customer and the pricing that will adequately compensate the Company for assuming that risk, management may require a certain amount of collateral support. The type of collateral held varies, but may include accounts receivable, inventory, land, buildings, equipment, income-producing commercial properties and residential real estate. The Company applies the same collateral policy for loans whether they are funded immediately or on a delayed basis. The loan and lease portfolio is principally located in Hawaii and, to a lesser extent, on the U.S. Mainland, Guam and Saipan. The risk inherent in the portfolio depends upon both the economic stability of the state or territories, which affects property values, and the financial strength and creditworthiness of the borrowers.

4. Allowance for Credit Losses

The Company maintains an ACL that is deducted from the amortized cost basis of loans and leases to present the net carrying value of loans and leases expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount of loans and leases.

The Company also maintains an estimated reserve for unfunded commitments on the unaudited interim consolidated balance sheets. The reserve for unfunded commitments is reduced in the period in which the OBS financial instruments expire, loan funding occurs, or is otherwise settled.

The U.S. has been operating under a presidentially declared emergency since March 13, 2020 (the “National Emergency”) as a result of COVID-19. On March 27, 2020, the CARES Act was signed into law. The CARES Act creates a forbearance program for federally backed mortgage loans, protects borrowers from negative credit reporting due to loan accommodations related to the National Emergency, and provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. Financial institutions accounting for eligible loans under the CARES Act are not required to report such loans as TDRs in accordance with GAAP. In addition, Interagency Statements were issued on March 22, 2020 and April 7, 2020 to encourage financial institutions to work prudently with borrowers and to describe the agencies’ interpretation of how current accounting rules under GAAP apply to certain COVID-19 related modifications. The agencies confirmed with the FASB that short-term modifications (e.g., six months or less) for payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant and made on a good faith basis in response to borrowers impacted by COVID-19 who were current prior to any relief are not TDRs under GAAP. The agencies also confirmed that these short-term modifications should not be reported as being on nonaccrual status and should not be considered past due during the period of the deferral.

Rollforward of the Allowance for Credit Losses

The following presents the activity in the ACL by class of loans and leases for the three months ended March 31, 2020:

Three Months Ended March 31, 2020

Commercial Lending

Residential Lending

Commercial

Commercial

Home

and

Real

Lease

Residential

Equity

(dollars in thousands)

    

Industrial

    

Estate

    

Construction

    

Financing

    

Mortgage

    

Line

    

Consumer

    

Unallocated

    

Total

 

Allowance for credit losses:

Balance at beginning of period

$

28,975

$

22,325

$

4,844

$

424

$

29,303

$

9,876

$

34,644

$

139

$

130,530

Adoption of ASU No. 2016-13

(16,105)

10,559

(1,803)

207

(2,793)

(4,731)

15,575

(139)

770

Charge-offs

(201)

(8)

(8,597)

(8,806)

Recoveries

220

110

135

122

2,083

2,670

Increase in Provision

7,995

9,954

5,673

220

3,376

1,297

12,334

40,849

Balance at end of period

$

20,884

$

42,838

$

8,824

$

851

$

30,021

$

6,556

$

56,039

$

$

166,013

15

The following presents the activity in the ACL by class of loans and leases for the three months ended March 31, 2019, presented in accordance with Topic 310, Receivables:

Three Months Ended March 31, 2019

Commercial Lending

Commercial

Commercial

and

Real

Lease

(dollars in thousands)

    

Industrial

    

Estate

    

Construction

    

Financing

    

Residential

    

Consumer

    

Unallocated

    

Total

 

Allowance for credit losses:

Balance at beginning of period

$

34,501

$

19,725

$

5,813

$

432

$

44,906

$

35,813

$

528

$

141,718

Charge-offs

(24)

(8,598)

(8,622)

Recoveries

37

31

250

2,452

2,770

Increase (decrease) in Provision

(2,745)

1,441

(432)

3

(245)

5,432

2,226

5,680

Balance at end of period

$

31,793

$

21,197

$

5,381

$

411

$

44,911

$

35,099

$

2,754

$

141,546

The disaggregation of the ACL and recorded investment in loans by impairment methodology as of December 31, 2019, presented in accordance with Topic 310, Receivables, was as follows:

December 31, 2019

Commercial Lending

Commercial

Commercial

and

Real

Lease

(dollars in thousands)

  

Industrial

  

Estate

  

Construction

  

Financing

  

Residential

  

Consumer

  

Unallocated

  

Total

 

Allowance for credit losses:

Individually evaluated for impairment

$

46

$

27

$

$

$

130

$

$

$

203

Collectively evaluated for impairment

28,929

22,298

4,844

424

39,049

34,644

139

130,327

Balance at end of period

$

28,975

$

22,325

$

4,844

$

424

$

39,179

$

34,644

$

139

$

130,530

Loans and leases:

Individually evaluated for impairment

$

4,951

$

723

$

$

$

14,964

$

$

$

20,638

Collectively evaluated for impairment

2,738,291

3,463,230

519,241

202,483

4,647,211

1,620,556

13,191,012

Balance at end of period

$

2,743,242

$

3,463,953

$

519,241

$

202,483

$

4,662,175

$

1,620,556

$

$

13,211,650

Rollforward of the Reserve for Unfunded Commitments

The following presents the activity in the Reserve for Unfunded Commitments for the three months ended March 31, 2020:

Three Months Ended March 31, 2020

Commercial Lending

Residential Lending

Commercial

Commercial

Home

and

Real

Lease

Residential

Equity

(dollars in thousands)

    

Industrial

    

Estate

    

Construction

    

Financing

    

Mortgage

    

Line

    

Consumer

    

Total

 

Reserve for unfunded commitments:

Balance at beginning of period

$

$

$

$

$

$

$

600

$

600

Adoption of ASU No. 2016-13

5,390

778

4,119

7

6,587

(581)

16,300

Increase (decrease) in Provision

(599)

(82)

694

(6)

340

4

351

Balance at end of period

$

4,791

$

696

$

4,813

$

$

1

$

6,927

$

23

$

17,251

Credit Quality Information

The Company performs an internal loan review and grading or scoring procedures on an ongoing basis. The review provides management with periodic information as to the quality of the loan portfolio and effectiveness of the Company’s lending policies and procedures. The objective of the loan review and grading or scoring procedures is to identify, in a timely manner, existing or emerging credit quality issues so that appropriate steps can be initiated to avoid or minimize future losses.

Loans and leases subject to grading primarily include: commercial and industrial loans, commercial real estate loans, construction loans and lease financing. Other loans subject to grading include installment loans to businesses or individuals for business and commercial purposes, overdraft lines of credit, commercial credit cards, and other credits as may be determined. Credit quality indicators for internally graded loans and leases are generally updated on an annual basis or on a quarterly basis for those loans  and leases deemed to be of potentially higher risk.

16

An internal credit risk rating system is used to determine loan grade and is based on borrower credit risk and transactional risk. The loan grading process is a mechanism used to determine the risk of a particular borrower and is based on the following factors of a borrower: character, earnings and operating cash flow, asset and liability structure, debt capacity, management and controls, borrowing entity, and industry and operating environment.

Pass – “Pass” (uncriticized) loans and leases, are not considered to carry greater than normal risk. The borrower has the apparent ability to satisfy obligations to the Company, and therefore no loss in ultimate collection is anticipated.

Special Mention – Loans and leases that have potential weaknesses deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for assets or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard – Loans and leases that are inadequately protected by the current financial condition and paying capacity of the obligor or by any collateral pledged. Loans and leases so classified must have a well-defined weakness or weaknesses that jeopardize the collection of the debt. They are characterized by the distinct possibility that the bank may sustain some loss if the deficiencies are not corrected.

Doubtful – Loans and leases that have weaknesses found in substandard borrowers with the added provision that the weaknesses make collection of debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss – Loans and leases classified as loss are considered uncollectible and of such little value that their continuance as an asset is not warranted. This classification does not mean that the loan or lease has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.

Loans that are primarily monitored for credit quality using FICO scores include: residential real estate loans, home equity lines and consumer loans. FICO scores are calculated primarily based on a consideration of payment history, the current amount of debt, the length of credit history available, a recent history of new sources of credit and the mix of credit type. FICO scores are updated on a monthly, quarterly or bi-annual basis, depending on the product type.

17

The amortized cost basis by year of origination and credit quality indicator of the Company's loans and leases as of March 31, 2020 was as follows:

Revolving

Loans

Converted

Term Loans

Revolving

to Term

Amortized Cost Basis by Origination Year

Loans

Loans

Amortized

Amortized

(dollars in thousands)

2020

2019

2018

2017

2016

Prior

Cost Basis

Cost Basis

Total

Commercial Lending

Commercial and Industrial

Risk rating:

Pass

$

96,493

$

364,221

$

294,506

$

86,993

$

72,683

$

210,731

$

1,542,232

$

62,021

$

2,729,880

Special Mention

126

3,490

2,757

360

535

7,064

88,787

256

103,375

Substandard

160

7,456

3,568

1,569

57

5,465

50,830

969

70,074

Other (1)

7,239

18,375

13,894

8,985

3,859

1,247

68,417

122,016

Total Commercial and Industrial

104,018

393,542

314,725

97,907

77,134

224,507

1,750,266

63,246

3,025,345

Commercial Real Estate

Risk rating:

Pass

70,775

731,880

577,488

497,579

324,782

1,024,477

47,680

2

3,274,663

Special Mention

8,810

17,407

23,558

28,562

27,346

2,999

108,682

Substandard

24,404

426

4,325

29,155

Other (1)

514

514

Total Commercial Real Estate

70,775

765,094

594,895

521,137

353,770

1,056,662

50,679

2

3,413,014

Construction

Risk rating:

Pass

15,537

96,333

192,397

99,207

25,151

53,105

25,991

507,721

Special Mention

200

200

Substandard

2,219

1,002

3,221

Other (1)

2,269

31,408

14,370

6,562

1,735

4,576

60,920

Total Construction

17,806

127,741

206,767

107,988

26,886

58,683

26,191

572,062

Lease Financing

Risk rating:

Pass

49,616

73,066

17,998

22,263

5,939

66,866

235,748

Special Mention

287

84

440

64

875

Total Lease Financing

49,616

73,353

18,082

22,703

5,939

66,930

236,623

Total Commercial Lending

$

242,215

$

1,359,730

$

1,134,469

$

749,735

$

463,729

$

1,406,782

$

1,827,136

$

63,248

$

7,247,044

(continued)

18

Revolving

Loans

Converted

Term Loans

Revolving

to Term

Amortized Cost Basis by Origination Year

Loans

Loans

(continued)

Amortized

Amortized

(dollars in thousands)

2020

2019

2018

2017

2016

Prior

Cost Basis

Cost Basis

Total

Residential Lending

Residential Mortgage

FICO:

740 and greater

$

134,802

$

429,854

$

380,979

$

437,915

$

376,570

$

1,044,890

$

$

$

2,805,010

680 - 739

28,248

71,374

69,543

69,434

44,492

170,974

454,065

620 - 679

3,527

13,645

11,235

13,074

11,621

57,611

110,713

550 - 619

2,012

1,834

3,547

4,096

3,050

13,474

28,013

Less than 550

1,206

1,912

966

6,363

10,447

No Score (3)

11,783

21,987

25,655

26,042

16,592

54,212

156,271

Other (2)

4,783

20,938

26,627

25,451

12,528

17,524

580

505

108,936

Total Residential Mortgage

185,155

559,632

518,792

577,924

465,819

1,365,048

580

505

3,673,455

Home Equity Line

FICO:

740 and greater

629,818

629,818

680 - 739

173,990

173,990

620 - 679

58,863

58,863

550 - 619

16,863

16,863

Less than 550

6,852

6,852

No Score (3)

5,312

5,312

Total Home Equity Line

891,698

891,698

Total Residential Lending

185,155

559,632

518,792

577,924

465,819

1,365,048

892,278

505

4,565,153

Consumer Lending

FICO:

740 and greater

46,781

150,459

128,010

76,608

41,303

17,034

117,149

577,344

680 - 739

29,047

124,783

99,908

59,075

29,503

13,332

92,315

447,963

620 - 679

11,357

73,221

51,785

35,102

18,932

9,072

49,123

248,592

550 - 619

1,679

21,334

23,130

20,105

10,676

6,105

18,624

101,653

Less than 550

581

7,625

12,696

12,928

6,832

3,459

7,906

52,027

No Score (3)

2,796

6,248

174

151

30

3

37,382

46,784

Other (2)

600

9,173

104

2,230

100

6,823

74,680

93,710

Total Consumer Lending

92,841

392,843

315,807

206,199

107,376

55,828

397,179

1,568,073

Total Loans and Leases

$

520,211

$

2,312,205

$

1,969,068

$

1,533,858

$

1,036,924

$

2,827,658

$

3,116,593

$

63,753

$

13,380,270

(1)Other credit quality indicators used for monitoring purposes are primarily FICO scores.
(2)Other credit quality indicators used for monitoring purposes are primarily internal risk ratings.
(3)No FICO scores are primarily related to loans and leases extended to non-residents.  Loans and leases of this nature are primarily secured by collateral and/or are closely monitored for performance.

There were 0 loans and leases graded as Loss as of March 31, 2020.

The amortized cost basis of revolving loans that were converted to term loans during the three months ended March 31, 2020 was as follows:

Three Months Ended

(dollars in thousands)

March 31, 2020

Commercial and industrial

$

28,228

Residential mortgage

296

Total Revolving Loans Converted to Term Loans During the Period

$

28,524

19

The credit risk profiles by internally assigned grade for loans and leases as of December 31, 2019, presented in accordance with Topic 310, Receivables, were as follows:

December 31, 2019

Commercial

Commercial

and

Real

Lease

(dollars in thousands)

  

Industrial

  

Estate

  

Construction

  

Financing

  

Total

Grade:

Pass

$

2,585,908

$

3,327,659

$

515,993

$

201,461

$

6,631,021

Special mention

91,365

106,331

127

1,022

198,845

Substandard

65,969

29,963

3,121

99,053

Total

$

2,743,242

$

3,463,953

$

519,241

$

202,483

$

6,928,919

There were 0 loans and leases graded as Loss as of December 31, 2019.

The credit risk profiles based on payment activity for loans and leases that were not subject to loan grading as of December 31, 2019, presented in accordance with Topic 310, Receivables, were as follows:

December 31, 2019

(dollars in thousands)

  

Residential Mortgage

  

Home Equity Line

  

Consumer

  

Consumer - Auto

  

Credit Cards

  

Total

Performing

$

3,759,799

$

886,879

$

219,046

$

1,016,142

$

347,264

$

6,229,130

Non-performing and delinquent

9,137

6,360

7,258

24,326

6,520

53,601

Total

$

3,768,936

$

893,239

$

226,304

$

1,040,468

$

353,784

$

6,282,731

Past-Due Status

The Company continually updates its aging analysis for loans and leases to monitor the migration of loans and leases into past due categories. The Company considers loans and leases that are delinquent for 30 days or more to be past due. As of March 31, 2020, the aging analysis of the amortized cost basis of the Company’s past due loans and leases was as follows:

March 31, 2020

Past Due

Loans and

Greater

Leases Past

Than or

Due 90 Days

30-59

60-89

Equal to

or More and

Days

Days

90 Days

Total

Total Loans

Still Accruing

(dollars in thousands)

  

Past Due

  

Past Due

  

Past Due

  

Past Due

  

Current

  

and Leases

Interest

Commercial and industrial

$

6,634

$

1,010

$

4,041

$

11,685

$

3,013,660

$

3,025,345

$

4,007

Commercial real estate

14,204

2,706

757

17,667

3,395,347

3,413,014

757

Construction

6,003

104

2,570

8,677

563,385

572,062

148

Lease financing

236,623

236,623

Residential mortgage

3,556

2,349

2,671

8,576

3,664,879

3,673,455

82

Home equity line

6,947

1,462

2,566

10,975

880,723

891,698

2,566

Consumer

33,077

6,223

3,353

42,653

1,525,420

1,568,073

3,353

Total

$

70,421

$

13,854

$

15,958

$

100,233

$

13,280,037

$

13,380,270

$

10,913

20

As of December 31, 2019, the aging analysis of the Company’s past due loans and leases, presented in accordance with Topic 310, Receivables, was as follows:

December 31, 2019

Accruing Loans and Leases

Greater

Total Non

Than or

Total

Accruing

30-59

60-89

Equal to

Total

Accruing

Loans

Days

Days

90 Days

Past

Loans and

and

Total

(dollars in thousands)

  

Past Due

  

Past Due

  

Past Due

  

Due

  

Current

  

Leases

  

Leases

  

Outstanding

Commercial and industrial

$

1,525

$

808

$

1,429

$

3,762

$

2,739,448

$

2,743,210

$

32

$

2,743,242

Commercial real estate

1,664

1,125

1,013

3,802

3,460,121

3,463,923

30

3,463,953

Construction

2,367

2,367

516,874

519,241

519,241

Lease financing

202,483

202,483

202,483

Residential mortgage

3,258

399

74

3,731

3,759,799

3,763,530

5,406

3,768,936

Home equity line

2,971

394

2,995

6,360

886,879

893,239

893,239

Consumer

26,810

7,022

4,272

38,104

1,582,452

1,620,556

1,620,556

Total

$

36,228

$

9,748

$

12,150

$

58,126

$

13,148,056

$

13,206,182

$

5,468

$

13,211,650

Nonaccrual Loans and Leases

The Company generally places a loan or lease on nonaccrual status when management believes that collection of principal or interest has become doubtful or when a loan or lease becomes 90 days past due as to principal or interest, unless it is well secured and in the process of collection. The Company charges off a loan or lease when facts indicate that the loan or lease is considered uncollectible.

The amortized cost basis of loans and leases on nonaccrual status as of March 31, 2020 and January 1, 2020 and the amortized cost basis of loans and leases on nonaccrual status with no allowance for credit losses as of March 31, 2020 were as follows:

March 31, 2020

January 1, 2020

Nonaccrual

Loans

and Leases

With No

Nonaccrual

Nonaccrual

Allowance

Loans

Loans

(dollars in thousands)

  

for Credit Losses

and Leases

and Leases

Commercial and industrial

$

$

32

$

32

Commercial real estate

30

Construction

2,422

Residential mortgage

806

4,472

5,406

Total Nonaccrual Loans and Leases

$

806

$

6,926

$

5,468

For the three months ended March 31, 2020, the Company recognized interest income of NaN on nonaccrual loans and leases. Furthermore, for the three months ended March 31, 2020, the amount of accrued interest receivables written off by reversing interest income was not material.

Collateral-Dependent Loans and Leases

Collateral-dependent loans and leases are those for which repayment (on the basis of the Company’s assessment as of the reporting date) is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. As of March 31, 2020, the amortized cost basis of collateral-dependent loans was $35.1 million. These loans were primarily collateralized by residential real estate property and borrower assets. As of March 31, 2020, the fair value of collateral on substantially all collateral-dependent loans were significantly in excess of their amortized cost basis.

21

Impaired Loans

The total carrying amounts and the total unpaid principal balances of impaired loans and leases as of December 31, 2019, presented in accordance with Topic 310, Receivables, were as follows:

December 31, 2019

Unpaid

Recorded

Principal

Related

(dollars in thousands)

  

Investment

  

Balance

  

Allowance

Impaired loans with no related allowance recorded:

Commercial and industrial

$

3,825

$

3,841

$

Commercial real estate

30

30

Residential mortgage

10,425

10,718

Total

$

14,280

$

14,589

$

Impaired loans with a related allowance recorded:

Commercial and industrial

$

1,126

$

1,126

$

46

Commercial real estate

693

693

27

Residential mortgage

4,539

4,819

130

Total

$

6,358

$

6,638

$

203

Total impaired loans:

Commercial and industrial

$

4,951

$

4,967

$

46

Commercial real estate

723

723

27

Residential mortgage

14,964

15,537

130

Total

$

20,638

$

21,227

$

203

The following table provides information with respect to the Company’s average balances, and of interest income recognized from, impaired loans for the three months ended March 31, 2019, presented in accordance with Topic 310, Receivables:

Three Months Ended

March 31, 2019

Average

Interest

Recorded

Income

(dollars in thousands)

  

Investment

  

Recognized

Impaired loans with no related allowance recorded:

Commercial and industrial

$

3,418

$

29

Commercial real estate

4,102

171

Residential mortgage

8,666

100

Total

$

16,186

$

300

Impaired loans with a related allowance recorded:

Commercial and industrial

$

5,978

$

108

Commercial real estate

723

10

Residential mortgage

7,156

96

Total

$

13,857

$

214

Total impaired loans:

Commercial and industrial

$

9,396

$

137

Commercial real estate

4,825

181

Residential mortgage

15,822

196

Total

$

30,043

$

514

Modifications

Commercial and industrial loans modified in a TDR may involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Modifications of commercial real estate and construction loans in a TDR may 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 new borrower or guarantor. Modifications of construction loans in a TDR may also involve extending the interest-only payment period. Interest continues to accrue on the missed payments and as a result, the effective yield on the loan remains unchanged. As the forbearance period usually involves an insignificant payment delay, lease financing modifications typically do not meet the reporting criteria for a TDR. Residential real estate loans modified in a TDR may be comprised of loans where monthly payments are lowered to accommodate the borrowers' financial needs for a period of time, normally two years. Generally,

22

consumer loans are not classified as a TDR as they are normally charged off upon reaching a predetermined delinquency status that ranges from 120 to 180 days and varies by product type.

Loans modified in a TDR may already be on nonaccrual status and in some cases partial charge-offs may have already been taken against the outstanding loan balance. Loans modified in a TDR are evaluated for impairment. As a result, this may have a financial effect of increasing the specific ACL associated with the loan. An ACL for impaired commercial loans, including commercial real estate and construction 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 or if the loan is collateral dependent, the estimated fair value of the collateral, less any selling costs. An ACL for impaired residential real estate loans that have been modified in a TDR is measured based on the estimated fair value of the collateral, less any selling costs. 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 2019:

Three Months Ended

Three Months Ended

March 31, 2020

March 31, 2019

Number of

Recorded

Related

Number of

Recorded

Related

(dollars in thousands)

  

Contracts

  

Investment(1)

  

Allowance

  

Contracts

  

Investment(1)

  

Allowance

Commercial and industrial

1

$

500

$

30

4

$

916

$

24

Residential mortgage

1

352

14

Total

1

$

500

$

30

5

$

1,268

$

38

(1)The recorded investment balances reflect all partial paydowns and charge-offs since the modification date and do not include TDRs that have been fully paid off, charged off, or foreclosed upon by the end of the period.

The above loans were modified in a TDR through an extension of maturity dates, temporary interest-only payments, reduced payments, or below-market interest rates.

The Company had commitments to extend credit, standby letters of credit, and commercial letters of credit totaling $5.9 billion and $6.1 billion as of March 31, 2020 and December 31, 2019. Of the $5.9 billion at March 31, 2020, there were commitments of $2.0 million related to borrowers who had loan terms modified in a TDR. Of the $6.1 billion at December 31, 2019, there were commitments of $4.5 million related to borrowers who had loan terms modified in a TDR.

There were 0 loans modified in TDRs that have defaulted in the current period within 12 months of their permanent modification dates during both the three months ended March 31, 2020 and 2019.

Foreclosure Proceedings

As of both March 31, 2020 and December 31, 2019, there was 1 residential mortgage loan collateralized by real estate property of $0.3 million that was modified in a TDR that was in process of foreclosure.

Foreclosed Property

As of March 31, 2020, residential real estate property held from 1 foreclosed residential real estate loan was held and included in other real estate owned and repossessed personal property with a carrying value of $0.2 million on the consolidated balance sheet. As of December 31, 2019, residential real estate properties from 2 foreclosed residential real estate loans were held and included in other real estate owned and repossessed personal property with a carrying value of $0.3 million on the consolidated balance sheet.

5. Mortgage Servicing Rights

Mortgage servicing activities include collecting principal, interest, tax, and insurance payments from borrowers while accounting for and remitting payments to investors, taxing authorities, and insurance companies. The Company also monitors delinquencies and administers foreclosure proceedings.

Mortgage loan servicing income is recorded in noninterest income as a part of other service charges and fees and amortization of the servicing assets is recorded in noninterest income as part of other income. The unpaid principal amount of residential real estate loans serviced for others was $2.4 billion and $2.3 billion as of March 31, 2020 and

23

December 31, 2019, respectively. Servicing fees include contractually specified fees, late charges, and ancillary fees, and were $1.5 million and $1.6 million for the three months ended March 31, 2020 and 2019, respectively.

Amortization of mortgage servicing rights (“MSRs”) was $2.0 million and $0.8 million for the three months ended March 31, 2020 and 2019, respectively. The estimated future amortization expenses for MSRs over the next five years are as follows:

Estimated

(dollars in thousands)

  

Amortization

Under one year

$

2,535

One to two years

2,047

Two to three years

1,651

Three to four years

1,341

Four to five years

1,101

The details of the Company’s MSRs are presented below:

March 31, 

December 31, 

(dollars in thousands)

  

2020

  

2019

Gross carrying amount

$

64,771

$

63,480

Less: accumulated amortization

52,792

50,812

Net carrying value

$

11,979

$

12,668

The following table presents changes in amortized MSRs for the three months ended March 31, 2020 and 2019:

Three Months Ended March 31, 

(dollars in thousands)

  

2020

  

2019

Balance at beginning of period

$

12,668

$

16,155

Originations

1,291

8

Amortization

(1,980)

(764)

Balance at end of period

$

11,979

$

15,399

Fair value of amortized MSRs at beginning of period

$

20,329

$

27,662

Fair value of amortized MSRs at end of period

$

17,615

$

26,383

MSRs are evaluated for impairment if events and circumstances indicate a possible impairment. NaN impairment of MSRs was recorded for the three months ended March 31, 2020 and 2019.

The quantitative assumptions used in determining the lower of cost or fair value of the Company’s MSRs as of March 31, 2020 and December 31, 2019 were as follows: