UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-Q


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


For the quarterly period ended March 31, 20192020
 
or


o☐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:File Number: 001-31567


CENTRAL PACIFIC FINANCIAL CORP.
(Exact name of registrant as specified in its charter) 
Hawaii99-0212597
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
 
220 South King Street, Honolulu, Hawaii 96813
(Address of principal executive offices) (Zip Code)
 
(808) 544-0500
(Registrant's telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, No Par ValueCPFNew York Stock Exchange

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 ý☒  No o☐
 
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 (§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 ý☒No o☐
 
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 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 x
Accelerated Filer
☒
Accelerated filer o☐
Non-accelerated filer o
☐
Smaller reporting companyo
☐
Emerging growth companyo
☐
 
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 Securities Act. o☐


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o☐  No ý☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, No Par ValueCPFNew York Stock Exchange


The number of shares outstanding of registrant's common stock, no par value, on April 30, 20192020 was 28,629,54128,115,353 shares.
1



CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
Form 10-Q
 
Table of Contents
Page
Page
3
Item 1.Financial Statements (Unaudited)
4
5
6
7
8
9
3845
5567
5567
5668
5668
5668
5770
5871


2


PART I.   FINANCIAL INFORMATION
 
Forward-Looking Statements and Factors that Could Affect Future Results
 
This document may contain forward-looking statements concerning: projections of revenues, income/expenses, income or loss, earnings/earnings or loss per share, capital expenditures, the payment or nonpayment of dividends, capital structure,position, net interest margin or other financial items,items; statements of plans, objectives and objectivesexpectations of Central Pacific Financial Corp. or its management for future operations,or Board of Directors, including those relating to business plans, use of capital resources, products or services and regulatory developments and regulatory actions; statements of future economic performance including anticipated performance results in
light of the COVID-19 pandemic and from our RISE2020 initiative; or any statements of the assumptions underlying or relating to any of the foregoing. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts, and may include the wordsWords such as "believes," "plans," "intends,"anticipates," "expects," "anticipates,"intends," "forecasts," "hopes," "targeting," "continue," "remain," "will," "should," "estimates" or words"estimates," "may" and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of similar meaning. identifying such statements.

While we believe that our forward-looking statements and the assumptions underlying them are reasonably based, such statements and assumptions are by their nature subject to risks and uncertainties, and thus could later prove to be inaccurate or incorrect. Accordingly, actual results could differ materially differ from those statements or projections for a variety of reasons, to include,including, but not be limited to: the adverse effects of the COVID-19 pandemic virus on local, national and international economies, including, but not limited to, the adverse impact on tourism and construction in the State of Hawaii, our borrowers, customers, third-party contractors, vendors and employees as well as the effects of government programs and initiatives in response to COVID-19; the increase in inventory or adverse conditions in the real estate market and deterioration in the construction industry; adverse changes in the financial performance and/or condition of our borrowers and, as a result, increased loan delinquency rates, deterioration in asset quality, and losses in our loan portfolio; our ability to successfully implement our RISE2020 initiative; the impact of local, national, and international economies and events (including natural disasters such as volcanoes, wildfires, volcanic eruptions, hurricanes, tsunamis, storms, earthquakes and earthquakes)pandemic virus and disease, including COVID-19) on the Company's business and operations and on tourism, the military, and other major industries operating within the Hawaii market and any other markets in which the Company does business; deterioration or malaise in domestic economic conditions, including any destabilization in the financial industry and deterioration of the real estate market, as well as the impact of declining levels of consumer and business confidence in the state of the economy in general and in financial institutions in particular; changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), changes in capital standards, other regulatory reform and federal and state legislation, including but not limited to regulations promulgated by the Consumer Financial Protection Bureau (the "CFPB"), government-sponsored enterprise reform, and any related rules and regulations onwhich affect our business operations and competitiveness; the costs and effects of legal and regulatory developments, including the resolution of legal proceedings or regulatory or other governmental inquiries and proceedings and the resolution thereof, the results of regulatory examinations or reviews and the effect of, and our ability to comply with, any regulatory orders or actions we are or may become subject to; ability to successfully implement our initiatives to lower our efficiency ratio; the ability to address any material weakness in our internal controls over financial reporting or disclosure controls and procedures; the effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System;System (the "FRB" or the "Federal Reserve"); inflation, interest rate, securities market and monetary fluctuations;fluctuations, including the anticipated replacement of the London Interbank Offered Rate ("LIBOR") Index and the impact on our loans and debt which are tied to that index; negative trends in our market capitalization and adverse changes in the price of the Company's common stock; political instability; acts of war or terrorism;
pandemic virus and disease, including COVID-19; changes in consumer spending, borrowings and savings habits; failure to maintain effective internal control over financial reporting or disclosure controls and procedures; cybersecurity and data privacy breaches and the consequence therefrom; the ability to address deficiencies in our internal controls over financial reporting or disclosure controls and procedures; technological changes;changes and developments; changes in the competitive environment among financial holding companies and other financial service providers; the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board ("FASB") and other accounting standard setters;setters and the cost and resources required to implement such changes; our ability to attract and retain key personnel; changes in our organization, compensation and benefit plans; and our success at managing the risks involved in the foregoing items.

For further information onwith respect to factors that could cause actual results to materially differ from the expectations or projections stated in the forward-looking statements, please see the Company's publicly available Securities and Exchange Commission filings, including the Company's Form 10-K for the last fiscal year and, in particular, the discussion of "Risk Factors" set forth therein. The Company does nottherein and herein. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Form 10-Q. Forward-looking statements speak only as of the date on which such statements are made. We undertake no obligation to update any of its forward-looking statements to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events except as required by law.


3


CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands)March 31,
2019		 December 31,
2018		(dollars in thousands)March 31,
2020		December 31,
2019
Assets 
  
Assets  
Cash and due from banks$90,869
 $80,569
Cash and due from banks$81,972  $78,418  
Interest-bearing deposits in other banks7,310
 21,617
Interest-bearing deposits in other banks11,021  24,554  
Investment securities:   Investment securities:
Available-for-sale debt securities, at fair value1,319,450
 1,205,478
Available-for-sale debt securities, at fair value1,184,023  1,126,983  
Held-to-maturity debt securities, at amortized cost; fair value of: none at March 31, 2019 and $144,272 at December 31, 2018—
 148,508
Equity securities, at fair value910
 826
Equity securities, at fair value1,002  1,127  
Total investment securities1,320,360
 1,354,812
Total investment securities1,185,025  1,128,110  
   
Loans held for sale3,539
 6,647
Loans held for sale3,910  9,083  
   
Loans and leases4,101,571
 4,078,366
Allowance for loan and lease losses(47,267) (47,916)
Net loans and leases4,054,304
 4,030,450
LoansLoans4,511,998  4,449,540  
Allowance for credit lossesAllowance for credit losses(59,645) (47,971) 
Loans, net of allowance for credit lossesLoans, net of allowance for credit losses4,452,353  4,401,569  
   
Premises and equipment, net44,527
 45,285
Premises and equipment, net50,447  46,343  
Accrued interest receivable17,082
 17,000
Accrued interest receivable16,851  16,500  
Investment in unconsolidated subsidiaries16,054
 14,008
Investment in unconsolidated subsidiaries16,721  17,115  
Other real estate owned276
 414
Other real estate owned100  164  
Mortgage servicing rights15,347
 15,596
Mortgage servicing rights13,345  14,718  
Bank-owned life insurance158,392
 157,440
Bank-owned life insurance159,637  159,656  
Federal Home Loan Bank stock16,145
 16,645
Federal Home Loan Bank stock18,109  14,983  
Right of use lease asset54,781
 —
Right-of-use lease assetRight-of-use lease asset51,198  52,348  
Other assets42,366
 46,543
Other assets47,859  49,111  
Total assets$5,841,352
 $5,807,026
Total assets$6,108,548  $6,012,672  
   
Liabilities 
  
Liabilities  
Deposits: 
  
Deposits:  
Noninterest-bearing demand$1,357,890
 $1,436,967
Noninterest-bearing demand$1,430,540  $1,450,532  
Interest-bearing demand965,316
 954,011
Interest-bearing demand1,018,508  1,043,010  
Savings and money market1,562,798
 1,448,257
Savings and money market1,693,280  1,600,028  
Time1,062,124
 1,107,255
Time993,741  1,026,453  
Total deposits4,948,128
 4,946,490
Total deposits5,136,069  5,120,023  
   
Short-term borrowings179,000
 197,000
Short-term borrowings222,000  150,000  
Long-term debt101,547
 122,166
Long-term debt101,547  101,547  
Lease liability54,861
 —
Lease liability51,541  52,632  
Other liabilities55,178
 49,645
Other liabilities63,561  59,950  
Total liabilities5,338,714
 5,315,301
Total liabilities5,574,718  5,484,152  
   
Shareholders' Equity 
  
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding: none at March 31, 2019 and December 31, 2018—
 —
Common stock, no par value, authorized 185,000,000 shares; issued and outstanding: 28,723,041 at March 31, 2019 and 28,967,715 at December 31, 2018462,952
 470,660
Contingent liabilities and other commitments (see Notes 8, 15 and 16)Contingent liabilities and other commitments (see Notes 8, 15 and 16)
EquityEquity  
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding: none at March 31, 2020 and December 31, 2019Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding: none at March 31, 2020 and December 31, 2019—  —  
Common stock, no par value, authorized 185,000,000 shares; issued and outstanding: 28,115,353 at March 31, 2020 and 28,289,257 at December 31, 2019Common stock, no par value, authorized 185,000,000 shares; issued and outstanding: 28,115,353 at March 31, 2020 and 28,289,257 at December 31, 2019442,853  447,602  
Additional paid-in capital89,374
 88,876
Additional paid-in capital92,284  91,611  
Accumulated deficit(41,733) (51,718)Accumulated deficit(20,428) (19,102) 
Accumulated other comprehensive income (loss)(7,955) (16,093)
Accumulated other comprehensive incomeAccumulated other comprehensive income19,072  8,409  
Total shareholders' equity502,638
 491,725
Total shareholders' equity533,781  528,520  
Total liabilities and shareholders' equity$5,841,352
 $5,807,026
Non-controlling interestNon-controlling interest49  —  
Total equityTotal equity533,830  528,520  
Total liabilities and equityTotal liabilities and equity$6,108,548  $6,012,672  
See accompanying notes to consolidated financial statements.
4


CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended
March 31,
(dollars in thousands, except per share data)20202019
Interest income:  
Interest and fees on loans and leases$46,204  $43,768  
Interest and dividends on investment securities:
Taxable interest6,757  8,260  
Tax-exempt interest668  866  
Dividends17  18  
Interest on deposits in other banks36  68  
Dividends on Federal Home Loan Bank stock132  161  
Total interest income53,814  53,141  
Interest expense:  
Interest on deposits:  
Demand176  192  
Savings and money market1,118  791  
Time3,268  5,092  
Interest on short-term borrowings508  893  
Interest on long-term debt914  1,060  
Total interest expense5,984  8,028  
Net interest income47,830  45,113  
Provision for credit losses9,329  1,283  
Net interest income after provision for credit losses38,501  43,830  
Other operating income:  
Mortgage banking income337  1,573  
Service charges on deposit accounts2,050  2,081  
Other service charges and fees4,897  3,215  
Income from fiduciary activities1,297  965  
Equity in earnings of unconsolidated subsidiaries26  8  
Income (loss) from bank-owned life insurance(19) 952  
Other298  2,879  
Total other operating income8,886  11,673  
Other operating expense:  
Salaries and employee benefits20,347  19,889  
Net occupancy3,672  3,458  
Equipment1,097  1,006  
Communication expense837  734  
Legal and professional services2,028  1,570  
Computer software expense2,943  2,597  
Advertising expense1,092  711  
Foreclosed asset expense67  159  
Other4,157  4,224  
Total other operating expense36,240  34,348  
Income before income taxes11,147  21,155  
Income tax expense2,821  5,118  
Net income$8,326  $16,037  
Per common share data:  
Basic earnings per common share$0.30  $0.56  
Diluted earnings per common share$0.29  $0.55  
Cash dividends declared$0.23  $0.21  
Weighted average common shares outstanding used in computation:
Basic shares28,126,400  28,758,310  
Diluted shares28,277,753  28,979,855  
 Three Months Ended
March 31,
(dollars in thousands, except per share data)2019 2018
Interest income: 
  
Interest and fees on loans and leases$43,768
 $37,390
Interest and dividends on investment securities:   
Taxable interest8,260
 8,843
Tax-exempt interest866
 933
Dividends18
 15
Interest on deposits in other banks68
 84
Dividends on Federal Home Loan Bank stock161
 45
Total interest income53,141
 47,310
Interest expense: 
  
Interest on deposits: 
  
Demand192
 180
Savings and money market791
 369
Time5,092
 3,425
Interest on short-term borrowings893
 43
Interest on long-term debt1,060
 971
Total interest expense8,028
 4,988
Net interest income45,113
 42,322
Provision (credit) for loan and lease losses1,283
 (211)
Net interest income after provision (credit) for loan and lease losses43,830
 42,533
Other operating income: 
  
Mortgage banking income1,424
 1,847
Service charges on deposit accounts2,081
 2,003
Other service charges and fees3,064
 3,034
Income from fiduciary activities965
 956
Equity in earnings of unconsolidated subsidiaries8
 43
Fees on foreign exchange151
 211
Income from bank-owned life insurance952
 318
Loan placement fees149
 197
Other2,879
 345
Total other operating income11,673
 8,954
Other operating expense: 
  
Salaries and employee benefits19,889
 18,505
Net occupancy3,458
 3,266
Equipment1,006
 1,068
Amortization of core deposit premium—
 669
Communication expense734
 898
Legal and professional services1,570
 1,821
Computer software expense2,597
 2,267
Advertising expense711
 612
Foreclosed asset expense159
 294
Other4,224
 4,004
Total other operating expense34,348
 33,404
Income before income taxes21,155
 18,083
Income tax expense5,118
 3,806
Net income$16,037
 $14,277
Per common share data: 
  
Basic earnings per common share$0.56
 $0.48
Diluted earnings per common share$0.55
 $0.48
Cash dividends declared$0.21
 $0.19
Weighted average common shares outstanding used in computation:   
Basic shares28,758,310
 29,807,572
Diluted shares28,979,855
 30,041,351
See accompanying notes to consolidated financial statements.
5


CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
  Three Months Ended
March 31,
(dollars in thousands) 2019 2018
Net income $16,037
 $14,277
Other comprehensive income (loss), net of tax:    
Net change in unrealized gain (loss) on investment securities 10,996
 (14,971)
Defined benefit plans 242
 256
Total other comprehensive income (loss), net of tax 11,238
 (14,715)
Comprehensive income (loss) $27,275
 $(438)
Three Months Ended
March 31,
(dollars in thousands)20202019
Net income$8,326  $16,037  
Other comprehensive income, net of tax:
Net change in unrealized gain on investment securities10,147  10,996  
Defined benefit plans516  242  
Total other comprehensive income, net of tax10,663  11,238  
Comprehensive income$18,989  $27,275  
 
See accompanying notes to consolidated financial statements.
6


CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)

Common
Shares
Outstanding		Preferred
Stock		Common
Stock		Additional Paid-In CapitalAccum.
Deficit		Accum.
Other
Comp.
Income
(Loss)		Non-
Controlling
Interest		Total
 (dollars in thousands, except per share data)
Balance at December 31, 201928,289,257  $—  $447,602  $91,611  $(19,102) $8,409  $—  $528,520  
Impact of the adoption of new accounting standards (1)—  —  —  —  (3,156) —  —  (3,156) 
Adjusted balance at January 1, 202028,289,257  —  447,602  91,611  (22,258) 8,409  —  525,364  
Net income—  —  —  —  8,326  —  —  8,326  
Other comprehensive income—  —  —  —  —  10,663  —  10,663  
Cash dividends declared ($0.23 per share)—  —  —  —  (6,496) —  —  (6,496) 
Common stock repurchased and retired and other related costs(206,802) —  (4,749) —  —  —  —  (4,749) 
Share-based compensation32,898  —  —  673  —  —  —  673  
Non-controlling interest—  —  —  —  —  —  49  49  
Balance at March 31, 2020  28,115,353  $—  $442,853  $92,284  $(20,428) $19,072  $49  $533,830  
 Common
Shares
Outstanding		 Preferred
Stock		 Common
Stock		 Additional Paid-In Capital Accumulated
Deficit		 Accumulated
Other
Comprehensive
Income (Loss)		 Non-
Controlling
Interest		 Total
 (dollars in thousands, except per share data)
Balance at December 31, 201828,967,715
 $—
 $470,660
 $88,876
 $(51,718) $(16,093) $—
 $491,725
Impact of the adoption of new accounting standards (1)—
 —
 —
 —
 —
 (3,100) —
 (3,100)
Adjusted balance at January 1, 201928,967,715
 —
 470,660
 88,876
 (51,718) (19,193) —
 488,625
Net income—
 —
 —
 —
 16,037
 —
 —
 16,037
Other comprehensive income—
 —
 —
 —
 —
 11,238
 —
 11,238
Cash dividends ($0.21 per share)—
 —
 —
 —
 (6,052) —
 —
 (6,052)
277,000 shares of common stock repurchased and retired and other related costs(277,000) —
 (7,708) —
 —
 —
 —
 (7,708)
Share-based compensation32,326
 —
 

 498
 —
 —
 —
 498
Balance at March 31, 201928,723,041
 $—
 $462,952
 $89,374
 $(41,733) $(7,955) $—
 $502,638
                
Balance at December 31, 201730,024,222
 $—
 $503,988
 $86,098
 $(89,036) $(1,039) $24
 $500,035
Impact of the adoption of new accounting standards (2)—
 —
 —
 —
 139
 (139) —
 —
Adjusted balance at January 1, 201830,024,222
 —
 503,988
 86,098
 (88,897) (1,178) 24
 500,035
Impact of the adoption of new accounting standards (3)—
 —
 —
 —
 1,836
 (1,836) —
 —
Net income—
 —
 —
 —
 14,277
 —
 —
 14,277
Other comprehensive loss—
 —
 —
 —
 —
 (14,715) —
 (14,715)
Cash dividends ($0.19 per share)—
 —
 —
 —
 (5,670) —
 —
 (5,670)
2,850 net shares of common stock purchased by directors' deferred compensation plan—
 —
 (83) —
 —
 —
 —
 (83)
344,362 shares of common stock repurchased and retired and other related costs(344,362) —
 (10,111) —
 —
 —
 —
 (10,111)
Share-based compensation27,262
 —
 —
 399
 —
 —
 —
 399
Net loss from variable interest entity—
 —
 —
 —
 —
 —
 (24) (24)
Balance at March 31, 201829,707,122
 $—
 $493,794
 $86,497
 $(78,454) $(17,729) $—
 $484,108
                
(1) Represents the impact of the adoption of Accounting Standards Update ("ASU") ASU 2017-12. See Note 2 to the consolidated financial statements for additional information.
(2) Represents the impact of the adoption of ASU 2016-01.
(3) Represents the impact of the adoption of ASU 2018-02.
                

Common
Shares
Outstanding		Preferred
Stock		Common
Stock		Additional Paid-In CapitalAccum.
Deficit		Accum.
Other
Comp.
Income
(Loss)		Non-
Controlling
Interest		Total
 (dollars in thousands, except per share data)
Balance at December 31, 2018  28,967,715  $—  $470,660  $88,876  $(51,718) $(16,093) $—  $491,725  
Impact of the adoption of new accounting standards (2) —  —  —  —  —  (3,100) —  (3,100) 
Adjusted balance at January 1, 2019  28,967,715  —  470,660  88,876  (51,718) (19,193) —  488,625  
Net income  —  —  —  —  16,037  —  —  16,037  
Other comprehensive income  —  —  —  —  —  11,238  —  11,238  
Cash dividends declared ($0.21 per share) —  —  —  —  (6,052) —  —  (6,052) 
Common stock repurchased and retired and other related costs  (277,000) —  (7,708) —  —  —  —  (7,708) 
Share-based compensation  32,326  —  —  498  —  —  —  498  
Balance at March 31, 2019  28,723,041  $—  $462,952  $89,374  $(41,733) $(7,955) $—  $502,638  
(1) Represents the impact of the adoption of Accounting Standards Update ("ASU") ASU 2016-13. See Note 2 to the consolidated financial statements for additional information.
(2) Represents the impact of the adoption of ASU 2017-12.
 
See accompanying notes to consolidated financial statements.
7


CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
March 31,
(dollars in thousands)20202019
Cash flows from operating activities:  
Net income$8,326  $16,037  
Adjustments to reconcile net income to net cash provided by operating activities: 
Provision for credit losses9,329  1,283  
Depreciation and amortization of premises and equipment1,504  1,540  
Non-cash lease expense59  79  
Cash flows from operating leases(1,594) (1,549) 
Loss on sale of other real estate, net of write-downs64  138  
Amortization of mortgage servicing rights1,547  471  
Net amortization and accretion of premium/discounts on investment securities1,982  2,211  
Share-based compensation expense673  498  
Net gain on sales of residential mortgage loans(727) (611) 
Proceeds from sales of loans held for sale31,498  31,877  
Originations of loans held for sale(25,598) (28,158) 
Equity in earnings of unconsolidated subsidiaries(26) (8) 
Distributions from unconsolidated subsidiaries73  82  
Net decrease (increase) in cash surrender value of bank-owned life insurance19  (952) 
Deferred income taxes(406) 5,013  
Net tax benefits from share-based compensation(48) 105  
Net change in other assets and liabilities4,570  (2,173) 
Net cash provided by operating activities31,245  25,883  
Cash flows from investing activities:  
Proceeds from maturities of and calls on investment securities available-for-sale50,878  43,093  
Purchases of investment securities available-for-sale(96,068) —  
Proceeds from sale of MasterCard stock—  2,555  
Net loan originations(41,339) (6,851) 
Purchases of loan portfolios(22,340) (18,286) 
Net purchases of premises, equipment and land(5,608) (782) 
Net return of capital from unconsolidated subsidiaries—  622  
Contributions to unconsolidated subsidiaries(422) —  
Net (purchases of) proceeds from redemption of FHLB stock(3,126) 500  
Net cash (used in) / provided by investing activities(118,025) 20,851  
Cash flows from financing activities:  
Net increase in deposits16,046  1,638  
Repayments of long-term debt—  (20,619) 
Net increase (decrease) in short-term borrowings72,000  (18,000) 
Cash dividends paid on common stock(6,496) (6,052) 
Repurchases of common stock and other related costs(4,749) (7,708) 
Net cash provided by financing activities76,801  (50,741) 
Net decrease in cash and cash equivalents(9,979) (4,007) 
Cash and cash equivalents at beginning of period102,972  102,186  
Cash and cash equivalents at end of period$92,993  $98,179  
Supplemental disclosure of cash flow information:  
Cash paid during the period for:  
Interest$6,140  $8,402  
Income taxes170  —  
Supplemental disclosure of non-cash information:
Net transfer of investment securities held-to-maturity to available-for-sale—  (149,042) 
Right-of-use lease assets obtained in exchange for lease liabilities—  55,887  
 Three Months Ended
March 31,
(dollars in thousands)2019 2018
Cash flows from operating activities: 
  
Net income$16,037
 $14,277
Adjustments to reconcile net income to net cash provided by operating activities:   
Provision (credit) for loan and lease losses1,283
 (211)
Depreciation and amortization of premises and equipment1,540
 1,599
Noncash lease expense79
 —
Cash flows from operating leases(1,549) —
Gain or loss on sale of other real estate, net of write-downs138
 256
Amortization of core deposit premium and mortgage servicing rights471
 1,126
Net amortization and accretion of premium/discounts on investment securities2,211
 2,922
Share-based compensation expense498
 399
Net gain on sales of residential mortgage loans(611) (972)
Proceeds from sales of loans held for sale31,877
 64,106
Originations of loans held for sale(28,158) (54,290)
Equity in earnings of unconsolidated subsidiaries(8) (43)
Distributions from unconsolidated subsidiaries82
 539
Net increase in cash surrender value of bank-owned life insurance(952) (318)
Deferred income taxes5,013
 3,734
Net tax benefits from share-based compensation105
 72
Net change in other assets and liabilities(2,173) (3,312)
Net cash provided by operating activities25,883
 29,884
Cash flows from investing activities: 
  
Proceeds from maturities of and calls on investment securities available-for-sale43,093
 40,039
Purchases of investment securities available-for-sale—
 (85,240)
Proceeds from maturities of and calls on investment securities held-to-maturity—
 14,545
Proceeds from sale of MasterCard stock2,555
 —
Net loan proceeds (originations)(6,851) (46,144)
Purchases of loan portfolios(18,286) —
Proceeds from sale of foreclosed loans/other real estate owned—
 40
Net purchases of premises and equipment(782) (687)
Net return of capital from unconsolidated subsidiaries622
 —
Net (purchases of) proceeds from redemption of FHLB stock500
 (1,246)
Net cash used in investing activities20,851
 (78,693)
Cash flows from financing activities: 
  
Net increase in deposits1,638
 24,077
Repayments of long-term debt(20,619) —
Net increase (decrease) in short-term borrowings(18,000) 24,000
Cash dividends paid on common stock(6,052) (5,670)
Repurchases of common stock and other related costs(7,708) (10,111)
Net cash provided by financing activities(50,741) 32,296
Net increase (decrease) in cash and cash equivalents(4,007) (16,513)
Cash and cash equivalents at beginning of period102,186
 82,293
Cash and cash equivalents at end of period$98,179
 $65,780
    
Supplemental disclosure of cash flow information: 
  
Cash paid during the period for: 
  
Interest$8,402
 $4,877
Income taxes—
 22
Supplemental disclosure of non-cash information:   
Net reclassification of loans to foreclosed loans/other real estate owned—
 40
Net transfer of investment securities held to maturity to available for sale149,042
 —
Right-of-use lease assets obtained in exchange for lease liabilities55,887
 —

See accompanying notes to consolidated financial statements.
8


CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Basis of Presentation
 
The accompanying unaudited consolidated financial statements of Central Pacific Financial Corp. and Subsidiaries (herein referred to as the "Company," "we," "us" or "our") have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 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.


These interim condensed consolidated financial statements and notes should be read in conjunction with the Company's consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended December 31, 2018.2019. In the opinion of management, all adjustments necessary for a fair presentation have been made and include all normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.


Principles of Consolidation


The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.


In December 2015,January 2020, we acquired a 50% ownership interest in a mortgage loan origination and brokerage company, One HawaiiOahu HomeLoans, LLC. The bank concluded that the investment meets the consolidation requirements under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 810, "Consolidation." The bank concluded that the entity meets the definition of a variable interest entity and that we are the primary beneficiary of the variable interest entity. Accordingly, the investment washas been consolidated into our financial statements. One Hawaii HomeLoans, LLC was terminated in 2017, and final payment of taxes and distributions to members was made in March 2018.

We have 50% ownership interests in three other mortgage loan origination and brokerage companies which are accounted for using the equity method and are included in investment in unconsolidated subsidiaries: Gentry HomeLoans, LLC, Haseko HomeLoans, LLC and Island Pacific HomeLoans, LLC. We also had 50% ownership interest in one additional mortgage loan origination and brokerage company, Pacific Access Mortgage, LLC, which was also accounted for using the equity method and was included in investment in unconsolidated subsidiaries. Pacific Access Mortgage, LLC was terminated in 2017, and final payment of taxes and distributions to members was made in March 2018.

During the fourth quarter of 2018, we voluntarily changed our accounting policy for investments in low income housing tax credit ("LIHTC") partnerships from the cost method to the proportional amortization method using the practical expedient available under ASC 323, "Investments - Equity Method and Joint Ventures", which permits an investor to amortize the initial cost of the investment in proportion to only the tax credits allocated to the investor. We believe the proportional amortization method is preferable because it better reflects the economics of an investment that is made for the primary purpose of receiving tax credits and other tax benefits. In addition to a change in the timing of the recognition of amortization expense on LIHTC investments, amortization expense on LIHTC investments is now reflected in the income tax expense line, which provides users a better understanding of the nature of the returns of such investments, instead of in other operating expenses on the consolidated statements of income. The change did not impact net income, the consolidated balance sheets and the consolidated statements of cash flows.


We also have non-controlling equity investments in affiliates that are accounted for under the cost method and are included in investment in unconsolidated subsidiaries.


Our investments in unconsolidated subsidiaries accounted for under the equity, proportional amortization and cost methods were $0.1 million, $14.3$15.0 million and $1.6 million, respectively, at March 31, 20192020 and $0.2 million, $11.6$15.3 million and $2.2$1.6 million, respectively, at December 31, 2018.2019. Our policy for determining impairment of these investments includes an evaluation of whether a loss in value of an investment is other than temporary. Evidence of a loss in value includes absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. We perform impairment tests whenever indicators of impairment are

present. If the value of an investment declines and it is considered other than temporary, the investment is written down to its respective fair value in the period in which this determination is made.


The Company sponsors the Central Pacific Bank Foundation, which is not consolidated in the Company's financial statements.


ReclassificationsRisks and Uncertainties


Certain prior year amountsCOVID-19 Pandemic

In December 2019, a novel strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China, and has since spread to a number of other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has severely impacted the level of economic activity in the consolidatedlocal, national and global economies and financial statementsmarkets. The pandemic has resulted in temporary closures of many businesses and the notes theretoinstitution of social distancing and sheltering in place requirements in many states and communities. The Company and its customers have been adversely affected by the COVID-19 pandemic. The extent to which the COVID-19 pandemic negatively impacts the Company's business, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, is unknown at this time and will depend on future developments, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. If the pandemic is sustained, it may further adversely impact the Company and the State of Hawaii and impair the ability of the Company's customers to fulfill their contractual obligations to the Company. This could cause the Company to experience a material adverse effect on its business operations, asset valuations, financial condition, and
9

results of operations. Material adverse impacts may include all or a combination of valuation impairments on the Company's investments, loans, mortgage servicing rights, deferred tax assets, or counter-party risk derivatives.

Change in Operating Segments and Reclassifications

In the first quarter of 2020, the Company reassessed the alignment of its reportable segments and combined its three reportable segments (Banking Operations, Treasury and All Others segments) into a single operating segment. We believe this change better reflects how the Company's Executive Committee, or its chief operating decision maker ("CODM"), manages, allocates resources and assesses performance of the activities of the Company. The Company also believes that this change is better aligned with how the Company's CODM manages its business. Segment results for 2019 have been reclassified to conformreflect the realignment of the Company’s reportable segments and be comparable to the fiscal 2019 presentation. Such reclassifications had no effectsegment results for 2020. This change in reportable segments did not have an impact on the Company's previously reported historical consolidated financial statements.

Investment Securities

Investments in debt securities are designated as trading, available-for-sale ("AFS"), or held-to-maturity ("HTM"). Investments in debt securities are designated as HTM only if we have the positive intent and ability to hold these securities to maturity. HTM securities are reported at amortized cost in the consolidated balance sheets. Trading securities are reported at fair value, with changes in fair value included in net income. Debt securities not classified as HTM or trading are classified as AFS and are reported at fair value, with net unrealized gains and losses, net of applicable taxes, excluded from net income and included in accumulated other comprehensive income (loss) ("AOCI").

Equity securities with readily determinable fair values are carried at fair value, with changes in fair value included in net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or shareholders' equity.minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.

The Company classifies its investment securities portfolio into the following major security types: mortgage-backed securities ("MBS"), other debt securities and equity securities. The Company’s MBS portfolio is comprised primarily of residential MBS issued by United States of America ("U.S.") government entities and agencies. These securities are either explicitly or implicitly guaranteed by an agency of the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The remainder of the MBS portfolio are commercial MBS issued by U.S government entities and agencies (which there is no minimum credit rating), non-agency residential MBS (which shall meet a minimum credit rating of AAA) and non-agency commercial MBS (which shall meet a minimum credit rating of BBB and meet minimum internal credit guidelines).

The Company’s other debt securities portfolio is comprised of obligations issued by U.S. government entities and agencies, obligations issued by states and political subdivisions (which shall meet a minimum credit rating of BBB), and corporate bonds (which shall meet a minimum credit rating of BBB-).

Interest income on investment securities includes amortization of premiums and accretion of discounts. We amortize premiums to the earliest call date. We accrete discounts associated with investment securities using the effective interest method over the life of the respective security instrument. Gains and losses on the sale of investment securities are recorded on the trade date and determined using the specific identification method.

A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days delinquent. Interest accrued but not received for a security placed on non-accrual status is reversed against current period interest income. There were no investment securities on nonaccrual status as of March 31, 2020 and the Company did not reverse any accrued interest against interest income during the three months ended March 31, 2020.

Allowance for Credit Losses (“ACL”) for AFS Debt Securities

AFS debt securities in an unrealized loss position are evaluated for impairment at least quarterly. For AFS debt securities in an unrealized loss position, the Company first assesses whether or not 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 investment security’s amortized cost basis is written down to fair value through net income.

For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In conducting this assessment for debt securities in an unrealized loss position, management evaluates the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a
10

credit loss exists, the present value of cash flows expected to be collected from the investment 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 ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in AOCI.

Changes in the ACL are recorded as a provision for (or reversal of) credit losses. Losses are charged against the ACL when management believes the uncollectibility of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

As of March 31, 2020, the declines in market values of our AFS debt securities were primarily attributable to changes in interest rates and volatility in the credit and financial markets. Because we have no intent to sell securities in an unrealized loss position and it is not more likely than not that we will be required to sell such securities before recovery of its amortized cost basis, we do not believe a credit loss exists and an ACL was not recorded.

The Company has made a policy election to exclude accrued interest receivable from the amortized cost basis of debt securities and report accrued interest receivable together with accrued interest on loans in the consolidated balance sheets. Accrued interest receivable on AFS debt securities totaled $4.5 million as of March 31, 2020. Accrued interest receivable on AFS debt securities is excluded from the estimate of credit losses.

ACL for HTM Debt Securities

Management measures expected credit losses on HTM debt securities on a collective basis by major security type. For pools of such securities with common risk characteristics, the historical lifetime probability of default and severity of loss in the event of default is derived or obtained from external sources. Expected credit losses for these securities are estimated using a loss rate methodology which considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

Expected credit loss on each security in the HTM portfolio that do not share common risk characteristics with any of the pools of debt securities is individually measured based on net realizable value, or the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the recorded amortized cost basis of the security.

Accrued interest on HTM debt securities is reported in accrued interest receivable on the consolidated balance sheets and is excluded from the estimate of credit losses.

The Company did not have any HTM debt securities as of March 31, 2020.

Federal Home Loan Bank Stock

We are a member of the Federal Home Loan Bank of Des Moines (the "FHLB"). The bank is required to obtain and hold a specific number of shares of capital stock of the FHLB equal to the sum of a membership investment requirement and an activity-based investment requirement. The securities are reported at cost and are presented separately in the consolidated balance sheets.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost, net of the ACL. Amortized cost is the unpaid principal amount outstanding, net of unamortized purchase premiums and discounts, unamortized deferred loan origination fees and costs and cumulative principal charge-offs. Purchase premiums and discounts are generally amortized into interest income over the contractual terms of the underlying loans using the effective interest method. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the life of the related loan as an adjustment to yield and are amortized using the interest method over the contractual term of the loan, adjusted for actual prepayments. Deferred loan fees and costs on loans paid in full are recognized as a component of interest income on loans.

Interest income on loans is accrued at the contractual rate of interest on the unpaid principal balance. Accrued interest receivable on loans totaled $12.4 million at March 31, 2020 and is reported together with accrued interest on AFS debt securities on the consolidated balance sheets. Accrued interest receivable on loans is excluded from the estimate of credit losses.

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Nonaccrual Loans

The Company determines delinquency status by considering the number of days full payments required by the contractual terms of the loan are past due. Loans are generally placed on nonaccrual status when interest payments are 90 days past due, or earlier should management determine that the borrowers will be unable to meet contractual principal and/or interest obligations, unless the loans are well-secured and in the process of collection. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income should management determine that the collectibility of such accrued interest is doubtful. All subsequent receipts are applied to principal outstanding and no interest income is recognized unless the financial condition and payment record of the borrowers warrant such recognition and the loan is restored to accrual status. A nonaccrual loan may be restored to an accrual basis when principal and interest payments are current for a predetermined period, normally at least six months, and full payment of principal and interest is reasonably assured.

Troubled Debt Restructuring (“TDR”)

A loan is accounted for and reported as a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) the Company grants a concession to the borrower experiencing financial difficulty that it would not otherwise consider for a borrower or transaction with similar credit risk characteristics. A restructuring that results in only an insignificant delay in payment is not considered a concession. A delay may be considered insignificant if the payments subject to the delay are insignificant relative to the unpaid principal or collateral value and the contractual amount due, or the delay in timing of the restructured payment period is insignificant relative to the frequency of payments, the debt’s original contractual maturity or original expected duration.

TDRs that are performing and on accrual status as of the date of the modification remain on accrual status. TDRs that are nonperforming as of the date of modification generally remain as nonaccrual until the prospect of future payments in accordance with the modified loan agreement is reasonably assured, generally demonstrated when the borrower maintains compliance with the restructured terms for a predetermined period, normally at least six months. TDRs with temporary below-market concessions remain designated as a TDR regardless of the accrual or performance status until the loan is paid off. However, if the TDR loan has been modified in a subsequent restructure with market terms and the borrower is not currently experiencing financial difficulty, then the loan may be de-designated as a TDR.

The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed TDRs are evaluated individually to determine the required ACL using the same method as all other loans held for investment, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the ACL is determined by discounting the expected future cash flows at the original interest rate of the loan. TDRs performing in accordance with their modified contractual terms for a reasonable period of time may be included in the Company’s existing pools based on the underlying risk characteristics of the loan to measure the ACL.

In April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued a revised interagency statement encouraging financial institutions to work with customers affected by the COVID-19 pandemic and providing additional information regarding loan modifications. The revised interagency statement clarifies the interaction between the interagency statement issued on March 22, 2020 and the temporary relief provided by Section 4013 of the CARES Act. Section 4013 allows financial institutions to suspend the requirements to classify certain loan modifications as TDRs. The revised statement also provides supervisory interpretations on past due and nonaccrual regulatory reporting of loan modification programs and regulatory capital. This interagency guidance is expected to reduce the number of TDRs that will be reported in future periods, however, the amount is indeterminable and will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

ACL for Loans

Under the current expected credit loss methodology, the ACL for loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Our policy is to charge off a loan in the period in which the loan is deemed to be uncollectible and all interest previously accrued but not collected is reversed against current period interest income. We consider a loan to be uncollectible when it is probable that a loss has been incurred and the Company can make a reasonable estimate of the loss. In these instances, the likelihood of and/or timeframe for recovery of the amount due is uncertain, weak, or protracted. Subsequent receipts, if any, are credited first to the remaining principal, then to the ACL for loans as recoveries, and finally to unaccrued interest.
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The ACL for loans represents management's estimate of all expected credit losses over the expected contractual life of our existing loan portfolio. Management estimates the ACL balance using relevant available information about the collectability of cash flows, from internal and external sources, including historical information relating to past events, current conditions, and reasonable and supportable forecasts of future economic conditions. When the Company is unable to forecast future economic events, management may revert to historical information.

The Company's methodologies incorporate a reasonable and supportable forecast period of one year and revert to historical loss information on straight-line basis over one year when its forecast is no longer deemed reasonable and supportable.

The Company maintains an ACL at an appropriate level as of a given balance sheet date to absorb management’s best estimate of expected life of loan credit losses.

Historical credit loss experience provides the basis for the Company’s expected credit loss estimate. Adjustments to historical loss information may be made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, or when historical asset terms do not reflect the contractual terms of the financial assets being evaluated.

The ACL methodology may also consider other adjustments to address changes in conditions, trends, and circumstances such as local industry changes that could have a significant impact on the risk profile of the loan portfolio and provide for losses in the loan portfolio that may not be reflected and/or captured in the historical loss data. These factors include: lending policies, imprecision in forecasting future economic conditions, loan profile, lending staff, problem loan trends, loan review, collateral, credit concentration and other internal and external factors.

The Company uses the Moody’s forecasting service for the economic forecast used in the ACL methodology. The Moody’s forecast includes both National and Hawaii specific economic indicators. The Moody’s forecast is widely used in the industry and is reasonable and supportable. The Moody’s forecast is updated at least monthly and includes a variety of economic scenarios. Generally the Company will use the most recent consensus forecast from Moody’s as of the balance sheet date. During times of economic and market volatility or instability, the Company may include a qualitative factor for forecast imprecision that factors in other potential economic scenarios provided by Moody’s. Had the Company used a different forecast scenario, or utilized updated forecasts released after the balance sheet date, the provision for expected credit losses could be materially different.

The ACL is measured on a collective or pool basis when similar risk characteristics exist. The Company segments its portfolio generally by Federal Financial Institutions Examination Council ("FFIEC") Call Report codes. Loan pools are further segmented by risk utilizing risk ratings or bands of payment delinquency (including TDR or non-accrual status), depending on what is most appropriate for each segment. Additional sub-segmentation may be utilized to identify groups of loans with unique risk characteristics relative to the rest of the portfolio.

The Company relies on a third-party platform which offers multiple methodologies to measure historical life losses. The Company has also developed models internally to incorporate future economic conditions and forecast future credit losses based on various macro-economic indicators.

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The Company has identified the following portfolio segments to measure the allowance for credit losses:


Loan SegmentHistorical Lifetime
Loss Method		Historical
Lookback
Period		Economic Forecast LengthReversion Method
ConstructionProbability of Default/Loss Given Default ("PD/LGD")2008-PresentOne YearOne Year (straight-line basis)
Commercial real estateLoss-Rate Migration2008-Present
Multi-family mortgagePD/LGD2008-Present
Commercial, financial and agriculturalLoss-Rate Migration2008-Present
Home equity lines of creditLoss-Rate Migration2008-Present
Residential mortgageLoss-Rate Migration2008-Present
Consumer - other revolvingLoss-Rate Migration2008-Present
Consumer - non-revolvingLoss-Rate Migration2008-Present
Other consumerLoss-Rate Migration2008-Present
Purchased dealer loansWeighted-Average Remaining Maturity ("WARM")2008-Present
Purchased consumer unsecured loansLoss-Rate Migration/WARM2008-Present

Below is a description and the risk characteristics of each segment:

Construction loans

Construction loans include both residential and commercial development projects. Each construction project is evaluated for economic viability and construction loans pose higher credit risks than typical secured loans. Financial strength of the borrower, completion risk (the risk that the project will not be completed on time and within budget) and geographic location are the predominant risk characteristics of this segment.

Commercial real estate loans

Commercial real estate loans are secured by commercial properties. The predominant risk characteristic of this segment is operating risk, which is the risk that the borrower will be unable to generate sufficient cash flows from the operation of the property. Interest rate conditions and the commercial real estate market through economic cycles also impact risk levels.

Multi-family mortgage loans

Multi-family mortgage loans can comprise multi-building properties with extensive amenities to a single building with no amenities. The primary risk characteristic of this segment is operating risk or the ability to generate sufficient rental cash flows from the operation of the property within the owner’s strategy and resources.

Commercial, financial and agricultural loans

Loans in this category consist primarily of term loans and lines of credit to small and middle-market businesses and professionals. The predominant risk characteristics of this segment are the cash flows of the business we lend to, global cash flows including guarantor liquidity, as well as economic and market conditions. The borrower’s business is typically regarded as the principal source of repayment, though our underwriting policy and practice generally requires secondary sources of support or collateral to mitigate risk.

Home equity lines of credit

Home equity lines of credit include fixed or floating interest rate loans and are secured by single-family owner-occupied primary residences in Hawaii. They are underwritten based on a minimum FICO score, maximum debt-to-income ratio, and maximum combined loan-to-value ratio. Home equity lines of credit are monitored based on credit score, delinquency, end of draw period and maturity.

14

Residential mortgage loans

Residential mortgage loans include fixed-rate and adjustable-rate loans primarily secured by single-family owner-occupied primary residences in Hawaii. Economic conditions such as unemployment levels, future changes in interest rates and other market factors impact the level of credit risk inherent in the portfolio.

Consumer loans - other revolving

This segment consists of consumer unsecured lines of credit. Its predominant risk characteristics relate to current and projected economic conditions as well as employment and income levels attributed to the borrower.

Consumer loans - non-revolving
This segment consists of consumer non-revolving loans, including dealer loans. Its predominant risk characteristics relate to current and projected economic conditions as well as employment and income levels attributed to the borrower.

Purchased consumer portfolios

Credit risk for purchased consumer loans is managed on a pooled basis. The predominant risk characteristics of purchased consumer loans include current and projected economic conditions, employment and income levels, and the quality of purchased consumer loans.

Below is a description of the methodologies mentioned above:

PD/LGD

The PD/LGD calculation is based on a cohort methodology whereby loans in the same cohort are tracked over time to identify defaults and corresponding losses. PD/LGD analysis requires a portfolio segmented into pools and then further sub-segmented by risk characteristics such as Risk Rating to measure losses accurately. PD measures the count or dollar amount of loans that defaulted in a given cohort. LGD measures the losses related to the loans that defaulted. Total loss rate is calculated using the formula ‘PD times LGD’.

Migration

Migration analysis is a cohort-based approach that measures cumulative net charge-offs over a defined time-horizon to calculate a loss rate that will be applied to the loan pool. Migration analysis requires a portfolio segmented by risk characteristics such as risk rating to measure loss rates accurately. The key inputs to run a migration analysis are the length and frequency of the migration period, the dates for the migration periods to start and the number of migration periods used for the analysis. For each migration period, the analysis will determine the outstanding balance in each segment and/or sub-segment at the start of each period. These loans will then be followed for the length of the migration period to identify the amount of associated charge-offs and recoveries. A loss rate for each migration period is calculated using the formula 'net charge-offs over the period divided by beginning loan balance'.

WARM

Under the WARM methodology, lifetime losses are calculated by determining the remaining life of the loan pool and then applying a loss rate which includes a forecast component over this remaining life. The methodology considers historical loss experience as well as a loss forecast expectation to estimate credit losses for the remaining balance of the loan pool. The calculated loss rate is applied to the contractual term (adjusted for prepayments) to determine the loan pool’s current expected credit losses.

Other

If a loan ceases to share similar risk characteristics with other loans in its segment, it will be moved to a different pool sharing similar risk characteristics. Loans that do not share risk characteristics are evaluated on an individual basis based on the fair value of the collateral or other approaches such as discounted cash flow (“DCF”) techniques. Loans evaluated individually are not also included in the collective evaluation.

15

Determining the Contractual Term

Expected credit losses are estimated over the contractual term of the loans and are adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. If such renewal options or extensions are present, these options are evaluated in determining the contractual term.

Reserve for Off-Balance Sheet Credit Exposures

The Company maintains a separate and distinct reserve for off-balance-sheet credit exposures which is included in other liabilities on the Company’s consolidated balance sheets. The Company estimates the amount of expected losses by calculating a commitment usage factor for letters of credit, non-revolving lines of credit, and revolving lines of credit over the remaining life during which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company.

Letters of credit are generally unlikely to advance since they are typically in place only to ensure various forms of performance of the borrowers. Many of the letters of credit are cash secured. Non-revolving lines of credit are determined to be likely to advance as these are typically construction lines. Meanwhile, the likelihood of revolving lines of credit advancing varies with each individual borrower. Therefore, the future usage of each line was estimated based on the average line utilization of the revolving line of credit portfolio as a whole.

The estimate also applies the loss factors for each loan type used in the ACL for loans methodology, which is based on historical losses, economic conditions and reasonable and supportable forecasts. The reserve for off-balance sheet credit exposures is adjusted as a provision for off-balance sheet credit exposures in other operating expense. No credit loss estimate is reported for off-balance-sheet credit exposures that are unconditionally cancellable by the bank.

Purchased Credit Deteriorated (“PCD”) Financial Assets

The Company has purchased financial assets, none of which were credit deteriorated since origination, at the time of purchase. The Company does not purchase any financial assets that are greater than 30 days delinquent at the time of purchase.

PCD financial assets, if any, are recorded at the amount paid. An ACL for PCD financial assets will be determined using the same methodology as other financial assets. The initial ACL determined on a collective basis is allocated to individual financial assets. The sum of the financial asset’s purchase price and the ACL becomes its initial amortized cost. The difference between the initial amortized costs basis and the par value of the financial asset is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the ACL are recorded through the provision for credit losses.

2. RECENT ACCOUNTING PRONOUNCEMENTS
 
Accounting Standards Adopted in 20192020


In February 2016,On January 1, 2020, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU establishes a right-of-use ("ROU") model that requires a lessee to recognize a ROU lease asset and lease liability on the balance sheet for all leases with a term of longer than 12 months. The FASB has also made available several practical expedients to assist entities with the adoption of ASU 2016-02. Among other things, these practical expedients require no reassessment of whether existing contracts are or contain leases as well as no reassessment of lease classification for current leases. In July 2018, the FASB released ASU 2018-11, "Leases (Topic 842): Targeted Improvements," which adds an additional practical expedient that allows entities to elect not to recast comparative periods presented when transitioning to Topic 842. The Company elected to adopt the practical expedient allowed under ASU 2018-11. During the year ended December 31, 2018, the Company engaged a software vendor to assist in the implementation of ASU 2016-02. The Company adopted ASU 2016-02 effective January 1, 2019 using the modified retrospective approach and recorded a ROU lease asset and corresponding lease liability on the Company's consolidated balance sheet of $55.9 million for its operating leases where it is a lessee. There was no impact to the Company's financial statements for its leases where it is a lessor. As of March 31, 2019, the ROU lease asset and lease liability was $54.8 million and $54.9 million, respectively. See Note 12 - Leases for required disclosures on this new standard.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." ASU 2017-12 was issued to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The FASB believes that such amendments will: 1) improve the transparency of information about an entity’s risk management activities and 2) simplify the application of hedge accounting. The ASU allows an entity that qualifies for the last-of-layer method to reclassify securities from the held-to-maturity category to the available-for-sale category. The Company adopted ASU 2017-12 effective January 1, 2019 and transferred its entire held-to-maturity investment securities portfolio with a fair value of $144.3 million at January 1, 2019 to the available-for-sale portfolio. On the date of adoption, the Company recorded a cumulative effect adjustment related to the unrealized loss on the investment securities transferred, which decreased available-for-sale investments by $4.2 million, increased deferred tax assets by $1.1 million, and decreased opening accumulated other comprehensive income (loss) ("AOCI") by $3.1 million. The ASU did not have a material impact on our current derivative activities.

Impact of Other Recently Issued Accounting Pronouncements on Future Filings

In June 2016, the FASB issued ASU 2016-13, "“Financial Instruments-CreditInstruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,,"” which significantly changes how entities will measure credit lossesreplaces the incurred loss methodology (Allowance for most financial assetsLoan and certain other instrumentsLeases Losses or "ALLL") with an expected loss methodology that aren’t measured at fair value through net income. In issuingis referred to as the standard, the FASB is responding to criticism that today’s “incurred loss” guidance delays the recognition of credit losses on loans, leases, held-to-maturity debt securities, loan commitments, and financial guarantees, and instead provides for a current expected credit loss (“CECL”) approach to determine the allowance for credit losses. CECL requires an organization to measure allmethodology. The measurement of expected credit losses forunder the CECL methodology is applicable to financial assets heldmeasured at the reporting date basedamortized cost, including loan receivables and HTM debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on historical experience, current conditions, and reasonable and supportable forecasts.leases. In addition, this guidance modifies theASC 326 made changes to accounting treatment for other-than-temporary impairment for available-for-saleAFS debt securities. OrganizationsOne such change is to require credit losses to be presented as an allowance rather than a write-down on AFS debt securities if management intends to sell or believes that it is more likely than not they will continuebe required to use judgment to determine which loss estimation methods are appropriate for their circumstances. This guidance requires entities to record a cumulative effect adjustment tosell the consolidated balance sheet asdebt security before recovery of the beginning ofamortized cost basis.

The Company adopted ASU 2016-13 using the first reporting period in which the guidance is effective. However, an organization may elect to phase in the regulatory capital impact over a three-year transition period if adoption of the new standard results in a reduction of retained earnings. This update is effectivemodified retrospective method for fiscal years,all financial assets measured at amortized cost and interim periods within those fiscal years, beginning after December 15, 2019, with earlier adoption permitted. As such, the Company will implement CECLoff-balance sheet credit exposures. Results for the reporting period

periods beginning after January 1, 2020.2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable generally accepted accounting principles (“GAAP”). The new guidance will require significant operational changes, particularly in existing processes, data collectionCompany recorded a net decrease to retained earnings (or a net increase to accumulated deficit) of $3.2 million as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13. The transition adjustment
16

includes increases of $3.6 million to the ACL for loans and analysis.$0.7 million to other liabilities, which includes the reserve for off-balance sheet credit exposures, offset by a $1.1 million increase to other assets for the related impact to net deferred tax assets.


The Company has formed a steering committee that is responsible for oversight of the Company’s implementation strategy for compliance with provisions of the new standard. The Company has also established a project management governance process to manage the implementation across affected disciplines. With the help of an external third-party provider specializing in CECL reserving model design as well as other related consulting services, we have begun evaluating several potential CECL test models. As part of this process, the Company has determined potential loan pool segmentation and sub-segmentation under CECL, as well as evaluated various key economic loss drivers for each segment. Further, the Company has engaged an additional third party specializing in economic forecasting services, to enable the Company to develop reasonable and supportable forecasts under CECL. Finally, the Company has begun developing internal controls around the CECL process, data, calculations and implementation. Later in the year, the Company plans to generate and evaluate model scenarios under CECL in tandem with its current reserving processes for select interim reporting periods in 2019. While the Company is currently unable to reasonably estimatefollowing table illustrates the impact of adopting this new guidance, management expects the impact of adoption will be significantly influenced by its own historical experience, the composition and quality of the Company’s loans as well as economic forecast conditions as of the date of adoption. The Company also anticipates significant changes to the processes and procedures for calculating the reserve for credit losses and continues to evaluate the potential impact on our consolidated financial statements.ASC 326:


January 1, 2020
(dollars in thousands)As Reported
Under
ASC 326		Pre-ASC 326
Adoption		Impact of
ASC 326
Adoption
Assets:
Allowance for credit losses on loans:
Commercial, financial & industrial$(7,509) $(8,136) $627  
Real estate:
Construction(2,271) (1,792) (479) 
Residential mortgage(13,935) (13,327) (608) 
Home equity(2,592) (4,206) 1,614  
Commercial mortgage(13,737) (11,113) (2,624) 
Consumer(11,493) (9,397) (2,096) 
Subtotal$(51,537) $(47,971) $(3,566) 
Net deferred tax assets (included in other assets)$17,692  $16,541  $1,151  
Liabilities:
Reserve for off-balance sheet credit exposures (included in other liabilities)$(2,012) $(1,272) $(740) 
Equity:
Accumulated deficit$22,257  $19,102  $3,155  

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement." The ASU is part of the FASB's disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by generally accepted accounting principles. The ASU modifies disclosure requirements on fair value measurements in Topic 820 and is820. The Company adopted ASU 2018-13 effective for the Company's reporting period beginning January 1, 2020. Early adoption is permitted. Based on preliminary evaluation, the ASU will2018-13 did not have a material impact on disclosures in our consolidated financial statements.


In April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued a revised interagency statement encouraging financial institutions to work with customers affected by the novel coronavirus pandemic ("COVID-19") and providing additional information regarding loan modifications. The revised interagency statement clarifies the interaction between the interagency statement issued on March 22, 2020 and the temporary relief provided by Section 4013 of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. Section 4013 allows financial institutions to suspend the requirements to classify certain loan modifications as troubled debt restructurings (TDRs). The revised statement also provides supervisory interpretations on past due and nonaccrual regulatory reporting of loan modification programs and regulatory capital. This interagency guidance is expected to reduce the number of TDR's that will be reported in future periods, however, the amount is indeterminable and will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

17

Impact of Other Recently Issued Accounting Pronouncements on Future Filings

In August 2018, the FASB issued ASU 2018-14, "Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans." Like ASU 2018-13, this ASU is part of the FASB's disclosure framework project. This ASU modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The ASU is effective for the Company's reporting period beginning January 1, 2021. Early adoption is permitted. Based on preliminary evaluation, the ASU will not have a material impact on disclosures in our consolidated financial statements.


In August 2018,March 2020, the FASB issued ASU 2018-15, 2020-04, "Intangibles—GoodwillReference Rate Reform (Topic 848)." This ASU provides optional expedients and Other— Internal-Use Software (Subtopic 350-40): Customer’s Accountingexceptions for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which requires an entity in a cloud computing arrangement (i.e., hosting arrangement)contracts, hedging relationships, and other transactions that is a service contractreference LIBOR or other reference rates expected to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs should be presented in the same line item on the balance sheet as amounts prepaid for the hosted service, if any (generally as an “other asset”).discontinued because of reference rate reform. The capitalized costs will be amortized over the term of the hosting arrangement, with the amortization expense being presented in the same income statement line item as the fees paid for the hosted service. ASU 2018-15 is effective for the Company's reporting period beginning January 1,all entities as of March 12, 2020 and early adoptionthrough December 31, 2022. The Company is permitted. We are currently in the process of evaluating the potential impact the amendments will haveprovisions of this ASU and its effects on our consolidated financial statements, but we do not expect the adoption of the ASU to have a material impact on our consolidated financial statements.



3. INVESTMENT SECURITIES
 
A summaryThe amortized cost, gross unrealized gains and losses, fair value and related ACL on AFS debt securities are as follows:
(dollars in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value		ACL
March 31, 2020    
Available-for-sale:    
Debt securities:    
States and political subdivisions$131,539  $2,955  $(284) $134,210  $—  
Corporate securities30,116  111  —  30,227  —  
U.S. Treasury obligations and direct obligations of U.S Government agencies  38,244  43  (781) 37,506  —  
Mortgage-backed securities:    
Residential - U.S. Government-sponsored entities716,398  18,861  (209) 735,050  —  
Commercial - U.S. Government agencies and sponsored entities77,612  2,707  —  80,319  —  
Residential - Non-government agencies34,113  608  (49) 34,672  —  
Commercial - Non-government agencies131,705  1,265  (931) 132,039  —  
Total available-for-sale securities$1,159,727  $26,550  $(2,254) $1,184,023  $—  

The amortized cost, gross unrealized gains and losses and fair value of AFS debt securities are as follows:

(dollars in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
December 31, 2019    
Available-for-sale:    
Debt securities:    
States and political subdivisions$119,755  $2,303  $(40) $122,018  
Corporate securities30,277  252  —  30,529  
U.S. Treasury obligations and direct obligations of U.S Government agencies  40,769  10  (398) 40,381  
Mortgage-backed securities:   
Residential - U.S. Government-sponsored entities673,918  6,003  (2,099) 677,822  
Commercial - U.S. Government agencies and sponsored entities80,773  1,198  (746) 81,225  
Residential - Non-government agencies36,377  830  (16) 37,191  
Commercial - Non-government agencies134,676  3,141  —  137,817  
Total available-for-sale securities$1,116,545  $13,737  $(3,299) $1,126,983  

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The amortized cost and fair value of our equity investment portfoliosecurities is as follows:

(dollars in thousands)Amortized CostFair Value
March 31, 2020
Equity securities$961  $1,002  
December 31, 2019
Equity securities935  1,127  
(dollars in thousands)Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value
March 31, 2019 
  
  
  
Available-for-sale: 
  
  
  
Debt securities: 
  
  
  
States and political subdivisions$161,638
 $1,532
 $(562) $162,608
Corporate securities52,893
 90
 (87) 52,896
U.S. Treasury obligations and direct obligations of U.S Government agencies31,985
 —
 (448) 31,537
Mortgage-backed securities: 
  
  
  
Residential - U.S. Government-sponsored entities791,994
 1,183
 (13,517) 779,660
Commercial - U.S. Government agencies and sponsored entities117,671
 87
 (1,283) 116,475
Residential - Non-government agencies40,648
 573
 (112) 41,109
Commercial - Non-government agencies134,819
 1,138
 (792) 135,165
Total available-for-sale securities$1,331,648
 $4,603
 $(16,801) $1,319,450
        
Equity securities$910
 $—
 $—
 $910


(dollars in thousands)Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value
December 31, 2018 
  
  
  
Held-to-maturity: 
  
  
  
Mortgage-backed securities: 
  
  
  
Residential - U.S. Government-sponsored entities$83,436
 $19
 $(3,174) $80,281
Commercial - U.S. Government-sponsored entities65,072
 —
 (1,081) 63,991
Total held-to-maturity securities$148,508
 $19
 $(4,255) $144,272
        
Available-for-sale: 
  
  
  
Debt securities: 
  
  
  
States and political subdivisions$174,114
 $1,035
 $(1,475) $173,674
Corporate securities55,259
 —
 (410) 54,849
U.S. Treasury obligations and direct obligations of U.S Government agencies33,257
 —
 (683) 32,574
Mortgage-backed securities:       
Residential - U.S. Government-sponsored entities736,175
 369
 (19,492) 717,052
Commercial - U.S. Government agencies and sponsored entities53,014
 —
 (1,531) 51,483
Residential - Non-government agencies41,245
 337
 (464) 41,118
Commercial - Non-government agencies134,867
 1,013
 (1,152) 134,728
Total available-for-sale securities$1,227,931
 $2,754
 $(25,207) $1,205,478
        
Equity securities$826
 $—
 $—
 $826


As discussed in Note 2 - Recent Accounting Pronouncements, onOn January 1, 2019 in connection with the adoption of ASU 2017-12, the Company transferred all of its held-to-maturityHTM investment securities with an amortized cost of $148.5 million and fair value of $144.3 million to its available-for-saleAFS investment securities portfolio.


The amortized cost and estimated fair value of investmentour AFS debt securities at March 31, 20192020 are shown below by contractual maturity are shown below. Actualmaturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
 
March 31, 2020
(dollars in thousands)(dollars in thousands)Amortized CostFair Value
March 31, 2019
(dollars in thousands)Amortized Cost Fair Value
Available-for-sale: 
  
Available-for-sale:  
Due in one year or less$58,360
 $58,394
Due in one year or less$48,598  $48,784  
Due after one year through five years88,840
 89,162
Due after one year through five years46,887  47,163  
Due after five years through ten years50,939
 51,278
Due after five years through ten years63,133  64,548  
Due after ten years48,377
 48,207
Due after ten years41,281  41,448  
   
Mortgage-backed securities:   Mortgage-backed securities:
Residential - U.S. Government-sponsored entities791,994
 779,660
Residential - U.S. Government-sponsored entities716,398  735,050  
Commercial - U.S. Government agencies and sponsored entities117,671
 116,475
Commercial - U.S. Government agencies and sponsored entities77,612  80,319  
Residential - Non-government agencies40,648
 41,109
Residential - Non-government agencies34,113  34,672  
Commercial - Non-government agencies134,819
 135,165
Commercial - Non-government agencies131,705  132,039  
Total available-for-sale securities$1,331,648
 $1,319,450
Total available-for-sale securities$1,159,727  $1,184,023  
   
Equity securities$910
 $910
 
We did not sell any available-for-sale securities during the three months ended March 31, 20192020 and March 31, 2018.2019.


Investment securities of $0.80 billion$617.9 million and $0.98 billion$719.8 million at March 31, 20192020 and December 31, 2018,2019, respectively, were pledged to secure public funds on deposit and other short-term borrowings.


Provided below isAt March 31, 2020 and December 31, 2019, there were no holdings of investment securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders' equity.

19

There were a summarytotal of the 24550 and 336 investment81 AFS debt securities which were in an unrealized or unrecognized loss position, without an ACL, at March 31, 20192020 and December 31, 2018, respectively,2019, respectively. The following tables summarize AFS debt securities which were in an unrealized loss position at March 31, 2020 and December 31, 2019, aggregated by major security type and length of time in a continuous unrealized or unrecognized loss position.
 
 Less Than 12 Months12 Months or LongerTotal
(dollars in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
March 31, 2020      
Debt securities:      
States and political subdivisions$6,953  $(278) $803  $(6) $7,756  $(284) 
Corporate securities—  —  —  —  —  —  
U.S. Treasury obligations and direct obligations of U.S Government agencies  14,879  (325) 17,437  (456) 32,316  (781) 
Mortgage-backed securities:      
Residential - U.S. Government-sponsored entities4,764  (28) 17,967  (181) 22,731  (209) 
Residential - Non-government agencies7,495  (49) —  —  7,495  (49) 
Commercial - U.S. Government agencies and sponsored entities—  —  —  —  —  —  
Commercial - Non-government agencies78,904  (931) —  —  78,904  (931) 
Total temporarily impaired securities$112,995  $(1,611) $36,207  $(643) $149,202  $(2,254) 
 Less Than 12 Months 12 Months or Longer Total
(dollars in thousands)Fair
Value		 Unrealized
Losses		 Fair
Value		 Unrealized
Losses		 Fair
Value		 Unrealized
Losses
March 31, 2019 
  
  
  
  
  
Debt securities: 
  
  
  
  
  
States and political subdivisions$13,980
 $(20) $35,577
 $(542) $49,557
 $(562)
Corporate securities—
 —
 25,054
 (87) 25,054
 (87)
U.S. Treasury obligations and direct obligations of U.S Government agencies12,630
 (93) 18,907
 (355) 31,537
 (448)
Mortgage-backed securities: 
  
  
  
  
  
Residential - U.S. Government-sponsored entities22,533
 (461) 645,030
 (13,056) 667,563
 (13,517)
Residential - Non-government agencies—
 —
 15,478
 (112) 15,478
 (112)
Commercial - U.S. Government agencies and sponsored entities—
 —
 102,257
 (1,283) 102,257
 (1,283)
Commercial - Non-government agencies14,888
 (48) 60,637
 (744) 75,525
 (792)
Total temporarily impaired securities$64,031
 $(622) $902,940
 $(16,179) $966,971
 $(16,801)


 Less Than 12 Months12 Months or LongerTotal
(dollars in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
December 31, 2019      
Debt securities:      
States and political subdivisions$1,754  $(9) $801  $(31) $2,555  $(40) 
Corporate securities—  —  —  —  —  —  
U.S. Treasury obligations and direct obligations of U.S Government agencies  18,882  (143) 19,031  (255) 37,913  (398) 
Mortgage-backed securities:      
Residential - U.S. Government-sponsored entities54,335  (283) 214,295  (1,816) 268,630  (2,099) 
Residential - Non-government agencies8,206  (16) —  —  8,206  (16) 
Commercial - U.S. Government-sponsored entities32,067  (746) —  —  32,067  (746) 
Total temporarily impaired securities$115,244  $(1,197) $234,127  $(2,102) $349,371  $(3,299) 

The Company has evaluated its AFS investment securities that are in an unrealized loss position and has determined that the unrealized losses on the Company's investment securities are unrelated to credit quality and are primarily attributable to changes in interest rates and volatility in the credit and financial markets since purchase. Investment securities in an unrealized loss position are evaluated on at least a quarterly basis, and include evaluating the changes in the investment securities' ratings issued by rating agencies and changes in the financial condition of the issuer. For mortgage-related securities, delinquency and loss information with respect to the underlying collateral, changes in levels of subordination for the Company's particular position within the repayment structure, and remaining credit enhancement as compared to projected credit losses of the security are also evaluated. All of the investment securities in an unrealized loss position continue to be rated investment grade by one or more major rating agencies. Because we have no intent to sell securities in an unrealized loss position and it is not more likely than not that we will be required to sell such securities before recovery of its amortized cost basis, the Company has not recorded an ACL and unrealized losses on these securities and have not been recognized into income.

20


 Less Than 12 Months 12 Months or Longer Total
(dollars in thousands)Fair
Value		 Unrealized
Losses		 Fair
Value		 Unrealized
Losses		 Fair
Value		 Unrealized
Losses
December 31, 2018 
  
  
  
  
  
Debt securities: 
  
  
  
  
  
States and political subdivisions$38,099
 $(157) $49,505
 $(1,318) $87,604
 $(1,475)
Corporate securities49,729
 (250) 5,120
 (160) 54,849
 (410)
U.S. Treasury obligations and direct obligations of U.S Government agencies30,029
 (613) 2,545
 (70) 32,574
 (683)
Mortgage-backed securities: 
  
  
  
  
  
Residential - U.S. Government-sponsored entities88,957
 (1,229) 666,685
 (21,437) 755,642
 (22,666)
Residential - Non-government agencies—
 —
 24,515
 (464) 24,515
 (464)
Commercial - U.S. Government-sponsored entities13,973
 (247) 101,500
 (2,365) 115,473
 (2,612)
Commercial - Non-government agencies33,847
 (233) 46,680
 (919) 80,527
 (1,152)
Total temporarily impaired securities$254,634
 $(2,729) $896,550
 $(26,733) $1,151,184
 $(29,462)

Visa and MasterCard Class B Common Stock


As of March 31, 2019,2020, the Company owns 34,631 shares of Class B common stock of Visa, Inc. ("Visa"). These shares were received in 2008 as part of Visa's initial public offering ("IPO"). These shares are transferable only under limited circumstances until they can be converted into shares of the publicly traded Class A common stock. This conversion will not occur until the resolution of certain litigation, which is indemnified by Visa members. Since its IPO, Visa has funded a litigation reserve to settle these litigation claims. At its discretion, Visa may continue to increase the litigation reserve based upon a change in the conversion ratio of each member bank’s restricted Class B common stock to unrestricted Class A common stock. Due to the existing transfer restriction and the uncertainty of the outcome of the Visa litigation, the Company has determined that the Visa Class B common stock does not have a readily determinable fair value and chooses to carry the shares on the Company's consolidated balance sheets at zero cost basis.


During the first quarter of 2019, the Company converted the 11,170 shares of Class B common stock of MasterCard, Inc. ("MasterCard") it received during their initial public offering to an equal number of Class A common stock and sold the shares for $2.6 million. The shares were carried on the Company's consolidated balance sheets at zero cost basis and the proceeds received were recorded as a gain in other operating income - other in the Company's consolidated statements of income. The Company no longer owns any shares of MasterCard Class B common stock.


4. LOANS AND LEASESCREDIT QUALITY
 
Loans, and leases, excluding loans held for sale, consistednet of the followingACL under ASC 326 as of March 31, 20192020 and loans, excluding loans held for sale, net of ACL under previous GAAP as of December 31, 2018:2019 consisted of the following:
 
(dollars in thousands)March 31, 2019 December 31, 2018(dollars in thousands)March 31, 2020December 31, 2019
Commercial, financial and agricultural$566,248
 $581,177
Commercial, financial and agricultural$575,169  $570,089  
Real estate:

 

Real estate:
Construction71,483
 67,269
Construction100,959  96,139  
Residential mortgage1,447,970
 1,424,384
Residential mortgage1,628,502  1,595,801  
Home equity465,798
 468,966
Home equity504,061  490,239  
Commercial mortgage1,059,401
 1,041,685
Commercial mortgage1,140,611  1,124,911  
Consumer487,888
 492,268
Consumer559,765  569,516  
Leases83
 124
Gross loans and leases4,098,871
 4,075,873
Gross loans and leases4,509,067  4,446,695  
Net deferred costs2,700
 2,493
Net deferred costs2,931  2,845  
Total loans and leases, net of deferred costs$4,101,571
 $4,078,366
LoansLoans4,511,998  4,449,540  
Allowance for credit lossesAllowance for credit losses(59,645) (47,971) 
Loans, net of allowance for credit lossesLoans, net of allowance for credit losses$4,452,353  $4,401,569  
   
 
During the three months ended March 31, 2019, we did not foreclose on any loans.


During the three months ended March 31, 2018, we foreclosed on one loan totaling $40 thousand.

During the three months ended March 31, 2019 and 2018, weThe Company did not transfer any loans to the held-for-sale category.

We did not sell any portfolio loanscategory during the three months ended March 31, 20192020 and 2018.2019.


InThe Company did not sell any loans originally held for investment during the first quarterthree months ended March 31, 2020 and 2019.

The Company has purchased loan portfolios, none of 2019, we purchased consumer loans totaling $18.3 million which represented the outstanding balancewere credit deteriorated since origination, at the time of purchase.


In 2018, we purchased consumer loans totaling $58.6 million, which included a 0.1 million premium over the $58.5 million outstanding balance at the time of purchase.
21


Impaired Loans
The following tables presenttable presents loans purchased by class for the balanceperiods presented:

(dollars in thousands)Consumer - Unsecured
Three Months Ended March 31, 2020
Purchases:
Outstanding balance$22,953 
Purchase premium (discount)(613)
Purchase price$22,340 
Three Months Ended March 31, 2019
Purchases:
Outstanding balance$18,286 
Purchase premium (discount)— 
Purchase price$18,286 

Collateral-Dependent Loans

In accordance with ASC 326, a loan is considered collateral-dependent when the allowance for loanborrower is experiencing financial difficulty and leaserepayment is expected to be provided substantially through the operation or sale of the collateral. The following table presents the amortized cost basis of collateral-dependent loans by class, which are individually evaluated to determine expected credit losses, (the "Allowance") and the recorded investment inrelated ACL allocated to these loans and leases based on the Company's impairment measurement method as of March 31, 2019 and December 31, 2018:2020:


(dollars in thousands)Secured by
1-4 Family
Residential
Properties		Secured by
Nonfarm
Nonresidential
Properties		Secured by
Real Estate
and Business
Assets		TotalAllocated
ACL
Three Months Ended March 31, 2020
Commercial, financial and agricultural$—  $—  $667  $667  $231  
Real estate:
Residential mortgage7,718  —  —  7,718  —  
Home equity545  —  —  545  —  
Commercial mortgage—  512  —  512  —  
Total$8,263  $512  $667  $9,442  $231  

22

   Real Estate      
(dollars in thousands)Comml, Fin & Ag Constr Resi Mortgage Home Equity Comml Mortgage Consumer Leases Total
March 31, 2019 
  
  
    
    
  
Allowance: 
  
  
    
    
  
Individually evaluated for impairment$—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
Collectively evaluated for impairment7,847
 1,299
 12,851
 4,278
 12,036
 8,956
 —
 47,267
Total ending balance$7,847
 $1,299
 $12,851
 $4,278
 $12,036
 $8,956
 $—
 $47,267
                
Loans and leases: 
  
  
    
    
  
Individually evaluated for impairment$199
 $2,194
 $9,633
 $570
 $2,222
 $—
 $—
 $14,818
Collectively evaluated for impairment566,049
 69,289
 1,438,337
 465,228
 1,057,179
 487,888
 83
 4,084,053
Subtotal566,248
 71,483
 1,447,970
 465,798
 1,059,401
 487,888
 83
 4,098,871
Net deferred costs (income)547
 (308) 3,824
 107
 (1,395) (75) —
 2,700
Total loans and leases, net of deferred costs (income)$566,795
 $71,175
 $1,451,794
 $465,905
 $1,058,006
 $487,813
 $83
 $4,101,571


   Real Estate      
(dollars in thousands)Comml, Fin & Ag Constr Resi Mortgage Home Equity Comml Mortgage Consumer Leases Total
December 31, 2018 
  
  
    
    
  
Allowance: 
  
  
    
    
  
Individually evaluated for impairment$—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
Collectively evaluated for impairment8,027
 1,202
 14,349
 3,788
 13,358
 7,192
 —
 47,916
Total ending balance$8,027
 $1,202
 $14,349
 $3,788
 $13,358
 7,192
 $—
 $47,916
                
Loans and leases: 
  
  
    
    
  
Individually evaluated for impairment$220
 $2,273
 $10,075
 $275
 $2,348
 $—
 $—
 $15,191
Collectively evaluated for impairment580,957
 64,996
 1,414,309
 468,691
 1,039,337
 492,268
 124
 4,060,682
Subtotal581,177
 67,269
 1,424,384
 468,966
 1,041,685
 492,268
 124
 4,075,873
Net deferred costs (income)483
 (342) 3,821
 —
 (1,407) (62) —
 2,493
Total loans and leases, net of deferred costs (income)$581,660
 $66,927
 $1,428,205
 $468,966
 $1,040,278
 $492,206
 $124
 $4,078,366


There were no impaired loans with an allowance recorded as of March 31, 2019 and December 31, 2018. The following table presents by class, information related to impaired loans as of MarchDecember 31, 2019, and December 31, 2018:as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:

December 31, 2019
(dollars in thousands)(dollars in thousands)Unpaid
Principal
Balance		Recorded
Investment		ACL
Allocated
Impaired loans:Impaired loans:   
Commercial, financial and agriculturalCommercial, financial and agricultural$246  $135  $—  
Real estate:Real estate:
Residential mortgageResidential mortgage7,230  6,516  —  
Home equityHome equity92  92  —  
Commercial mortgageCommercial mortgage1,839  1,839  —  
TotalTotal9,407  8,582  —  
Impaired loans with an ACL recorded:Impaired loans with an ACL recorded:   
Commercial, financial and agriculturalCommercial, financial and agricultural467  467  218  
March 31, 2019 December 31, 2018
Unpaid
Principal
Balance		 Recorded
Investment		 Allowance
Allocated		 Unpaid
Principal
Balance		 Recorded
Investment		 Allowance
Allocated
(dollars in thousands)
Impaired loans: 
  
  
  
  
  
Commercial, financial and agricultural$309
 $199
 $—
 $330
 $220
 $—
Real estate:           
Construction2,996
 2,194
 —
 3,076
 2,273
 —
Residential mortgage10,578
 9,633
 —
 11,019
 10,075
 —
Home equity570
 570
 —
 275
 275
 —
Commercial mortgage2,222
 2,222
 —
 2,348
 2,348
 —
ConsumerConsumer17  17  17  
TotalTotal484  484  235  
Total impaired loans$16,675
 $14,818
 $—
 $17,048
 $15,191
 $—
Total impaired loans$9,891  $9,066  $235  
The following table presents by class, the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2019, and 2018:as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:
 
 Three Months Ended
 March 31, 2019
(dollars in thousands)Average
Recorded
Investment		Interest
Income
Recognized
Commercial, financial and agricultural$209  $3  
Real estate:  
Construction2,233  30  
Residential mortgage9,818  106  
Home equity497  —  
Commercial mortgage2,285  23  
Total$15,042  $162  
 Three Months Ended
 March 31, 2019 March 31, 2018
(dollars in thousands)Average
Recorded
Investment		 Interest
Income
Recognized		 Average
Recorded
Investment		 Interest
Income
Recognized
Commercial, financial and agricultural$209
 $3
 $483
 $2
Real estate:     
  
Construction2,233
 30
 2,557
 26
Residential mortgage9,818
 106
 13,744
 137
Home equity497
 —
 567
 —
Commercial mortgage2,285
 23
 3,809
 38
Total$15,042
 $162
 $21,160
 $203


For the three months ended March 31, 2019, and 2018, the amount of interest income recognized on impaired loans within the period that the loans were impaired were primarily related to loans modified in a troubled debt restructuring ("TDR") that were on accrual status. For the three months ended March 31, 2019, and 2018, the amount of interest income recognized using a cash-based method of accounting during the period that the loans were impaired was not material.
 
Foreclosure Proceedings


The Company had $0.5$0.7 million and $0.7$0.6 million of residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure at March 31, 20192020 and December 31, 2018,2019, respectively.


The Company did not foreclose on any loans during the three months ended March 31, 2020 and 2019.

23


Aging Analysis of AccruingNonaccrual and Non-AccruingPast Due Loans and Leases
 
For all loan types, the Company determines delinquency status by considering the number of days full payments required by the contractual terms of the loan are past due. The following tables present by class, the aging of the recorded investment in past due loans and leases as of March 31, 20192020 and December 31, 2018:2019. The following tables also present the amortized cost of loans on onaccrual status for which there was no related ACL under ASC 326 as of March 31, 2020 and under previous GAAP as of December 31, 2019.
 
(dollars in thousands)Accruing
Loans
30 - 59 Days
Past Due		Accruing
Loans
60 - 89 Days
Past Due		Accruing
Loans
Greater 
Than
90 Days
Past Due		Nonaccrual
Loans		Total
Past Due
and
Nonaccrual		Loans and
Leases
Not
Past Due		TotalNonaccrual
Loans
With
No ACL
March 31, 2020       
Commercial, financial and agricultural$7,050  $712  $—  $667  $8,429  $566,895  $575,324  $—  
Real estate:  
Construction478  —  —  —  478  100,139  100,617  —  
Residential mortgage4,371  82  1,221  2,287  7,961  1,624,575  1,632,536  2,287  
Home equity573  —  —  545  1,118  503,568  504,686  545  
Commercial mortgage287  —  —  —  287  1,138,850  1,139,137  —  
Consumer4,739  1,167  352  48  6,306  553,392  559,698  —  
Total$17,498  $1,961  $1,573  $3,547  $24,579  $4,487,419  $4,511,998  $2,832  
(dollars in thousands)Accruing
Loans
30 - 59 Days
Past Due		 Accruing
Loans
60 - 89 Days
Past Due		 Accruing
Loans
Greater Than
90 Days
Past Due		 Nonaccrual
Loans		 Total
Past Due
and
Nonaccrual		 Loans and
Leases
Not
Past Due		 Total
March 31, 2019 
  
  
  
  
  
  
Commercial, financial and agricultural$924
 $565
 $—
 $—
 $1,489
 $565,306
 $566,795
Real estate:         
    
Construction—
 —
 —
 —
 —
 71,175
 71,175
Residential mortgage3,559
 —
 —
 2,492
 6,051
 1,445,743
 1,451,794
Home equity108
 —
 —
 570
 678
 465,227
 465,905
Commercial mortgage—
 —
 —
 —
 —
 1,058,006
 1,058,006
Consumer1,712
 518
 159
 —
 2,389
 485,424
 487,813
Leases—
 —
 —
 —
 —
 83
 83
Total$6,303
 $1,083
 $159
 $3,062
 $10,607
 $4,090,964
 $4,101,571


(dollars in thousands)Accruing
Loans
30 - 59 Days
Past Due		 Accruing
Loans
60 - 89 Days
Past Due		 Accruing
Loans
Greater Than
90 Days
Past Due		 Nonaccrual
Loans		 Total
Past Due
and
Nonaccrual		 Loans and
Leases
Not
Past Due		 Total(dollars in thousands)Accruing
Loans
30 - 59 Days
Past Due		Accruing
Loans
60 - 89 Days
Past Due		Accruing
Loans
Greater 
Than
90 Days
Past Due		Nonaccrual
Loans		Total
Past Due
and
Nonaccrual		Loans and
Leases
Not
Past Due		TotalNonaccrual
Loans
With
No ACL
December 31, 2018 
  
  
  
  
  
  
December 31, 2019December 31, 2019       
Commercial, financial and agricultural$1,348
 $162
 $—
 $—
 $1,510
 $580,150
 $581,660
Commercial, financial and agricultural$476  $865  $—  $467  $1,808  $568,496  $570,304  $—  
Real estate:         
    
Real estate:  
Construction—
 —
 —
 —
 —
 66,927
 66,927
Construction643  —  —  —  643  95,211  95,854  —  
Residential mortgage3,966
 157
 —
 2,048
 6,171
 1,422,034
 1,428,205
Residential mortgage1,830  589  724  979  4,122  1,595,679  1,599,801  979  
Home equity433
 104
 298
 275
 1,110
 467,856
 468,966
Home equity759  207  —  92  1,058  489,676  490,734  92  
Commercial mortgage—
 —
 —
 —
 —
 1,040,278
 1,040,278
Commercial mortgage—  397  —  —  397  1,123,018  1,123,415  —  
Consumer2,340
 872
 238
 —
 3,450
 488,756
 492,206
Consumer3,223  943  286  17  4,469  564,963  569,432  —  
Leases—
 —
 —
 —
 —
 124
 124
Total$8,087
 $1,295
 $536
 $2,323
 $12,241
 $4,066,125
 $4,078,366
Total$6,931  $3,001  $1,010  $1,555  $12,497  $4,437,043  $4,449,540  $1,071  
 
ModificationsTroubled Debt Restructurings


Troubled debt restructurings ("TDRs") included in nonperforming assets at March 31, 20192020 consisted of three 1 Hawaii residential mortgage loans loan with a combined principal balance of $0.4$0.3 million. There were $7.3 million of TDRs still accruing interest at March 31, 2020, none of which were more than 90 days delinquent. At December 31, 2019, there were $7.5 million of TDRs still accruing interest, none of which were more than 90 days delinquent.


The Company offers various types of concessions when modifying a loan. Concessions made to the original contractual terms of these loans consisted primarilythe loan typically consists of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. TheIn these cases, the principal balancesbalance on these TDRsthe TDR had matured and/or werewas in default at the time of restructure, and we havethere are no commitments to lend additional funds to anythe borrower.

24

As discussed in Note 1 to these financial statements, the CARES Act provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of these borrowers. ThereDecember 31, 2019. The TDRs disclosed above were $11.8not related to COVID-19 modifications. The Company executed loan deferrals on outstanding balances of approximately $65 million of TDRs still accruing interestresulting from the COVID-19 pandemic that were not classified as a TDR at March 31, 2019, none of which were more than 90 days delinquent. At December 31, 2018, there were $12.9 million of TDRs still accruing interest, none of which were more than 90 days delinquent.2020.
Some loans modified in a TDR may already be on nonaccrual status and partial charge-offs may have already been taken against the outstanding loan balance. Thus, these loans have already been identified as impaired and have already been evaluated under the Company's allowance for loan and lease losses (the "Allowance") methodology. Loans that were not on nonaccrual status when modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan. The loans modified in a TDR did not have a material effect on our provision for loan and lease losses (the "Provision") and the Allowance during the three months ended March 31, 2019.



No loans were modified in a TDR during the three months ended March 31, 20192020 and 2018.2019.


NoNaN loans were modified as a TDR within the previous twelve months that subsequently defaulted during the three months ended March 31, 20192020 and 2018.2019.


We had no commitments on TDRs during the three months ended March 31, 20192020 and 2018.2019.
 
Credit Quality Indicators
 
The Company categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases individually by classifying the loans and leases by credit risk. This analysis includes non-homogeneous loans, and leases, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:rating of loans. Loans not meeting the following criteria that are analyzed individually as part of the described process are considered to be pass-rated loans.
 
Special Mention. Loans and leases classified as special mention, while still adequately protected by the borrower's capital adequacy and payment capability, exhibit distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment. These exposures require management's close attention so as to avoid becoming undue or unwarranted credit exposures.
 
Substandard. Loans and leases classified as substandard are inadequately protected by the borrower's current financial condition and payment capability or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.
 
Doubtful. Loans and leases classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.
 
Loss. Loans and leases classified as loss are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Losses are taken in the period in which they surface as uncollectible.


Loans and leases not meeting the criteria above are considered to be pass-rated.
25

The following table presents the amortized cost basis of the Company's loans by class, credit quality indicator and origination year as of March 31, 2020. Revolving loans converted to term as of and during the three months ended March 31, 2020 were not material to the total loan portfolio.

Amortized Cost of Term Loans by Origination Year
20202019201820172016PriorAmortized Cost of Revolving LoansTotal
(dollars in thousands)
March 31, 2020
Commercial, financial and agricultural
Risk Rating
Pass$40,976  $77,593  $64,288  $59,642  $50,144  $125,599  $97,073  $515,315  
Special Mention2,865  9,777  5,627  15,376  1,006  9,153  3,280  47,084  
Substandard—  7,497  526  1,229  2,097  1,576  —  12,925  
Subtotal43,841  94,867  70,441  76,247  53,247  136,328  100,353  575,324  
Construction
Risk Rating
Pass7,923  12,157  50,181  6,920  2,277  21,159  —  100,617  
Residential mortgage
Risk Rating
Pass80,293  364,858  186,851  201,685  227,341  566,829  —  1,627,857  
Special Mention—  —  —  —  159  835  —  994  
Substandard—  —  550  929  302  1,904  —  3,685  
Subtotal80,293  364,858  187,401  202,614  227,802  569,568  —  1,632,536  
Home equity
Risk Rating
Pass4,927  21,426  22,858  493  249  3,951  450,237  504,141  
Substandard—  —  —  —  207  338  —  545  
Subtotal4,927  21,426  22,858  493  456  4,289  450,237  504,686  
Commercial mortgage
Risk Rating
Pass36,503  153,355  170,779  172,937  118,087  396,221  17,463  1,065,345  
Special Mention—  —  2,392  12,597  13,220  32,666  —  60,875  
Substandard—  7,434  —  —  —  5,483  —  12,917  
Subtotal36,503  160,789  173,171  185,534  131,307  434,370  17,463  1,139,137  
Consumer
Risk Rating
Pass47,522  206,573  111,490  68,480  31,287  17,520  76,277  559,149  
Special Mention—  —  —  —  —  —  150  150  
Substandard—  11  26  11  —  237  —  285  
Loss—  —  —  —  —  114  —  114  
Subtotal47,522  206,584  111,516  68,491  31,287  17,871  76,427  559,698  
Total$221,009  $860,681  $615,568  $540,299  $446,376  $1,183,585  $644,480  $4,511,998  
26

The following table presents the Company's loans by class and credit quality indicator the recorded investment in the Company's loans and leases as of March 31, 2019 and December 31, 2018:2019:

(dollars in thousands)PassSpecial
Mention		SubstandardLossSubtotalNet 
Deferred
Costs
(Income)		Total
December 31, 2019      
Commercial, financial and agricultural$523,342  $20,677  $26,070  $—  $570,089  $215  $570,304  
Real estate:  
Construction96,139  —  —  —  96,139  (285) 95,854  
Residential mortgage1,593,072  840  1,889  —  1,595,801  4,000  1,599,801  
Home equity490,147  —  92  —  490,239  495  490,734  
Commercial mortgage1,094,364  17,440  13,107  —  1,124,911  (1,496) 1,123,415  
Consumer569,212  —  193  111  569,516  (84) 569,432  
Total$4,366,276  $38,957  $41,351  $111  $4,446,695  $2,845  $4,449,540  
 
(dollars in thousands)Pass Special
Mention		 Substandard Loss Subtotal Net 
Deferred
Costs
(Income)		 Total
March 31, 2019 
  
  
    
  
  
Commercial, financial and agricultural$554,400
 $2,142
 $9,706
 $—
 $566,248
 $547
 $566,795
Real estate:         
    
Construction71,483
 —
 —
 —
 71,483
 (308) 71,175
Residential mortgage1,445,385
 —
 2,585
 —
 1,447,970
 3,824
 1,451,794
Home equity465,228
 —
 570
 —
 465,798
 107
 465,905
Commercial mortgage1,033,791
 11,881
 13,729
 —
 1,059,401
 (1,395) 1,058,006
Consumer487,729
 —
 114
 45
 487,888
 (75) 487,813
Leases83
 —
 —
 —
 83
 —
 83
Total$4,058,099
 $14,023
 $26,704
 $45
 $4,098,871
 $2,700
 $4,101,571


(dollars in thousands)Pass Special
Mention		 Substandard Loss Subtotal Net 
Deferred
Costs
(Income)		 Total
December 31, 2018 
  
  
    
  
  
Commercial, financial and agricultural$552,706
 $7,961
 $20,510
 $—
 $581,177
 $483
 $581,660
Real estate:         
    
Construction67,269
 —
 —
 —
 67,269
 (342) 66,927
Residential mortgage1,422,240
 —
 2,144
 —
 1,424,384
 3,821
 1,428,205
Home equity468,394
 —
 572
 —
 468,966
 —
 468,966
Commercial mortgage1,029,581
 10,412
 1,692
 —
 1,041,685
 (1,407) 1,040,278
Consumer492,030
 —
 80
 158
 492,268
 (62) 492,206
Leases124
 —
 —
 —
 124
 —
 124
Total$4,032,344
 $18,373
 $24,998
 $158
 $4,075,873
 $2,493
 $4,078,366
5. ALLOWANCE FOR LOANCREDIT LOSSES AND LEASE LOSSESRESERVE FOR OFF-BALANCE SHEET CREDIT EXPOSURES
 
The following table presents by class, the activity in the AllowanceACL for loans under ASC 326 during the periods indicated:three months ended March 31, 2020 and under previous GAAP during the three months ended March 31, 2019:
 
Real Estate 
  Real Estate      
Commercial,
Financial &
Agricultural		 Construction Residential Mortgage Home Equity Commercial Mortgage Consumer Leases Total
(dollars in thousands)
Three Months Ended March 31, 2019
Beginning balance$8,027
 $1,202
 $14,349
 $3,788
 $13,358
 $7,192
 $—
 $47,916
Provision (credit) for loan and lease losses50
 91
 (1,520) 481
 (1,322) 3,503
 —
 1,283
(dollars in thousands)(dollars in thousands)Commercial,
Financial &
Agricultural		ConstructionResidential MortgageHome EquityCommercial MortgageConsumerTotal
Three Months Ended March 31, 2020Three Months Ended March 31, 2020
Beginning balance prior to ASC 326Beginning balance prior to ASC 326$8,136  $1,792  $13,327  $4,206  $11,113  $9,397  $47,971  
Impact of adoption of ASC 326Impact of adoption of ASC 326(627) 479  608  (1,614) 2,624  2,096  3,566  
Balance after adoption of ASC 326Balance after adoption of ASC 3267,509  2,271  13,935  2,592  13,737  11,493  51,537  
Provision for credit lossesProvision for credit losses1,231  655  (935) (314) 5,779  2,913  9,329  
8,077
 1,293
 12,829
 4,269
 12,036
 10,695
 —
 49,199
Charge-offs463
 —
 —
 —
 —
 2,251
 —
 2,714
Charge-offs437  —  —�� —  —  2,217  2,654  
Recoveries233
 6
 22
 9
 —
 512
 —
 782
Recoveries342  131  181  31  2  746  1,433  
Net charge-offs (recoveries)230
 (6) (22) (9) —
 1,739
 —
 1,932
Net charge-offs (recoveries)95  (131) (181) (31) (2) 1,471  1,221  
Ending balance$7,847
 $1,299
 $12,851
 $4,278
 $12,036
 $8,956
 $—
 $47,267
Ending balance$8,645  $3,057  $13,181  $2,309  $19,518  $12,935  $59,645  
               
Three Months Ended March 31, 2018
Three Months Ended March 31, 2019Three Months Ended March 31, 2019
Beginning balance$7,594
 $1,835
 $14,328
 $3,317
 $16,801
 $6,126
 $—
 $50,001
Beginning balance$8,027  $1,202  $14,349  $3,788  $13,358  $7,192  $47,916  
Provision (credit) for loan and lease losses236
 (1,314) (147) 8
 (630) 1,636
 —
 (211)
Provision for credit lossesProvision for credit losses50  91  (1,520) 481  (1,322) 3,503  1,283  
7,830
 521
 14,181
 3,325
 16,171
 7,762
 —
 49,790
 8,077  1,293  12,829  4,269  12,036  10,695  49,199  
Charge-offs498
 —
 —
 —
 —
 1,933
 —
 2,431
Charge-offs463  —  —  —  —  2,251  2,714  
Recoveries144
 1,193
 26
 3
 15
 477
 —
 1,858
Recoveries233  6  22  9  —  512  782  
Net charge-offs (recoveries)354
 (1,193) (26) (3) (15) 1,456
 —
 573
Net charge-offs (recoveries)230  (6) (22) (9) —  1,739  1,932  
Ending balance$7,476
 $1,714
 $14,207
 $3,328
 $16,186
 $6,306
 $—
 $49,217
Ending balance$7,847  $1,299  $12,851  $4,278  $12,036  $8,956  $47,267  
               

27

The following table presents the activity in the reserve for off-balance sheet credit exposures, included in other liabilities, under ASC 326 during the three months ended March 31, 2020 and under previous GAAP during the three months ended March 31, 2019.

Three Months Ended March 31, 2020
Beginning balance prior to ASC 326$1,272 
Impact of adoption of ASC 326740 
Balance after adoption of ASC 3262,012 
Provision for off-balance sheet credit exposures1,798 
Ending Balance$3,810 
Three Months Ended March 31, 2019
Beginning balance$1,242 
Provision for off-balance sheet credit exposures167 
Ending balance$1,409 

In accordance with GAAP, loans held for sale and other real estate assets are not included in our assessment of the Allowance.ACL.

Our Provisionprovision for credit losses on loans was a debit of$9.3 million in the three months ended March 31, 2020 under ASC 326, compared to $1.3 million in the three months ended March 31, 2019 compared to a credit of $0.2 million in the three months ended March 31, 2018.under previous GAAP.


6. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

The components of the Company's investments in unconsolidated subsidiaries were as follows:
 
(dollars in thousands)March 31, 2020December 31, 2019
Investments in low income housing tax credit partnerships$14,974  $15,322  
Investments in common securities of statutory trusts1,547  1,547  
Investments in affiliates146  192  
Other54  54  
Total$16,721  $17,115  
(dollars in thousands)March 31, 2019 December 31, 2018
Investments in low income housing tax credit partnerships$14,345
 $11,603
Investments in common securities of statutory trusts1,547
 2,169
Investments in affiliates108
 182
Other54
 54
Total$16,054
 $14,008

The Company invests in low-income housing tax credit ("LIHTC") partnerships. As of March 31, 20192020 and December 31, 2018,2019, the Company had $10.8$11.0 million and $8.3$11.5 million, respectively, in unfunded commitments related to the LIHTC partnerships. The expected payments for the unfunded commitments as of March 31, 20192020 for the remainder of fiscal year 2020, the next five succeeding fiscal years and all years thereafter are as follows (in(dollars in thousands):


Year Ending December 31,
2020 (remainder)$6,452  
20211,494  
20223,010  
202310  
202426  
20256  
Thereafter42  
Total unfunded commitments$11,040  
Year Ending December 31, 
2019 (remainder)$4,167
20206,466
202194
202210
202310
202426
Thereafter49
Total unfunded commitments$10,822


Prior to 2018, the Company's investments in LIHTC partnerships were accounted for using the cost method. In 2018, the Company voluntarily changed its accounting policy for LIHTC partnerships from the cost method to the proportional amortization method using the practical expedient available under ASC 323, "Investments - Equity Method and Joint Ventures", which permits an investor to amortize the initial cost of the investment in proportion to only the tax credits allocated to the investor. The Company believes the proportional amortization method is preferable because it better reflects the economics of an investment that is made for the primary purpose of receiving tax credits and other tax benefits. In addition to a change in the
28

timing of the recognition of amortization expense on LIHTC investments, amortization expense on LIHTC investments is now reflected in the income tax expense line, which provides users a better understanding of the nature of the returns of such investments, instead of in other operating expenses on the consolidated statements of income.


The following table presents amortization and tax credits recognized associated with our investments in LIHTC partnerships for the three months ended March 31, 20192020 and March 31, 2018:2019:


(dollars in thousands)Three Months Ended
March 31, 2020		Three Months Ended
March 31, 2019
Proportional amortization method:
Amortization expense recognized in income tax expense$348  $258  
Tax credits recognized in income tax expense400  277  
(dollars in thousands)Three Months Ended
March 31, 2019		 Three Months Ended
March 31, 2018
Proportional amortization method:   
Amortization expense recognized in income tax expense$258
 $114
Tax credits recognized in income tax expense277
 152



7. CORE DEPOSIT PREMIUM AND MORTGAGE SERVICING RIGHTS
 
The following table presents changes in core deposit premium and mortgage servicing rights for the periods presented:
 
(dollars in thousands)Mortgage
Servicing
Rights
Balance, January 1, 2019$15,596 
Additions222 
Amortization(471)
Balance, March 31, 2019$15,347 
Balance, January 1, 2020$14,718 
Additions174 
Amortization(1,547)
Balance, March 31, 2020$13,345 
(dollars in thousands)Core
Deposit
Premium		 Mortgage
Servicing
Rights		 Total
Balance, January 1, 2018$2,006
 $15,843
 $17,849
Additions—
 435
 435
Amortization(669) (457) (1,126)
Balance, March 31, 2018$1,337
 $15,821
 $17,158
      
Balance, January 1, 2019$—
 $15,596
 $15,596
Additions—
 222
 222
Amortization—
 (471) (471)
Balance, March 31, 2019$—
 $15,347
 $15,347

Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans and totaled $0.2 million for the three months ended March 31, 20192020 compared to $0.4$0.2 million for the three months ended March 31, 2018.2019.


Amortization of mortgage servicing rights was $0.5totaled $1.5 million for the three months ended March 31, 2019,2020 compared to $0.5 million for the three months ended March 31, 2018.2019.


The following table presents the fair market value and key assumptions used in determining the fair market value of our mortgage servicing rights:
 
Three Months Ended Three Months EndedThree Months EndedThree Months Ended
(dollars in thousands)March 31, 2019 March 31, 2018(dollars in thousands)March 31, 2020March 31, 2019
Fair market value, beginning of period$17,696
 $17,161
Fair market value, beginning of period$15,820  $17,696  
Fair market value, end of period16,541
 18,463
Fair market value, end of period13,525  16,541  
Weighted average discount rate9.5% 9.5%Weighted average discount rate9.5 %9.5 %
Forecasted constant prepayment rate assumption (1)
16.2
 14.2
Forecasted constant prepayment rate assumption (1)
16.1 %16.2 %
 
(1) Represents annualized average life loan prepayment rate assumption.


29

The gross carrying value and accumulated amortization related to our core deposit premium and mortgage servicing rights are presented below:
 
March 31, 2019 December 31, 2018 March 31, 2020December 31, 2019
(dollars in thousands)Gross
Carrying
Value		 Accumulated
Amortization		 Net
Carrying
Value		 Gross
Carrying
Value		 Accumulated
Amortization		 Net
Carrying
Value		(dollars in thousands)Gross
Carrying
Value		Accumulated
Amortization		Net
Carrying
Value		Gross
Carrying
Value		Accumulated
Amortization		Net
Carrying
Value
Core deposit premium$44,642
 $(44,642) $—
 $44,642
 $(44,642) $—
Mortgage servicing rights66,235
 (50,888) 15,347
 66,013
 (50,417) 15,596
Mortgage servicing rights$67,769  $(54,424) $13,345  $67,595  $(52,877) $14,718  
Total$110,877
 $(95,530) $15,347
 $110,655
 $(95,059) $15,596
 

Based on the mortgage servicing rights held as of March 31, 2019,2020, estimated amortization expense for the remainder of fiscal year 2019,2020, the next five succeeding fiscal years and all years thereafter are as follows:follows (dollars in thousands):
 
(dollars in thousands) 
2019 (remainder)$1,263
20201,382
Year Ending December 31,Year Ending December 31,
2020 (remainder)2020 (remainder)$4,400  
20211,130
20214,764  
2022945
20223,856  
2023786
2023325  
2024704
2024—  
20252025—  
Thereafter9,137
Thereafter—  
Total$15,347
Total$13,345  
 
We perform an impairment assessment of our mortgage servicing rights whenever events or changes in circumstance indicate that the carrying value of the asset may not be recoverable.


8. DERIVATIVES
 
We utilize various designated and undesignated derivative financial instruments to reduce our exposure to movements in interest rates including interest rate lock commitments and forward sale commitments. We measure all derivatives at fair value on our consolidated balance sheet. In each reporting period, we record the derivative instruments in other assets or other liabilities depending on whether the derivatives are in an asset or liability position. For derivative instruments that are designated as cash flow hedging instruments, we record the effective portion of the changes in the fair value of the derivative in AOCI, net of tax, until earnings are affected by the variability of cash flows of the hedged transaction. We immediately recognize the portion of the gain or loss in the fair value of the derivative that represents hedge ineffectiveness in current period earnings. For derivative instruments that are not designated as hedging instruments, changes in the fair value of the derivative are included in current period earnings. At March 31, 20192020 and December 31, 2018,2019, we were not party to any derivatives designated as part of a fair value or cash flow hedge.

Interest Rate Lock and Forward Sale Commitments
 
We enter into interest rate lock commitments on certain mortgage loans that are intended to be sold. To manage interest rate risk on interest rate lock commitments, we also enter into forward loan sale commitments. The interest rate locks and forward loan sale commitments are accounted for as undesignated derivatives and are recorded at their respective fair values in other assets or other liabilities, with changes in fair value recorded in current period earnings. These instruments serve to reduce our exposure to movements in interest rates. At March 31, 2019,2020, we were a party to interest rate lock and forward sale commitments on $2.3$4.2 million and $5.8$8.1 million of mortgage loans, respectively.
 
The following table presents the location of all assets and liabilities associated with our derivative instruments within the consolidated balance sheets:
 
Derivatives Financial Instruments Not Designated as Hedging InstrumentsAsset DerivativesLiability Derivatives
Fair Value atFair Value at
(dollars in thousands)Balance Sheet LocationMarch 31,
2020		December 31,
2019		March 31,
2020		December 31,
2019
Interest rate lock and forward sale commitmentsOther assets / other liabilities$115  $8  $37  $28  
30

Derivatives Financial Instruments Not Designated as Hedging Instruments Asset Derivatives Liability Derivatives
 Fair Value at Fair Value at
(dollars in thousands) Balance Sheet Location March 31,
2019		 December 31,
2018		 March 31,
2019		 December 31,
2018
Interest rate lock and forward sale commitments Other assets / other liabilities $15
 $11
 $61
 $95

Risk Participation Agreement


In the first quarter of 2020, the Company entered into a credit risk participation agreement ("RPA") with a financial institution counterparty for an interest rate swap related to a loan which we were a participant in. The risk participation agreement entered into by us as a participant bank provides credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution. The fair value of the exposure related to the RPA was not material to the consolidated financial statements at March 31, 2020.

The following table presents the impact of derivative instruments and their location within the consolidated statements of income:
 
Derivatives Financial Instruments
Not Designated as Hedging Instruments		Location of Gain (Loss)
Recognized in
Earnings on Derivatives		Amount of Gain (Loss)
Recognized in
Earnings on Derivatives
(dollars in thousands)
Three Months Ended March 31, 2020
Interest rate lock and forward sale commitmentsMortgage banking income$99 
Risk participation agreementOther service charges and fees1,288 
Three Months Ended March 31, 2019
Interest rate lock and forward sale commitmentsMortgage banking income39 
Derivatives Financial Instruments
Not Designated as Hedging Instruments		 Location of Gain (Loss)
Recognized in
Earnings on Derivatives		 Amount of Gain (Loss)
Recognized in
Earnings on Derivatives
(dollars in thousands)  
Three Months Ended March 31, 2019    
Interest rate lock and forward sale commitments Mortgage banking income $39
     
Three Months Ended March 31, 2018    
Interest rate lock and forward sale commitments Mortgage banking income 21
Loans held for sale Other income (7)


9. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
 
Federal Home Loan Bank Advances and Other Borrowings


The bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB") and maintained a $1.72$1.87 billion line of credit as of March 31, 2019,2020, compared to $1.43$1.84 billion at December 31, 2018.2019. At March 31, 2019, $1.422020, $1.41 billion was undrawn under this arrangement, compared to $1.18$1.57 billion at December 31, 2018.2019. Short-term borrowings under this arrangement totaled $179.0$222.0 million at March 31, 2019,2020, compared to $197.0$150.0 million at December 31, 2018.2019. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled $187.4 million at March 31, 2020, compared to $78.9 million at December 31, 2019. Long-term borrowings under this arrangement totaled $50.0 million at March 31, 20192020 and December 31, 2018.2019. FHLB advances and standby letters of credit available at March 31, 20192020 were secured by certain real estate loans with a carrying value of $2.32$2.51 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB.
 
At March 31, 20192020 and December 31, 2018,2019, our bank had additional unused borrowings available at the Federal Reserve discount window of $70.6$60.3 million and $73.9$65.3 million, respectively. As of March 31, 20192020 and December 31, 2018,2019, certain commercial and commercial real estate loans with a carrying value totaling $122.0$125.2 million and $123.3$126.1 million, respectively, were pledged as collateral on our line of credit with the Federal Reserve discount window. The Federal Reserve does not have the right to sell or repledge these loans.
 
Subordinated Debentures


In October 2003, we created two2 wholly-owned statutory trusts, CPB Capital Trust II ("Trust II") and CPB Statutory Trust III ("Trust III"). Trust II issued $20.0 million in floating rate trust preferred securities bearing an interest rate of three-month LIBOR plus 2.85% and maturing on October 7, 2033. The principal assets of Trust II were $20.6 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust II trust preferred securities. Trust II issued $0.6 million of common securities to the Company.


On January 7, 2019, the Company completed the redemption of$20.0of $20.0 million in floating rate trust preferred securities of Trust II. The redemption price was 100% of the aggregate liquidation amount of the securities plus accumulated but unpaid distributions up to but not including the redemption date. The Company also redeemed $0.6 million of common securities issued by Trust II and held by the Company, as a result of the concurrent redemption of 100% of the principal assets of Trust II, or $20.6 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust II trust preferred securities. The redemption was pursuant to the optional prepayment provisions of the indenture. On January 22, 2019, Trust II was canceled with the state of Delaware.
 
31

Trust III issued $20.0 million in floating rate trust preferred securities bearing an interest rate of three-month LIBOR plus 2.85% and maturing on December 17, 2033. The principal assets of Trust III were $20.6 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust III trust preferred securities. Trust III issued $0.6 million of common securities to the Company.


On December 17, 2018, the Company completed the redemption of $20.0 million in floating rate trust preferred securities of Trust III. The redemption price was 100% of the aggregate liquidation amount of the securities plus accumulated but unpaid distributions up to but not including the redemption date. The Company also redeemed $0.6 million of common securities issued by Trust III and held by the Company, as a result of the concurrent redemption of 100% of the principal assets of Trust III, or $20.6 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust III

trust preferred securities. The redemption was pursuant to the optional prepayment provisions of the indenture. On January 9, 2019, Trust III was canceled with the state of Connecticut.
 
In September 2004, we created a wholly-owned statutory trust, CPB Capital Trust IV ("Trust IV"). Trust IV issued $30.0 million in floating rate trust preferred securities bearing an interest rate of three-month LIBOR plus 2.45% and maturing on December 15, 2034. The principal assets of Trust IV are $30.9 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust IV trust preferred securities. Trust IV issued $0.9 million of common securities to the Company.
 
In December 2004, we created a wholly-owned statutory trust, CPB Statutory Trust V ("Trust V"). Trust V issued $20.0 million in floating rate trust preferred securities bearing an interest rate of three-month LIBOR plus 1.87% and maturing on December 15, 2034. The principal assets of Trust V are $20.6 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust V trust preferred securities. Trust V issued $0.6 million of common securities to the Company.
 
At March 31, 2020 and December 31, 2019, the Company had the following junior subordinated debentures outstanding, which is recorded in long-term debt on the Company's consolidated balance sheets:

(dollars in thousands)March 31, 2020
Name of TrustSubordinated DebenturesInterest Rate
Trust IV$30,928 Three month LIBOR + 2.45%
Trust V20,619 Three month LIBOR + 1.87%
Total$51,547 
December 31, 2019
Name of TrustSubordinated DebenturesInterest Rate
Trust IV30,928 Three month LIBOR + 2.45%
Trust V20,619 Three month LIBOR + 1.87%
Total$51,547 

The floating trust preferred securities, the junior subordinated debentures that are the assets of Trusts IV and V and the common securities issued by Trusts IV and V are redeemable in whole or in part on any interest payment date on or after December 15, 2009 for Trust IV and V, or at any time in whole but not in part within 90 days following the occurrence of certain events. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from time to time to defer interest payments on the subordinated debentures, which would result in a deferral of distribution payments on the related trust preferred securities, for up to 20 consecutive quarterly periods without default or penalty.


The subordinated debentures may be included in Tier 1 capital, with certain limitations applicable, under current regulatory guidelines and interpretations.


10. REVENUE FROM CONTRACTS WITH CUSTOMERS


32

The following presents the Company's other operating income, segregated by revenue streams that are in-scope and out-of-scope of ASC 606, "Revenue from Contracts with Customers" for the three months ended March 31, 20192020 and 2018.2019.


Three Months Ended
March 31,
(dollars in thousands)20202019
Other operating income:
In-scope of ASC 606
Mortgage banking income$229  $149  
Service charges on deposit accounts2,050  2,081  
Other service charges and fees2,996  2,594  
Income on fiduciary activities1,297  965  
In-scope other operating income6,572  5,789  
Out-of-scope other operating income2,314  5,884  
Total other operating income$8,886  $11,673  
 Three Months Ended
March 31,
(dollars in thousands)2019 2018
Other operating income:   
In-scope of ASC 606   
Service charges on deposit accounts$2,081
 $2,003
Other service charges and fees2,568
 2,556
Income on fiduciary activities965
 956
Fees on foreign exchange26
 32
Loan placement fees149
 197
In-scope other operating income5,789
 5,744
Out-of-scope other operating income5,884
 3,210
Total other operating income$11,673
 $8,954



11. SHARE-BASED COMPENSATION
 
Restricted Stock Units
 
The table below presents the activity of restricted stock units for the three months ended March 31, 2019:2020:
 
SharesWeighted Average Grant Date Fair Value
Non-vested restricted stock units, beginning of period366,467  $28.89  
Changes during the period:  
Granted78,697  28.10  
Vested(46,050) 30.43  
Forfeited(5,813) 29.55  
Non-vested restricted stock units, end of period393,301  28.54  

 Shares Weighted Average Grant Date Fair Value
Non-vested restricted stock units, beginning of period362,725
 $26.98
Changes during the period: 
  
Granted111,478
 29.27
Vested(50,062) 22.03
Forfeited(5,890) 29.83
Non-vested restricted stock units, end of period418,251
 28.15

12. LEASES


We lease certain land and buildings for our bank branches and ATMs. In some instances, a lease may contain renewal options to extend the term of the lease. All renewal options are likely to be exercised and therefore have been recognized as part of our right-of-use assets and lease liabilities in accordance with ASC 842, "Leases". Certain leases also contain variable payments that are primarily determined based on common area maintenance costs and Hawaii state tax rates. All leases are operating leases and we do not haveinclude any short term leases.leases in the calculation of the right-of-use assets and lease liabilities. The most significant assumption related to the Company’s application of ASC 842 was the discount rate assumption. As most of the Company’s lease agreements do not provide for an implicit interest rate, the Company useduses the collateralized interest rate that the Company would have to pay to borrow over a similar term to estimate the Company’s lease liability as of January 1, 2019.liability.


33

Total lease cost, cash flow information, weighted-average remaining lease term and weighted-average discount rate is summarized below for the period indicated:


Three Months Ended
March 31,
(dollars in thousands)20202019
Lease cost:
Operating lease cost$1,653  $1,628  
Variable lease cost678  647  
Less: sublease income(12) (11) 
Total lease cost$2,319  2,264  
Other information:
Operating cash flows from operating leases$(1,594) $(1,549) 
Weighted-average remaining lease term - operating leases13.36 years14.10 years
Weighted-average discount rate - operating leases3.92 %3.92 %
 Three Months Ended
March 31,
(dollars in thousands)2019
Lease cost: 
Operating lease cost$1,628
Variable lease cost647
Less: sublease income(11)
Total lease cost$2,264
  
Other information: 
Operating cash flows from operating leases$(1,549)
Weighted-average remaining lease term - operating leases14.10 years
Weighted-average discount rate - operating leases3.92%



The following is a schedule of annual undiscounted cash flows for our operating leases and a reconciliation of those cash flows to the operating lease liabilities:liabilities for the remainder of fiscal year 2020, the next five succeeding fiscal years and all years thereafter (dollars in thousands):


Year Ending December 31,Undiscounted Cash FlowsLease Liability ExpenseLease Liability Reduction
2020 (remainder)$4,622  $1,462  $3,160  
20215,907  1,808  4,099  
20225,472  1,659  3,813  
20235,175  1,519  3,656  
20244,947  1,385  3,562  
20254,634  1,247  3,387  
Thereafter36,285  6,421  29,864  
Total$67,042  $15,501  $51,541  
Year Ending December 31,Undiscounted cash flows Lease liability expense Lease liability reduction
2019 (remainder)$4,663
 $1,557
 $3,106
20206,015
 1,939
 4,076
20215,705
 1,787
 3,918
20225,268
 1,645
 3,623
20234,970
 1,512
 3,458
20244,812
 1,383
 3,429
Thereafter40,920
 7,669
 33,251
Total$72,353
 $17,492
 $54,861


In addition, the Company, as lessor, leases certain properties that it owns. All of these leases are operating leases. The following represents lease income related to these leases that was recognized for the period indicated:


Three Months Ended
March 31,
(dollars in thousands)20202019
Total rental income recognized$533  535  

34
 Three Months Ended
March 31,
(dollars in thousands)2019
Total rental income recognized$535


Based on the Company's leases as lessor as of March 31, 2019,2020, estimated lease payments for the remainder of fiscal year 2019,2020, the next five succeeding fiscal years and all years thereafter are as follows:follows (dollars in thousands):


Year Ending December 31,
2020 (remainder)$1,710  
20212,263  
20221,657  
2023644  
2024155  
202572  
Thereafter190  
Total$6,691  
Year Ending December 31, 
2019 (remainder)$1,486
20201,774
20211,849
20221,275
2023446
202488
Thereafter267
Total$7,185

13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
The following tables present the components of other comprehensive income for the three months ended March 31, 20192020 and 2018,2019, by component:
 
(dollars in thousands)Before TaxTax EffectNet of Tax
Three Months Ended March 31, 2020   
Net unrealized gains on investment securities:   
Net unrealized gains arising during the period$13,858  $3,711  $10,147  
Less: Reclassification adjustments from AOCI realized in net income—  —  —  
Net unrealized gains on investment securities13,858  3,711  10,147  
Defined benefit plans:   
Net actuarial gains arising during the period427  114  313  
Amortization of net actuarial loss268  72  196  
Amortization of net transition obligation5  1  4  
Amortization of prior service cost4  1  3  
Defined benefit plans, net704  188  516  
Other comprehensive income$14,562  $3,899  $10,663  

(dollars in thousands)Before TaxTax EffectNet of Tax
Three Months Ended March 31, 2019   
Net unrealized gains on investment securities:   
Net unrealized gains arising during the period$15,024  $4,028  $10,996  
Less: Reclassification adjustments from AOCI realized in net income—  —  —  
Net unrealized gains on investment securities15,024  4,028  10,996  
Defined benefit plans:   
Amortization of net actuarial loss263  29  234  
Amortization of net transition obligation5  1  4  
Amortization of prior service cost5  1  4  
Defined benefit plans, net273  31  242  
Other comprehensive income$15,297  $4,059  $11,238  

(dollars in thousands)Before Tax Tax Effect Net of Tax
Three Months Ended March 31, 2018 
  
  
Net unrealized losses on investment securities: 
  
  
Net unrealized losses arising during the period$(20,455) $(5,484) $(14,971)
Less: Reclassification adjustments from AOCI realized in net income—
 —
 —
Net unrealized losses on investment securities(20,455) (5,484) (14,971)
      
Defined benefit plans: 
  
  
Amortization of net actuarial loss341
 93
 248
Amortization of net transition obligation5
 1
 4
Amortization of prior service cost5
 1
 4
Defined benefit plans, net351
 95
 256
      
Other comprehensive loss$(20,104) $(5,389) $(14,715)

35


The following tables present the changes in each component of AOCI, net of tax, for the three months ended March 31, 20192020 and 2018:

2019:
 
(dollars in thousands)Investment
Securities		Defined
Benefit
Plans		AOCI
Three Months Ended March 31, 2020   
Balance at beginning of period14,825  (6,416) 8,409  
Other comprehensive income before reclassifications10,147  313  10,460  
Reclassification adjustments from AOCI—  203  203  
Total other comprehensive income10,147  516  10,663  
Balance at end of period$24,972  $(5,900) $19,072  
(dollars in thousands)Investment
Securities		 Defined
Benefit
Plans		 AOCI
Three Months Ended March 31, 2019 
  
  
Balance at beginning of period$(9,643) $(6,450) $(16,093)
Impact of the adoption of new accounting standards(3,100) —
 (3,100)
Adjusted balance at beginning of period(12,743) (6,450) (19,193)
      
Other comprehensive income before reclassifications10,996
 —
 10,996
Reclassification adjustments from AOCI—
 242
 242
Total other comprehensive income10,996
 242
 11,238
      
Balance at end of period$(1,747) $(6,208) $(7,955)


(dollars in thousands)Investment
Securities		Defined
Benefit
Plans		AOCI
Three Months Ended March 31, 2019   
Balance at beginning of period$(9,643) $(6,450) $(16,093) 
Impact of the adoption of new accounting standards(3,100) —  (3,100) 
Adjusted balance at beginning of period(12,743) (6,450) (19,193) 
Other comprehensive loss before reclassifications10,996  —  10,996  
Reclassification adjustments from AOCI—  242  242  
Total other comprehensive income10,996  242  11,238  
Balance at end of period$(1,747) $(6,208) $(7,955) 

(dollars in thousands)Investment
Securities		 Defined
Benefit
Plans		 AOCI
Three Months Ended March 31, 2018 
  
  
Balance at beginning of period$5,073
 $(6,112) $(1,039)
Impact of the adoption of new accounting standards(139) —
 (139)
Adjusted balance at beginning of period4,934
 (6,112) (1,178)
      
Impact of the adoption of new accounting standards(455) (1,381) (1,836)
      
Other comprehensive income before reclassifications(14,971) —
 (14,971)
Reclassification adjustments from AOCI—
 256
 256
Total other comprehensive income (loss)(14,971) 256
 (14,715)
      
Balance at end of period$(10,492) $(7,237) $(17,729)



The following table presents the amounts reclassified out of each component of AOCI for the three months ended March 31, 20192020 and 2018:2019:
 
 Amount Reclassified from AOCIAffected Line Item in the Statement Where Net Income is Presented
Details about AOCI ComponentsThree months ended March 31,
(dollars in thousands)20202019
Defined benefit retirement and supplemental executive retirement plan items:   
Amortization of net actuarial loss$(268) $(263) Salaries and employee benefits  
Amortization of net transition obligation(5) (5) Salaries and employee benefits  
Amortization of prior service cost(4) (5) Salaries and employee benefits  
Total before tax(277) (273) 
Tax effect74  31  Income tax benefit (expense)
Net of tax$(203) $(242) 
Total reclassification adjustments from AOCI for the period, net of tax$(203) $(242) 
 Amount Reclassified from AOCI Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI ComponentsThree months ended March 31, 
(dollars in thousands)2019 2018 
Sale of investment securities available-for-sale:     
Realized losses on securities available-for-sale$—
 $—
 Investment securities gains (losses)
Tax effect—
 —
 Income tax benefit (expense)
Net of tax$—
 $—
 
      
Defined benefit retirement and supplemental executive retirement plan items: 
  
  
Amortization of net actuarial loss$(263) $(341) Salaries and employee benefits
Amortization of net transition obligation(5) (5) Salaries and employee benefits
Amortization of prior service cost(5) (5) Salaries and employee benefits
Total before tax(273) (351) 
Tax effect31
 95
 Income tax benefit (expense)
Net of tax$(242) $(256) 
      
Total reclassification adjustments from AOCI for the period, net of tax$(242) $(256) 

36




14. EARNINGS PER SHARE
 
The following table presents the information used to compute basic and diluted earnings per common share for the periods indicated:
 
Three Months Ended
March 31,
(dollars in thousands, except per share data)20202019
Net income$8,326  $16,037  
Weighted average common shares outstanding - basic28,126,400  28,758,310  
Dilutive effect of employee stock options and awards151,353  221,545  
Weighted average common shares outstanding - diluted28,277,753  28,979,855  
Basic earnings per common share$0.30  $0.56  
Diluted earnings per common share$0.29  $0.55  
Anti-dilutive employee stock options and awards outstanding  —  —  
 Three Months Ended
March 31,
(dollars in thousands, except per share data)2019 2018
Net income$16,037
 $14,277
    
Weighted average common shares outstanding - basic28,758,310
 29,807,572
Dilutive effect of employee stock options and awards221,545
 233,779
Weighted average common shares outstanding - diluted28,979,855
 30,041,351
    
Basic earnings per common share$0.56
 $0.48
Diluted earnings per common share$0.55
 $0.48
    
Anti-dilutive employee stock options and awards outstanding—
 —



15. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
 
Disclosures about Fair Value of Financial Instruments
 
Fair value estimates, methods and assumptions are set forth below for our financial instruments.
 
Short-Term Financial Instruments
 
The carrying values of short-term financial instruments are deemed to approximate fair values. Such instruments are considered readily convertible to cash and include cash and due from financial institutions, interest-bearing deposits in other financial institutions, accrued interest receivable, the majority of Federal Home Loan Bank advances and other short-term borrowings, and accrued interest payable.


Investment Securities
 
The fair value of investment securities is based on market price quotations received from third-party pricing services. The third-party pricing services utilize pricing models supported with timely market data information. Where quoted market prices are not available, fair values are based on quoted market prices of comparable securities.


Loans
 
Fair values of loans are estimated based on discounted cash flows of portfolios of loans with similar financial characteristics including the type of loan, interest terms and repayment history. Fair values are calculated by discounting scheduled cash flows through estimated maturities using estimated market discount rates. Estimated market discount rates are reflective of credit and interest rate risks inherent in the Company's various loan types and are derived from available market information, as well as specific borrower information. As of March 31, 2020, the weighted average discount rate used in the valuation of loans was 4.63%. In accordance with ASU 2016-01, the fair value of loans are measured based on the notion of exit price.
 
37

Loans Held for Sale
 
The fair value of loans classified as held for sale are generally based upon quoted prices for similar assets in active markets, acceptance of firm offer letters with agreed upon purchase prices, discounted cash flow models that take into account market observable assumptions, or independent appraisals of the underlying collateral securing the loans. We report the fair values of Hawaii and U.S. Mainland construction and commercial real estate loans, if any, net of applicable selling costs on our consolidated balance sheets.
 
Deposit Liabilities
 
The fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits and interest-bearing demand and savings accounts, are equal to the amount payable on demand. The fair value of time deposits is estimated using discounted cash flow analyses. As of March 31, 2020, the weighted average discount rate used in the valuation of time deposits was 0.52%. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
 
Long-Term Debt
 
The fair value of our long-term debt is estimated by discounting scheduled cash flows over the contractual borrowing period at the estimated market rate for similar borrowing arrangements.
 
Derivatives


The fair values of derivative financial instruments are based upon current market values, if available. If there are no relevant comparables, fair values are based on pricing models using current assumptions for interest rate swaps and options.


Off-Balance Sheet Financial Instruments
 
The fair values of off-balance sheet financial instruments are estimated based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties, current settlement values or quoted market prices of comparable instruments.



Limitations
 
Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument. Because no market exists for a significant portion of our financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
 
38

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of future business and the value of assets and liabilities that are not considered financial instruments. For example, significant assets and liabilities that are not considered financial assets or liabilities include deferred tax assets, premises and equipment and intangible assets.


   Fair Value Measurement Using
(dollars in thousands)Carrying
Amount		Estimated
Fair Value		Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
March 31, 2020     
Financial assets:     
Cash and due from banks$81,972  $81,972  $81,972  $—  $—  
Interest-bearing deposits in other banks11,021  11,021  11,021  —  —  
Investment securities1,185,025  1,185,025  1,002  1,172,451  11,572  
Loans held for sale3,910  3,910  —  3,910  —  
Net loans and leases4,452,353  4,204,383  —  —  4,204,383  
Accrued interest receivable (included in other assets)16,851  16,851  16,851  —  —  
Financial liabilities:     
Deposits:     
Noninterest-bearing demand1,430,540  1,430,540  1,430,540  —  —  
Interest-bearing demand and savings and money market2,711,788  2,711,788  2,711,788  —  —  
Time993,741  996,284  —  —  996,284  
Short-term borrowings222,000  222,000  —  222,000  —  
Long-term debt101,547  91,032  —  91,032  —  
Accrued interest payable (included in other liabilities)4,132  4,132  4,132  —  —  

   Fair Value Measurement Using
(dollars in thousands)Notional
Amount		Carrying
Amount		Estimated
Fair Value		Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
March 31, 2020               
Derivatives:
Interest rate lock commitments$4,237  $115  $115  $—  $115  $—  
Forward sale commitments8,118  (37)��(37) —  (37) —  
Off-balance sheet financial instruments:   
Commitments to extend credit1,186,476  1,414  1,414  —  1,414  —  
Standby letters of credit and financial guarantees written9,424  141  141  —  141  —  
Risk participation agreement28,800  32  32  —  —  32  

39

    Fair Value Measurement Using   Fair Value Measurement Using
(dollars in thousands)Carrying
Amount		 Estimated
Fair Value		 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant
Unobservable
Inputs
(Level 3)		(dollars in thousands)Carrying
Amount		Estimated
Fair Value		Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
March 31, 2019 
  
  
  
  
December 31, 2019December 31, 2019     
Financial assets: 
  
  
  
  
Financial assets:     
Cash and due from banks$90,869
 $90,869
 $90,869
 $—
 $—
Cash and due from banks$78,418  $78,418  $78,418  $—  $—  
Interest-bearing deposits in other banks7,310
 7,310
 7,310
 —
 —
Interest-bearing deposits in other banks24,554  24,554  24,554  —  —  
Investment securities1,320,360
 1,320,360
 910
 1,308,186
 11,264
Investment securities1,128,110  1,128,110  1,127  1,115,728  11,255  
Loans held for sale3,539
 3,539
 —
 3,539
 —
Loans held for sale9,083  9,083  —  9,083  —  
Net loans and leases4,054,304
 3,986,933
 —
 14,818
 3,972,115
Net loans and leases4,401,569  4,392,477  —  —  4,392,477  
Accrued interest receivable17,082
 17,082
 17,082
 —
 —
Accrued interest receivable (included in other assets)Accrued interest receivable (included in other assets)16,500  16,500  16,500  —  —  
         
Financial liabilities: 
  
  
  
  
Financial liabilities:     
Deposits: 
  
  
  
  
Deposits:     
Noninterest-bearing demand1,357,890
 1,357,890
 1,357,890
 —
 —
Noninterest-bearing demand1,450,532  1,450,532  1,450,532  —  —  
Interest-bearing demand and savings and money market2,528,114
 2,528,114
 2,528,114
 —
 —
Interest-bearing demand and savings and money market2,643,038  2,643,038  2,643,038  —  —  
Time1,062,124
 1,056,236
 —
 —
 1,056,236
Time1,026,453  1,023,362  —  —  1,023,362  
Short-term borrowings179,000
 179,000
 —
 179,000
 —
Short-term borrowings150,000  150,000  —  150,000  —  
Long-term debt101,547
 97,737
 —
 97,737
 —
Long-term debt101,547  97,827  —  97,827  —  
Accrued interest payable (included in other liabilities)4,677
 4,677
 4,677
 

 —
Accrued interest payable (included in other liabilities)4,288  4,288  4,288  —  —  


   Fair Value Measurement Using
(dollars in thousands)Notional
Amount		Carrying
Amount		Estimated
Fair Value		Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
December 31, 2019
Derivatives:
Interest rate lock commitments$625  $8  $8  $—  $8  $—  
Forward sale commitments8,968  (28) (28) —  (28) —  
Off-balance sheet financial instruments:                  
Commitments to extend credit1,089,135  1,230  1,230  —  1,230  —  
Standby letters of credit and financial guarantees written10,526  158  158  —  158  —  
       Fair Value Measurement Using
(dollars in thousands)Notional
Amount		 Carrying
Amount		 Estimated
Fair Value		 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant
Unobservable
Inputs
(Level 3)
March 31, 2019   
  
  
  
  
Derivatives:           
Interest rate lock commitments$2,309
 $15
 $15
 $—
 $15
 $—
Forward sale commitments5,790
 (61) (61) —
 (61) —
            
Off-balance sheet financial instruments:     
      
Commitments to extend credit1,056,453
 1,270
 1,270
 —
 1,270
 —
Standby letters of credit and financial guarantees written12,683
 190
 190
 —
 190
 —


     Fair Value Measurement Using
(dollars in thousands)Carrying
Amount		 Estimated
Fair Value		 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant
Unobservable
Inputs
(Level 3)
December 31, 2018 
  
  
  
  
Financial assets: 
  
  
  
  
Cash and due from banks$80,569
 $80,569
 $80,569
 $—
 $—
Interest-bearing deposits in other banks21,617
 21,617
 21,617
 —
 —
Investment securities1,354,812
 1,350,576
 826
 1,338,581
 11,169
Loans held for sale6,647
 6,647
 —
 6,647
 —
Net loans and leases4,030,450
 3,938,380
 —
 —
 3,938,380
Accrued interest receivable17,000
 17,000
 17,000
 —
 —
          
Financial liabilities: 
  
  
  
  
Deposits: 
  
  
  
  
Noninterest-bearing demand1,436,967
 1,436,967
 1,436,967
 —
 —
Interest-bearing demand and savings and money market2,402,268
 2,402,268
 2,402,268
 —
 —
Time1,107,255
 1,099,560
 —
 —
 1,099,560
Short-term borrowings197,000
 197,000
 —
 197,000
 —
Long-term debt122,166
 118,057
 —
 118,057
 —
Accrued interest payable (included in other liabilities)5,051
 5,051
 5,051
 —
 —

       Fair Value Measurement Using
(dollars in thousands)Notional
Amount		 Carrying
Amount		 Estimated
Fair Value		 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant
Unobservable
Inputs
(Level 3)
December 31, 2018           
Derivatives:           
Interest rate lock commitments$2,158
 $11
 $11
 $—
 $11
 $—
Forward sale commitments8,530
 (95) (95) —
 (95) —
            
Off-balance sheet financial instruments: 
  
  
  
  
  
Commitments to extend credit1,030,322
 1,205
 1,205
 —
 1,205
 —
Standby letters of credit and financial guarantees written13,377
 201
 201
 —
 201
 —


Fair Value Measurements
 
We group our financial assets and liabilities at fair value into three levels based on the markets in which the financial assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:
 
•Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities traded in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.


•Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.


•Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques that requires the use of significant judgment or estimation.
 
40


We base our fair values on the price that we would expect to receive if an asset were sold, or the price that we would expect to pay to transfer a liability in an orderly transaction between market participants at the measurement date. We also maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.
 
We use fair value measurements to record adjustments to certain financial assets and liabilities and to determine fair value disclosures. Available-for-sale and equity securities and derivatives are recorded at fair value on a recurring basis. From time to time, we may be required to record other financial assets at fair value on a nonrecurring basis such as loans held for sale, impaired loans, mortgage servicing rights, and other real estate owned. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.
 
The Company's policy is to recognize transfers into or out of a level as of the end of the reporting period. There were no transfers of financial assets and liabilities between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2019. Also, there were no0 transfers of financial assets and liabilities into or out of Level 3 of the fair value hierarchy during the three months ended March 31, 2019.2020.


The following tables present the fair value of assets and liabilities measured on a recurring basis as of March 31, 20192020 and December 31, 2018:2019:
 
  Fair Value at Reporting Date Using
(dollars in thousands)Fair ValueQuoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
March 31, 2020    
Available-for-sale securities:    
Debt securities:    
States and political subdivisions$134,210  $—  $122,638  $11,572  
Corporate securities30,227  —  30,227  —  
U.S. Treasury obligations and direct obligations of U.S Government agencies37,506  —  37,506  —  
Mortgage-backed securities:    
Residential - U.S. Government sponsored entities735,050  —  735,050  —  
Commercial - U.S. Government agencies and sponsored entities80,319  —  80,319  —  
Residential - Non-government agencies34,672  —  34,672  —  
Commercial - Non-government agencies132,039  —  132,039  —  
Total available-for-sale securities1,184,023  —  1,172,451  11,572  
Equity securities1,002  1,002  —  —  
Derivatives: Interest rate lock and forward sale commitments78  —  78  —  
Total$1,185,103  $1,002  $1,172,529  $11,572  

41

  Fair Value at Reporting Date Using  Fair Value at Reporting Date Using
(dollars in thousands)Fair Value Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)		 Significant
Other
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)		(dollars in thousands)Fair ValueQuoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
March 31, 2019 
  
  
  
December 31, 2019December 31, 2019    
Available-for-sale securities: 
  
  
  
Available-for-sale securities:    
Debt securities: 
  
  
  
Debt securities:    
States and political subdivisions$162,608
 $—
 $151,344
 $11,264
States and political subdivisions$122,018  $—  $110,763  $11,255  
Corporate securities52,896
 —
 52,896
 —
Corporate securities30,529  —  30,529  —  
U.S. Treasury obligations and direct obligations of U.S Government agencies31,537
 —
 31,537
 —
U.S. Treasury obligations and direct obligations of U.S Government agencies  40,381  —  40,381  —  
Mortgage-backed securities: 
  
  
  
Mortgage-backed securities:    
Residential - U.S. Government sponsored entities779,660
 —
 779,660
 —
Residential - U.S. Government sponsored entities677,822  —  677,822  —  
Commercial - U.S. Government agencies and sponsored entities116,475
 —
 116,475
 —
Commercial - U.S. Government agencies and sponsored entities81,225  —  81,225  —  
Residential - Non-government agencies41,109
 —
 41,109
 —
Residential - Non-government agencies37,191  —  37,191  —  
Commercial - Non-government agencies135,165
 —
 135,165
 —
Commercial - Non-government agencies137,817  —  137,817  —  
Total available-for-sale securities1,319,450
 —
 1,308,186
 11,264
Total available-for-sale securities1,126,983  —  1,115,728  11,255  
       
Equity securities910
 910
 —
 —
Equity securities1,127  1,127  —  —  
       
Derivatives - Interest rate lock and forward sale commitments(46) —
 (46) —
Derivatives: Interest rate lock and forward sale commitmentsDerivatives: Interest rate lock and forward sale commitments(20) —  (20) —  
Total$1,320,314
 $910
 $1,308,140
 $11,264
Total$1,128,090  $1,127  $1,115,708  $11,255  


   Fair Value at Reporting Date Using
(dollars in thousands)Fair Value Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)		 Significant
Other
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)
December 31, 2018 
  
  
  
Available-for-sale securities: 
  
  
  
Debt securities: 
  
  
  
States and political subdivisions$173,674
 $—
 $162,505
 $11,169
Corporate securities54,849
 —
 54,849
 —
U.S. Treasury obligations and direct obligations of U.S Government agencies32,574
 —
 32,574
 —
Mortgage-backed securities: 
  
  
  
Residential - U.S. Government sponsored entities717,052
 —
 717,052
 —
Commercial - U.S. Government agencies and sponsored entities41,118
 —
 41,118
 —
Residential - Non-government agencies51,483
 —
 51,483
 —
Commercial - Non-government agencies134,728
 —
 134,728
 —
Total available-for-sale securities1,205,478
 —
 1,194,309
 11,169
        
Equity securities826
 826
 —
 —
        
Derivatives - Interest rate lock and forward sale commitments(84) —
 (84) —
Total$1,206,220
 $826
 $1,194,225
 $11,169


For the three months ended March 31, 20192020 and 2018,2019, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
 
(dollars in thousands)Available for Sale
Debt Securities:
States and
Political
Subdivisions
Balance at December 31, 2018$11,169
Principal payments received(105)
Unrealized net gain (loss) included in other comprehensive income200
Balance at March 31, 2019$11,264
  
Balance at December 31, 2017$11,794
Principal payments received(91)
Unrealized net gain (loss) included in other comprehensive income(165)
Balance at March 31, 2018$11,538
(dollars in thousands)Available-For-Sale
Debt Securities:
States and
Political
Subdivisions
Balance at December 31, 2019$11,255 
Principal payments received(109)
Unrealized net gain included in other comprehensive income426 
Balance at March 31, 2020$11,572 
Balance at December 31, 2018$11,169 
Principal payments received(105)
Unrealized net loss included in other comprehensive income200 
Balance at March 31, 2019$11,264 
 
Within the states and political subdivisions available-for-sale debt securities category, the Company holds four4 mortgage revenue bonds issued by the City & County of Honolulu with an aggregate fair value of $11.3$11.6 million and $11.5$11.3 million at March 31, 20192020 and March 31, 2018,2019, respectively. The Company estimates the fair value of its mortgage revenue bonds by using a discounted cash flow model to calculate the present value of estimated future principal and interest payments.
 
The significant unobservable input used in the fair value measurement of the Company's mortgage revenue bonds is the weighted average discount rate. As of March 31, 2019,2020, the weighted average discount rate utilized was 4.71%3.25% compared to 5.02%4.71% at March 31, 20182019 and 5.06%4.08% at December 31, 2018,2019, which was derived by incorporating a credit spread over the FHLB Fixed-Rate Advance curve. Significant increases (decreases) in the weighted average discount rate could result in a significantly lower (higher) fair value measurement.


42


The following table presents the fair value of assets measured on a nonrecurring basis and the level of valuation assumptions used to determine the respective fair values as of March 31, 20192020 and December 31, 2018:2019:
 
  Fair Value Measurements Using
(dollars in thousands)Fair ValueQuoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
March 31, 2020    
Other real estate (1)
$100  $—  $100  $—  
December 31, 2019            
Other real estate (1)
$164  $—  $164  $—  
   Fair Value Measurements Using
(dollars in thousands)Fair Value Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		 Significant
Other
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)
March 31, 2019 
  
  
  
Other real estate (1)
$276
 $—
 $276
 $—
        
December 31, 2018 
  
  
  
Other real estate (1)
$414
 $—
 $414
 $—


(1)
(1)Represents other real estate that is carried at fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral.

16. SEGMENT INFORMATION
We have the following three reportable segments: Banking Operations, Treasury and All Others. These segments are consistent with our internal functional reporting lines and are managed separately because each unit has different target markets, technological requirements, and specialized skills.
The Banking Operations segment includes construction and real estate development lending, commercial lending, residential mortgage lending, indirect auto lending, trust services, retail brokerage services and our retail branch offices, which provide a full range of deposit and loan products, as well as various other banking services. The Treasury segmentthat is responsible for managing the Company's investment securities portfolio and wholesale funding activities. The All Others segment consists of all activities not captured by the Banking Operationscarried at fair value less costs to sell. Fair value is generally based upon independent market prices or Treasury segments described above and includes activities such as electronic banking, data processing and management of bank owned properties.
The accounting policiesappraised values of the segments are consistent with the Company's accounting policies that are described in Note 1 - Summary of Significant Accounting Policies to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC. The majority of the Company's net income is derived from net interest income. Accordingly, management focuses primarily on net interest income, rather than gross interest income and expense amounts, in evaluating segment profitability.collateral.

Intersegment net interest income (expense) was allocated to each segment based upon a funds transfer pricing process that assigns costs of funds to assets and earnings credits to liabilities based on market interest rates that reflect interest rate sensitivity and maturity characteristics. All administrative and overhead expenses are allocated to the segments at cost. Cash, investment securities, loans and leases and their related balances are allocated to the segment responsible for acquisition and maintenance of those assets. Segment assets also include all premises and equipment used directly in segment operations.

Segment profits and assets are provided in the following table for the periods indicated.


(dollars in thousands)Banking
Operations		 Treasury All Others Total
Three Months Ended March 31, 2019 
  
  
  
Net interest income$41,680
 $3,433
 $—
 $45,113
Inter-segment net interest income (expense)6,690
 (2,606) (4,084) —
Credit (provision) for loan and lease losses(1,283) —
 —
 (1,283)
Other operating income:       
Mortgage banking income650
 —
 774
 1,424
Service charges on deposit accounts2,081
 —
 —
 2,081
Other service charges and fees1,076
 —
 1,988
 3,064
Income from fiduciary activities965
 —
 —
 965
Equity in earnings of unconsolidated subsidiaries8
 —
 —
 8
Fees on foreign exchange22
 129
 —
 151
Income from bank-owned life insurance—
 952
 —
 952
Loan placement fees149
 —
 —
 149
Other146
 2,554
 179
 2,879
Other operating income5,097
 3,635
 2,941
 11,673
Other operating expense(15,904) (346) (18,098) (34,348)
Administrative and overhead expense allocation(15,397) (209) 15,606
 —
Income before taxes20,883
 3,907
 (3,635) 21,155
Income tax (expense) benefit(5,052) (945) 879
 (5,118)
Net income (loss)$15,831
 $2,962
 $(2,756) $16,037

(dollars in thousands)Banking
Operations		 Treasury All Others Total
Three Months Ended March 31, 2018 
  
  
  
Net interest income$36,142
 $6,180
 $—
 $42,322
Inter-segment net interest income (expense)6,921
 (5,449) (1,472) —
Credit (provision) for loan and lease losses211
 —
 —
 211
Other operating income:       
Mortgage banking income993
 —
 854
 1,847
Service charges on deposit accounts2,003
 —
 —
 2,003
Other service charges and fees1,143
 6
 1,885
 3,034
Income from fiduciary activities956
 —
 —
 956
Equity in earnings of unconsolidated subsidiaries43
 —
 —
 43
Fees on foreign exchange24
 187
 

 211
Income from bank-owned life insurance—
 318
 —
 318
Loan placement fees197
 —
 —
 197
Other155
 —
 190
 345
Other operating income5,514
 511
 2,929
 8,954
Other operating expense(15,925) (385) (17,094) (33,404)
Administrative and overhead expense allocation(14,946) (223) 15,169
 —
Income before taxes17,917
 634
 (468) 18,083
Income tax (expense) benefit(3,681) (130) 5
 (3,806)
Net income (loss)$14,236
 $504
 $(463) $14,277

(dollars in thousands)Banking
Operations		 Treasury All Others Total
March 31, 2019       
Investment securities$—
 $1,320,360
 $—
 $1,320,360
Loans and leases (including loans held for sale)4,105,110
 —
 —
 4,105,110
Other26,332
 249,054
 140,496
 415,882
Total assets$4,131,442
 $1,569,414
 $140,496
 $5,841,352

(dollars in thousands)Banking
Operations		 Treasury All Others Total
December 31, 2018       
Investment securities$—
 $1,354,812
 $—
 $1,354,812
Loans and leases (including loans held for sale)4,085,013
 —
 —
 4,085,013
Other36,905
 256,652
 73,644
 367,201
Total assets$4,121,918
 $1,611,464
 $73,644
 $5,807,026

17.16. LEGAL PROCEEDINGS
 
We are involved in legal actions arising in the ordinary course of business. Management, after consultation with our legal counsel, believes the ultimate disposition of those matters will not have a material adverse effect on our consolidated financial statements.


17. SUBSEQUENT EVENTS

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included an allocation of $349 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”). This program is known as the Paycheck Protection Program (“PPP”). PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. Payments are deferred for the first six months of the loan. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. From April 3, 2020, the date the SBA began accepting submissions for the initial round of PPP loans through April 16, 2020, the date the SBA reached the limit of funds available to disburse under the initial round of the program, the Company received approval from the SBA on over 4,100 loans totaling approximately $475 million. As the initial $349 billion allotted for PPP loans ran out in less than two weeks, an additional $310 billion was added to the program. From April 27, 2020, the date the SBA began accepting submissions for the second round of PPP loans through April 30, 2020, the Company received approval from the SBA on over 1,500 loans totaling approximately $66 million. Certain PPP loans approved by the SBA may be cancelled or withdrawn prior to closing and funding. Although the Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program, there could be risks and liability to the Company associated with participation in the program that cannot be determined at this time.

In April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued a revised interagency statement encouraging financial institutions to work with customers affected by COVID-19 and providing additional information regarding loan modifications. The revised interagency statement clarifies the interaction between the interagency statement issued on March 22, 2020 and the temporary relief provided by Section 4013 of the CARES Act. Section 4013 allows financial institutions to suspend the requirements to classify certain loan modifications as TDRs. The revised statement also provides supervisory interpretations on past due and nonaccrual regulatory reporting of loan modification programs and regulatory capital. In response to the COVID-19 pandemic, the Company is providing 3-month principal and interest payment deferrals for its residential mortgage and consumer customers. The Company is also deferring either the full loan payment or the principal component of the loan payment for 3 to 6 months for its commercial real estate and commercial and industrial customers on a case-by-case basis depending on need. The Company executed loan deferrals on outstanding balances of approximately $65 million through March 31, 2020. As of April 30, 2020, the Company executed loan deferrals on outstanding balances of approximately $453 million, which includes the loans deferred during the first quarter of 2020, and is approximately 10% of the Company’s total loan portfolio. In accordance with the revised interagency guidance issued in April 2020, these short-term deferrals are not presently considered TDRs and at this time interest has continued to accrue. Collectibility of the accrued interest on deferred loans is uncertain and the Company may need to reverse the accrued interest which may negatively impact interest income in future periods.
43


Additional loan modifications to capitalize interest and/or extend loan terms may also be necessary. The Company anticipates increased requests for loan deferrals in the second quarter of 2020.

44

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
Central Pacific Financial Corp. ("CPF") is a Hawaii corporation and a bank holding company. Our principal business is to serve as a holding company for our bank subsidiary, Central Pacific Bank. We refer to Central Pacific Bank herein as "our bank" or "the bank," and when we say "the Company," "we," "us" or "our," we mean the holding company on a consolidated basis with the bank and our other consolidated subsidiaries.
 
Central Pacific Bank is a full-service community bank with 35 branches ,13 of which are temporarily closed to protect the health and 79well-being of the Company's employees and customers from the novel coronavirus pandemic ("COVID-19"), and 75 ATMs located throughout the state of Hawaii.Hawaii as of March 31, 2020. The bank offers a broad range of products and services including accepting time, savings, money market, and demand deposits and originating loans, including commercial loans, construction loans, commercial andreal estate loans, residential mortgage loans, and consumer loans.


Basis of Presentation
 
Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements under "Part I, Item 1. Financial Statements (Unaudited)." The following discussion should also be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 20182019 filed with the U.S. Securities and Exchange Commission (the "SEC") on February 28, 2019.25, 2020, including the
“Risk Factors” set forth therein.
 
Critical Accounting Policies and Use of Estimates


The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") requires that management make certain judgments and use certain estimates and assumptions that affect amounts reported and disclosures made. Actual results may differ from those estimates and such differences could be material to the financial statements.

Accounting estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimate are reasonably likely to occur from period to period and would materially impact our consolidated financial statements as of or for the periods presented. Management has discussed the development and selection of the critical accounting estimates noted below with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed the accompanying disclosures.

Allowance for Loan and Lease Losses

The Company identified a significant accounting policy which involves a higher degree of judgment and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial statements. At December 31, 2019, the significant accounting policy which we believed to be the most critical in preparing our consolidated financial statements is the determination of the allowance for loan and lease losses (the "Allowance")losses. This is management's estimatefurther described in Note 1 to the consolidated financial statements in our 2019 Form 10-K.

On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of incurredCredit Losses on Financial Instruments,” which created material changes to the Company’s existing critical accounting policy that existed at December 31, 2019. Effective January 1, 2020 through March 31, 2020, the significant accounting policy which we believe to be the most critical in preparing our consolidated financial statements is the determination of the allowance for credit losses inherenton loans.

Allowance for Credit Losses on Loans

Management considers the policies related to the allowance for credit losses ("ACL") on loans as the most critical to the financial statement presentation. The total ACL on loans includes activity related to allowances calculated in accordance with Accounting Standards Codification (“ASC”) 326, "Financial Instruments – Credit Losses". The ACL is established through the provision for credit losses charged to current earnings. The amount maintained in the ACL reflects management’s continuing evaluation of the estimated loan losses expected to be recognized over the life of the loans in our loan and lease portfolio at the balance sheet date. We maintain our Allowance at an amount we expect to be sufficient to absorb probable losses incurred in our loan and lease portfolio.

The Company's approach to developing the Allowance has three basic elements. These elements includeACL is comprised of specific reserves for individually impairedassigned to certain loans athat don’t share general allowance forrisk characteristics and general reserves on pools of loans other than those analyzed as individually impaired, and qualitative adjustments based on environmental and other factors which may be internal or externalthat do share general risk characteristics. Factors contributing to the Company.
Specific Reserve
Individually impaired loans in all loan categories are evaluated using onedetermination of three valuation methods as prescribed under Accounting Standards Codification ("ASC") 310-10, "Fair Value of Collateral, Observable Market Price, or Cash Flow". A loan is generally evaluated for impairment on an individual basis if it meets one or morespecific reserves include the creditworthiness of the following characteristics: risk-rated as substandard, doubtful borrower, and more specifically, changes in the expected future receipt of principal and interest payments and/or loss, loans on nonaccrual status, troubled debt restructures, or any loan deemed prudent by management to so analyze. Ifin the valuationvalue of pledged collateral. A reserve is recorded when the carrying amount of the impaired loan is less than
45

exceeds the recorded investment indiscounted estimated cash flows using the loan,loan’s initial effective interest rate or the deficiency will be charged off againstfair value of the Allowance or, alternatively, a specific reserve will be established and included in the overall Allowance balance. The Company did not record a specific reserve ascollateral for certain collateral dependent loans. For purposes of March 31, 2019 and December 31, 2018.

General Allowance

In determiningestablishing the general allowance component of the Allowance, the Company utilizes a comprehensive approach to segmentreserve, we stratify the loan portfolio into homogeneous groups. The Company's methodology segmentsgroups of loans that possess similar loss potential characteristics and calculate the portfolio generally by FDIC Call Report codes. Innet amount expected to be collected over the second quarter of 2017, an additional segment was added for auto dealer purchased loans. In the third quarter of 2018, another segment was broken out for multifamily commercial real estate loans. This results in eleven segments, and is consistent with general industry practice. For the purpose of determining general allowance loss factors, loss experience is derived from a migration analysis, with the exception of national syndicated loans and auto dealer purchased loans where an

average historical loss rate is applied due to limited historical loss experience. The key inputs to run a migration analysis are the lengthlife of the migration period,loans to estimate the dates for the migration periods to start and the number of migration periods used for the analysis. For each migration period, the analysis will determine the outstanding balance in each segment and/or sub-segment at the start of each period. These loans will then be followed for the length of the migration period to identify the amount of associated charge-offs and recoveries. A loss rate for each migration period is calculated using the formula 'net charge-offs over the period divided by beginning loan balance'. The Allowance methodology applies a look back period to January 1, 2010. The Company extends its look back period with each additional quarter passing. As of March 31, 2019, the look back period was nine years and three months.

Qualitative Adjustments

Our Allowance methodology uses qualitative adjustments to address changes in conditions, trends, and circumstances such as economic conditions and industry changes that could have a significant impact on the risk profile of the loan portfolio, and provide forexpected credit losses in the loan portfolio that may not be reflected and/or capturedportfolio. The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. Refer to Note 1 – Summary of Significant Accounting Policies in the historical loss data. In order to ensure that the qualitative adjustments are in compliance with current regulatory standards and U.S. GAAP, the Company is primarily basing adjustments on the nine standard factors outlined in the 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses. These factors include: lending policies, economic conditions, loan profile, lending staff, problem loan trends, loan review, collateral, credit concentrations and other internal and external factors.

In recognizing that current and relevant environmental (economic, market or other) conditions that can affect repayment may not yet be fully reflected in historical loss experience, qualitative adjustments are applied to factor in current loan portfolio and market intelligence. These adjustments, which are addedaccompanying notes to the historical loss rate, consider the natureconsolidated financial statements in this report for further discussion of the Company's primary markets and are reasonable, consistently determined and appropriately documented. Management reviewsrisk factors considered by management in establishing the results of the qualitative adjustment quarterly to ensure it is consistent with the trends in the overall economy, and from time to time may make adjustments, if necessary, to ensure directional consistency.ACL.


Financial Summary
 
Net income for the three months ended March 31, 20192020 was $16.0$8.3 million, or $0.55$0.29 per diluted share, compared to $14.3net income of $16.0 million, or $0.48$0.55 per diluted share for the three months ended March 31, 2018.2019. On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” ("CECL") and, as a result, recorded increases of $3.6 million to the allowance for credit losses on loans and $0.7 million to the reserve for off-balance sheet credit exposures, included in other liabilities. The transition adjustments recorded on January 1, 2020 were offset to retained earnings of $3.2 million and net deferred tax assets of $1.1 million. During the three months ended March 31, 2020, the Company recorded total credit loss expense under ASC 326, which includes the provisions for credit losses and off-balance sheet credit exposures, of $11.1 million which impacted our first quarter operating results.
 
The following table presents annualized returns on average assets and average shareholders' equity, and basic and diluted earnings per share for the periods indicated. Returns on average assets and average shareholders' equity are annualized based on a 30/360 day convention.


Three Months Ended
March 31,
 20202019
Return on average assets0.55 %1.10 %
Return on average shareholders’ equity6.21  12.97  
Basic earnings per common share$0.30  $0.56  
Diluted earnings per common share0.29  0.55  
COVID-19 Pandemic

The ongoing novel coronavirus pandemic ("COVID-19") has caused significant disruption in the local, national and global economies and financial markets. The pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. Continuation and further spread of COVID-19 could cause additional quarantines, shutdowns, reductions in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability.

In response to the anticipated economic effects of COVID-19, the Board of Governors of the Federal Reserve System (the "FRB") has taken a number of actions that have significantly affected the financial markets in the United States, including actions intended to result in substantial decreases in market interest rates. On March 3, 2020, the 10-year Treasury yield fell below 1.00% for the first time, and the FRB reduced the target federal funds range by 50 basis points to 1.00% to 1.25%. On March 15, 2020, the FRB further reduced the target federal funds range by 100 basis points to 0% to 0.25% and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by COVID-19. On March 22, 2020, the FRB announced that it would continue its quantitative easing program in amounts necessary to support the smooth functioning of markets for Treasury securities and agency MBS. We expect that these reductions in interest rates, among other actions of the FRB and the Federal government generally, especially if prolonged, could adversely affect our net interest income, margins and profitability.

In late March 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law as an over $2 trillion economic stimulus package. The CARES Act is intended to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors.

46

 Three Months Ended
March 31,
 2019 2018
Return on average assets1.10% 1.01%
Return on average shareholders’ equity12.97
 11.60
Basic earnings per common share$0.56
 $0.48
Diluted earnings per common share0.55
 0.48
On March 4, 2020, Hawaii Governor David Ige declared a state of emergency allowing Hawaii to use funds to act quickly in containing the spread of the coronavirus when an outbreak occurs in the islands. The measure allows for “funding flexibility” to buy supplies and equipment and gives the governor authority to suspend any laws that may impede emergency functions.

On March 16, 2020, Governor Ige issued a supplemental emergency proclamation ordering all residents to heed any orders and guidance of federal and state public health officials, including but not limited to, the imposition of social distancing measures, to control the spread of COVID-19.

On March 21, 2020, Governor Ige issued a second supplemental proclamation. Beginning March 26, 2020, all individuals, both residents and visitors, arriving or returning to the State of Hawaii will be subject to a mandatory 14-day self-quarantine. The mandate -- the first such action in the nation -- applies to all arrivals at state airports from the continental U.S. and international destinations and extends to other private and commercial aircrafts.

On March 23, 2020, Governor Ige issued a third supplemental proclamation - stay-at-home order - beginning March 25, 2020 through April 30, 2020. All persons within the State of Hawaii are ordered to stay at home or in their place of residence, such as hotels or condominiums. Individuals may leave only for essential activities or to engage in essential businesses and operations. On April 25, 2020, Governor Ige extended the state's stay-at-home order through May 31, 2020. As of April 27, 2020, the Centers for Disease Control and Prevention reported there were 607 cases and 16 COVID-19-related deaths in Hawaii.

On March 24, 2020, in response to Governor Ige's statewide restrictions on the movements of Hawaii residents and visitors to combat the potential spread of COVID-19 in Hawaii, the Company announced it would temporarily close 13 branch locations and will keep 22 branches open and fully operational. The decision to temporarily close the branches was made to protect the health and well-being of the Company's employees and customers. Some branches, such as the in-store branches with limited floor space, made it challenging to operate with social distancing in mind. The staff from the temporarily closed branches have been redeployed to work at the remaining branches, assist other areas of the bank or make customer telephone calls. The majority of our support staff, even at the executive level, have started working remotely on a full-time or rotating basis. The Company believes the actions it has taken to date, will allow it to meet the needs of its customers and community while ensuring the safety of all employees. In addition, to protect its employees as well as to manage its expenses, the Company has implemented internal policies to temporarily suspend all business travel, large group meetings, meals and entertainment. The Company has also reevaluated or postponed certain consulting projects. Hiring of new employees is on an exception basis, and the Company is evaluating its compensation plans.

Our operations, like those of other financial institutions that operate in our market, are significantly influenced by economic conditions in Hawaii, including the strength of the real estate market and the tourism industry. The COVID-19 pandemic and the mandatory 14-day self quarantine has resulted in a significant decline in tourism to the state of Hawaii, with daily visitors to Hawaii down 98% from the same year-ago period. Hawaii's unemployment rate has gone from one of the best in the nation to one of the worst at approximately 37%. As a result, many customers and businesses across the state have been significantly impacted by the COVID-19 pandemic which could lead to additional provisions for credit losses and lower interest and fee income, which if significant, could have a material impact to our financial statements.

COVID-19 may also materially disrupt banking and other financial activity generally and in Hawaii where the Bank operates. This may result in a decline in customer demand for our products and services, including loans and deposits which could negatively impact our liquidity position and our growth strategy. Any one or more of these developments could have a material adverse effect on our business, operations, consolidated financial condition, and consolidated results of operations.

Financial position and results of operations

The disruptions in the economy has impaired and will continue to impair the ability of some of our borrowers to make their monthly loan payments, which could result in significant increases in delinquencies, defaults, foreclosures and declining collateral values. As a result, the COVID-19 pandemic could result in the recognition of credit losses in our loan portfolios and increase our allowance for credit losses, particularly as businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize an allowance for credit losses in future periods on the securities we hold as well as reductions in other comprehensive income. At this time, the Company is unable to project the probability and materiality of such credit losses and the impact its financial position and results of operation.

The Company’s interest income could also be reduced due to COVID-19. Through guidance from regulatory agencies, the Company is prudently working with its borrowers impacted by COVID-19 to defer payments, interest, and fees. During the first quarter, the Company executed loan deferrals on outstanding balances of approximately $65 million. Accrued interest
47

receivable on these deferred loans totaled $0.2 million as of March 31, 2020. As of April 30, 2020, the Company executed loan deferrals on outstanding balances of approximately $453 million, which includes the loans deferred during the first quarter of 2020. The Company is continuing to grant loan deferrals in the second quarter and therefore expects that the accrued interest receivable balance on the deferred loans will significantly increase. While interest and fees will still accrue during the deferral period under GAAP, should the Company later determine that collection of payments is not expected and eventual credit losses on these deferred payments emerge, accrued and unpaid interest income and fees will need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the probability and materiality of such an impact to net income.

The Company’s fee income could be reduced due to COVID-19. To support our customers during this difficult time, we have waived non-CPB ATM fees and early withdrawal fees on our time deposits. At this time, these reductions in fees are temporary and the Company does not expect it to have a material impact to net income.

Liquidity and capital

Through our past experience during the Great Recession in the late 2000s, we have developed robust liquidity and capital stress tests and comprehensive liquidity and capital contingency plans. Our liquidity and capital positions remain strong. The Company currently believes that it has sufficient liquidity and capital to withstand an economic recession brought about by COVID-19. However the Company's regulatory capital ratios could be adversely impacted by significant credit losses and lower interest income and fees. The Company relies on cash on hand as well as dividends from its subsidiary bank to service its debt. If the Company’s capital deteriorates such that its subsidiary bank is unable to pay dividends to it for an extended period of time, the Company may not be able to service its debt or pay dividends to its shareholders.

The Company’s liquidity will be impacted by loan principal and interest payment deferrals that are being granted for certain customers due to COVID-19. Cash flow from loan payments will be reduced due to the deferrals which are being granted for 3 to 6 months. The Company anticipates increased requests for loans deferrals in the second quarter of 2020. Additionally, liquidity could be adversely impacted if customers withdraw significant deposit balances due to COVID-19 concerns.

In the case of loans serviced by the Company for certain third parties, including those under the Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corp. ("FHLMC") programs, the Company is required to advance to the owners the payment of principal and interest on a scheduled basis even when such payment was not collected from the borrower due to payment forbearance granted or payment delinquency. Such amounts advanced are recorded as a receivable by the Company and are expected to be collected from the borrower and/or government agencies (FNMA or FHLMC).

The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile. The collateral that is pledged for wholesale funding lines, could lose value and may result in less funding availability. The Company will also have access to thePaycheck Protection Program Liquidity Facility (“PPPLF”), which is an extension of credit to eligible financial institutions that originate Paycheck Protection Program (“PPP”) loans that takes the PPP loans as collateral at face value. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession caused large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

In March 2020, we decided to suspend our share repurchase program for the time being until we know more about the extent the pandemic will have on the economy and our business.

Asset valuation

The Company currently does not expect COVID-19 to affect its ability to account timely for the assets on its balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

The Company has a significant real estate loan portfolio. Due to COVID-19, the real estate loan collateral used to secure such loans could experience a reduction in value. Further, the ability for the Company to obtain appraisals of property value could be difficult during COVID-19. This may lead to credit impairments and asset write-downs.

48

Processes, controls and business continuity plan

The Company's Business Continuity Plan includes a Pandemic Preparedness Plan which it successfully activated in early March 2020. The Company’s remote workforce plan has been rolled out with an overall smooth transition. The Company already had Virtual Private Network ("VPN") technology capability, and during the first quarter of 2020, expanded VPN access to over 70% of its employees. In addition to VPN, the Company is well-setup with latest technologies that enable our operations to continue efficiently. The Company is using collaboration tools and several other cloud-based software programs. For its customers, the Company continues to offer its current online and mobile banking tools, and is making progress on its new digital offerings as part of its RISE2020 initiative.

The Company may incur additional cost related to its continued deployment of the remote workforce plan, but does not expect such costs to be material at this point in time. A remote workforce plan potentially could introduce operational or internal control challenges and risks, including resource constraints. The Company is closely monitoring operations to mitigate those risks, and currently does not anticipate significant challenges to its ability to maintain its systems and internal controls in light of the measures the Company has taken to prevent the spread of COVID-19. However, should there be significant changes to government orders, the health and well-being of our workforce, or to our critical systems and vendors, there could be an adverse impact on our operations.

Lending operations and accommodations to borrowers

To support its customers during this difficult time, the Company has moved quickly to put in place a number of COVID-19 relief programs for its consumer and business customers affected by the pandemic. For its customers, the Company is offering an employment disruption loan as well as consumer, commercial, commercial mortgage, and residential mortgage payment deferral programs. In addition, as previously mentioned, we have waived non-CPB ATM fees and early withdrawal fees on our time deposits and increased spending cap limits on debit cards and mobile deposit limits to $10,000 daily.

The bank is a Small Business Administration ("SBA") approved lender and is actively participating in assisting customers with loan applications for the SBA’s Paycheck Protection Program, or PPP, which was part of the CARES Act. PPP loans have a two-year term and earn interest at 1%. The SBA will pay the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan, which the Company will recognize over the life of the loan. The Company has seen tremendous interest in the PPP. From April 3, 2020, the date the SBA began accepting submissions for the initial round of PPP loans through April 16, 2020, the date the SBA reached the limit of funds available to disburse under the initial round of the program, the Company received approval from the SBA on over 4,100 loans totaling approximately $475 million. From April 27, 2020, the date the SBA began accepting submissions for the second round of PPP loans through April 30, 2020, the Company received approval from the SBA on over 1,500 loans totaling approximately $66 million. Certain PPP loans approved by the SBA may be cancelled or withdrawn prior to closing and funding. The Company began funding PPP loans in April 2020. Although the Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program, there could be risks and liability by the Company that cannot be determined at this time.

With the significant increase in volume of PPP loan requests, the Company has redeployed staff to handle and assist with loan processing. Additionally, the Company has brought on some outside resources to assist with the PPP.

The Company is staying in close contact with its customers and has increased its client outreach efforts. The Company’s commercial loan officers are having calls with their key clients as frequently as daily. The Company is monitoring its client’s financial health during this challenging time and is providing guidance to help them through the pandemic. Further, the Company believes it is prudently making loan modifications for certain borrowers to allow deferral of loan principal and/or interest for a short-term period.

The Company is providing 3-month principal and interest payment deferrals for its residential mortgage and consumer customers. The Company is deferring either the full loan payment or the principal component of the loan payment for 3 to 6 months for its commercial real estate, commercial and industrial, and other consumer loan customers on a case-by-case basis depending on need. The Company executed loan deferrals on outstanding balances of approximately $65 million through March 31, 2020. As of April 30, 2020, the Company executed loan deferrals on outstanding balances of approximately $453 million, which includes the loans deferred during the first quarter of 2020, and is approximately 10% of the Company’s total loan portfolio. In accordance with the revised interagency guidance issued in April 2020 and Section 4013 of the CARES Act, these short-term deferrals are not presently considered TDRs and at this time interest has continued to accrue. Collectibility of the accrued interest on deferred loans is uncertain and the Company may need to reverse the accrued interest which may negatively impact interest income in future periods. Additional loan modifications to capitalize interest and/or extend loan terms may also be necessary. The Company anticipates increased requests for loan deferrals through the second quarter of 2020.
49


Credit

Following the recovery from the Great Recession, the Company believes it has implemented a disciplined approach to credit that includes tighter underwriting standards with a focus on making quality loans and maintaining a diversified loan portfolio. The Company’s loan portfolio today is diversified by product and by industry.

The Company expects that the primary industries that we lend to that will likely experience impact from the pandemic include accommodation and food-service, retail trade, wholesale trade, manufacturing and healthcare. Many of the loans in these industries are to well-established businesses that have weathered through the last downturn. Secondary industries that may also experience impact include real estate management and other leasing, transportation, professional and administrative, and other industries. The Company also anticipates adverse impact on its consumer portfolio, and is actively granting 90-day payment deferrals to these borrowers.

In the final week of March, the Company closely reviewed its commercial loan portfolio and reached out to its customers to determine the initial impact, if any, of COVID-19 on their businesses. Through this process, the Company identified borrowers that were likely to experience financial difficulty and proactively downgraded approximately $65 million in loans from pass to special mention. As part of its assessment for the downgrade, the Company reviewed customer management and actions taken such as closing businesses and reducing expenses, monthly cash burn and access to cash liquidity and capital, and the overall ability to weather through the pandemic in the near term. The Company believes that it is still too early to reach any firm conclusions and that the downgrade assessments did not include the expected positive impact from Federal subsidy programs. The Company is proactively working with its customers, including those that have already applied and have been approved for a PPP loan. Furthermore, the Company has also provided assistance with short-term payment deferrals, as necessary.

Economic forecasts are utilized to determine the Company’s allowance for credit losses. With deteriorating economic conditions due to COVID-19 and the potential for a global recession, it is expected that economic forecasts utilized in upcoming interim financial periods will include substantial economic deterioration. This may result in the Company recognizing additional provisions for credit losses which will negatively impact net income.

Material Trends

The majority of our operations are concentrated in the state of Hawaii. As a result, our performance is significantly influenced by the real estate markets, economic environment and environmental conditions in Hawaii. Macroeconomic conditions also influence our performance. A favorable business environment is generally characterized by expanding gross state product, low unemployment, robust tourism and rising personal income; while an unfavorable business environment is characterized by the reverse.


Hawaii's general economic conditions continued to improveHawaii tourism started the year strong with solid growth in 2018 but at a slower pace. The growth of Hawaii's economy has slowed, yet the Hawaii Department of Business, Economic Development and Tourism ("DBEDT") sees a positive forecast with continued growth at a steady pace in 2019. Tourism continues to be Hawaii's center of strength and its most significant economic driver. While visitor arrivals to Hawaii grew duringand spending in the threefirst two months of 2020. However, the COVID-19 outbreak has impacted Hawaii’s tourism significantly since late February. Total visitor arrivals in the two months ended March 31, 2019, visitor spending was downFebruary 29, 2020, which includes an additional day associated with leap year, increased 5.5% from the same prior year period. Total visitor expenditures in the two months ended February 29, 2020 increased by 4.8% from the same prior year period. The mandated 14-day self-quarantine for arriving visitors and residents began on March 26, 2020. Total arrivals on that day were down to 1,580 from a historical daily average of 30,000 passengers during last March. During the first week of April, total visitors were down approximately 98% from the same year-ago period.

A few airlines have announced temporary suspension of flights to international destinations. Many hotels throughout the state have temporarily closed. Many shopping centers have temporarily closed or have significantly reduced hours. Restaurants, bars and nightclubs are also closed for indoor service. Take-out, curbside pick-up and delivery are still allowed.

Unemployment continues to soar. In the week ended April 18, 2020, 4.4 million Americans filed claims for unemployment. This was the fifth consecutive week with over 3 million in claims for unemployment. During that time, 26.5 million Americans have filed jobless claims. Through March 31, 2020, Hawaii received more than 160,000 unemployment claims. The number of unemployment claims in Hawaii has grown to more than 250,000 through April 22, 2020.

Oahu home sales started the year strong with healthy year-over-year increases in closed sales of single-family homes and condominiums. According to the Hawaii Tourism Authority ("HTA"), 2.5 million visitors visited the state in the three months ended March 31, 2019. This was an increase of 2.6%latest data available from the number of visitor arrivals in the three months ended March 31, 2018. The HTA also reported total spending by visitors decreased to $4.5 billion in the three months

ended March 31, 2019, or a decrease of $0.3 billion, or 6.3%, from the three months ended March 31, 2018. According to DBEDT, total visitor arrivals and visitor spending are both expected to increase 2.0% and 3.3% in 2019, respectively, and 1.9% and 3.7% in 2020, respectively.

DBEDT reported Hawaii's economy, as measured by the growth of real personal income and real gross state product, continued positive growth in 2018. DBEDT projects real personal income and real gross state product to grow at a rate of 1.5% and 1.2%, respectively, for 2019 and 1.6% and 1.4%, respectively, for 2020.
Hawaii's labor market continues to be among the best in the nation. The Department of Labor and Industrial Relations reported that Hawaii's seasonally adjusted annual unemployment rate was 2.8% in March 2019, compared to 2.3% in March 2018. Hawaii's unemployment rate in March 2019 remained below the national seasonally adjusted unemployment rate of 3.8%. DBEDT projects Hawaii's seasonally adjusted annual unemployment rate to be 2.7% in 2019 and 3.1% in 2020.

Real estate lending is a primary focus for us, including residential mortgage and commercial mortgage loans. As a result, we are dependent on the strength of Hawaii's real estate market. Home sales in Hawaii remained strong in 2018. The Oahu real estate market closed out 2018 with its eighth straight year of appreciation, however the sales volume for the year dropped. During the first quarter of 2019, Oahu single family home prices continued to rise despite lower sales. According to the Honolulu Board of Realtors, Oahu unit sales volume declinedincreased by 5.7%11.6% for single-family homes and 10.5%were stable for condominiums for the three months ended March 31, 2019,2020, compared to the same time period last year. For the three months ended March 31, 2019,2020, the median sales price for single-family homes on Oahu was $780,000, representing an increase of 2.0%and remained unchanged from $765,000 in the same prior year period. The median sales price for condominiums on
50

Oahu for the three months ended March 31, 20192020 was $411,250,$430,000, representing a decreasean increase of 3.2%4.6% from $425,000$411,250 in the same prior year period. While the numbers appear to be strong, many of the sales which closed in March were in escrow at least 30 days before the State's stay-at-home order. The impact of COVID-19 on the housing market remains to be seen.


As we have seenRISE2020

Commencing in the past,second quarter of 2019, the Company launched RISE2020, a new multifaceted initiative intended to enhance customer experience, drive stronger long-term growth and profitability, improve shareholder returns and lower our operating results are significantly impacted byefficiency ratio. RISE2020 includes initiatives in the economyfollowing key areas of opportunity: Digital Banking, Revenue Enhancements, Branch Transformation and Operational Excellence. RISE2020 is intended to provide Central Pacific Bank with best-in class products and services in Hawaiiseveral strategic areas. During 2019, the outsourcing of the Company's residential mortgage loan servicing, the launch of its new website under the cpb.bank domain name and the compositionimplementation of ourits end-to-end commercial loan portfolio. Loan demand, deposit growth, Provision, asset quality, noninterest income and noninterest expense are all affected by changes in economic conditions. Iforigination system were completed. Despite several challenges resulting from the residential and commercial real estate markets we have exposureimpact of COVID-19, the Company will continue the revitalization of its building headquarters. Digital strategies will continue to deteriorate, our results of operations would be negatively impacted.

In late 2008,push forward. The Company may postpone other initiatives such as branch modernization for the Federal Reserve lowered the target Federal Funds range to 0%-0.25%. In an attempt to help the overall economy, the Federal Reserve kept interest rates low through its targeted Federal Funds rate until the recession was safely over. In recent years, the Federal Reserve has begun raising the target Federal Funds range.

remaining branch network. During 2018, the Federal Reserve increased the Federal Funds range four times, each by 25 basis points to 2.25%-2.50% as of December 31, 2018. The Federal Reserve left the Federal Funds range unchanged during the first quarter of 2019 and pledged2020, the Company opened its concept branch providing its customers a glimpse into the future moves will be done patiently and with an eye toward how global economic and financial developments unfold.

If the Federal Reserve increases the Federal Funds rate, overall interest rates will likely rise, which may negatively impact the U.S. economic recovery. Further, changes in monetary policy, including changes in interest rates, could influence, among other things, (i) the amount of interest we receive on loans and securities, (ii) the amount of interest we pay on deposits and borrowings, (iii) our ability to originate loans and obtain deposits and (iv) the fair valueCentral Pacific Bank. The rollout of our assetsnew ATMs has begun. The development of the Company's new online and liabilities.mobile banking platforms is progressing, with a pilot of the new platforms scheduled for June 2020. Digital technology is even more critical to our business during crises like the current pandemic and will remain a high priority strategy for our future.


Results of Operations
 
Net Interest Income
 
Net interest income, when annualized and expressed as a percentage of average interest earning assets, is referred to as "net interest margin." Interest income, which includes loan fees and resultant yield information, is expressed on a taxable equivalent basis using a federal statutory tax rate of 21% for the three months ended March 31, 20192020 and 2018.2019. A comparison of net interest income on a taxable-equivalent basis ("net interest income") for the three months ended March 31, 20192020 and 20182019 is set forth below. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in volume and (ii) changes in rates. The change in volume is calculated as change in average balance, multiplied by prior period average yield/rate. The change in rate is calculated as change in average yield/rate, multiplied by current period volume. The change in interest income not solely due to change in volume or change in rate has been allocated proportionately to change in volume and change in average yield/rate.

51

 
(dollars in thousands)Three Months Ended March 31,
20202019Variance
Average
Balance		Average
Yield/
Rate		Interest
Income/
Expense		Average
Balance		Average
Yield/
Rate		Interest
Income/
Expense		Average
Balance		Average
Yield/
Rate		Interest
Income/
Expense
Assets     
Interest earning assets: 
Interest-bearing deposits in other banks$11,082  1.29 %36  $11,380  2.41 %68  $(298) (1.12)%(32) 
Investment securities, excluding valuation allowance:
Taxable (1)1,027,695  2.64  6,774  1,201,732  2.76  8,278  (174,037) (0.12) (1,504) 
Tax-exempt (1)105,330  3.21  845  153,196  2.86  1,096  (47,866) 0.35  (251) 
Total investment securities1,133,025  2.69  7,619  1,354,928  2.67  9,374  (221,903) 0.02  (1,755) 
Loans, including loans held for sale (2)4,462,347  4.16  46,204  4,083,791  4.33  43,768  378,556  (0.17) 2,436  
Federal Home Loan Bank stock14,589  3.61  132  14,278  4.52  161  311  (0.91) (29) 
Total interest earning assets5,621,043  3.85  53,991  5,464,377  3.94  53,371  156,666  (0.09) 620  
Noninterest-earning assets386,194      345,554      40,640     
Total assets$6,007,237      $5,809,931      $197,306     
Liabilities and Equity
Interest-bearing liabilities:               
Interest-bearing demand deposits$1,013,795  0.07 %176  $951,101  0.08 %192  $62,694  (0.01)%(16) 
Savings and money market deposits1,651,751  0.27  1,118  1,472,835  0.22  791  178,916  0.05  327  
Time deposits under $100,000164,274  0.70  284  175,823  0.66  287  (11,549) 0.04  (3) 
Time deposits $100,000 and over846,152  1.42  2,984  982,678  1.98  4,805  (136,526) (0.56) (1,821) 
Total interest-bearing deposits3,675,972  0.50  4,562  3,582,437  0.69  6,075  93,535  (0.19) (1,513) 
Short-term borrowings139,813  1.46  508  137,544  2.63  893  2,269  (1.17) (385) 
Long-term debt101,547  3.62  914  101,547  4.23  1,060  —  (0.61) (146) 
Total interest-bearing liabilities3,917,332  0.61  5,984  3,821,528  0.85  8,028  95,804  (0.24) (2,044) 
Noninterest-bearing deposits1,445,724   1,396,033   49,691  
Other liabilities107,458    97,735    9,723   
Total liabilities5,470,514    5,315,296    155,218   
Shareholders’ equity536,721    494,635    42,086   
Non-controlling interest2    —    2   
Total equity536,723    494,635    42,088   
Total liabilities and equity$6,007,237    $5,809,931    $197,306   
Net interest income  $48,007    $45,343    $2,664  
Interest rate spread3.24 %3.09 %0.15 %
Net interest margin 3.43 %  3.34 %  0.09 % 
(1)  At amortized cost.
(2)  Includes nonaccrual loans.
(dollars in thousands)Three Months Ended March 31,
2019 2018 Variance
Average
Balance		 Average
Yield/
Rate		 Interest
Income/
Expense		 Average
Balance		 Average
Yield/
Rate		 Interest
Income/
Expense		 Average
Balance		 Average
Yield/
Rate		 Interest
Income/
Expense
Assets   
      
  
    
  
Interest earning assets:   
              
Interest-bearing deposits in other banks$11,380
 2.41% 68
 $22,790
 1.50% 84
 $(11,410) 0.91 % (16)
Investment securities, excluding valuation allowance:                 
Taxable (1)1,201,732
 2.76
 8,278
 1,350,135
 2.62
 8,858
 (148,403) 0.14
 (580)
Tax-exempt (1)153,196
 2.86
 1,096
 165,176
 2.86
 1,181
 (11,980) —
 (85)
Total investment securities1,354,928
 2.77
 9,374
 1,515,311
 2.65
 10,039
 (160,383) 0.12
 (665)
Loans and leases, including loans held for sale (2)4,083,791
 4.33
 43,768
 3,789,338
 3.98
 37,390
 294,453
 0.35
 6,378
Federal Home Loan Bank stock14,278
 4.52
 161
 6,837
 2.61
 45
 7,441
 1.91
 116
Total interest earning assets5,464,377
 3.94
 53,371
 5,334,276
 3.59
 47,558
 130,101
 0.35
 5,813
Noninterest-earning assets345,554
  
  
 303,929
  
  
 41,625
  
  
Total assets$5,809,931
  
  
 $5,638,205
  
  
 $171,726
  
  
                  
Liabilities and Equity                 
Interest-bearing liabilities: 
  
  
  
  
  
  
  
  
Interest-bearing demand deposits$951,101
 0.08% 192
 $935,483
 0.08% 180
 $15,618
 — % 12
Savings and money market deposits1,472,835
 0.22
 791
 1,499,419
 0.10
 369
 (26,584) 0.12
 422
Time deposits under $100,000175,823
 0.66
 287
 179,547
 0.44
 195
 (3,724) 0.22
 92
Time deposits $100,000 and over982,678
 1.98
 4,805
 1,029,972
 1.27
 3,230
 (47,294) 0.71
 1,575
Total interest-bearing deposits3,582,437
 0.69
 6,075
 3,644,421
 0.44
 3,974
 (61,984) 0.25
 2,101
Short-term borrowings137,544
 2.63
 893
 8,806
 1.97
 43
 128,738
 0.66
 850
Long-term debt101,547
 4.23
 1,060
 92,785
 4.25
 971
 8,762
 (0.02) 89
Total interest-bearing liabilities3,821,528
 0.85
 8,028
 3,746,012
 0.54
 4,988
 75,516
 0.31
 3,040
Noninterest-bearing deposits1,396,033
    
 1,355,687
    
 40,346
    
Other liabilities97,735
  
  
 44,306
  
  
 53,429
  
  
Total liabilities5,315,296
  
  
 5,146,005
  
  
 169,291
  
  
Shareholders’ equity494,635
  
  
 492,184
  
  
 2,451
  
  
Non-controlling interest—
  
  
 16
  
  
 (16)  
  
Total equity494,635
  
  
 492,200
  
  
 2,435
  
  
Total liabilities and equity$5,809,931
  
  
 $5,638,205
  
  
 $171,726
  
  
                  
Net interest income 
  
 $45,343
  
  
 $42,570
  
  
 $2,773
                  
Interest rate spread  3.09%     3.05%     0.04 %  
                  
Net interest margin 
 3.34%  
  
 3.21%  
  
 0.13 %  
                  
(1)  At amortized cost.                 
(2)  Includes nonaccrual loans.                 




Net interest income (expressed on a taxable-equivalent basis) was $45.3$48.0 million for the first quarter of 2019,three months ended March 31, 2020, representing an increase of 6.5%5.9% from $42.6$45.3 million in the first quarter of 2018.three months ended March 31, 2019. The increase in the three months ended March 31, 20192020 was primarily attributable to a significant increase in average loans and leases balancesloan growth funded by runoff of the investment securities portfolio combined with higher yields earned on the loans and leases and investment securities portfolios. Partially offsetting this increase was an increase in core deposits, combined with lower rates paid on interest-bearing depositsliabilities. Partially offsetting these increases were decreases in yields earned on interest-earning assets. The decreases in yields earned on interest-earning assets and short-term borrowingsrates paid on interest-bearing liabilities were primarily attributable to the increases infive rate cuts by the Federal Funds rate in 2018, combined with an increase in short-term borrowings.Reserve from August 2019 through March 2020.


52

Interest Income

Taxable-equivalent interest income was $53.4$54.0 million for the first quarter of 2019,three months ended March 31, 2020, representing an increase of 12.2%1.2% from $47.6$53.4 million in the first quarter of 2018.three months ended March 31, 2019. The increase was primarily attributable to a $294.5$378.6 million increase in average loans and leases compared to the first quarter of 2018,three months ended March 31, 2019, accounting for approximately $2.9$4.5 million of the increase in interest income during the first quarter of 2019. In addition,three months ended March 31, 2020. This increase was partially offset by a decrease in the average yields earned on the loans and leases and taxable investment securities portfolios during the first quarterthree months ended March 31, 2020 of 2019 increased by 3517 bp, and 14 bp, respectively, compared to the first quarter of 2018, accounting for approximately $3.6 million and $0.4 million of the increase in interest income, respectively. These increases were partially offset by a $160.4 million decline in average investment securities,three months ended March 31, 2019, which decreased interest income by approximately $1.1$2.1 million. In addition, average investment securities declined by $221.9 million, which decreased interest income by approximately $1.5 million.


Interest Expense

Interest expense for the first quarterthree months ended March 31, 2020 was $6.0 million, representing a decrease of 2019 was25.5% from $8.0 million representing an increase of 60.9% fromin the first quarter of 2018.three months ended March 31, 2019. The increasedecrease was primarily attributable to 71 bp and 12 bp increasesdeclines in average rates paid on time deposits $100,000 and over, short-term borrowings and savingslong-term debt of 56 bp, 117 bp and money market deposits,61 bp, respectively, which increaseddecreased interest expense by approximately $1.7$1.2 million, $0.4 million and $0.4$0.1 million, respectively. In addition, average time deposits $100,000 and over declined by $136.5 million resulting in a decrease in interest expense of approximately $0.7 million. Time deposits $100,000 and over primarily consists of public funds which may be opportunistic sources of funding, but fluctuate more directly with changes in the Federal Funds rate. In addition, average short-term borrowings increased by $128.7 million, resulting in higher interest expense of approximately $0.6 million.


Net Interest Margin

Our net interest margin of 3.34%3.43% for the first quarter of 2019three months ended March 31, 2020 increased by 139 bp from 3.34% in the first quarter of 2018.three months ended March 31, 2019.

The average yields earnedrates paid on our interest-earning assets,interest-bearing liabilities, which increaseddeclined by 3524 bp in the three months ended March 31, 2019,2020, compared to the same prior year period, outpaced the increasedecline in average rates paidyields earned on our interest-bearing liabilities,interest-earning assets, which increaseddeclined by 319 bp in the three months ended March 31, 2019,2020, compared to the same prior year period.


The aforementioned increases in average yields earnedProvision for Credit Losses

Our provision for credit losses on our loans and leases and taxable investment securities portfoliosunder ASC 326 was $9.3 million during the three months ended March 31, 2020, compared to an expense of $1.3 million in the three months ended March 31, 2019 was partially offset by the aforementioned increasesunder previous GAAP.

In addition, we recorded a provision for off-balance sheet credit exposures of $1.8 million, included in average rates paid on our time deposits $100,000 and over and savings and money market depositsother operating expense, during the three months ended March 31, 2019.

Provision for Loan and Lease Losses
Our Provision was a debit of $1.3 million during the first quarter of 2019,2020, compared to a creditprovision of $0.2 million in the first quarter of 2018. three months ended March 31, 2019 under previous GAAP.

We did not record a provision for credit losses on investment securities during the three months ended March 31, 2020 and 2019.

Our net charge-offs were $1.9$1.2 million during the first quarter of 2019,three months ended March 31, 2020, compared to net charge-offs of $0.6$1.9 million in the first quarterthree months ended March 31, 2019.

The disruptions in the economy resulting from the COVID-19 pandemic has impaired and will continue to impair the ability of 2018.some of our borrowers to make their monthly loan payments, which could result in significant increases in delinquencies, defaults, foreclosures and declining collateral values. As a result, the COVID-19 pandemic could result in the recognition of credit losses in our loan portfolios and increase our ACL, particularly as businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize an allowance for credit losses in future periods on the securities we hold as well as reductions in other comprehensive income. At this time, the Company is unable to project the probability and materiality of such credit losses and the impact its financial position and results of operation.



53

Other Operating Income
 
The following tables set forth components of other operating income for the periods indicated:


 Three Months Ended
(dollars in thousands)March 31, 2020March 31, 2019$ Change% Change
Other operating income:
Mortgage banking income$337  $1,573  $(1,236) -78.6 %
Service charges on deposit accounts2,050  2,081  (31) -1.5 %
Other service charges and fees4,897  3,215  1,682  52.3 %
Income from fiduciary activities1,297  965  332  34.4 %
Equity in earnings of unconsolidated subsidiaries26  8  18  225.0 %
Income (loss) from bank-owned life insurance(19) 952  (971) -102.0 %
Other:      
Income recovered on nonaccrual loans previously charged-off23  82  (59) -72.0 %
Other recoveries40  26  14  53.8 %
Commissions on sale of checks81  80  1  1.3 %
Gain on sale of MasterCard stock—  2,555  (2,555) -100.0 %
Other154  136  18  13.2 %
Total other operating income$8,886  $11,673  $(2,787) -23.9 %
Note: Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period.

 Three Months Ended
(dollars in thousands)March 31, 2019 March 31, 2018 $ Change % Change
Other operating income:       
Mortgage banking income$1,424
 $1,847
 $(423) -22.9 %
Service charges on deposit accounts2,081
 2,003
 78
 3.9 %
Other service charges and fees3,064
 3,034
 30
 1.0 %
Income from fiduciary activities965
 956
 9
 0.9 %
Equity in earnings of unconsolidated subsidiaries8
 43
 (35) -81.4 %
Fees on foreign exchange151
 211
 (60) -28.4 %
Income from bank-owned life insurance952
 318
 634
 199.4 %
Loan placement fees149
 197
 (48) -24.4 %
Other: 
  
    
Income recovered on nonaccrual loans previously charged-off82
 96
 (14) -14.6 %
Other recoveries26
 46
 (20) -43.5 %
Commissions on sale of checks80
 86
 (6) -7.0 %
Gain on sale of MasterCard stock2,555
 —
 2,555
 N.M.
Other136
 117
 19
 16.2 %
Total other operating income$11,673
 $8,954
 $2,719
 30.4 %
        


For the first quarter of 2019,three months ended March 31, 2020, total other operating income of $11.7$8.9 million increaseddecreased by $2.7$2.8 million, or 30.4%23.9%, from $9.0$11.7 million in the year-ago quarter. The increasedecrease from the year-ago quarter was primarily due to a $2.6 million gain on the conversionsale of MasterCard Class B common stock received during their initial public offering to Class A common stock and immediate sale ofrecorded in the converted shares resulting in a gain of $2.6 million,year-ago quarter, combined with higherlower mortgage banking income of $1.2 million and lower income from bank-owned life insurance of $0.6 million.$1.0 million in the current quarter. The lower mortgage banking income was primarily attributable to higher amortization of mortgage servicing rights of $1.1 million, primarily attributable to the decline in market interest rates. The lower income from bank-owned life insurance was primarily attributable to fluctuationsvolatility in the stock marketequity markets during the quarter. PartiallyThis included a loss on corporate-owned life insurance, which had an offsetting these positive variances was lower net gains on sales of residential mortgage loans of $0.4decrease in the Company's employee deferred compensation expense due to the market movements during the quarter. These decreases were partially offset by $1.3 million in income related to an interest rate swap (included in mortgage banking income)other service charges and fees).


54


Other Operating Expense
 
The following tables set forth components of other operating expense for the periods indicated:


 Three Months Ended
(dollars in thousands)March 31, 2020March 31, 2019$ Change% Change
Other operating expense:
Salaries and employee benefits$20,347  $19,889  $458  2.3 %
Net occupancy3,672  3,458  214  6.2 %
Equipment1,097  1,006  91  9.0 %
Communication expense837  734  103  14.0 %
Legal and professional services2,028  1,570  458  29.2 %
Computer software expense2,943  2,597  346  13.3 %
Advertising expense1,092  711  381  53.6 %
Foreclosed asset expense67  159  (92) -57.9 %
Other:  
Charitable contributions187  154  33  21.4 %
FDIC insurance assessment—  501  (501) -100.0 %
Miscellaneous loan expenses300  294  6  2.0 %
ATM and debit card expenses634  650  (16) -2.5 %
Armored car expenses294  198  96  48.5 %
Entertainment and promotions280  230  50  21.7 %
Stationery and supplies248  225  23  10.2 %
Directors’ fees and expenses241  242  (1) -0.4 %
Directors' deferred compensation plan expense(1,483) 435  (1,918) -440.9 %
Provision for off-balance sheet credit exposures1,798  167  1,631  976.6 %
Other1,658  1,128  530  47.0 %
Total other operating expense$36,240  $34,348  $1,892  5.5 %
 Three Months Ended
(dollars in thousands)March 31, 2019 March 31, 2018 $ Change % Change
Other operating expense:       
Salaries and employee benefits$19,889
 $18,505
 $1,384
 7.5 %
Net occupancy3,458
 3,266
 192
 5.9 %
Equipment1,006
 1,068
 (62) -5.8 %
Amortization of core deposit premium—
 669
 (669) -100.0 %
Communication expense734
 898
 (164) -18.3 %
Legal and professional services1,570
 1,821
 (251) -13.8 %
Computer software expense2,597
 2,267
 330
 14.6 %
Advertising expense711
 612
 99
 16.2 %
Foreclosed asset expense159
 294
 (135) -45.9 %
Other: 
  
    
Charitable contributions154
 200
 (46) -23.0 %
FDIC insurance assessment501
 434
 67
 15.4 %
Miscellaneous loan expenses294
 299
 (5) -1.7 %
ATM and debit card expenses650
 648
 2
 0.3 %
Armored car expenses198
 166
 32
 19.3 %
Entertainment and promotions230
 159
 71
 44.7 %
Stationery and supplies225
 201
 24
 11.9 %
Directors’ fees and expenses242
 231
 11
 4.8 %
Increase (decrease) to the reserve for unfunded commitments167
 41
 126
 307.3 %
Other1,563
 1,625
 (62) -3.8 %
Total other operating expense$34,348
 $33,404
 $944
 2.8 %
        


For the first quarter of 2019,three months ended March 31, 2020, total other operating expense was $34.3$36.2 million and increased by $0.9$1.9 million, or 2.8%5.5%, from $33.4$34.3 million in the year-ago quarter. The increase was primarily due to a higher provision for off-balance sheet credit exposures of $1.6 million under ASC 326, combined with higher salaries and employee benefits of $1.4$0.5 million and higher computer software expenselegal and professional services of $0.3 million. The increase in salaries and employee benefits was partially$0.5 million, primarily attributable to a $0.6 million increase in deferred compensation expense with a corresponding increase in income from bank-owned life insurance, combined with merit increases in the second quarter of 2018.our RISE2020 initiative. These increases were partially offset by lower amortizationa $1.5 million credit related to the fair value of core deposit premium of $0.7 million, asour directors' deferred compensation obligation recorded in the intangible asset was fully amortized as of September 30, 2018, and lower legal and professional services of $0.3 millioncurrent quarter, compared to a $0.4 million expense recorded in the year-ago period.quarter. The variance is primarily attributable to volatility in the equity markets. In addition, FDIC insurance expense includes a $0.4 million assessment credit received in the current quarter.

A key measure of operating efficiency tracked by management is the efficiency ratio, which is calculated by dividing total other operating expensesexpense by total pre-provision revenue (net interest income and total other operating income). Management believes that the efficiency ratio provides useful supplemental information that is important to a proper understanding of the company's core business results by investors. Our efficiency ratio should not be viewed as a substitute for results determined in accordance with GAAP, nor is it necessarily comparable to the efficiency ratio presented by other companies.


55


The following table sets forth a reconciliation tocalculation of our efficiency ratio for each of the periods indicated:


Three Months Ended
March 31,
(dollars in thousands)20202019
Total other operating expense  $36,240  $34,348  
Net interest income  $47,830  $45,113  
Total other operating income  8,886  11,673  
Total revenue before provision for credit losses  $56,716  $56,786  
Efficiency ratio63.90 %60.49 %
 Three Months Ended
March 31,
(dollars in thousands)2019 2018
Total other operating expense$34,348
 $33,404
    
Net interest income$45,113
 $42,322
Total other operating income11,673
 8,954
Total revenue$56,786
 $51,276
    
Efficiency ratio60.49% 65.15%


Our efficiency ratio improvedincreased to 60.49%63.90% in the first quarter of 2019three months ended March 31, 2020 compared to 65.15%60.49% in the year-ago quarter. The efficiency ratio in the year-ago quarter was positively impacted by the aforementioned $2.6 million gain on sale of MasterCard stock.


Income Taxes
 
The Company recorded income tax expense of $5.1$2.8 million for the three months ended March 31, 2019,2020, compared to $3.8$5.1 million in the same prior year period.year-ago quarter. The effective tax rate for the three months ended March 31, 20192020 was 24.2%25.3%, compared to 21.1%24.2% in the same prior year period. The increase in income tax expense and the effective tax rate in the three months ended March 31, 2019 was primarily due to higher pre-tax income in the current quarter, combined with an income tax benefit of $0.7 million related to the finalization of the impact of H.R.1, commonly referred to as the Tax Cuts and Jobs Act, recorded in the first quarter of 2018.year-ago quarter.


The valuation allowance on our net DTAdeferred tax assets ("DTA") totaled $3.3$3.4 million at March 31, 20192020 and $3.5$3.4 million at December 31, 2018,2019, of which $3.2 million and $3.3$3.2 million, respectively, related to our DTA from net apportioned net operating loss ("NOL") carryforwards for California state income tax purposes as we do not expect to generate sufficient income in California to utilize the DTA. The remaining valuation allowance of $0.1$0.2 million and $0.2 million as of March 31, 20192020 and December 31, 20182019 relates to a Hawaii capital loss carryforward balance that we do not expect to be able to utilize. Net of the valuation allowance, the Company's net DTA totaled $19.3$16.9 million at March 31, 2019,2020, compared to a net DTA of $21.5$16.5 million as of December 31, 2018,2019, and is included in other assets on our consolidated balance sheets.
 
Financial Condition
 
Total assets at March 31, 20192020 of $5.84$6.11 billion increased by $34.3$95.9 million from $5.81$6.01 billion at December 31, 2018.2019.
 
Investment Securities
 
Investment securities of $1.32$1.19 billion at March 31, 2019 decreased2020 increased by $34.5$56.9 million, or 2.5%5.0%, from December 31, 2018.2019. The decreaseincrease reflects $45.3$96.1 million in principal runoff, offset bynet purchases and a $10.8$13.9 million increase in the market valuation on the available-for-sale portfolio.portfolio, partially offset by $52.9 million in principal runoff.


56


Loans
Loans and Leases


The following table sets forth information regarding our outstanding loans and leases by category and geographic location as of the dates indicated.


(dollars in thousands)March 31,
2020		December 31,
2019		$ Change% Change
Hawaii:    
Commercial, financial and agricultural$454,817  $454,582  $235  0.1 %
Real estate:
Construction100,617  95,854  4,763  5.0  
Residential mortgage  1,632,536  1,599,801  32,735  2.0  
Home equity  504,686  490,734  13,952  2.8  
Commercial mortgage  917,886  909,798  8,088  0.9  
Consumer367,960  373,451  (5,491) (1.5) 
Total loans3,978,502  3,924,220  54,282  1.4  
Allowance for credit losses ("ACL")(51,646) (42,592) (9,054) 21.3  
Loans, net of ACL$3,926,856  $3,881,628  $45,228  1.2  
U.S. Mainland:      
Commercial, financial and agricultural$120,507  $115,722  $4,785  4.1  
Real estate:
Construction—  —  —  —  
Residential mortgage  —  —  —  —  
Home equity  —  —  —  —  
Commercial mortgage  221,251  213,617  7,634  3.6  
Consumer191,738  195,981  (4,243) (2.2) 
Total loans533,496  525,320  8,176  1.6  
ACL(7,999) (5,379) (2,620) 48.7  
Loans, net of ACL$525,497  $519,941  $5,556  1.1  
Total:      
Commercial, financial and agricultural$575,324  $570,304  $5,020  0.9  
Real estate:
Construction100,617  95,854  4,763  5.0  
Residential mortgage  1,632,536  1,599,801  32,735  2.0  
Home equity  504,686  490,734  13,952  2.8  
Commercial mortgage  1,139,137  1,123,415  15,722  1.4  
Consumer559,698  569,432  (9,734) (1.7) 
Total loans4,511,998  4,449,540  62,458  1.4  
ACL(59,645) (47,971) (11,674) 24.3  
Loans, net of ACL$4,452,353  $4,401,569  $50,784  1.2  
(Dollars in thousands) March 31, 2019 December 31, 2018 $ Change % Change
Hawaii:  
  
  
  
Commercial, financial and agricultural $411,396
 $439,112
 $(27,716) (6.3)%
Real estate:        
Construction 68,981
 64,654
 4,327
 6.7
Residential mortgage 1,451,794
 1,428,205
 23,589
 1.7
Home equity 465,905
 468,966
 (3,061) (0.7)
Commercial mortgage 869,521
 861,086
 8,435
 1.0
Consumer 352,771
 357,908
 (5,137) (1.4)
Leases 83
 124
 (41) (33.1)
Total loans and leases 3,620,451
 3,620,055
 396
 —
Allowance for loan and lease losses (41,413) (42,993) 1,580
 (3.7)
Net loans and leases $3,579,038
 $3,577,062
 $1,976
 0.1
         
U.S. Mainland:  
  
  
  
Commercial, financial and agricultural $155,399
 $142,548
 $12,851
 9.0
Real estate:        
Construction 2,194
 2,273
 (79) (3.5)
Residential mortgage —
 —
 —
 —
Home equity —
 —
 —
 —
Commercial mortgage 188,485
 179,192
 9,293
 5.2
Consumer 135,042
 134,298
 744
 0.6
Leases —
 —
 —
 —
Total loans and leases 481,120
 458,311
 22,809
 5.0
Allowance for loan and lease losses (5,854) (4,923) (931) 18.9
Net loans and leases $475,266
 $453,388
 $21,878
 4.8
         
Total:  
  
  
  
Commercial, financial and agricultural $566,795
 $581,660
 $(14,865) (2.6)
Real estate:        
Construction 71,175
 66,927
 4,248
 6.3
Residential mortgage 1,451,794
 1,428,205
 23,589
 1.7
Home equity 465,905
 468,966
 (3,061) (0.7)
Commercial mortgage 1,058,006
 1,040,278
 17,728
 1.7
Consumer 487,813
 492,206
 (4,393) (0.9)
Leases 83
 124
 (41) (33.1)
Total loans and leases 4,101,571
 4,078,366
 23,205
 0.6
Allowance for loan and lease losses (47,267) (47,916) 649
 (1.4)
Net loans and leases $4,054,304
 $4,030,450
 $23,854
 0.6


Loans, and leases, net of deferred costs, of $4.10$4.51 billion at March 31, 20192020 increased by $23.2$62.5 million, or 0.6%1.4%, from December 31, 2018.2019. The increase reflects net increases in the following loan portfolios: residential mortgage of $23.6$32.7 million, commercial mortgage of $17.7$15.7 million, home equity of $14.0 million, commercial, financial and agricultural of $5.0 million and construction of $4.2$4.8 million. These increases were partially offset by a net decreasesdecrease in the following loan portfolios: commercial, financial and agriculturalconsumer portfolio of $14.9 million, consumer of $4.4 million, and home equity of $3.1$9.7 million.


The Hawaii loan portfolio increased by $0.4$54.3 million, or 0.01%1.4%, from December 31, 2018.2019. The increase reflects net increases in the following loan portfolios: residential mortgage of $23.6$32.7 million, home equity of $14.0 million, commercial mortgage of $8.4$8.1 million and construction of $4.3$4.8 million, partially offset by a net decrease in the consumer portfolio of $5.5 million. The increases in the portfolios were primarily due to an increased demand from both new and existing customers.

These increases were partially offset by net decreases in the following loan portfolios: commercial, financial and agricultural of $27.7 million consumer of $5.1 million, and home equity of $3.1 million.


The U.S. Mainland loan portfolio increased by $22.8$8.2 million, or 5.0%1.6% from December 31, 2018.2019. The net increase was primarily attributable to net increases in the commercial mortgage loan portfolio of $7.6 million and commercial, financial and agricultural loan portfolio of $12.9$4.8 million, and commercial mortgagepartially offset by a net decrease in the consumer loan portfolio of $9.3$4.2 million.

57


In the first quarter of 2020, we purchased U.S. Mainland unsecured consumer loans totaling $22.3 million, which reflected a net discount of $0.6 million from the $23.0 million outstanding balance. At the time of purchase, the unsecured consumer loans had a weighted average remaining term of 87 months and a weighted average yield, net of servicing costs, of 5.03%.

In 2019, we purchased consumer loansan auto loan portfolio totaling $18.3 million which represented the outstanding balance at the time of purchase.

In 2018, we purchased consumer loans totaling $58.6$30.2 million, which included a $0.1$0.6 million premium over the $58.5$29.6 million outstanding balance atbalance. At the time of purchase.purchase, the auto loans had a weighted average remaining term of 56 months and a weighted average yield, net of servicing costs, of 6.15%. In 2019, we also purchased unsecured consumer loan portfolios totaling $109.9 million which included a $2.3 million discount to the $112.2 million outstanding balance. At the time of purchase, the unsecured consumer loan portfolios had a weighted average remaining term of 76 months and a weighted average yield, net of servicing costs, of 6.24%.

58


Nonperforming Assets, Accruing Loans Delinquent for 90 Days or More, Restructured Loans Still Accruing Interest


The following table sets forth nonperforming assets, accruing loans delinquent for 90 days or more and restructured loans still accruing interest as of the dates indicated.


(dollars in thousands)March 31,
2020		December 31,
2019		$ Change% Change
Nonperforming Assets  
Nonaccrual loans:  
Commercial, financial and agricultural$667  $467  $200  42.8 %
Real estate:
Residential mortgage2,287  979  1,308  133.6  
Home equity545  92  453  492.4  
Consumer48  17  31  182.4  
Total nonaccrual loans3,547  1,555  1,992  128.1  
Other real estate owned ("OREO"): 
Real estate:
Home equity100  164  (64) (39.0) 
Total OREO100  164  (64) (39.0) 
Total nonperforming assets3,647  1,719  1,928  112.2  
Accruing Loans Delinquent for 90 Days or More
Real estate:
Residential mortgage1,221  724  497  68.6  
Consumer352  286  66  23.1  
Total accruing loans delinquent for 90 days or more1,573  1,010  563  55.7  
Restructured Loans Still Accruing Interest 
Commercial, financial and agricultural113  135  (22) (16.3) 
Real estate:
Residential mortgage5,431  5,502  (71) (1.3) 
Commercial mortgage1,709  1,839  (130) (7.1) 
Total restructured loans still accruing interest7,253  7,476  (223) (3.0) 
Total nonperforming assets, accruing loans delinquent for 90 days or more and restructured loans still accruing interest$12,473  $10,205  $2,268  22.2  
Ratio of nonaccrual loans to total loans0.08 %0.03 %0.05 %
Ratio of nonperforming assets to total loans and OREO0.08 %0.04 %0.04 %
Ratio of nonperforming assets and accruing loans delinquent for 90 days or more to total loans and OREO0.12 %0.06 %0.06 %
Ratio of nonperforming assets, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO0.28 %0.23 %0.05 %

59
(dollars in thousands)March 31, 2019 December 31, 2018 $ Change % Change
Nonperforming Assets 
  
    
Nonaccrual loans (including loans held for sale): 
  
    
Real estate:       
Residential mortgage$2,492
 $2,048
 $444
 21.7
Home equity570
 275
 295
 107.3
Commercial mortgage—
 —
 —
 —
Total nonaccrual loans3,062
 2,323
 739
 31.8
        
Other real estate owned ("OREO"):     
  
Real estate:       
Residential mortgage276
 414
 (138) (33.3)
Total OREO276
 414
 (138) (33.3)
Total nonperforming assets3,338
 2,737
 601
 22.0
        
Accruing Loans Delinquent for 90 Days or More       
Real estate:       
Home equity—
 298
 (298) (100.0)
Consumer159
 238
 (79) (33.2)
Total accruing loans delinquent for 90 days or more159
 536
 (377) (70.3)
        
Restructured Loans Still Accruing Interest     
  
Commercial, financial and agricultural199
 220
 (21) (9.5)
Real estate:       
Construction2,194
 2,273
 (79) (3.5)
Residential mortgage7,141
 8,026
 (885) (11.0)
Commercial mortgage2,222
 2,348
 (126) (5.4)
Total restructured loans still accruing interest11,756
 12,867
 (1,111) (8.6)
        
Total nonperforming assets, accruing loans delinquent for 90 days or more and restructured loans still accruing interest$15,253
 $16,140
 $(887) (5.5)
        
Ratio of nonaccrual loans to total loans and leases0.07% 0.06%   0.01 %
Ratio of nonperforming assets to total loans and leases and OREO0.08% 0.07%   0.01 %
Ratio of nonperforming assets and accruing loans delinquent for 90 days or more to total loans and leases and OREO0.09% 0.08%   0.01 %
Ratio of nonperforming assets, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and leases and OREO0.37% 0.40%   (0.03)%



The following table sets forth year-to-date activity in nonperforming assets as of the date indicated.indicated:


(dollars in thousands)
Balance at December 31, 2019$1,719 
Additions2,056 
Reductions:
Payments(60)
Return to accrual status— 
Net charge-offs, valuation and other adjustments(68)
Total reductions(128)
Net increase1,928 
Balance at March 31, 2020$3,647 
Year-to-Date Changes in Nonperforming Assets: 
(dollars in thousands) 
Balance at December 31, 2018$2,737
Additions810
Reductions: 
Payments(71)
Return to accrual status—
Sales of nonperforming assets—
Charge-offs and/or valuation adjustments(138)
Total reductions(209)
Net increase601
Balance at March 31, 2019$3,338


Nonperforming assets, which includes nonaccrual loans and leases and other real estate owned, totaled $3.3$3.6 million at March 31, 2019,2020, compared to $2.7$1.7 million at December 31, 2018.2019. There were no nonperforming loans classified as held for sale at March 31, 20192020 and December 31, 2018.2019. The increase in nonperforming assets from December 31, 20182019 was primarily attributable to two additions to nonaccrual loans totaling $0.8$2.1 million, offset by a $0.1 million write-down of a Hawaii residential mortgage foreclosed asset and $0.1 million in repayments of nonaccrual loans.loans and $0.1 million in net charge-offs, valuation and other adjustments.
 
Troubled debt restructurings ("TDRs") included in nonperforming assets at March 31, 20192020 consisted of threeone Hawaii residential mortgage loansloan with a combined principal balance of $0.4$0.3 million. There were $7.3 million of TDRs still accruing interest at March 31, 2020, none of which were more than 90 days delinquent. At December 31, 2019, there were $7.5 million of TDRs still accruing interest, none of which were more than 90 days delinquent.


The Company offers various types of concessions when modifying a loan. Concessions made to the original contractual terms of these loans consisted primarilythe loan typically consists of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. TheIn these cases, the principal balancesbalance on these TDRsthe TDR had matured and/or werewas in default at the time of restructure, and we havethere are no commitments to lend additional funds to any of these borrowers. There were $11.8 million of TDRs still accruing interest at March 31, 2019, none of which were more than 90 days delinquent. At December 31, 2018, there were $12.9 million of TDRs still accruing interest, none of which were more than 90 days delinquent.the borrower.


60


Allowance for Loan and LeaseCredit Losses
 
The following table sets forth certain information with respect to the AllowanceACL as of the dates and for the periods indicated:
 
Three Months Ended
March 31,
(dollars in thousands)(dollars in thousands)20202019
Allowance for Credit Losses:Allowance for Credit Losses:  
Balance at beginning of periodBalance at beginning of period$47,971  $47,916  
Adoption of ASU 2016-13 Adoption of ASU 2016-13  3,566  —  
Adjusted balance at beginning of period Adjusted balance at beginning of period  51,537  47,916  
Provision for credit lossesProvision for credit losses9,329  1,283  
Charge-offs:Charge-offs:
Commercial, financial and agriculturalCommercial, financial and agricultural437  463  
Three Months Ended
March 31,
(dollars in thousands)2019 2018
Allowance for Loan and Lease Losses: 
  
Balance at beginning of period$47,916
 $50,001
   
Provision (credit) for loan and lease losses1,283
 (211)
   
Charge-offs:   
Commercial, financial and agricultural463
 498
Consumer2,251
 1,933
Consumer2,217  2,251  
Total charge-offs2,714
 2,431
Total charge-offs2,654  2,714  
   
Recoveries: 
  
Recoveries:  
Commercial, financial and agricultural233
 144
Commercial, financial and agricultural342  233  
Real estate:   Real estate:
Construction6
 1,193
Construction131  6  
Residential mortgage22
 26
Residential mortgage181  22  
Home equity9
 3
Home equity31  9  
Commercial mortgage—
 15
Commercial mortgage2  —  
Consumer512
 477
Consumer746  512  
Total recoveries782
 1,858
Total recoveries1,433  782  
   
Net charge-offs1,932
 573
Net charge-offs1,221  1,932  
   
Balance at end of period$47,267
 $49,217
Balance at end of period$59,645  $47,267  
   
Allowance as a percentage of total loans and leases1.15% 1.29%
ACL as a percentage of total loansACL as a percentage of total loans1.32 %1.15 %
   
Annualized ratio of net charge-offs to average loans and leases0.19% 0.06%
Annualized ratio of net charge-offs to average loansAnnualized ratio of net charge-offs to average loans0.11 %0.19 %
 
Our AllowanceACL at March 31, 20192020 totaled $47.3$59.6 million compared to $47.9$48.0 million at December 31, 2018. 2019.

On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. The Company recorded increases of $3.6 million to the ACL for loans and $0.7 million to the reserve for off-balance sheet credit exposures, included in other liabilities, offset by a net decrease to retained earnings (or a net increase to accumulated deficit) of $3.2 million and a $1.1 million increase to other assets for the related impact to net deferred tax assets as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13.

During the three months ended March 31, 2019,2020, we recorded a debit to the Provisionprovision for credit losses on loans of $1.3$9.3 million primarily due toand net charge-offs of $1.9$1.2 million. The decrease in our Allowance during the three months ended March 31, 2019, as well as the continued reduction of our reserve coverage ratio, primarilyprovision reflects the credit qualityincorporation of life of loan estimated losses under ASC 326 and economic forecasts that anticipate deterioration due to the loan portfolio, real estate markets and general economic conditions both in Hawaii and the U.S. mainland.COVID-19 pandemic.

Our AllowanceACL as a percentage of total loans and leases decreasedincreased from 1.17%1.08% at December 31, 20182019 to 1.15%1.32% at March 31, 2019.2020. The increase in our ACL as a percentage of total loans reflects the adoption of ASU 2016-13. Our AllowanceACL as a percentage of nonperforming assets decreased from 1,750.68%2,791% at December 31, 20182019 to 1,416.03%1,635% at March 31, 2019.2020.
 
61

In accordance with GAAP, loans held for sale and other real estate assets are not included in our assessment of the Allowance.ACL.


Federal Home Loan Bank Stock
 
The bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB"). FHLB stock of $16.1$18.1 million at March 31, 2019 decreased2020 increased by $0.5$3.1 million, or 3.0%20.9%, from the FHLB stock balance at December 31, 2018.2019.  FHLB membership stock has an activity-based stock requirement, thus as borrowings decline,increase, so will our holdings.holdings of FHLB stock. There is a minimum requirement of $6.96$7.0 million in FHLB membership stock even if we have no borrowings outstanding.



Deposits
 
The following table sets forth the composition of our deposits by category for the periods indicated:


(dollars in thousands)March 31,
2020		December 31,
2019		$ Change% Change
Noninterest-bearing demand deposits$1,430,540  $1,450,532  $(19,992) (1.4)%
Interest-bearing demand deposits1,018,508  1,043,010  (24,502) (2.3) 
Savings and money market deposits1,693,280  1,600,028  93,252  5.8  
Time deposits less than $100,000162,399  165,755  (3,356) (2.0) 
Core deposits4,304,727  4,259,325  45,402  1.1  
Government time deposits523,343  533,088  (9,745) (1.8) 
Other time deposits $100,000 to $250,000100,047  107,550  (7,503) (7.0) 
Other time deposits greater than $250,000207,952  220,060  (12,108) (5.5) 
Total time deposits $100,000 and greater831,342  860,698  (29,356) (3.4) 
Total deposits$5,136,069  $5,120,023  $16,046  0.3  
(dollars in thousands)March 31,
2019		 December 31,
2018		 $ Change % Change
Noninterest-bearing demand deposits$1,357,890
 $1,436,967
 $(79,077) (5.5)%
Interest-bearing demand deposits965,316
 954,011
 11,305
 1.2
Savings and money market deposits1,562,798
 1,448,257
 114,541
 7.9
Time deposits less than $100,000174,265
 176,707
 (2,442) (1.4)
Core deposits4,060,269
 4,015,942
 44,327
 1.1
        
Government time deposits600,572
 631,293
 (30,721) (4.9)
Other time deposits $100,000 to $250,000107,051
 106,783
 268
 0.3
Other time deposits greater than $250,000180,236
 192,472
 (12,236) (6.4)
Total time deposits $100,000 and greater887,859
 930,548
 (42,689) (4.6)
        
Total deposits$4,948,128
 $4,946,490
 $1,638
 —


Total deposits of $4.95$5.14 billion at March 31, 2019 remained relatively unchanged2020 increased by $16.0 million from total deposits of $4.95$5.12 billion at December 31, 2018.2019. Net increases in savings and money market deposits of $114.5 million and interest-bearing demand deposits of $11.3$93.3 million, were partially offset by net decreases in interest-bearing demand deposits of $24.5 million, noninterest-bearing demand deposits of $79.1$20.0 million, government time deposits of $30.7 million, and other time deposits greater than $250,000 of $12.2$12.1 million, government time deposits of $9.7 million, other time deposits $100,000 to $250,000 of $7.5 million and time deposits less than $100,000 of $3.4 million.
 
Core deposits, which we define as demand deposits, savings and money market deposits, and time deposits less than $100,000, totaled $4.06$4.30 billion at March 31, 20192020 and increased by $44.3$45.4 million, or 1.1%,1.1, from December 31, 2018.2019. Core deposits as a percentage of total deposits was 82.1%83.8% at March 31, 2019,2020, compared to 81.2%83.2% at December 31, 2018.2019.


Capital Resources
 
In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources and uses of capital in conjunction with an analysis of the size and quality of our assets, the anticipated performance of our business (including the
effects of the COVID-19 pandemic) and the level of risk and regulatory capital requirements. As part of this ongoing assessment, the Board of Directors reviews our capital position on an ongoing basis to ensure it is adequate, including, but not limited to, need for raising additional capital or returning capital to our shareholders, including the ability to declare cash dividends or repurchase our securities.
 
Common and Preferred Equity
 
Shareholders' equity totaled $502.6$533.8 million at March 31, 2019,2020, compared to $491.7$528.5 million at December 31, 2018.2019. The change in total shareholders' equity was attributable to net income of $16.0$8.3 million and other comprehensive income of $11.2$10.7 million, partially offset by the repurchase of 277,000206,802 shares of common stock under our repurchase program, at a cost of $7.7$4.7 million and cash dividends paid of $6.1$6.5 million in the three months ended March 31, 2019.2020. During the three months ended March 31, 2019,2020, we repurchased approximately 1.0%0.7% of our common stock outstanding as of December 31, 2018.2019.


The tangible common equity ratio is a non-GAAP financial measure which should be read and used in conjunction with the Company's GAAP financial information. Comparison of our tangible common equity ratio with those of other companies may not be possible because other companies may calculate the tangible common equity ratio differently.
62

Our tangible common equity ratio is derived by dividing commontotal shareholders' equity less intangible assets, byto total assets less intangible assets. The Company did not have any intangible assets at three months ended March 31, 2019 and December 31, 2018.


The following table sets forth a reconciliation of our tangible common equity ratio for each of the periods indicated:

(dollars in thousands)March 31, 2019 December 31, 2018
Total shareholders' equity$502,638
 $491,725
Less: preferred stock—
 —
Total common equity502,638
 491,725
Less: other intangible assets—
 —
Tangible common equity$502,638
 $491,725
    
Total assets$5,841,352
 $5,807,026
Less: other intangible assets—
 —
Tangible assets$5,841,352
 $5,807,026
    
Tangible common equity ratio8.60% 8.47%

Our tangible common equity ratio was 8.60%8.74% at March 31, 2019,2020, compared to 8.47%8.79% at December 31, 2018.2019. Our book value per share was $17.50$18.99 and $16.97$18.68 at March 31, 20192020 and December 31, 2018, respectively. Our tangible book value per share was $17.50 and $16.97 at March 31, 2019, and December 31, 2018, respectively.
 
Holding Company Capital Resources
 
CPF is required to act as a source of strength to the bank under the Dodd-Frank Act. CPF is obligated to pay its expenses and payments on its junior subordinated debentures which fund payments on the outstanding trust preferred securities.
 
CPF relies on the bank to pay dividends to fund its obligations. As of March 31, 2019,2020, on a stand-alone basis, CPF had an available cash balance of approximately $15.6$7.7 million in order to meet its ongoing obligations.


As a Hawaii state-chartered bank, the bank may only pay dividends to the extent it has retained earnings as defined under Hawaii banking law ("Statutory Retained Earnings"), which differs from GAAP retained earnings. As of March 31, 2019,2020, the bank had Statutory Retained Earnings of $51.7$65.8 million. On April 23, 2019,21, 2020, the Company's Board of Directors declared a cash dividend of $0.23 per share on the Company's outstanding common stock, which was a 9.5% increase from the $0.21 per share a year-ago.
 
Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. Our ability to pay cash dividends to our shareholders is subject to restrictions under federal and Hawaii law, including restrictions imposed by the FRB and covenants set forth in various agreements we are a party to, including covenants set forth in our subordinated debentures.
 
In the year ended December 31, 2018,2019, the Company repurchased 1,155,157797,003 shares of common stock, at a cost of $32.8$22.8 million, under the Company's repurchase plan.


In January 2020, the Company’s Board of Directors authorized the repurchase of up to $30 million of its common stock from time to time in the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase program (the "Repurchase Plan"). The Repurchase Plan replaces and supersedes in its entirety the share repurchase program previously approved by the Company's Board of Directors, which had $19.8 million in remaining repurchase authority. In the three months ended March 31, 2019,2020, a total of 277,000206,802 shares of common stock, at a cost of $7.7$4.7 million, were repurchased under the Company's stock repurchase plan.plans. As of March 31, 2019, $13.02020, $26.6 million remained available for repurchase under the Company's current stock repurchase plan.Repurchase Plan. The Company's repurchase plan has no expiration date.Repurchase Plan is subject to a one year expiration. In March 2020, the Company temporarily suspended the Repurchase Plan due to uncertainty during the current COVID-19 pandemic. We cannot

provide any assurance when or to what extent we will resume repurchases under our Repurchase Plan.

Trust Preferred Securities


On December 17, 2018, the Company completed the redemption of $20.0 million in floating rate trust preferred securities of CPB Statutory Trust III ("Trust III") bearing an interest rate of three-month LIBOR plus 2.85% and maturing on December 17, 2033. The redemption price was 100% of the aggregate liquidation amount of the securities plus accumulated but unpaid distributions up to but not including the redemption date. The Company also redeemed $0.6 million of common securities issued by Trust III and held by the Company, as a result of the concurrent redemption of 100% of the principal assets of Trust III, or $20.6 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust III

trust preferred securities. The redemption was pursuant to the optional prepayment provisions of the indenture. On January 9, 2019, Trust III was canceled with the state of Connecticut.


On January 7, 2019, the Company completed the redemption of $20.0 million in floating rate trust preferred securities of CPB Capital Trust II ("Trust II") bearing an interest rate of three-month LIBOR plus 2.85% and maturing on October 7, 2033. The redemption price was 100% of the aggregate liquidation amount of the securities plus accumulated but unpaid distributions up to but not including the redemption date. The Company also redeemed $0.6 million of common securities issued by Trust II and held by the Company, as a result of the concurrent redemption of 100% of the principal assets of Trust II, or $20.6 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust II trust preferred securities. The redemption was pursuant to the optional prepayment provisions of the indenture. On January 22, 2019, Trust II was canceled with the state of Delaware.


As of March 31, 2019,2020, we have two remaining statutory trusts, CPB Capital Trust IV ("Trust IV") and CPB Statutory Trust V ("Trust V"), which issued a total of $50.0 million in floating rate trust preferred securities. The trust preferred securities, the underlying floating rate junior subordinated debentures that are the assets of Trusts IV and V, and the common securities issued by Trusts IV and V are redeemable in whole or in part on any interest payment date on or after December 15, 2009 for Trust IV
63

and V, or at any time in whole but not in part within 90 days following the occurrence of certain events. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from time to time to defer subordinated debenture interest payments, which would result in a deferral of dividend payments on the related trust preferred securities, for up to 20 consecutive quarterly periods without default or penalty.


Regulatory Capital Ratios
 
General capital adequacy regulations adopted by the FRB and FDIC require an institution to maintain minimum leverage capital, Tier 1 risk-based capital, total risk-based capital, and common equity Tier 1 ("CET1") capital ratios. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. For a further discussion of the effect of forthcoming changes in required regulatory capital ratios, see the discussion in the "Business — Supervision and Regulation" sections of our 20182019 Form 10-K.

In March 2020, the FDIC, FRB and OCC, collectively, issued three interim final rules that impact the reporting of regulatory capital in the Call Report. The revisions include:

1.Revising the definition of eligible retained income in the capital rule;
2.Permitting banking organizations to neutralize the effects of purchasing assets through the Money Market Mutual Fund Liquidity Facility ("MMLF") on their risk-based and leverage capital ratios;
3.Providing banking organizations that implement the Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses, Topic 326, Measurement of Credit Losses on Financial Instruments, before the end of 2020 the option to delay for two years an estimate of the CECL methodology’s effect on regulatory capital, relative to the incurred loss methodology’s effect on capital, followed by a three-year transition period;
4.Allowing banking organizations to implement the final rule titled Standardized Approach for Calculating the Exposure Amount of Derivative Contracts (the "SA-CCR rule") for the first quarter of 2020, on a best efforts basis.

As of March 31, 2020, the Company has elected to exercise the option to delay for two years an estimate of the CECL methodology on regulatory capital.
 
The Company's and the bank's leverage capital, tier 1 risk-based capital, total risk-based capital, and CET1 risk-based capital ratios as of March 31, 20192020 were above the levels required for a "well capitalized" regulatory designation.
 
64


The following table sets forth the Company's and the bank's capital ratios, as well as the minimum capital adequacy requirements applicable to all financial institutions as of the dates indicated.
 
 ActualMinimum Required
for Capital Adequacy
Purposes		Minimum Required
to be
Well Capitalized
(dollars in thousands)AmountRatioAmountRatioAmountRatio
Company      
At March 31, 2020:      
Leverage capital$567,947  9.5 %$239,808  4.0 %N/A
Tier 1 risk-based capital567,947  12.3  276,171  6.0  N/A
Total risk-based capital618,504  13.4  368,228  8.0  N/A
CET1 risk-based capital517,947  11.3  207,128  4.5  N/A
At December 31, 2019:      
Leverage capital$568,529  9.5 %$238,630  4.0 %N/A
Tier 1 risk-based capital568,529  12.6  271,788  6.0  N/A
Total risk-based capital617,772  13.6  362,384  8.0  N/A
CET1 risk-based capital518,529  11.5  203,841  4.5  N/A
Central Pacific Bank      
At March 31, 2020:      
Leverage capital$556,895  9.3 %$239,635  4.0 %$299,544  5.0 %
Tier 1 risk-based capital556,895  12.1  275,928  6.0  367,904  8.0  
Total risk-based capital607,402  13.2  367,904  8.0  459,880  10.0  
CET1 risk-based capital556,895  12.1  206,946  4.5  298,922  6.5  
At December 31, 2019:      
Leverage capital$556,077  9.3 %$238,342  4.0 %$297,928  5.0 %
Tier 1 risk-based capital556,077  12.3  271,350  6.0  361,800  8.0  
Total risk-based capital605,320  13.4  361,800  8.0  452,250  10.0  
CET1 risk-based capital556,077  12.3  203,512  4.5  293,962  6.5  
  Actual Minimum Required
for Capital Adequacy
Purposes		 Minimum Required
to be
Well Capitalized
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
Company  
  
  
  
  
  
At March 31, 2019:  
  
  
  
  
  
Leverage capital $554,148
 9.5% $233,126
 4.0% 

 N/A
Tier 1 risk-based capital 554,148
 13.0
 255,911
 6.0
 

 N/A
Total risk-based capital 602,824
 14.1
 341,214
 8.0
 

 N/A
CET1 risk-based capital 504,148
 11.8
 191,933
 4.5
 

 N/A
             
At December 31, 2018:  
  
  
  
  
  
Leverage capital $570,260
 9.9% $230,847
 4.0% 

 N/A
Tier 1 risk-based capital 570,260
 13.5
 252,921
 6.0
 

 N/A
Total risk-based capital 619,419
 14.7
 337,228
 8.0
 

 N/A
CET1 risk-based capital 500,260
 11.9
 189,691
 4.5
 

 N/A
             
Central Pacific Bank  
  
  
  
  
  
At March 31, 2019:  
  
  
  
  
  
Leverage capital $539,390
 9.3% $232,969
 4.0% $291,211
 5.0%
Tier 1 risk-based capital 539,390
 12.7
 255,686
 6.0
 340,915
 8.0
Total risk-based capital 588,066
 13.8
 340,915
 8.0
 426,144
 10.0
CET1 risk-based capital 539,390
 12.7
 191,765
 4.5
 276,993
 6.5
             
At December 31, 2018:  
  
  
  
  
  
Leverage capital $533,166
 9.3% $230,638
 4.0% $288,298
 5.0%
Tier 1 risk-based capital 533,166
 12.7
 252,667
 6.0
 336,889
 8.0
Total risk-based capital 582,325
 13.8
 336,889
 8.0
 421,111
 10.0
CET1 risk-based capital 533,166
 12.7
 189,500
 4.5
 273,722
 6.5


Asset/Liability Management and Interest Rate Risk
 
Our earnings and capital are sensitive to risk of interest rate fluctuations. Interest rate risk arises when rate-sensitive assets and rate-sensitive liabilities mature or reprice during different periods or in differing amounts. In the normal course of business, we are subjected to interest rate risk through the activities of making loans and taking deposits, as well as from our investment securities portfolio and other interest-bearing funding sources. Asset/liability management attempts to coordinate our rate-sensitive assets and rate-sensitive liabilities to meet our financial objectives.


Our Asset/Liability Management Policy seeks to maximize the risk-adjusted return to shareholders while maintaining consistently acceptable levels of liquidity, interest rate risk and capitalization. Our Asset/Liability Management Committee, or ALCO, monitors interest rate risk through the use of interest rate sensitivity gap, net interest income and market value of portfolio equity simulation and rate shock analyses. This process is designed to measure the impact of future changes in interest rates on net interest income and market value of portfolio equity. Adverse interest rate risk exposures are managed through the shortening or lengthening of the duration of assets and liabilities.
 
ALCO utilizes a detailed and dynamic simulation model to measure and manage interest rate risk exposures. The simulation process is designed to measure the impact of future changes in interest rates on net interest income and market value of portfolio equity and to allow ALCO to model alternative balance sheet strategies.


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The following reflects our net interest income sensitivity analysis as of March 31, 2019, over a one-year horizon,2020. Net interest income is estimated assuming no balance sheet growth and given bothunder a flat interest rate scenario. The net interest income sensitivity is measured as the change in net interest income in alternate interest rate scenarios as a percentage of the flat rate scenario. The alternate rate scenarios typically assume rates move up or down 100 bps in an instantaneous, parallel fashion. However, due to historically low rates stemming from the COVID-19 pandemic, market rate changes in the down 100 bp upward and 100 bp downward parallel shift in interest rates.scenario were limited.
 
Rate ChangeEstimated Net Interest Income Sensitivity
+100 bp1.773.08 %
-100 bp(4.24(1.85))%


Liquidity and Borrowing Arrangements
 
Our objective in managing liquidity is to maintain a balance between sources and uses of funds in order to economically meet the cash requirements of customers for loans and deposit withdrawals and participate in lending and investment opportunities as they arise. We monitor our liquidity position in relation to changes in loan and deposit balances on a daily basis to ensure maximum utilization, maintenance of an adequate level of readily marketable assets and access to short-term funding sources.
 
Core deposits have historically provided us with a sizable source of relatively stable and low cost funds, but are subject to competitive pressure in our market. In addition to core deposit funding, we also have access to a variety of other short-term and long-term funding sources, which include proceeds from maturities of our investment securities, as well as secondary funding sources such as the FHLB, secured repurchase agreements and the Federal Reserve discount window, available to meet our liquidity needs. While we historically have had access to these other funding sources, access to these sources may not be guaranteed and can be restricted in the future as a result of market conditions or the Company's and bank's financial position.
 
The bank is a member of and maintained a $1.72$1.87 billion line of credit with the FHLB as of March 31, 2019,2020, compared to $1.43$1.84 billion at December 31, 2018.2019. We had $179.0$222.0 million in short-term borrowings under this arrangement at March 31, 2019,2020, compared to $197.0$150.0 million at December 31, 2018.2019. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled $187.4 million at March 31, 2020, compared to $78.9 million at December 31, 2019. Long-term borrowings under this arrangement totaled $50.0 million at March 31, 20192020 and December 31, 2018.2019. FHLB advances and standby letters of credit available at March 31, 20192020 were secured by certain real estate loans with a carrying value of $2.32$2.51 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB. At March 31, 2019, $1.422020, $1.41 billion was undrawn under this arrangement, compared to $1.18$1.57 billion at December 31, 2018.2019.
 
At March 31, 20192020 and December 31, 2018,2019, our bank had additional unused borrowings available at the Federal Reserve discount window of $70.6$60.3 million and $73.9$65.3 million, respectively. As of March 31, 20192020 and December 31, 2018,2019, certain commercial and commercial real estate loans with a carrying value totaling $122.0$125.2 million and $123.3$126.1 million, respectively, were pledged as collateral on our line of credit with the Federal Reserve discount window. The Federal Reserve does not have the right to sell or repledge these loans.
 
Our ability to maintain adequate levels of liquidity is dependent on our ability to continue to maintain our strong risk profile and capital base. Our liquidity may also be negatively impacted by weakness in the financial markets and industry-wide reductions in liquidity.
 
Contractual Obligations
 
Information regarding our contractual obligations is provided in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2018. During the first quarter of 2019, the Company signed an extension to its existing agreement with a computer software vendor. This extension increases the Company's contractual obligations for the years 2022 through 2024 by approximately $6 million per year.2019. There werehave been no other material changes in our contractual obligations since December 31, 2018.2019.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency rates, commodity prices and equity prices. Our primary market risk exposure is interest rate risk that occurs when rate-sensitive assets and rate-sensitive liabilities mature or reprice during different periods or in differing amounts. Asset/liability management attempts to coordinate our rate-sensitive assets and rate-sensitive liabilities to meet our financial objectives. The Asset/Liability Committee ("ALCO") monitors interest rate risk through the use of interest rate sensitivity gap, net interest income and market value of portfolio equity simulation, and rate shock analyses. Adverse interest rate risk exposures are managed through the shortening or lengthening of the duration of assets and liabilities.


The primary analytical tool we use to measure and manage our interest rate risk is a simulation model that projects changes in net interest income ("NII") as market interest rates change. Our ALCO policy requires that simulated changes in NII should be within certain specified ranges, or steps must be taken to reduce interest rate risk. The results of the model indicate that the mix of rate-sensitive assets and liabilities at March 31, 20192020 would not result in a fluctuation of NII that would exceed the established policy limits.


Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), the Company's management, including the principal executive officer and principal financial officer, conducted an evaluation of the effectiveness and design of the Company's disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, the Company's principal executive officer and principal financial officer concluded, as of the end of the period covered by this report, that the Company's disclosure controls and procedures were effective.
 
Changes in Internal Control Over Financial Reporting

AsOn January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which replaces the endincurred loss methodology (Allowance for Loan and Leases Losses or "ALLL") with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The Company designed new controls and modified existing controls as part of its adoption. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data. There were no other changes in the Company’s internal control over financial reporting that occurred during the period covered by this report there have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.
67


PART II.   OTHER INFORMATION
 
Item 1A. Risk Factors
 
There have been no material changes from the Risk Factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, as filed with the SEC on February 28, 2019.25, 2020, except as described below.

The COVID-19 pandemic has significantly impacted the State of Hawaii and our business. The ultimate impact on our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. Our operations, like those of other financial institutions that operate in our market, are significantly influenced by economic conditions in Hawaii, including the strength of the real estate market and the tourism industry. The COVID-19 pandemic has resulted in an extreme decline in tourism to the state of Hawaii. As a result, the demand for our products and services has been, and may continue to be, impacted. In addition, material adverse effects on
our business may include all or a combination of valuation impairments on our investments, loans, mortgage servicing
rights, deferred tax assets or counter-party risk derivatives.

Furthermore, the pandemic could influence the recognition of credit losses in our loan portfolios and increase our allowance for credit losses, particularly as businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize an allowance for credit losses in future periods on the securities we hold as well as reductions in other comprehensive income. We have already temporarily closed certain of our branches and offices in response to the pandemic and our business operations may be further disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions. In response to the pandemic, we are offering fee waivers, payment deferrals, and other expanded assistance for mortgage, business and personal lending customers.

We and our customers have been, and will continue to be adversely affected by the COVID-19 pandemic. The extent to which the COVID-19 pandemic continues to negatively impact our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
 
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
 
Issuer Purchases of Equity Securities
 
OurIn January 2020, the Company’s Board of Directors most recently amended ourauthorized the repurchase of up to $30 million of its common stock from time to time in the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase program (the "Repurchase Plan"). The Repurchase Plan replaces and supersedes in its entirety the share repurchase program previously approved by the Company's Board of Directors, which had $19.8 million in remaining repurchase authority. The current repurchase plan in November 2017, when it increased such repurchase authority by $50 million.is subject to a one year expiration.


In the three months ended March 31, 2019,2020, the Company repurchased 277,000206,802 shares of common stock, at an aggregate cost of $7.7$4.7 million, under the Company's stock repurchase plan.plans. As of March 31, 2019,2020, a total of $13.0$26.6 million remained available for repurchase under the Company's stock repurchase plan. There is no expiration date onRepurchase Plan. In March 2020, the stock repurchase plan.Company temporarily suspended the Repurchase Plan due to uncertainty during the current COVID-19 pandemic. We cannot provide any assurance as to when or if we will
recommence our Repurchase Plan.
68

 
 Issuer Purchases of Equity Securities
PeriodTotal
Number
of Shares
Purchased		Average
Price Paid
per Share		Total Shares
Purchased as
Part of Publicly
Announced
Programs		Maximum Dollar
Value of
Shares That
May Yet Be
Purchased Under
the Program
January 1-31, 202049,130  $28.90  49,130  $29,928,774  
February 1-29, 202022,710  28.13  22,710  29,289,953  
March 1-31, 2020134,962  19.93  134,962  26,600,028  
Total206,802  $22.96  206,802  26,600,028  
  Issuer Purchases of Equity Securities
Period Total
Number
of Shares
Purchased		 Average
Price Paid
per Share		 Total Shares
Purchased as
Part of Publicly
Announced
Programs		 Maximum Dollar
Value of
Shares That
May Yet Be
Purchased Under
the Program
January 1-31, 2019 110,500
 $25.98
 110,500
 $17,798,165
February 1-28, 2019 71,000
 29.50
 71,000
 15,703,976
March 1-31, 2019 95,500
 28.73
 95,500
 12,960,324
Total 277,000
 $27.83
 277,000
 12,960,324





69


Item 6. Exhibits
 
Exhibit No.Document
31.1
31.2
32.1
32.2
101.INSXBRL Instance Document*
101.SCHXBRL Taxonomy Extension Schema Document*
101.CALXBRL Taxonomy Extension Calculation Linkbase Document*
101.LABXBRL Taxonomy Extension Label Linkbase Document*
101.PREXBRL Taxonomy Extension Presentation Linkbase Document*
101.DEFXBRL Taxonomy Extension Definition Linkbase Document*
104Cover Page Interactive Data File (formatted as Inline XBRL and included within the Exhibit 101 attachments)
*Filed herewith.
*Filed herewith.
**Furnished herewith.
**Furnished herewith.




70


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
CENTRAL PACIFIC FINANCIAL CORP.
(Registrant)
Date:May 7, 20195, 2020/s/ Paul K. Yonamine
Paul K. Yonamine
Chairman and Chief Executive Officer
Date:May 7, 20195, 2020/s/ David S. Morimoto
David S. Morimoto
Executive Vice President and Chief Financial Officer


Central Pacific Financial Corp.
Exhibit Index

71
Exhibit No.Document
31.1
Rule 13a-14(a) Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2
Rule 13a-14(a) Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1
Section 1350 Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 **
32.2
Section 1350 Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 **
101.INSXBRL Instance Document*
101.SCHXBRL Taxonomy Extension Schema Document*
101.CALXBRL Taxonomy Extension Calculation Linkbase Document*
101.LABXBRL Taxonomy Extension Label Linkbase Document*
101.PREXBRL Taxonomy Extension Presentation Linkbase Document*
101.DEFXBRL Taxonomy Extension Definition Linkbase Document*
*Filed herewith.
**Furnished herewith.



59