00000002850141001460000false--12-31Q22019000070134700000.190.210.210.2300185000000185000000289677152856777728967715285677770.500.500000000000000500000005590000000100000010000000000344362269885277000213700(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.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

~~FORM~~
~~10-Q~~

(Mark One)

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

For the quarterly period ended June 30, ~~2019~~2020

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

For the transition period from to

Commission File Number: 001-31567

~~001-31567~~

CENTRAL PACIFIC FINANCIAL ~~CORP~~.CORP.

(Exact name of registrant as specified in its charter)



Hawaii						99-0212597
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

220 South King Street,, Honolulu,, Hawaii96813

(Address of principal executive offices) (Zip Code)

(~~808~~) (808) 544-0500

(Registrant's telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, No Par Value

CPF

New 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 ☒ No ☐

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

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



Large Accelerated Filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

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

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

The number of shares outstanding of registrant's common stock, no par value, on July ~~31, 2019~~17, 2020 was ~~28,556,677~~28,154,159 shares.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

Form 10-Q

Table of Contents


					Page

		~~Page~~

Part I.	Financial Information		3

Item 1.		Financial Statements (Unaudited)

		Consolidated Balance Sheets - June 30 ~~2019~~, 2020 and December 31, ~~2018~~2019		4

		Consolidated Statements of Income - Three months and six months ended June ~~30,~~3 0 , 2020 and 2019 ~~and 2018~~		5

		Consolidated Statements of Comprehensive Income - Three months and six ~~months~~ ended June 30 , 2020 and 2019 ~~and 2018~~		6

		Consolidated Statements of Changes in Equity - Three months and six months ended June 30 , 2020 and 2019 ~~and 2018~~		7

		Consolidated Statements of Cash Flows - ~~Three months and six~~ Six months ended June 30 , 2020 and 2019 ~~and 2018~~		8

		Notes to Consolidated Financial Statements (Unaudited)		9

Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations		4249

Item 3.		Quantitative and Qualitative Disclosures About Market Risk		6277

Item 4.		Controls and Procedures		6277

Part II.		Other Information		6378

Item 1A.		Risk Factors		6378

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		6378

Item 6.		Exhibits		6480

Signatures				6581

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, expenses, income or loss, earnings or loss per share, capital expenditures, the payment or nonpayment of dividends, capital position, net interest margin or other financial items; statements of plans, objectives and expectations of Central Pacific Financial Corp. or its management 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 words~~Words such as "believes," "plans," "anticipates," "expects," "intends," "forecasts," "hopes," "targeting," "continue," "remain," "will," "should," "estimates," "may" ~~or words~~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 from those statements or projections for a variety of reasons, including, but not 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 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 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, 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 ~~any material weakness~~deficiencies in our internal controls over financial reporting or disclosure controls and procedures; technological 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 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 with 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.~~therein 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 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.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)


(dollars in thousands)	June 30, 2019			December 31, 2018			(dollars in thousands)	June 30, 2020		December 31, 2019
Assets							Assets
Cash and due from banks	$	83,534		$	80,569		Cash and due from banks	$	102,132	$	78,418
Interest-bearing deposits in other banks	15,173			21,617			Interest-bearing deposits in other banks	41,201		24,554
Investment securities:							Investment securities:
Available-for-sale debt securities, at fair value	1,254,743			1,205,478			Available-for-sale debt securities, at fair value	1,168,594		1,126,983
Held-to-maturity debt securities, at amortized cost; fair value of: none at June 30, 2019 and $144,272 at December 31, 2018	—			148,508

Equity securities, at fair value	1,034			826			Equity securities, at fair value	1,209		1,127
Total investment securities	1,255,777			1,354,812			Total investment securities	1,169,803		1,128,110

Loans held for sale	6,848			6,647			Loans held for sale	10,443		9,083

Loans and leases	4,247,113			4,078,366
Allowance for loan and lease losses	(48,267		)	(47,916		)
Net loans and leases	4,198,846			4,030,450
Loans							Loans	5,003,438		4,449,540
Allowance for credit losses							Allowance for credit losses	(67,339)		(47,971)
Loans, net of allowance for credit losses							Loans, net of allowance for credit losses	4,936,099		4,401,569

Premises and equipment, net	43,600			45,285			Premises and equipment, net	55,032		46,343
Accrued interest receivable	17,260			17,000			Accrued interest receivable	19,590		16,500
Investment in unconsolidated subsidiaries	17,247			14,008			Investment in unconsolidated subsidiaries	16,428		17,115
Other real estate owned	276			414			Other real estate owned	—		164
Mortgage servicing rights	15,266			15,596			Mortgage servicing rights	12,771		14,718

Bank-owned life insurance	158,294			157,440			Bank-owned life insurance	161,758		159,656
Federal Home Loan Bank stock	17,824			16,645			Federal Home Loan Bank stock	9,229		14,983
Right of use lease asset	53,678			—
Right-of-use lease asset							Right-of-use lease asset	50,039		52,348
Other assets	36,383			46,543			Other assets	48,447		49,111
Total assets	$	5,920,006		$	5,807,026		Total assets	$	6,632,972	$	6,012,672

Liabilities							Liabilities
Deposits:							Deposits:
Noninterest-bearing demand	$	1,351,190		$	1,436,967		Noninterest-bearing demand	$	1,851,012	$	1,450,532
Interest-bearing demand	1,002,706			954,011			Interest-bearing demand	1,067,483		1,043,010
Savings and money market	1,573,805			1,448,257			Savings and money market	1,945,744		1,600,028
Time	1,049,148			1,107,255			Time	930,446		1,026,453
Total deposits	4,976,849			4,946,490			Total deposits	5,794,685		5,120,023

Short-term borrowings	221,000			197,000			Short-term borrowings	—		150,000
Long-term debt	101,547			122,166			Long-term debt	167,491		101,547
Lease liability	53,829			—			Lease liability	50,440		52,632

Other liabilities	51,086			49,645			Other liabilities	76,050		59,950
Total liabilities	5,404,311			5,315,301			Total liabilities	6,088,666		5,484,152

Shareholders' Equity
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding: none at June 30, 2019 and December 31, 2018	—			—
Common stock, no par value, authorized 185,000,000 shares; issued and outstanding: 28,567,777 at June 30, 2019 and 28,967,715 at December 31, 2018	456,293			470,660
Contingent liabilities and other commitments (see Notes 8, 15 and 16)							Contingent liabilities and other commitments (see Notes 8, 15 and 16)

Equity							Equity
Preferred stock, 0 par value, authorized 1,000,000 shares; issued and outstanding: NaN at June 30, 2020 and December 31, 2019							Preferred stock, 0 par value, authorized 1,000,000 shares; issued and outstanding: NaN at June 30, 2020 and December 31, 2019	—		—
Common stock, 0 par value, authorized 185,000,000 shares; issued and outstanding: 28,154,159 at June 30, 2020 and 28,289,257 at December 31, 2019							Common stock, 0 par value, authorized 185,000,000 shares; issued and outstanding: 28,154,159 at June 30, 2020 and 28,289,257 at December 31, 2019	442,699		447,602
Additional paid-in capital	89,724			88,876			Additional paid-in capital	93,007		91,611
Accumulated deficit	(34,780		)	(51,718		)	Accumulated deficit	(16,986)		(19,102)
Accumulated other comprehensive income (loss)	4,458			(16,093		)
Accumulated other comprehensive income							Accumulated other comprehensive income	25,551		8,409
Total shareholders' equity	515,695			491,725			Total shareholders' equity	544,271		528,520
Total liabilities and shareholders' equity	$	5,920,006		$	5,807,026
Non-controlling interest							Non-controlling interest	35		—
Total equity							Total equity	544,306		528,520
Total liabilities and equity							Total liabilities and equity	$	6,632,972	$	6,012,672

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands, except per share data)	2019		2018		2019		2018		(dollars in thousands, except per share data)	2020		2019		2020		2019
Interest income:									Interest income:
Interest and fees on loans and leases	$	45,540	$	38,699	$	89,308	$	76,089	Interest and fees on loans and leases	$	45,915	$	45,540	$	92,119	$	89,308
Interest and dividends on investment securities:									Interest and dividends on investment securities:
Taxable interest	7,530		8,717		15,790		17,560		Taxable interest	6,310		7,530		13,067		15,790
Tax-exempt interest	814		933		1,680		1,866		Tax-exempt interest	599		814		1,267		1,680
Dividends	14		3		32		18		Dividends	17		14		34		32
Interest on deposits in other banks	46		117		114		201		Interest on deposits in other banks	3		46		39		114
Dividends on Federal Home Loan Bank stock	161		40		322		85		Dividends on Federal Home Loan Bank stock	106		161		238		322
Total interest income	54,105		48,509		107,246		95,819		Total interest income	52,950		54,105		106,764		107,246
Interest expense:									Interest expense:
Interest on deposits:									Interest on deposits:
Demand	199		193		391		373		Demand	114		199		290		391
Savings and money market	1,507		459		2,298		828		Savings and money market	567		1,507		1,685		2,298
Time	4,867		4,034		9,959		7,459		Time	2,124		4,867		5,392		9,959
Interest on short-term borrowings	1,123		48		2,016		91		Interest on short-term borrowings	74		1,123		582		2,016
Interest on long-term debt	1,031		1,103		2,091		2,074		Interest on long-term debt	812		1,031		1,726		2,091
Total interest expense	8,727		5,837		16,755		10,825		Total interest expense	3,691		8,727		9,675		16,755
Net interest income	45,378		42,672		90,491		84,994		Net interest income	49,259		45,378		97,089		90,491
Provision (credit) for loan and lease losses	1,404		532		2,687		321
Net interest income after provision (credit) for loan and lease losses	43,974		42,140		87,804		84,673
Provision for credit losses									Provision for credit losses	10,640		1,404		19,969		2,687
Net interest income after provision for credit losses									Net interest income after provision for credit losses	38,619		43,974		77,120		87,804
Other operating income:									Other operating income:
Mortgage banking income	1,601		1,775		3,025		3,622		Mortgage banking income	3,566		1,708		3,903		3,281
Service charges on deposit accounts	2,041		1,977		4,122		3,980		Service charges on deposit accounts	1,149		2,041		3,199		4,122
Other service charges and fees	3,691		3,377		6,755		6,411		Other service charges and fees	2,916		3,909		7,813		7,124
Income from fiduciary activities	1,129		1,017		2,094		1,973		Income from fiduciary activities	1,270		1,129		2,567		2,094
Equity in earnings of unconsolidated subsidiaries	71		37		79		80		Equity in earnings of unconsolidated subsidiaries	104		71		130		79
Fees on foreign exchange	218		277		369		488

Income from bank-owned life insurance	914		501		1,866		819		Income from bank-owned life insurance	1,424		914		1,405		1,866
Loan placement fees	107		220		256		417

Net loss on sales of foreclosed assets									Net loss on sales of foreclosed assets	(6)		—		(6)		—

Other	322		449		3,201		794		Other	269		322		567		3,201
Total other operating income	10,094		9,630		21,767		18,584		Total other operating income	10,692		10,094		19,578		21,767
Other operating expense:									Other operating expense:
Salaries and employee benefits	20,563		18,783		40,452		37,288		Salaries and employee benefits	20,622		20,563		40,969		40,452
Net occupancy	3,525		3,360		6,983		6,626		Net occupancy	3,645		3,525		7,317		6,983
Equipment	1,138		1,044		2,144		2,112		Equipment	1,043		1,138		2,140		2,144
Amortization of core deposit premium	—		668		—		1,337

Communication expense	903		746		1,637		1,644		Communication expense	774		903		1,611		1,637
Legal and professional services	1,728		1,769		3,298		3,590		Legal and professional services	2,238		1,728		4,266		3,298
Computer software expense	2,560		2,305		5,157		4,572		Computer software expense	3,035		2,560		5,978		5,157
Advertising expense	712		617		1,423		1,229		Advertising expense	923		712		2,015		1,423
Foreclosed asset expense	49		31		208		325		Foreclosed asset expense	—		49		67		208

Other	4,929		4,288		9,153		8,292		Other	4,147		4,929		8,304		9,153
Total other operating expense	36,107		33,611		70,455		67,015		Total other operating expense	36,427		36,107		72,667		70,455
Income before income taxes	17,961		18,159		39,116		36,242		Income before income taxes	12,884		17,961		24,031		39,116
Income tax expense	4,427		3,935		9,545		7,741		Income tax expense	2,967		4,427		5,788		9,545
Net income	$	13,534	$	14,224	$	29,571	$	28,501	Net income	$	9,917	$	13,534	$	18,243	$	29,571
Per common share data:									Per common share data:
Basic earnings per common share	$	0.47	$	0.48	$	1.03	$	0.96	Basic earnings per common share	$	0.35	$	0.47	$	0.65	$	1.03
Diluted earnings per common share	$	0.47	$	0.48	$	1.03	$	0.95	Diluted earnings per common share	$	0.35	$	0.47	$	0.65	$	1.03
Cash dividends declared	$	0.23	$	0.21	$	0.44	$	0.40	Cash dividends declared	$	0.23	$	0.23	$	0.46	$	0.44
Weighted average common shares outstanding used in computation:									Weighted average common shares outstanding used in computation:
Basic shares	28,546,564		29,510,175		28,651,852		29,658,051		Basic shares	28,040,802		28,546,564		28,083,602		28,651,852
Diluted shares	28,729,510		29,714,942		28,847,786		29,881,534		Diluted shares	28,095,230		28,729,510		28,190,132		28,847,786

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	Three Months Ended June 30,					Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2019		2018			2019		2018			(dollars in thousands)	2020		2019		2020		2019
Net income	$	13,534	$	14,224		$	29,571	$	28,501		Net income	$	9,917	$	13,534	$	18,243	$	29,571
Other comprehensive income (loss), net of tax:
Net change in unrealized gain (loss) on investment securities	12,165		(3,669		)	23,161		(18,640		)
Other comprehensive income, net of tax:											Other comprehensive income, net of tax:
Net change in unrealized gain on investment securities											Net change in unrealized gain on investment securities	6,275		12,165		16,422		23,161
Defined benefit plans	248		150			490		406			Defined benefit plans	204		248		720		490
Total other comprehensive income (loss), net of tax	12,413		(3,519		)	23,651		(18,234		)
Total other comprehensive income, net of tax											Total other comprehensive income, net of tax	6,479		12,413		17,142		23,651
Comprehensive income	$	25,947	$	10,705		$	53,222	$	10,267		Comprehensive income	$	16,396	$	25,947	$	35,385	$	53,222

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)


																						Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-In Capital		Accum. Deficit		Accum. Other Comp. Income (Loss)		Non- Controlling Interest		Total
																						(dollars in thousands, except per share data)
Balance at December 31, 2019																					Balance at December 31, 2019	28,289,257	$	—	$	447,602	$	91,611	$	(19,102)	$	8,409	$	—	$	528,520
Impact of the adoption of new accounting standards (1)																					Impact of the adoption of new accounting standards (1)	—	—		—		—		(3,156)		—		—		(3,156)
Adjusted balance at January 1, 2020																					Adjusted balance at January 1, 2020	28,289,257	—		447,602		91,611		(22,258)		8,409		—		525,364
Net income																					Net income	—	—		—		—		8,326		—		—		8,326
Other comprehensive income																					Other comprehensive income	—	—		—		—		—		10,663		—		10,663
Cash dividends declared ($0.23 per share)																					Cash dividends declared ($0.23 per share)	—	—		—		—		(6,496)		—		—		(6,496)

Common stock repurchased and retired and other related costs																					Common stock repurchased and retired and other related costs	(206,802)	—		(4,749)		—		—		—		—		(4,749)
Share-based compensation																					Share-based compensation	32,898	—		—		673		—		—		—		673
Non-controlling interest																					Non-controlling interest	—	—		—		—		—		—		49		49
Balance at March 31, 2020																					Balance at March 31, 2020	28,115,353	$	—	$	442,853	$	92,284	$	(20,428)	$	19,072	$	49	$	533,830
Net income																					Net income	—	—		—		—		9,917		—		—		9,917
Other comprehensive income																					Other comprehensive income	—	—		—		—		—		6,479		—		6,479
Cash dividends declared ($0.23 per share)																					Cash dividends declared ($0.23 per share)	—	—		—		—		(6,475)		—		—		(6,475)
Common stock purchased by directors' deferred compensation plan (8,800 shares, net)																					Common stock purchased by directors' deferred compensation plan (8,800 shares, net)	—	—		(154)		—		—		—		—		(154)

Share-based compensation expense																					Share-based compensation expense	38,806	—				723		—		—		—		723
Non-controlling interest																					Non-controlling interest	—	—		—		—		—		—		(14)		(14)
Balance at June 30, 2020																					Balance at June 30, 2020	28,154,159	$	—	$	442,699	$	93,007	$	(16,986)	$	25,551	$	35	$	544,306

	Common Shares Outstanding		Preferred Stock		Common Stock			Additional Paid-In Capital		Accum. 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 (1)	—		—		—			—		—			(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 shares)	(277,000	)	—		(7,708		)	—		—			—			—		(7,708		)
Share-based compensation expense	32,326		—		—			498		—			—			—		498
Balance at March 31, 2019	28,723,041		$	—	$	462,952		$	89,374	$	(41,733	)	$	(7,955	)	$	—	$	502,638
Net income	—		—		—			—		13,534			—			—		13,534
Other comprehensive income	—		—		—			—		—			12,413			—		12,413
Cash dividends declared ($0.23 per share)	—		—		—			—		(6,581		)	—			—		(6,581		)
Common stock purchased by directors' deferred compensation plan (14,600 shares, net)	—		—		(416		)	—		—			—			—		(416		)
Common stock repurchased and retired and other related costs (213,700 shares)	(213,700	)	—		(6,243		)	—		—			—			—		(6,243		)
Share-based compensation expense	58,436		—					350		—			—			—		350
Balance at June 30, 2019	28,567,777		$	—	$	456,293		$	89,724	$	(34,780	)	$	4,458		$	—	$	515,695

Common
Shares
Outstanding Preferred
Stock Common
Stock Additional Paid-In Capital Accum.
Deficit Accum.
Other
Comp.
Income
(Loss) Non-
Controlling
Interest Total
(dollars in thousands, except per share data)
Balance at December 31, 2017 30,024,222
$ —
$ 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, 2018 30,024,222
—
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 declared ($0.19 per share) —
—
—
—
(5,670 ) —
—
(5,670 )
Common stock purchased by directors' deferred compensation plan (2,850 shares, net) —
—
(83 ) —
—
—
—
(83 )
Common stock repurchased and retired and other related costs (344,362 shares) (344,362 ) —
(10,111 ) —
—
—
—
(10,111 )
Share-based compensation 27,262
—
—
399
—
—
—
399
Distribution from variable interest entity —
—
—
—
—
—
(24 ) (24 )
Balance at March 31, 2018 29,707,122
$ —
$ 493,794
$ 86,497
$ (78,454 ) $ (17,729 ) $ —
$ 484,108
Net income —
—
—
—
14,224
—
—
14,224
Other comprehensive income —
—
—
—
—
(3,519 ) —
(3,519 )
Cash dividends declared ($0.21 per share) —
—
—
—
(6,205 ) —
—
(6,205 )
Common stock purchased by directors' deferred compensation plan (14,100 shares, net) —
—
(421 ) —
—
—
—
(421 )
Common stock repurchased and retired and other related costs (269,885 shares) (269,885 ) —
(7,971 ) —
—
—
—
(7,971 )
Share-based compensation 52,717
—
452
—
—
—
452
Balance at June 30, 2018 29,489,954
$ —
$ 485,402
$ 86,949
$ (70,435 ) $ (21,248 ) $ —
$ 480,668

(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 Capital		Accum. 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
Net income	—	—		—		—		13,534		—		—		13,534
Other comprehensive income	—	—		—		—		—		12,413		—		12,413
Cash dividends declared ($0.23 per share)	—	—		—		—		(6,581)		—		—		(6,581)
Common stock purchased by directors' deferred compensation plan (14,600 shares, net)	—	—		(416)		—		—		—		—		(416)
Common stock repurchased and retired and other related costs	(213,700)	—		(6,243)		—		—		—		—		(6,243)
Share-based compensation	58,436	—				350		—		—		—		350

Balance at June 30, 2019	28,567,777	$	—	$	456,293	$	89,724	$	(34,780)	$	4,458	$	—	$	515,695

















(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.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Six Months Ended June 30,
(dollars in thousands)	2020		2019
Cash flows from operating activities:
Net income	$	18,243	$	29,571
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	19,969		2,687
Depreciation and amortization of premises and equipment	3,010		3,085
Non-cash lease expense	117		151
Cash flows from operating leases	(3,189)		(3,105)

Loss on sale of other real estate, net of write-downs	70		138
Amortization of mortgage servicing rights	3,217		1,072
Net amortization and accretion of premium/discounts on investment securities	4,327		4,644
Share-based compensation expense	1,396		848

Net gain on sales of residential mortgage loans	(5,273)		(1,586)
Proceeds from sales of loans held for sale	167,643		93,490
Originations of loans held for sale	(163,730)		(92,105)
Equity in earnings of unconsolidated subsidiaries	(130)		(79)
Distributions from unconsolidated subsidiaries	121		101
Net increase in cash surrender value of bank-owned life insurance	(2,268)		(854)
Deferred income taxes	(2,129)		8,501
Net tax (expense) benefit from share-based compensation	(134)		192
Net change in other assets and liabilities	15,798		(8,782)
Net cash provided by operating activities	57,058		37,969
Cash flows from investing activities:
Proceeds from maturities of and calls on investment securities available-for-sale	123,720		121,881

Purchases of investment securities available-for-sale	(147,359)		—


Proceeds from sale of MasterCard stock	—		2,555
Net loan originations	(524,869)		(121,756)
Purchases of loan portfolios	(33,196)		(49,327)

Proceeds from sale of foreclosed loans/other real estate owned	94		—
Proceeds from bank-owned life insurance	166		—

Net purchases of premises, equipment and land	(11,699)		(1,400)
Net return of capital from unconsolidated subsidiaries	—		622
Contributions to unconsolidated subsidiaries	(2,194)		—
Net proceeds from redemption of (purchases of) FHLB stock	5,754		(1,179)
Net cash used in investing activities	(589,583)		(48,604)
Cash flows from financing activities:
Net increase in deposits	674,662		30,359
Proceeds from long-term debt	65,944		—
Repayments of long-term debt	—		(20,619)
Net (decrease) increase in short-term borrowings	(150,000)		24,000
Cash dividends paid on common stock	(12,971)		(12,633)
Repurchases of common stock and other related costs	(4,749)		(13,951)

Net cash provided by financing activities	572,886		7,156
Net increase (decrease) in cash and cash equivalents	40,361		(3,479)
Cash and cash equivalents at beginning of period	102,972		102,186
Cash and cash equivalents at end of period	$	143,333	$	98,707

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	11,069	$	16,916
Income taxes	185		9,401


Supplemental disclosure of non-cash information:
Net change in common stock held by directors’ deferred compensation plan	154		416


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

Six Months Ended
June 30,
(dollars in thousands) 2019 2018
Cash flows from operating activities:

Net income $ 29,571
$ 28,501
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for loan and lease losses 2,687
321
Depreciation and amortization of premises and equipment 3,085
3,177
Non-cash lease expense 151
—
Cash flows from operating leases (3,105 ) —
(Gain) loss on sale of other real estate, net of write-downs 138
250
Amortization of core deposit premium and mortgage servicing rights 1,072
2,231
Net amortization and accretion of premium/discounts on investment securities 4,644
5,769
Share-based compensation expense 848
851
Net gain on sales of residential mortgage loans (1,586 ) (1,931 )
Proceeds from sales of loans held for sale 93,490
118,294
Originations of loans held for sale (92,105 ) (109,123 )
Equity in earnings of unconsolidated subsidiaries (79 ) (80 )
Distributions from unconsolidated subsidiaries 101
578
Net increase in cash surrender value of bank-owned life insurance (854 ) (819 )
Deferred income taxes 8,501
7,575
Net tax benefits from share-based compensation 192
166
Net change in other assets and liabilities (8,782 ) (5,501 )
Net cash provided by operating activities 37,969
50,259
Cash flows from investing activities:

Proceeds from maturities of and calls on investment securities available-for-sale 121,881
78,401
Purchases of investment securities available-for-sale —
(85,313 )
Proceeds from maturities of and calls on investment securities held-to-maturity —
33,319
Proceeds from sale of MasterCard stock 2,555
—
Net loan proceeds (originations) (121,756 ) (92,539 )
Purchases of loan portfolios (49,327 ) (20,608 )
Proceeds from sale of foreclosed loans/other real estate owned —
46
Proceeds from bank-owned life insurance —
167
Net purchases of premises and equipment (1,400 ) (1,833 )
Net return of capital from unconsolidated subsidiaries 622
—
Net (purchases of) proceeds from redemption of FHLB stock (1,179 ) (2,485 )
Net cash used in investing activities (48,604 ) (90,845 )
Cash flows from financing activities:

Net increase in deposits 30,359
22,745
Repayments of long-term debt (20,619 ) —
Net increase (decrease) in short-term borrowings 24,000
55,000
Cash dividends paid on common stock (12,633 ) (11,875 )
Repurchases of common stock and other related costs (13,951 ) (18,082 )
Net cash provided by financing activities 7,156
47,788
Net (decrease) increase in cash and cash equivalents (3,479 ) 7,202
Cash and cash equivalents at beginning of period 102,186
82,293
Cash and cash equivalents at end of period $ 98,707
$ 89,495

Supplemental disclosure of cash flow information:

Cash paid during the period for:

Interest $ 16,916
$ 10,552
Income taxes 9,401
22
Supplemental disclosure of non-cash information:
Net change in common stock held by directors’ deferred compensation plan 416
—
Net reclassification of loans to foreclosed loans/other real estate owned —
40
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
—

See accompanying notes to consolidated financial statements.

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 Hawaii~~Oahu 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 ~~was~~has 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 $0.2 million, ~~$15.5~~$14.6 million and $1.6 million, respectively, at June 30, ~~2019~~2020 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.

~~Reclassifications~~Risks and Uncertainties

~~Certain prior year amounts~~COVID-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 ~~consolidated~~local, national and global economies and financial ~~statements~~markets. The pandemic has resulted in temporary closures of many businesses and the ~~notes thereto~~institution 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 full 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 continues to be 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 results of operations. Material adverse effects may include all or a combination of losses in operations, higher provisions for loan losses and 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 3 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 ~~conform~~reflect the realignment of the Company’s reportable segments and be comparable to the ~~fiscal 2019 presentation. Such reclassifications had no effect~~segment 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 ~~or shareholders' equity.~~

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 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 June 30, 2020 and the Company did not reverse any accrued interest against interest income during the three and six months ended June 30, 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 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 June 30, 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 $4.3 million as of June 30, 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 June 30, 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 $15.3 million at June 30, 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.

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 collectability 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.

Expected credit losses are estimated on a collective (pool) basis when they share similar risk characteristics. If a TDR financial asset shares similar risk characteristics with other financial assets, it is evaluated with those other financial assets on a collective basis. If it does not share similar risk characteristics with other financial assets, it is evaluated individually. 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 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. Based on the underlying risk characteristics, TDRs performing in accordance with their modified contractual terms may be collectively evaluated.

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. Section 4013 and the interagency guidance are being applied by the Company to loan modifications made related to the COVID-19 pandemic as eligible and appropriate. The application of the guidance reduced the number of TDRs that were reported. Future TDRs are 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.

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 a 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 Analytics forecasting service for the economic forecast considered in its ACL methodology. The Moody’s Analytics 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 Analytics 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 available by Moody’s Analytics or may apply overrides to its statistical models to enhance the reasonableness of its loss estimates.

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-of-loan losses. The Company has also developed statistical models internally to incorporate future economic conditions and forecast expected credit losses based on various macro-economic indicators such as unemployment and income levels.

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

Loan Segment

Historical Lifetime Loss Method

Historical
Lookback
Period

Economic
Forecast
Length

Reversion Method

Construction

Probability of Default/Loss Given Default ("PD/LGD")

2008-Present

One Year

One Year (straight-line basis)

Commercial real estate

Loss-Rate Migration

2008-Present

Multi-family mortgage

PD/LGD

2008-Present

Commercial, financial and agricultural

Loss-Rate Migration

2008-Present

Home equity lines of credit

Loss-Rate Migration

2008-Present

Residential mortgage

Loss-Rate Migration

2008-Present

Consumer - other revolving

Loss-Rate Migration

2008-Present

Consumer - non-revolving

Loss-Rate Migration

2008-Present

Purchased Mainland portfolios (Dealer, Other consumer)

Weighted-Average Remaining Maturity ("WARM")

2008-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.

Paycheck Protection Program (“PPP”) loans are also in this category and are considered lower risk as they are guaranteed by the Small Business Administration (“SBA”) and may be forgivable in whole or in part in accordance with the requirements of the PPP.

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.

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 we elected to then further sub-segment by risk characteristics such as Risk Rating, days past due, delinquency counters, TDR status and Nonaccrual status 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 the portfolio to be segmented into pools then further sub-segmented by risk characteristics such as risk rating, days past due, delinquency counters, TDR status and Nonaccrual status 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 included in the collective evaluation.

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.

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.

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 ~~2019~~

2020

~~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 June 30, 2019, the ROU lease asset and lease liability was $53.7 million and $53.8 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 a one-time opportunity 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.

~~In August 2018, the FASB issued ASU 2018-15,~~ ~~"Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40): Customer’s Accounting 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) that is a service contract 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”). 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, 2020 and early adoption is permitted. The Company early adopted ASU 2018-15 during the second quarter of 2019. The adoption of the ASU did not have a material impact on our consolidated financial statements.

~~Impact of Other Recently Issued Accounting Pronouncements on Future Filings~~

~~In June 2016, the FASB issued ASU~~ 2016-13, "“Financial ~~Instruments-Credit~~Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,,"” which replaces the incurred loss methodology (Allowance for Loan and ~~subsequent amendments~~Leases Losses or "ALLL") with an expected loss methodology that is referred to as the guidance, ASU 2019-04 in April 2019 and ASU 2019-05 in May 2019. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing 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 all~~methodology. The measurement of expected credit losses ~~for~~under the CECL methodology is applicable to financial assets ~~held~~measured at ~~the reporting date based~~amortized 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 the~~ASC 326 made changes to accounting ~~treatment~~ for ~~other-than-temporary impairment for available-for-sale~~AFS debt securities. ~~Organizations~~One 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 ~~continue~~be 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 to~~sell the ~~consolidated balance sheet as~~debt security before recovery of the ~~beginning of~~amortized 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 CECL~~off-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 collection~~Company 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 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~~following table illustrates 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. To date, the Company has established appropriate loan pools by segment and sub-segment, developed internal loss driver models, and has leveraged a third-party software solution to measure expected losses under CECL. As part of this process, the Company has also engaged an additional third party specializing in economic forecasting to enable it to incorporate reasonable and supportable forecasts in its process. Finally, the Company is developing internal controls around all applicable components, including 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 evaluating the full impact of adopting this new guidance, management expects that it will be significantly influenced by its own historical experience, the composition and quality of the Company’s loans, as well as economic condition expectations as of the date of adoption. The Company also anticipates significant changes to its reserve calculation processes and procedures 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 is~~820. 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 ~~will~~2018-13 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 being applied by the Company to loan modifications made related to the COVID-19 pandemic as eligible and appropriate. The application of the guidance reduced the number of TDRs that were reported. Future TDRs are 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.

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 March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)." This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the provisions of this ASU and its effects on our consolidated financial statements.

3. INVESTMENT SECURITIES

~~A summary~~The 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
June 30, 2020
Available-for-sale:
Debt securities:
States and political subdivisions	$	136,597	$	4,882	$	(11)	$	141,468	$	—
Corporate securities	29,221		531		—		29,752		—
U.S. Treasury obligations and direct obligations of U.S Government agencies	36,802		25		(473)		36,354		—
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	692,989		21,516		(28)		714,477		—
Commercial - U.S. Government agencies and sponsored entities	77,743		2,926		(4)		80,665		—
Residential - Non-government agencies	30,697		1,389		—		32,086		—
Commercial - Non-government agencies	131,679		2,290		(177)		133,792		—
Total available-for-sale securities	$	1,135,728	$	33,559	$	(693)	$	1,168,594	$	—

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 securities	30,277		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 entities	673,918		6,003		(2,099)		677,822
Commercial - U.S. Government agencies and sponsored entities	80,773		1,198		(746)		81,225
Residential - Non-government agencies	36,377		830		(16)		37,191
Commercial - Non-government agencies	134,676		3,141		—		137,817
Total available-for-sale securities	$	1,116,545	$	13,737	$	(3,299)	$	1,126,983

The amortized cost and fair value of our equity investment ~~portfolio~~securities is as follows:

(dollars in thousands) Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
June 30, 2019

Available-for-sale:

Debt securities:

States and political subdivisions $ 152,303
$ 2,308
$ (107 ) $ 154,504
Corporate securities 30,594
231
(28 ) 30,797
U.S. Treasury obligations and direct obligations of U.S Government agencies 29,869
2
(256 ) 29,615
Mortgage-backed securities:

Residential - U.S. Government-sponsored entities 758,008
3,309
(5,944 ) 755,373
Commercial - U.S. Government agencies and sponsored entities 105,347
1,136
(129 ) 106,354
Residential - Non-government agencies 39,429
1,088
—
40,517
Commercial - Non-government agencies 134,771
2,869
(57 ) 137,583
Total available-for-sale securities $ 1,250,321
$ 10,943
$ (6,521 ) $ 1,254,743

Equity securities $ 872
$ 162
$ —
$ 1,034


(dollars in thousands)	Amortized Cost		Fair Value
June 30, 2020
Equity securities	$	1,064	$	1,209

December 31, 2019
Equity securities	935		1,127

(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 entities 65,072
—
(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 securities 55,259
—
(410 ) 54,849
U.S. Treasury obligations and direct obligations of U.S Government agencies 33,257
—
(683 ) 32,574
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities 736,175
369
(19,492 ) 717,052
Commercial - U.S. Government agencies and sponsored entities 53,014
—
(1,531 ) 51,483
Residential - Non-government agencies 41,245
337
(464 ) 41,118
Commercial - Non-government agencies 134,867
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, on~~On January 1, 2019 in connection with the adoption of ASU 2017-12, the Company transferred all of its ~~held-to-maturity~~HTM investment securities with an amortized cost of $148.5 million and fair value of $144.3 million to its ~~available-for-sale~~AFS investment securities portfolio.

The amortized cost and estimated fair value of ~~investment~~our AFS debt securities at June 30, ~~2019~~2020 are shown below by contractual ~~maturity are shown below. Actual~~maturity. 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.

June 30, 2019
(dollars in thousands) Amortized Cost Fair Value
Available-for-sale:

Due in one year or less $ 36,539
$ 36,603
Due after one year through five years 82,075
82,723
Due after five years through ten years 49,903
50,805
Due after ten years 44,249
44,785

Mortgage-backed securities:
Residential - U.S. Government-sponsored entities 758,008
755,373
Commercial - U.S. Government agencies and sponsored entities 105,347
106,354
Residential - Non-government agencies 39,429
40,517
Commercial - Non-government agencies 134,771
137,583
Total available-for-sale securities $ 1,250,321
$ 1,254,743

Equity securities $ 872
$ 1,034


	June 30, 2020
(dollars in thousands)	Amortized Cost		Fair Value






Available-for-sale:	��
Due in one year or less	$	44,455	$	44,638
Due after one year through five years	43,905		44,632
Due after five years through ten years	69,693		72,675
Due after ten years	44,567		45,629

Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	692,989		714,477
Commercial - U.S. Government agencies and sponsored entities	77,743		80,665
Residential - Non-government agencies	30,697		32,086
Commercial - Non-government agencies	131,679		133,792

Total available-for-sale securities	$	1,135,728	$	1,168,594

We did ~~not~~0t sell any available-for-sale securities during the three and six months ended June 30, ~~2019~~2020 and June 30, ~~2018.~~2019.

Investment securities of ~~$753.3~~$597.4 million and ~~$980.2~~$719.8 million at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, were pledged to secure public funds on deposit and other short-term borrowings.

~~Provided below is~~At June 30, 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.

There were a ~~summary~~total of ~~the 134~~25 and ~~336 investment~~81 AFS debt securities which were in an unrealized ~~or unrecognized~~loss position, without an ACL, at June 30, 2020 and December 31, 2019, respectively. The following tables summarize AFS debt securities which were in an unrealized loss position at June 30, ~~2019~~2020 and December 31, ~~2018, respectively,~~2019, aggregated by major security type and length of time in a continuous unrealized ~~or unrecognized~~ loss position.


	Less Than 12 Months						12 Months or Longer						Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2020
Debt securities:
States and political subdivisions	$	3,631	$	(11)	$	—	$	—	$	3,631	$	(11)
Corporate securities	—		—		—		—		—		—
U.S. Treasury obligations and direct obligations of U.S Government agencies	10,867		(187)		18,458		(286)		29,325		(473)
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	4,505		(28)		—		—		4,505		(28)
Residential - Non-government agencies	—		—		—		—		—		—
Commercial - U.S. Government agencies and sponsored entities	1,781		(4)		—		—		1,781		(4)
Commercial - Non-government agencies	26,729		(177)		—		—		26,729		(177)
Total temporarily impaired securities	$	47,513	$	(407)	$	18,458	$	(286)	$	65,971	$	(693)

Less Than 12 Months 12 Months or Longer Total
(dollars in thousands) Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses
June 30, 2019

Debt securities:

States and political subdivisions $ 2,656
$ (5 ) $ 10,456
$ (102 ) $ 13,112
$ (107 )
Corporate securities —
—
5,200
(28 ) 5,200
(28 )
U.S. Treasury obligations and direct obligations of U.S Government agencies —
—
27,943
(256 ) 27,943
(256 )
Mortgage-backed securities:

Residential - U.S. Government-sponsored entities 18,320
(194 ) 426,811
(5,750 ) 445,131
(5,944 )
Residential - Non-government agencies —
—
—
—
—
—
Commercial - U.S. Government agencies and sponsored entities —
—
30,253
(129 ) 30,253
(129 )
Commercial - Non-government agencies 16,709
(57 ) —
—
16,709
(57 )
Total temporarily impaired securities $ 37,685
$ (256 ) $ 500,663
$ (6,265 ) $ 538,348
$ (6,521 )


	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, 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 entities	54,335		(283)		214,295		(1,816)		268,630		(2,099)
Residential - Non-government agencies	8,206		(16)		—		—		8,206		(16)
Commercial - U.S. Government-sponsored entities	32,067		(746)		—		—		32,067		(746)

Total temporarily impaired securities	$	115,244	$	(1,197)	$	234,127	$	(2,102)	$	349,371	$	(3,299)

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 securities 49,729
(250 ) 5,120
(160 ) 54,849
(410 )
U.S. Treasury obligations and direct obligations of U.S Government agencies 30,029
(613 ) 2,545
(70 ) 32,574
(683 )
Mortgage-backed securities:

Residential - U.S. Government-sponsored entities 88,957
(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 entities 13,973
(247 ) 101,500
(2,365 ) 115,473
(2,612 )
Commercial - Non-government agencies 33,847
(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 )

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.

Visa and MasterCard Class B Common Stock

As of June 30, ~~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 ~~LEASES~~CREDIT QUALITY

Loans, ~~and leases,~~ excluding loans held for sale, ~~consisted~~net of ~~the following~~ACL under ASC 326 as of June 30, ~~2019~~2020 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)	June 30, 2020		December 31, 2019
Commercial, financial and agricultural:
Small Business Administration Paycheck Protection Program	$	543,653	$	—
Other	547,768		570,089
Real estate:
Construction	103,826		96,139
Residential mortgage	1,653,632		1,595,801
Home equity	510,188		490,239
Commercial mortgage	1,131,959		1,124,911
Consumer	527,100		569,516

Gross loans and leases	5,018,126		4,446,695
Net deferred (fees) costs	(14,688)		2,845
Total loans, net of deferred fees and costs	5,003,438		4,449,540
Allowance for credit losses	(67,339)		(47,971)
Total loans, net of allowance for credit losses	$	4,936,099	$	4,401,569

(dollars in thousands) June 30, 2019 December 31, 2018
Commercial, financial and agricultural $ 590,071
$ 581,177
Real estate:

Construction 72,835
67,269
Residential mortgage 1,513,104
1,424,384
Home equity 472,918
468,966
Commercial mortgage 1,094,256
1,041,685
Consumer 501,273
492,268
Leases 52
124
Gross loans and leases 4,244,509
4,075,873
Net deferred costs 2,604
2,493
Total loans and leases, net of deferred costs $ 4,247,113
$ 4,078,366

Section 1102 of the CARES Act includes 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”). An additional $310 billion was allocated to the PPP with the enactment of the Paycheck Protection Program and Healthcare Enhancement Act (“CARES 2.0”) on April 21, 2020. Subsequently, on June 5, 2020, the Paycheck Protection Flexibility Act of 2020 (“Flexibility Act”) was signed into law, amending the CARES Act. Loans under the PPP 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 interest rate of 1.00%. The Flexibility Act and new guidance issued by the U.S. Department of the Treasury and the SBA on June 17, 2020, provides a maturity of two years for PPP loans made before June 5, 2020, unless the borrower and lender mutually agree to extend the maturity of such loans to five years, and a maturity of five years for those PPP loans made on or after June 5, 2020. Through June 30, 2020, the Company did not mutually agree to extend any of the PPP loans to borrowers with two-year terms. Under the original PPP guidelines, payments of principal and interest are deferred for the first six months of the loan. The Flexibility Act extends the deferral period until the date the lender receives the applicable forgiven amount from the SBA. In addition, it clarifies that if a borrower fails to apply for forgiveness within 10 months after the end of the covered period, the deferral period for that loan will end on the date that is 10 months after the last day of the covered period. 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 June 30, 2020, the Company received approval from the SBA on over 7,200 loans totaling over $550 million. Certain PPP loans paid-off shortly after funding resulting in a total balance as of June 30, 2020 of $544 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. As of June 30, 2020, the Company's PPP loan portfolio totaled $526.4 million, net of deferred fees and costs.

~~During the six months ended June 30, 2019, we~~The Company did ~~not foreclose on any loans.~~

~~During the six months ended June 30, 2018, we foreclosed on one loan totaling $40 thousand.~~

~~During the six months ended June 30, 2019 and 2018, we did not~~0t transfer any loans to the held-for-sale ~~category.~~

~~We did not sell any portfolio loans~~category during the six months ended June 30, ~~2019~~2020 and ~~2018.~~2019.

InThe Company did 0t sell any loans originally held for investment during the ~~first quarter~~six months ended June 30, 2020 and 2019.

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

~~In the second quarter of 2019, we purchased consumer loans totaling $31.0 million which represented the outstanding balance 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.~~

~~Impaired Loans~~

The following ~~tables present~~table presents loans purchased by class for the ~~balance~~periods presented:


(dollars in thousands)	Consumer - Unsecured
Three Months Ended June 30, 2020
Purchases:
Outstanding balance	$	11,359
Purchase premium (discount)	(503)
Purchase price	$	10,856

Six Months Ended June 30, 2020
Purchases:
Outstanding balance	$	34,312
Purchase premium (discount)	(1,116)
Purchase price	$	33,196

Three Months Ended June 30, 2019
Purchases:
Outstanding balance	$	31,041
Purchase premium (discount)	—
Purchase price	$	31,041

Six Months Ended June 30, 2019
Purchases:
Outstanding balance	$	49,327
Purchase premium (discount)	—
Purchase price	$	49,327

Note: Purchases of unsecured consumer loans were made under forward flow purchase agreements.

Collateral-Dependent Loans

In accordance with ASC 326, a loan is considered collateral-dependent when the ~~allowance for loan~~borrower is experiencing financial difficulty and ~~lease~~repayment 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 in~~related ACL allocated to these loans ~~and leases based on the Company's impairment measurement method~~ as of June 30, ~~2019 and December 31, 2018:~~2020:

Real Estate
(dollars in thousands) Comml, Fin & Ag Constr Resi Mortgage Home Equity Comml Mortgage Consumer Leases Total
June 30, 2019

Allowance:

Individually evaluated for impairment $ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
Collectively evaluated for impairment 8,109
1,313
13,367
4,313
11,668
9,497
—
48,267
Total ending balance $ 8,109
$ 1,313
$ 13,367
$ 4,313
$ 11,668
$ 9,497
$ —
$ 48,267

Loans and leases:

Individually evaluated for impairment $ 178
$ —
$ 7,569
$ 244
$ 2,097
$ —
$ —
$ 10,088
Collectively evaluated for impairment 589,893
72,835
1,505,535
472,674
1,092,159
501,273
52
4,234,421
Subtotal 590,071
72,835
1,513,104
472,918
1,094,256
501,273
52
4,244,509
Net deferred costs (income) 412
(408 ) 3,832
233
(1,398 ) (67 ) —
2,604
Total loans and leases, net of deferred costs (income) $ 590,483
$ 72,427
$ 1,516,936
$ 473,151
$ 1,092,858
$ 501,206
$ 52
$ 4,247,113

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 impairment 8,027
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 impairment 580,957
64,996
1,414,309
468,691
1,039,337
492,268
124
4,060,682
Subtotal 581,177
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


(dollars in thousands)	Secured by 1-4 Family Residential Properties		Secured by Nonfarm Nonresidential Properties		Secured by Real Estate and Business Assets		Total		Allocated ACL
June 30, 2020
Commercial, financial and agricultural	$	—	$	—	$	736	$	736	$	223
Real estate:

Residential mortgage	8,504		—		—		8,504		—
Home equity	538		—		—		538		—
Commercial mortgage	—		711		—		711		—


Total	$	9,042	$	711	$	736	$	10,489	$	223

~~There were no impaired loans with an allowance recorded as of June 30, 2019 and December 31, 2018.~~

The following table presents by class, information related to impaired loans as of ~~June 30, 2019 and~~ December 31, ~~2018:~~2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:

June 30, 2019 December 31, 2018
(dollars in thousands) Unpaid
Principal
Balance Recorded
Investment Allowance
Allocated Unpaid
Principal
Balance Recorded
Investment Allowance
Allocated
Impaired loans:

Commercial, financial and agricultural $ 288
$ 178
$ —
$ 330
$ 220
$ —
Real estate:
Construction —
—
—
3,076
2,273
—
Residential mortgage 8,306
7,569
—
11,019
10,075
—
Home equity 244
244
—
275
275
—
Commercial mortgage 2,097
2,097
—
2,348
2,348
—
Total impaired loans $ 10,935
$ 10,088
$ —
$ 17,048
$ 15,191
$ —


	December 31, 2019
(dollars in thousands)	Unpaid Principal Balance		Recorded Investment		ACL Allocated
Impaired loans:
Commercial, financial and agricultural	$	246	$	135	$	—
Real estate:

Residential mortgage	7,230		6,516		—
Home equity	92		92		—
Commercial mortgage	1,839		1,839		—
Total	9,407		8,582		—

Impaired loans with an ACL recorded:
Commercial, financial and agricultural	467		467		218





Consumer	17		17		17
Total	484		484		235
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 and six months ended June 30, 2019, ~~and 2018:~~as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:


	Three Months Ended						Six Months Ended
	June 30, 2019						June 30, 2019
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial, financial and agricultural	$	185	$	2	$	199	$	5
Real estate:
Construction	1,434		32		1,890		62
Residential mortgage	8,583		607		9,289		713
Home equity	254		13		393		13
Commercial mortgage	2,138		23		2,222		46

Total	$	12,594	$	677	$	13,993	$	839

Three Months Ended Six Months Ended
June 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018
(dollars in thousands) Average
Recorded
Investment Interest
Income
Recognized Average
Recorded
Investment Interest
Income
Recognized Average
Recorded
Investment Interest
Income
Recognized Average
Recorded
Investment Interest
Income
Recognized
Commercial, financial and agricultural $ 185
$ 2
$ 628
$ 3
$ 199
$ 5
$ 540
$ 5
Real estate:

Construction 1,434
32
2,464
28
1,890
62
2,517
54
Residential mortgage 8,583
607
12,832
159
9,289
713
13,358
296
Home equity 254
13
518
—
393
13
546
—
Commercial mortgage 2,138
23
3,616
36
2,222
46
3,726
74
Total $ 12,594
$ 677
$ 20,058
$ 226
$ 13,993
$ 839
$ 20,687
$ 429

For the three and six months ended June 30, 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 and six months ended June 30, 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~~$0.9 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 June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

The Company did not foreclose on any loans during the six months ended June 30, 2020 and 2019.

~~Aging Analysis of Accruing~~Nonaccrual and ~~Non-Accruing~~Past 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 June 30, ~~2019~~2020 and December 31, ~~2018:~~2019. The following tables also present the amortized cost of loans on nonaccrual status for which there was no related ACL under ASC 326 as of June 30, 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		Total		Nonaccrual Loans With No ACL
June 30, 2020
Commercial, financial and agricultural - SBA PPP	$	—	$	—	$	—	$	—	$	—	$	526,408	$	526,408	$	—
Commercial, financial and agricultural - Other	979		176		—		934		2,089		545,769		547,858		—
Real estate:
Construction	—		—		—		—		—		103,518		103,518		—
Residential mortgage	—		1,375		726		3,215		5,316		1,652,242		1,657,558		3,215
Home equity	366		—		—		538		904		510,058		510,962		538
Commercial mortgage	—		—		—		—		—		1,130,169		1,130,169		—


Consumer	1,673		964		444		54		3,135		523,830		526,965		—

Total	$	3,018	$	2,515	$	1,170	$	4,741	$	11,444	$	4,991,994	$	5,003,438	$	3,753


(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		Nonaccrual Loans With No ACL
December 31, 2019
Commercial, financial and agricultural	$	476	$	865	$	—	$	467	$	1,808	$	568,496	$	570,304	$	—
Real estate:
Construction	643		—		—		—		643		95,211		95,854		—
Residential mortgage	1,830		589		724		979		4,122		1,595,679		1,599,801		979
Home equity	759		207		—		92		1,058		489,676		490,734		92
Commercial mortgage	—		397		—		—		397		1,123,018		1,123,415		—


Consumer	3,223		943		286		17		4,469		564,963		569,432		—

Total	$	6,931	$	3,001	$	1,010	$	1,555	$	12,497	$	4,437,043	$	4,449,540	$	1,071

(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
December 31, 2018

Commercial, financial and agricultural $ 1,348
$ 162
$ —
$ —
$ 1,510
$ 580,150
$ 581,660
Real estate:

Construction —
—
—
—
—
66,927
66,927
Residential mortgage 3,966
157
—
2,048
6,171
1,422,034
1,428,205
Home equity 433
104
298
275
1,110
467,856
468,966
Commercial mortgage —
—
—
—
—
1,040,278
1,040,278
Consumer 2,340
872
238
—
3,450
488,756
492,206
Leases —
—
—
—
—
124
124
Total $ 8,087
$ 1,295
$ 536
$ 2,323
$ 12,241
$ 4,066,125
$ 4,078,366
In accordance with the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" issued in April 2020, loans with deferrals granted because of COVID-19 are not considered past due and/or reported as nonaccrual during the deferral period.

~~Modifications~~

Troubled Debt Restructurings

Troubled debt restructurings ("TDRs") included in nonperforming assets at June 30, ~~2019~~2020 consisted of ~~three~~ 1 Hawaii residential mortgage ~~loans~~ loan with a ~~combined~~ principal balance of ~~$0.4~~$0.3 million. There were $7.5 million of TDRs still accruing interest at June 30, 2020, NaN of which were more than 90 days delinquent. At December 31, 2019, there were $7.5 million of TDRs still accruing interest, NaN 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 primarily~~the loan typically consists of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. ~~The~~In these cases, the principal ~~balances~~balance on ~~these TDRs~~the TDR had matured and/or ~~were~~was in default at the time of restructure, and ~~we have~~there were no commitments to lend additional funds to any of these borrowers. There were $9.1 million of TDRs still accruing interest at June 30, 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.

~~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 Allowanceborrower during the three and six months ended June 30, 2020 and 2019.

As discussed in Note 1 to these financial statements, Section 4013 of CARES Act and the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" 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 December 31, 2019 and at the time of modification program implementation, respectively, and meets other applicable criteria. The Company identified 9 consumer loans totaling $0.1 million that were modified during the quarter and did not meet the criteria under Section 4013 of CARES Act or the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)". As a result, these loans are included in the TDRs disclosed above. The remaining TDRs disclosed above were not related to COVID-19 modifications. The Company executed loan deferrals on outstanding balances of approximately $567.9 million resulting from the COVID-19 pandemic that were not classified as a TDR at June 30, 2020.

NoThe following table presents by class, information related to loans modified in a TDR during the three and six months ended June 30, 2020:


(dollars in thousands)	Number of Contracts	Recorded Investment (as of Period End)		Increase in the ACL
Three Months Ended June 30, 2020

Real estate: Commercial mortgage	1	$	285	$	—
Consumer	9	145		—
Total	10	$	430	$	—

Six Months Ended June 30, 2020

Real estate: Commercial mortgage	1	$	285	$	—
Consumer	9	145
Total	10	$	430	$	—

NaN loans were modified in a TDR during the three and six months ended June 30, ~~2019 and 2018.~~2019.

NoNaN loans were modified as a TDR within the previous twelve months that subsequently defaulted during the three and six months ended June 30, ~~2019~~2020 and ~~2018.~~

~~We had no commitments on TDRs during the three and six months ended June 30, 2019 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.~~

The following table presents the amortized cost basis of the Company's loans by class, credit quality indicator and origination year as of June 30, 2020. Revolving loans converted to term as of and during the three and six months ended June 30, 2020 were not material to the total loan portfolio.


	Amortized Cost of Term Loans by Origination Year
	2020		2019		2018		2017		2016		Prior		Amortized Cost of Revolving Loans		Total
	(dollars in thousands)
June 30, 2020
Commercial, financial and agricultural - SBA PPP:
Risk Rating
Pass	$	526,408	$	—	$	—	$	—	$	—	$	—	$	—	$	526,408




Commercial, financial and agricultural - Other:
Risk Rating
Pass	73,563		70,052		64,647		53,927		46,574		99,703		82,204		490,670
Special Mention	2,740		8,796		5,490		15,034		550		9,632		1,520		43,762
Substandard	—		7,362		595		1,220		2,407		1,842		—		13,426

Subtotal	76,303		86,210		70,732		70,181		49,531		111,177		83,724		547,858
Construction:
Risk Rating
Pass	12,308		15,026		46,092		7,164		2,239		20,689		—		103,518




Residential mortgage:
Risk Rating
Pass	252,833		335,607		163,136		181,703		210,585		506,943		—		1,650,807
Special Mention	—		—		—		1,437		153		1,145		—		2,735
Substandard	—		—		545		895		888		1,688		—		4,016

Subtotal	252,833		335,607		163,681		184,035		211,626		509,776		—		1,657,558
Home equity:
Risk Rating
Pass	9,200		18,464		19,080		457		298		4,923		457,792		510,214
Special Mention	—		—		—		—		—		—		210		210
Substandard	—		—		—		—		206		332		—		538

Subtotal	9,200		18,464		19,080		457		504		5,255		458,002		510,962
Commercial mortgage:
Risk Rating
Pass	42,505		149,625		155,100		171,513		113,485		383,327		17,363		1,032,918
Special Mention	—		2,602		18,508		12,718		10,369		24,984		—		69,181
Substandard	—		4,593		—		—		4,513		18,964		—		28,070

Subtotal	42,505		156,820		173,608		184,231		128,367		427,275		17,363		1,130,169
Consumer:
Risk Rating
Pass	61,790		136,956		73,808		57,622		25,622		99,447		71,221		526,466

Substandard	11		27		14		48		4		256		—		360
Loss	—		—		—		79		45		15		—		139
Subtotal	61,801		136,983		73,822		57,749		25,671		99,718		71,221		526,965
Total	$	981,358	$	749,110	$	547,015	$	503,817	$	417,938	$	1,173,890	$	630,310	$	5,003,438

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 ~~June 30, 2019 and~~ December 31, ~~2018:~~2019:


(dollars in thousands)	Pass		Special Mention		Substandard		Loss		Subtotal		Net Deferred Costs (Income)		Total
December 31, 2019
Commercial, financial and agricultural	$	523,342	$	20,677	$	26,070	$	—	$	570,089	$	215	$	570,304
Real estate:
Construction	96,139		—		—		—		96,139		(285)		95,854
Residential mortgage	1,593,072		840		1,889		—		1,595,801		4,000		1,599,801
Home equity	490,147		—		92		—		490,239		495		490,734
Commercial mortgage	1,094,364		17,440		13,107		—		1,124,911		(1,496)		1,123,415


Consumer	569,212		—		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
June 30, 2019

Commercial, financial and agricultural $ 574,264
$ 3,994
$ 11,813
$ —
$ 590,071
$ 412
$ 590,483
Real estate:

Construction 72,835
—
—
—
72,835
(408 ) 72,427
Residential mortgage 1,512,276
—
828
—
1,513,104
3,832
1,516,936
Home equity 472,674
—
244
—
472,918
233
473,151
Commercial mortgage 1,054,254
26,711
13,291
—
1,094,256
(1,398 ) 1,092,858
Consumer 501,007
—
178
88
501,273
(67 ) 501,206
Leases 52
—
—
—
52
—
52
Total $ 4,187,362
$ 30,705
$ 26,354
$ 88
$ 4,244,509
$ 2,604
$ 4,247,113

(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:

Construction 67,269
—
—
—
67,269
(342 ) 66,927
Residential mortgage 1,422,240
—
2,144
—
1,424,384
3,821
1,428,205
Home equity 468,394
—
572
—
468,966
—
468,966
Commercial mortgage 1,029,581
10,412
1,692
—
1,041,685
(1,407 ) 1,040,278
Consumer 492,030
—
80
158
492,268
(62 ) 492,206
Leases 124
—
—
—
124
—
124
Total $ 4,032,344
$ 18,373
$ 24,998
$ 158
$ 4,075,873
$ 2,493
$ 4,078,366

5. ALLOWANCE FOR ~~LOAN~~CREDIT LOSSES AND ~~LEASE LOSSES~~RESERVE FOR OFF-BALANCE SHEET CREDIT EXPOSURES

The following table presents by class, the activity in the ~~Allowance~~ACL for loans under ASC 326 during the ~~periods indicated:~~three and six months ended June 30, 2020 and under previous GAAP during the three and six months ended June 30, 2019:


			Real Estate																			Commercial, Financial and Agricultural						Real Estate
(dollars in thousands)	Commercial, Financial & Agricultural		Construction			Residential Mortgage			Home Equity			Commercial Mortgage			Consumer		Leases		Total		(dollars in thousands)	SBA PPP		Other		Construction		Residential Mortgage		Home Equity		Commercial Mortgage		Consumer		Total
Three Months Ended June 30, 2019
Three Months Ended June 30, 2020																					Three Months Ended June 30, 2020
Beginning balance prior to ASC 326																					Beginning balance prior to ASC 326	$	—	$	8,645	$	3,057	$	13,181	$	2,309	$	19,518	$	12,935	$	59,645
Impact of adoption of ASC 326																					Impact of adoption of ASC 326	—		—		—		—		—		—		—		—
Beginning balance	$	7,847	$	1,299		$	12,851		$	4,278		$	12,036		$	8,956	$	—	$	47,267	Beginning balance	—		8,645		3,057		13,181		2,309		19,518		12,935		59,645
Provision (credit) for loan and lease losses	786		(578		)	144			26			(393		)	1,419		—		1,404
Provision for credit losses																					Provision for credit losses	388		7,660		217		1,876		1,342		(3,371)		2,528		10,640

	8,633		721			12,995			4,304			11,643			10,375		—		48,671			388		16,305		3,274		15,057		3,651		16,147		15,463		70,285
Charge-offs	839		—			—			—			—			1,459		—		2,298		Charge-offs	—		1,103		—		52		—		—		2,626		3,781
Recoveries	315		592			372			9			25			581		—		1,894		Recoveries	—		305		—		20		—		1		509		835
Net charge-offs (recoveries)	524		(592		)	(372		)	(9		)	(25		)	878		—		404		Net charge-offs (recoveries)	—		798		—		32		—		(1)		2,117		2,946
Ending balance	$	8,109	$	1,313		$	13,367		$	4,313		$	11,668		$	9,497	$	—	$	48,267	Ending balance	$	388	$	15,507	$	3,274	$	15,025	$	3,651	$	16,148	$	13,346	$	67,339

Three Months Ended June 30, 2018
Three Months Ended June 30, 2019																					Three Months Ended June 30, 2019
Beginning balance	$	7,476	$	1,714		$	14,207		$	3,328		$	16,186		$	6,306	$	—	$	49,217	Beginning balance	$	—	$	7,847	$	1,299	$	12,851	$	4,278	$	12,036	$	8,956	$	47,267
Provision (credit) for loan and lease losses	496		91			24			(169		)	(1,121		)	1,211		—		532
Provision for credit losses																					Provision for credit losses	—		786		(578)		144		26		(393)		1,419		1,404
	7,972		1,805			14,231			3,159			15,065			7,517		—		49,749			—		8,633		721		12,995		4,304		11,643		10,375		48,671
Charge-offs	742		—			—			—			—			1,729		—		2,471		Charge-offs	—		839		—		—		—		—		1,459		2,298
Recoveries	295		6			21			9			29			543		—		903		Recoveries	—		315		592		372		9		25		581		1,894
Net charge-offs (recoveries)	447		(6		)	(21		)	(9		)	(29		)	1,186		—		1,568		Net charge-offs (recoveries)	—		524		(592)		(372)		(9)		(25)		878		404
Ending balance	$	7,525	$	1,811		$	14,252		$	3,168		$	15,094		$	6,331	$	—	$	48,181	Ending balance	$	—	$	8,109	$	1,313	$	13,367	$	4,313	$	11,668	$	9,497	$	48,267

Real Estate
(dollars in thousands) Commercial,
Financial &
Agricultural Construction Residential Mortgage Home Equity Commercial Mortgage Consumer Leases Total
Six Months Ended June 30, 2019
Beginning balance $ 8,027
$ 1,202
$ 14,349
$ 3,788
$ 13,358
$ 7,192
$ —
$ 47,916
Provision (credit) for loan and lease losses 836
(487 ) (1,376 ) 507
(1,715 ) 4,922
—
2,687
8,863
715
12,973
4,295
11,643
12,114
—
50,603
Charge-offs 1,302
—
—
—
—
3,710
—
5,012
Recoveries 548
598
394
18
25
1,093
—
2,676
Net charge-offs (recoveries) 754
(598 ) (394 ) (18 ) (25 ) 2,617
—
2,336
Ending balance $ 8,109
$ 1,313
$ 13,367
$ 4,313
$ 11,668
$ 9,497
$ —
$ 48,267

Six Months Ended June 30, 2018
Beginning balance $ 7,594
$ 1,835
$ 14,328
$ 3,317
$ 16,801
$ 6,126
$ —
$ 50,001
Provision (credit) for loan and lease losses 732
(1,223 ) (123 ) (161 ) (1,751 ) 2,847
—
321
8,326
612
14,205
3,156
15,050
8,973
—
50,322
Charge-offs 1,240
—
—
—
—
3,662
—
4,902
Recoveries 439
1,199
47
12
44
1,020
—
2,761
Net charge-offs (recoveries) 801
(1,199 ) (47 ) (12 ) (44 ) 2,642
—
2,141
Ending balance $ 7,525
$ 1,811
$ 14,252
$ 3,168
$ 15,094
$ 6,331
$ —
$ 48,181


	Commercial, Financial and Agricultural						Real Estate
(dollars in thousands)	SBA PPP		Other		Construction		Residential Mortgage		Home Equity		Commercial Mortgage		Consumer		Total
Six Months Ended June 30, 2020
Beginning balance prior to ASC 326	$	—	$	8,136	$	1,792	$	13,327	$	4,206	$	11,113	$	9,397	$	47,971
Impact of adoption of ASC 326	—		(627)		479		608		(1,614)		2,624		2,096		3,566
Balance after adoption of ASC 326	—		7,509		2,271		13,935		2,592		13,737		11,493		51,537
Provision for credit losses	388		8,891		872		941		1,028		2,408		5,441		19,969
	388		16,400		3,143		14,876		3,620		16,145		16,934		71,506
Charge-offs	—		1,540		—		52		—		—		4,843		6,435
Recoveries	—		647		131		201		31		3		1,255		2,268
Net charge-offs (recoveries)	—		893		(131)		(149)		(31)		(3)		3,588		4,167
Ending balance	$	388	$	15,507	$	3,274	$	15,025	$	3,651	$	16,148	$	13,346	$	67,339

Six Months Ended June 30, 2019
Beginning balance	$	—	$	8,027	$	1,202	$	14,349	$	3,788	$	13,358	$	7,192	$	47,916
Provision for credit losses	—		836		(487)		(1,376)		507		(1,715)		4,922		2,687
	—		8,863		715		12,973		4,295		11,643		12,114		50,603
Charge-offs	—		1,302		—		—		—		—		3,710		5,012
Recoveries	—		548		598		394		18		25		1,093		2,676
Net charge-offs (recoveries)	—		754		(598)		(394)		(18)		(25)		2,617		2,336
Ending balance	$	—	$	8,109	$	1,313	$	13,367	$	4,313	$	11,668	$	9,497	$	48,267

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 and six months ended June 30, 2020 and under previous GAAP during the three and six months ended June 30, 2019.


Three Months Ended June 30, 2020


Beginning balance	$	3,810
Provision for off-balance sheet credit exposures	573
Ending balance	$	4,383

Three Months Ended June 30, 2019
Beginning balance	$	1,409


Provision for off-balance sheet credit exposures	488
Ending balance	$	1,897

Six Months Ended June 30, 2020
Beginning balance prior to ASC 326	$	1,272
Impact of adoption of ASC 326	740
Balance after adoption of ASC 326	2,012
Provision for off-balance sheet credit exposures	2,371
Ending balance	$	4,383

Six Months Ended June 30, 2019
Beginning balance	$	1,242


Provision for off-balance sheet credit exposures	655
Ending balance	$	1,897

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

Our ~~Provision~~provision for credit losses on loans was ~~a debit of~~$10.6 million and $20.0 million in the three and six months ended June 30, 2020 under ASC 326, compared to $1.4 million and ~~a debit of~~ $2.7 million in the three and six months ended June 30, 2019 ~~respectively, compared to a debit of $0.5 million and a debit of $0.3 million in the three and six months ended June 30, 2018, respectively.~~under previous GAAP.

6. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

The components of the Company's investments in unconsolidated subsidiaries were as follows:


(dollars in thousands)	June 30, 2020		December 31, 2019
Investments in low income housing tax credit partnerships	$	14,626	$	15,322
Investments in common securities of statutory trusts	1,547		1,547
Investments in affiliates	201		192
Other	54		54
Total	$	16,428	$	17,115

(dollars in thousands) June 30, 2019 December 31, 2018
Investments in low income housing tax credit partnerships $ 15,486
$ 11,603
Investments in common securities of statutory trusts 1,547
2,169
Investments in affiliates 160
182
Other 54
54
Total $ 17,247
$ 14,008

The Company invests in low-income housing tax credit ("LIHTC") partnerships. As of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had ~~$12.1~~$9.3 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 June 30, ~~2019~~2020 for the remainder of fiscal year ~~2019,~~2020, the next five succeeding fiscal years and all years thereafter are as follows (dollars in thousands):


Year Ending December 31,
2020 (remainder)	$	4,694
2021	1,494
2022	2,995
2023	10
2024	26
2025	6
Thereafter	43
Total unfunded commitments	$	9,268

Year Ending December 31,
2019 (remainder) $ 4,018
2020 7,866
2021 94
2022 10
2023 10
2024 26
Thereafter 49
Total unfunded commitments $ 12,073

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 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 and six months ended June 30, ~~2019~~2020 and June 30, ~~2018:~~2019:

(dollars in thousands) Three Months Ended
June 30, 2019 Three Months Ended
June 30, 2018 Six Months Ended
June 30, 2019 Six Months Ended
June 30, 2018
Proportional amortization method:
Amortization expense recognized in income tax expense $ 259
$ 113
$ 517
$ 227
Tax credits recognized in income tax expense 338
153
615
305


(dollars in thousands)	Three Months Ended June 30, 2020		Three Months Ended June 30, 2019		Six Months Ended June 30, 2020		Six Months Ended June 30, 2019
Proportional amortization method:
Amortization expense recognized in income tax expense	$	348	$	259	$	696	$	517
Tax credits recognized in income tax expense	400		338		800		615

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
Additions	742
Amortization	(1,072)
Balance, June 30, 2019	$	15,266

Balance, January 1, 2020	$	14,718
Additions	1,270
Amortization	(3,217)
Balance, June 30, 2020	$	12,771

(dollars in thousands) Core
Deposit
Premium Mortgage
Servicing
Rights Total
Balance, January 1, 2018 $ 2,006
$ 15,843
$ 17,849
Additions —
807
807
Amortization (1,337 ) (894 ) (2,231 )
Balance, June 30, 2018 $ 669
$ 15,756
$ 16,425

Balance, January 1, 2019 $ —
$ 15,596
$ 15,596
Additions —
742
742
Amortization —
(1,072 ) (1,072 )
Balance, June 30, 2019 $ —
$ 15,266
$ 15,266

Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans and totaled $1.1 million and $1.3 million for the three and six months ended June 30, 2020 compared to $0.5 million and $0.7 million for the three and six months ended June 30, ~~2019, respectively, compared to $0.4~~2019.

Amortization of mortgage servicing rights totaled $1.7 million and ~~$0.8~~$3.2 million for the three and six months ended June 30, ~~2018, respectively.~~

~~Amortization of mortgage servicing rights was~~2020 compared to $0.6 million and $1.1 million for the three and six months ended June 30, ~~2019, respectively, compared to $0.4 million and $0.9 million for the three and six months ended June 30, 2018, respectively.~~2019.

The following ~~table presents~~tables present the fair market value and key assumptions used in determining the fair market value of our mortgage servicing rights:


	Six Months Ended		Six Months Ended
(dollars in thousands)	June 30, 2020		June 30, 2019
Fair market value, beginning of period	$	15,820	$	17,696
Fair market value, end of period	13,060		15,554

Six Months Ended Six Months Ended
(dollars in thousands) June 30, 2019 June 30, 2018
Fair market value, beginning of period $ 17,696
$ 17,161
Fair market value, end of period 15,554
18,560
Weighted average discount rate 9.5 % 9.5 %
Forecasted constant prepayment rate assumption ⁽¹⁾
17.4
13.9


	June 30, 2020		December 31, 2019
Weighted average discount rate	9.6	%	9.5	%
Forecasted constant prepayment rate assumption ⁽¹⁾	21.7	%	11.9	%

⁽¹⁾ Represents annualized loan prepayment rate assumption.

The gross carrying value and accumulated amortization related to our ~~core deposit premium and~~ mortgage servicing rights are presented below:

June 30, 2019 December 31, 2018
(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 rights 66,755
(51,489 ) 15,266
66,013
(50,417 ) 15,596
Total $ 111,397
$ (96,131 ) $ 15,266
$ 110,655
$ (95,059 ) $ 15,596


	June 30, 2020										December 31, 2019
(dollars in thousands)	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Gross Carrying Value		Accumulated Amortization		Net Carrying Value

Mortgage servicing rights	$	68,865	$	(56,094)	$	12,771	$	67,595	$	(52,877)	$	14,718

Based on the mortgage servicing rights held as of June 30, ~~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 (dollars in thousands):

Year Ending December 31,
2019 (remainder) $ 1,481
2020 2,437
2021 1,941
2022 1,570
2023 1,297
2024 1,120
Thereafter 5,420
Total $ 15,266


Year Ending December 31,
2020 (remainder)	$	2,583
2021	4,359
2022	3,538
2023	2,291
2024	—
2025	—
Thereafter	—
Total	$	12,771

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 June 30, ~~2019~~2020 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 June 30, ~~2019,~~2020, we were a party to interest rate lock and forward sale commitments on ~~$1.0~~$0.4 million and ~~$7.8~~$10.9 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 Instruments

Asset Derivatives

Liability Derivatives

Fair Value at

(dollars in thousands)

Balance Sheet Location

June 30,
2020

December 31,
2019

June 30,
2020

December 31,
2019

Interest rate lock and forward sale commitments

Other assets / other liabilities

Derivatives Financial Instruments Not Designated as Hedging Instruments Asset Derivatives Liability Derivatives
Fair Value at Fair Value at
(dollars in thousands) Balance Sheet Location June 30,
2019 December 31,
2018 June 30,
2019 December 31,
2018
Interest rate lock and forward sale commitments Other assets / other liabilities $ 6
$ 11
$ 69
$ 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 in which we participate. 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 June 30, 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 June 30, 2020

Interest rate lock and forward sale commitments

Mortgage banking income

(149)

Three Months Ended June 30, 2019

Interest rate lock and forward sale commitments

Mortgage banking income

(18)

Six Months Ended June 30, 2020

Interest rate lock and forward sale commitments

Mortgage banking income

(50)

Risk participation agreement

Other service charges and fees

1,288

Six Months Ended June 30, 2019

Interest rate lock and forward sale commitments

Mortgage banking 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 June 30, 2019
Interest rate lock and forward sale commitments Mortgage banking income $ (18 )
Loans held for sale Other income —

Three Months Ended June 30, 2018
Interest rate lock and forward sale commitments Mortgage banking income (36 )
Loans held for sale Other income 7

Six Months Ended June 30, 2019
Interest rate lock and forward sale commitments Mortgage banking income 21
Loans held for sale Other income —

Six Months Ended June 30, 2018
Interest rate lock and forward sale commitments Mortgage banking income (15 )
Loans held for sale Other income —

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 ~~$1.74~~$1.97 billion line of credit as of June 30, ~~2019,~~2020, compared to ~~$1.43~~$1.84 billion at December 31, ~~2018.~~2019. At June 30, ~~2019, $1.40~~2020, $1.67 billion was undrawn under this arrangement, compared to ~~$1.18~~$1.57 billion at December 31, ~~2018. Short-term~~2019. There were 0 short-term borrowings under this arrangement at June 30, 2020, compared to $150.0 million at December 31, 2019. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled ~~$221.0~~$248.5 million at June 30, ~~2019,~~2020, compared to ~~$197.0~~$78.9 million at December 31, ~~2018.~~2019. Long-term borrowings under this arrangement totaled $50.0 million at June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. FHLB advances and standby letters of credit available at June 30, ~~2019~~2020 were secured by certain real estate loans with a carrying value of ~~$2.34~~$2.66 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB.

At June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, our bank had additional unused borrowings available at the Federal Reserve discount window of ~~$67.7~~$54.6 million and ~~$73.9~~$65.3 million, respectively. As of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, certain commercial and commercial real estate loans with a carrying value totaling ~~$121.2~~$126.7 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.

To bolster the effectiveness of the SBA's PPP the Federal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provides loans to small businesses so that they can keep their workers on the payroll. The Paycheck Protection Program Liquidity Facility ("PPPLF") will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. At June 30, 2020, PPP loans pledged to the Federal Reserve Bank totaled $65.9 million and funds drawn from the Federal Reserve Bank related to the PPPLF as of June 30, 2020 totaled $65.9 million.

Subordinated Debentures

In October 2003, we created ~~two~~2 wholly-owned statutory trusts, CPB Capital Trust II ("Trust II") and CPB Statutory Trust III ("Trust III"). ~~Trust II issued $20.0~~We completed the redemption of $20 million inof 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~~issued by Trust II ~~were $20.6~~in January 2019 and $20 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 $20.0 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.

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 December 2018.

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 June 30, 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)

June 30, 2020

Name of Trust

Subordinated Debentures

Interest Rate

Trust IV

30,928

Three month LIBOR + 2.45%

Trust V

20,619

Three month LIBOR + 1.87%

Total

51,547

December 31, 2019

Name of Trust

Subordinated Debentures

Interest Rate

Trust IV

30,928

Three month LIBOR + 2.45%

Trust V

20,619

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

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 and six months ended June 30, ~~2019~~2020 and ~~2018.~~2019:

Three Months Ended
June 30, Six Months Ended
June 30,
(dollars in thousands) 2019 2018 2019 2018
Other operating income:
In-scope of ASC 606
Service charges on deposit accounts $ 2,041
$ 1,977
$ 4,122
$ 3,980
Other service charges and fees 3,193
2,835
5,761
5,391
Income on fiduciary activities 1,129
1,017
2,094
1,973
Fees on foreign exchange 28
28
54
60
Loan placement fees 107
220
256
417
In-scope other operating income 6,498
6,077
12,287
11,821
Out-of-scope other operating income 3,596
3,553
9,480
6,763
Total other operating income $ 10,094
$ 9,630
$ 21,767
$ 18,584


	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2020		2019		2020		2019
Other operating income:
In-scope of ASC 606
Mortgage banking income	$	189	$	107	$	418	$	256
Service charges on deposit accounts	1,149		2,041		3,199		4,122
Other service charges and fees	2,589		3,221		5,585		5,815
Income on fiduciary activities	1,270		1,129		2,567		2,094

Net gain on sales of foreclosed assets	(6)		—		(6)		—
In-scope other operating income	5,191		6,498		11,763		12,287
Out-of-scope other operating income	5,501		3,596		7,815		9,480
Total other operating income	$	10,692	$	10,094	$	19,578	$	21,767

11. SHARE-BASED COMPENSATION

Restricted Stock Units

The table below presents the activity of restricted stock units for the six months ended June 30, ~~2019:~~2020:


	Shares	Weighted Average Grant Date Fair Value
Non-vested restricted stock units, beginning of period	366,467	$	28.89
Changes during the period:
Granted	321,722	18.11
Vested	(105,553)	30.24
Forfeited	(15,631)	26.38
Non-vested restricted stock units, end of period	567,005	22.59

Shares Weighted Average Grant Date Fair Value
Non-vested restricted stock units, beginning of period 362,725
$ 26.98
Changes during the period:

Granted 181,073
28.89
Vested (134,256 ) 24.31
Forfeited (6,970 ) 29.63
Non-vested restricted stock units, end of period 402,572
28.69

12. LEASES

~~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 ~~have~~include 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 ~~used~~uses 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.

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
June 30, Six Months Ended
June 30,
(dollars in thousands) 2019 2019
Lease cost:
Operating lease cost $ 1,628
$ 3,256
Variable lease cost 604
1,251
Less: sublease income (11 ) (22 )
Total lease cost $ 2,221
4,485

Other information:
Operating cash flows from operating leases $ (1,556 ) $ (3,105 )
Weighted-average remaining lease term - operating leases 14.05 years
14.21 years
Weighted-average discount rate - operating leases 3.92 % 3.92 %


	Three Months Ended June 30,									Six Months Ended June 30,
(dollars in thousands)	2020			2019			2020			2019
Lease cost:
Operating lease cost	$	1,653		$	1,628		$	3,306		$	3,256
Variable lease cost	688			604			1,366			1,251
Less: sublease income	(3)			(11)			(15)			(22)
Total lease cost	$	2,338		$	2,221		$	4,657		$	4,485

Other information:
Operating cash flows from operating leases	$	(1,595)		$	(1,556)		$	(3,189)		$	(3,105)
Weighted-average remaining lease term - operating leases	13.23 years			14.05 years			13.23 years			14.21 years
Weighted-average discount rate - operating leases	3.93		%	3.92		%	3.93		%	3.92		%

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 for the remainder of fiscal year ~~2019,~~2020, the next five succeeding fiscal years and all years thereafter (dollars in thousands):

Year Ending December 31, Undiscounted Cash Flows Lease Liability Expense Lease Liability Reduction
2019 (remainder) $ 3,106
$ 1,032
$ 2,074
2020 6,015
1,939
4,076
2021 5,705
1,787
3,918
2022 5,268
1,645
3,623
2023 4,970
1,512
3,458
2024 4,812
1,383
3,429
Thereafter 40,920
7,669
33,251
Total $ 70,796
$ 16,967
$ 53,829


Year Ending December 31,	Undiscounted Cash Flows		Lease Liability Expense		Lease Liability Reduction
2020 (remainder)	$	3,027	$	968	$	2,059
2021	5,907		1,808		4,099
2022	5,472		1,659		3,813
2023	5,175		1,519		3,656
2024	4,947		1,385		3,562
2025	4,634		1,247		3,387
Thereafter	36,285		6,421		29,864
Total	$	65,447	$	15,007	$	50,440

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
June 30, Six Months Ended
June 30,
(dollars in thousands) 2019 2019
Total rental income recognized $ 519
1,054


	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2020		2019		2020		2019
Total rental income recognized	$	534	$	519	$	1,067	$	1,054

Based on the Company's leases as lessor as of June 30, ~~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 (dollars in thousands):

Year Ending December 31,
2019 (remainder) $ 982
2020 1,782
2021 1,842
2022 1,283
2023 450
2024 88
Thereafter 268
Total $ 6,695


Year Ending December 31,
2020 (remainder)	$	1,117
2021	2,245
2022	1,662
2023	578
2024	109
2025	72
Thereafter	190
Total	$	5,973

13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the components of other comprehensive income for the three and six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, by component:


(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Three Months Ended June 30, 2020
Net unrealized gains on investment securities:
Net unrealized gains arising during the period	$	8,570	$	2,295	$	6,275
Less: Reclassification adjustments from AOCI realized in net income	—		—		—
Net unrealized gains on investment securities	8,570		2,295		6,275

Defined benefit plans:

Amortization of net actuarial loss	269		70		199
Amortization of net transition obligation	4		1		3
Amortization of prior service cost	3		1		2

Defined benefit plans, net	276		72		204

Other comprehensive income	$	8,846	$	2,367	$	6,479


(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Three Months Ended June 30, 2019
Net unrealized gains on investment securities:
Net unrealized gains arising during the period	$	16,620	$	4,455	$	12,165
Less: Reclassification adjustments from AOCI realized in net income	—		—		—
Net unrealized gains on investment securities	16,620		4,455		12,165

Defined benefit plans:

Amortization of net actuarial loss	264		22		242
Amortization of net transition obligation	4		1		3
Amortization of prior service cost	4		1		3

Defined benefit plans, net	272		24		248

Other comprehensive income	$	16,892	$	4,479	$	12,413

(dollars in thousands) Before Tax Tax Effect Net of Tax
Three Months Ended June 30, 2018

Net unrealized losses on investment securities:

Net unrealized losses arising during the period $ (5,057 ) $ (1,388 ) $ (3,669 )
Less: Reclassification adjustments from AOCI realized in net income —
—
—
Net unrealized losses on investment securities (5,057 ) (1,388 ) (3,669 )

Defined benefit plans:

Amortization of net actuarial loss 235
91
144
Amortization of net transition obligation 4
1
3
Amortization of prior service cost 4
1
3
Defined benefit plans, net 243
93
150

Other comprehensive loss $ (4,814 ) $ (1,295 ) $ (3,519 )

(dollars in thousands) Before Tax Tax Effect Net of Tax
Six Months Ended June 30, 2019

Net unrealized gains on investment securities:

Net unrealized gains arising during the period $ 31,644
$ 8,483
$ 23,161
Less: Reclassification adjustments from AOCI realized in net income —
—
—
Net unrealized gains on investment securities 31,644
8,483
23,161

Defined benefit plans:

Net actuarial losses arising during the period —
—
—
Amortization of net actuarial loss 527
51
476
Amortization of net transition obligation 9
2
7
Amortization of prior service cost 9
2
7
Settlement

—
Defined benefit plans, net 545
55
490

Other comprehensive income
$ 32,189
$ 8,538
$ 23,651


(dollars in thousands)	Before Tax			Tax Effect			Net of Tax			(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Six Months Ended June 30, 2018
Net unrealized losses on investment securities:
Net unrealized losses arising during the period	$	(25,512	)	$	(6,872	)	$	(18,640	)
Six Months Ended June 30, 2020										Six Months Ended June 30, 2020
Net unrealized gains on investment securities:										Net unrealized gains on investment securities:
Net unrealized gains arising during the period										Net unrealized gains arising during the period	$	22,428	$	6,006	$	16,422
Less: Reclassification adjustments from AOCI realized in net income	—			—			—			Less: Reclassification adjustments from AOCI realized in net income	—		—		—
Net unrealized losses on investment securities	(25,512		)	(6,872		)	(18,640		)
Net unrealized gains on investment securities										Net unrealized gains on investment securities	22,428		6,006		16,422

Defined benefit plans:										Defined benefit plans:
Net actuarial losses arising during the period	—			—			—
Net actuarial gains arising during the period										Net actuarial gains arising during the period	427		114		313
Amortization of net actuarial loss	576			184			392			Amortization of net actuarial loss	537		142		395
Amortization of net transition obligation	9			2			7			Amortization of net transition obligation	9		2		7
Amortization of prior service cost	9			2			7			Amortization of prior service cost	7		2		5
Settlement	—			—			—

Defined benefit plans, net	594			188			406			Defined benefit plans, net	980		260		720

Other comprehensive loss	$	(24,918	)	$	(6,684	)	$	(18,234	)
Other comprehensive income										Other comprehensive income	$	23,408	$	6,266	$	17,142


(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Six Months Ended June 30, 2019
Net unrealized gains on investment securities:
Net unrealized gains arising during the period	$	31,644	$	8,483	$	23,161
Less: Reclassification adjustments from AOCI realized in net income	—		—		—
Net unrealized gains on investment securities	31,644		8,483		23,161

Defined benefit plans:

Amortization of net actuarial loss	527		51		476
Amortization of net transition obligation	9		2		7
Amortization of prior service cost	9		2		7

Defined benefit plans, net	545		55		490

Other comprehensive income	$	32,189	$	8,538	$	23,651

The following tables present the changes in each component of AOCI, net of tax, for the three and six months ended June 30, ~~2019~~2020 and ~~2018:~~2019:

(dollars in thousands) Investment
Securities Defined
Benefit
Plans AOCI
Three Months Ended June 30, 2019

Balance at beginning of period (1,747 ) (6,208 ) (7,955 )

Other comprehensive income before reclassifications 12,165
—
12,165
Reclassification adjustments from AOCI —
248
248
Total other comprehensive income 12,165
248
12,413

Balance at end of period $ 10,418
$ (5,960 ) $ 4,458


(dollars in thousands)	Investment Securities		Defined Benefit Plans		AOCI
Three Months Ended June 30, 2020


Balance at beginning of period	$	24,972	$	(5,900)	$	19,072



Other comprehensive income before reclassifications	6,275		—		6,275
Reclassification adjustments from AOCI	—		204		204
Total other comprehensive income	6,275		204		6,479

Balance at end of period	$	31,247	$	(5,696)	$	25,551

(dollars in thousands) Investment
Securities Defined
Benefit
Plans AOCI
Three Months Ended June 30, 2018

Balance at beginning of period $ (10,492 ) $ (7,237 ) $ (17,729 )

Impact of the adoption of new accounting standards —
—
—

Other comprehensive income before reclassifications (3,669 ) —
(3,669 )
Reclassification adjustments from AOCI —
150
150
Total other comprehensive income (loss) (3,669 ) 150
(3,519 )

Balance at end of period $ (14,161 ) $ (7,087 ) $ (21,248 )

(dollars in thousands) Investment
Securities Defined
Benefit
Plans AOCI
Six Months Ended June 30, 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 (loss) before reclassifications 23,161
—
23,161
Reclassification adjustments from AOCI —
490
490
Total other comprehensive income 23,161
490
23,651

Balance at end of period $ 10,418
$ (5,960 ) $ 4,458

(dollars in thousands) Investment
Securities Defined
Benefit
Plans AOCI
Six Months Ended June 30, 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 period 4,934
(6,112 ) (1,178 )

Impact of the adoption of new accounting standards (455 ) (1,381 ) (1,836 )

Other comprehensive income (loss) before reclassifications (18,640 ) —
(18,640 )
Reclassification adjustments from AOCI —
406
406
Total other comprehensive income (loss) (18,640 ) 406
(18,234 )

Balance at end of period $ (14,161 ) $ (7,087 ) $ (21,248 )


(dollars in thousands)	Investment Securities		Defined Benefit Plans		AOCI
Three Months Ended June 30, 2019
Balance at beginning of period	$	(1,747)	$	(6,208)	$	(7,955)





Other comprehensive loss before reclassifications	12,165		—		12,165
Reclassification adjustments from AOCI	—		248		248
Total other comprehensive income	12,165		248		12,413

Balance at end of period	$	10,418	$	(5,960)	$	4,458


(dollars in thousands)	Investment Securities		Defined Benefit Plans		AOCI
Six Months Ended June 30, 2020
Balance at beginning of period	$	14,825	$	(6,416)	$	8,409





Other comprehensive income before reclassifications	16,422		313		16,735
Reclassification adjustments from AOCI	—		407		407
Total other comprehensive income	16,422		720		17,142

Balance at end of period	$	31,247	$	(5,696)	$	25,551


(dollars in thousands)	Investment Securities		Defined Benefit Plans		AOCI
Six Months Ended June 30, 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 reclassifications	23,161		—		23,161
Reclassification adjustments from AOCI	—		490		490
Total other comprehensive income (loss)	23,161		490		23,651

Balance at end of period	$	10,418	$	(5,960)	$	4,458

The following table presents the amounts reclassified out of each component of AOCI for the three and six months ended June 30, ~~2019~~2020 and ~~2018:~~2019:


	Amount Reclassified from AOCI					Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI Components	Three months ended June 30,
(dollars in thousands)	2020		2019





Defined benefit retirement and supplemental executive retirement plan items:
Amortization of net actuarial loss	$	(269)	$	(264)	Salaries and employee benefits
Amortization of net transition obligation	(4)		(4)		Salaries and employee benefits
Amortization of prior service cost	(3)		(4)		Salaries and employee benefits

Total before tax	(276)		(272)
Tax effect	72		24		Income tax benefit (expense)
Net of tax	$	(204)	$	(248)

Total reclassification adjustments from AOCI for the period, net of tax	$	(204)	$	(248)

Amount Reclassified from AOCI Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI Components Three months ended June 30,
(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 $ (264 ) $ (235 ) Salaries and employee benefits
Amortization of net transition obligation (4 ) (4 ) Salaries and employee benefits
Amortization of prior service cost (4 ) (4 ) Salaries and employee benefits
Total before tax (272 ) (243 )
Tax effect 24
93
Income tax benefit (expense)
Net of tax $ (248 ) $ (150 )

Total reclassification adjustments from AOCI for the period, net of tax $ (248 ) $ (150 )


	Amount Reclassified from AOCI					Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI Components	Six months ended June 30,
(dollars in thousands)	2020		2019





Defined benefit retirement and supplemental executive retirement plan items:
Amortization of net actuarial loss	$	(537)	$	(527)	Salaries and employee benefits
Amortization of net transition obligation	(9)		(9)		Salaries and employee benefits
Amortization of prior service cost	(7)		(9)		Salaries and employee benefits
Settlement	—		—		Salaries and employee benefits
Total before tax	(553)		(545)
Tax effect	146		55		Income tax benefit (expense)
Net of tax	$	(407)	$	(490)

Total reclassification adjustments from AOCI for the period, net of tax	$	(407)	$	(490)

Amount Reclassified from AOCI Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI Components Six months ended June 30,
(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 $ (527 ) $ (576 ) Salaries and employee benefits
Amortization of net transition obligation (9 ) (9 ) Salaries and employee benefits
Amortization of prior service cost (9 ) (9 ) Salaries and employee benefits
Total before tax (545 ) (594 )
Tax effect 55
188
Income tax benefit (expense)
Net of tax $ (490 ) $ (406 )

Total reclassification adjustments from AOCI for the period $ (490 ) $ (406 ) Net of tax

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 June 30,						Six Months Ended June 30,
(dollars in thousands, except per share data)	2020		2019		2020		2019
Net income	$	9,917	$	13,534	$	18,243	$	29,571

Weighted average common shares outstanding - basic	28,040,802		28,546,564		28,083,602		28,651,852
Dilutive effect of employee stock options and awards	54,428		182,946		106,530		195,934
Weighted average common shares outstanding - diluted	28,095,230		28,729,510		28,190,132		28,847,786

Basic earnings per common share	$	0.35	$	0.47	$	0.65	$	1.03
Diluted earnings per common share	$	0.35	$	0.47	$	0.65	$	1.03

Anti-dilutive employee stock options and awards outstanding	—		—		—		—

Three Months Ended
June 30, Six Months Ended
June 30,
(dollars in thousands, except per share data) 2019 2018 2019 2018
Net income $ 13,534
$ 14,224
$ 29,571
$ 28,501

Weighted average common shares outstanding - basic 28,546,564
29,510,175
28,651,852
29,658,051
Dilutive effect of employee stock options and awards 182,946
204,767
195,934
223,483
Weighted average common shares outstanding - diluted 28,729,510
29,714,942
28,847,786
29,881,534

Basic earnings per common share $ 0.47
$ 0.48
$ 1.03
$ 0.96
Diluted earnings per common share $ 0.47
$ 0.48
$ 1.03
$ 0.95

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 June 30, 2020, the weighted average discount rate used in the valuation of loans was 5.15%. In accordance with ASU 2016-01, the fair value of loans are measured based on the notion of exit price.

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 June 30, 2020, the weighted average discount rate used in the valuation of time deposits was 0.47%. 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. As of June 30, 2020, the weighted average discount rate used in the valuation of long-term debt was 1.93%.

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.

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)
June 30, 2019

Financial assets:

Cash and due from banks $ 83,534
$ 83,534
$ 83,534
$ —
$ —
Interest-bearing deposits in other banks 15,173
15,173
15,173
—
—
Investment securities 1,255,777
1,255,777
1,034
1,243,338
11,405
Loans held for sale 6,848
6,848
—
6,848
—
Net loans and leases 4,198,846
4,195,832
—
10,088
4,185,744
Accrued interest receivable 17,260
17,260
17,260
—
—

Financial liabilities:

Deposits:

Noninterest-bearing demand 1,351,190
1,351,190
1,351,190
—
—
Interest-bearing demand and savings and money market 2,576,511
2,576,511
2,576,511
—
—
Time 1,049,148
1,045,184
—
—
1,045,184
Short-term borrowings 221,000
221,000
—
221,000
—
Long-term debt 101,547
97,710
—
97,710
—
Accrued interest payable (included in other liabilities) 4,890
4,890
4,890

—


					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)
June 30, 2020
Financial assets:
Cash and due from banks	$	102,132	$	102,132	$	102,132	$	—	$	—
Interest-bearing deposits in other banks	41,201		41,201		41,201		—		—
Investment securities	1,169,803		1,169,803		1,209		1,156,923		11,671
Loans held for sale	10,443		10,443		—		10,443		—
Net loans and leases	4,936,099		4,795,025		—		—		4,795,025

Accrued interest receivable	19,590		19,590		19,590		—		—

Financial liabilities:
Deposits:
Noninterest-bearing demand	1,851,012		1,851,012		1,851,012		—		—
Interest-bearing demand and savings and money market	3,013,227		3,013,227		3,013,227		—		—
Time	930,446		932,077		—		—		932,077
Short-term borrowings	—		—		—		—		—
Long-term debt	167,491		156,386		—		—		156,386
Accrued interest payable (included in other liabilities)	2,894		2,894		2,894		—		—

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)
June 30, 2019

Derivatives:
Interest rate lock commitments $ 1,001
$ 6
$ 6
$ —
$ 6
$ —
Forward sale commitments 7,798
(69 ) (69 ) —
(69 ) —

Off-balance sheet financial instruments:

Commitments to extend credit 1,085,507
1,246
1,246
—
1,246
—
Standby letters of credit and financial guarantees written 13,069
196
196
—
196
—

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 banks 21,617
21,617
21,617
—
—
Investment securities 1,354,812
1,350,576
826
1,338,581
11,169
Loans held for sale 6,647
6,647
—
6,647
—
Net loans and leases 4,030,450
3,938,380
—
—
3,938,380
Accrued interest receivable 17,000
17,000
17,000
—
—

Financial liabilities:

Deposits:

Noninterest-bearing demand 1,436,967
1,436,967
1,436,967
—
—
Interest-bearing demand and savings and money market 2,402,268
2,402,268
2,402,268
—
—
Time 1,107,255
1,099,560
—
—
1,099,560
Short-term borrowings 197,000
197,000
—
197,000
—
Long-term debt 122,166
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)
June 30, 2020
Derivatives:
Interest rate lock commitments	$	410	$	9	$	9	$	—	$	9	$	—
Forward sale commitments	10,879		(79)		(79)		—		(79)		—

Off-balance sheet financial instruments:
Commitments to extend credit	1,186,385		1,362		1,362		—		1,362		—
Standby letters of credit and financial guarantees written	11,505		173		173		—		173		—
Risk participation agreement	28,800		49		49		—		—		49

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 commitments 8,530
(95 ) (95 ) —
(95 ) —

Off-balance sheet financial instruments:

Commitments to extend credit 1,030,322
1,205
1,205
—
1,205
—
Standby letters of credit and financial guarantees written 13,377
201
201
—
201
—


					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, 2019
Financial assets:
Cash and due from banks	$	78,418	$	78,418	$	78,418	$	—	$	—
Interest-bearing deposits in other banks	24,554		24,554		24,554		—		—
Investment securities	1,128,110		1,128,110		1,127		1,115,728		11,255
Loans held for sale	9,083		9,083		—		9,083		—
Net loans and leases	4,401,569		4,392,477		—		—		4,392,477

Accrued interest receivable	16,500		16,500		16,500		—		—

Financial liabilities:
Deposits:
Noninterest-bearing demand	1,450,532		1,450,532		1,450,532		—		—
Interest-bearing demand and savings and money market	2,643,038		2,643,038		2,643,038		—		—
Time	1,026,453		1,023,362		—		—		1,023,362
Short-term borrowings	150,000		150,000		—		150,000		—
Long-term debt	101,547		97,827		—		97,827		—
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 commitments	8,968		(28)		(28)		—		(28)		—

Off-balance sheet financial instruments:
Commitments to extend credit	1,089,135		1,230		1,230		—		1,230		—
Standby letters of credit and financial guarantees written	10,526		158		158		—		158		—

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.

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~~There was 1 transfer 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~~3 of the fair value hierarchy for long-term debt during the three and six months ended June 30, ~~2019. Also, there~~2020. There were no0 transfers of financial assets and liabilities ~~into or~~ out of Level 3 of the fair value hierarchy during the three and six months ended June 30, ~~2019.~~2020.

The following tables present the fair value of assets and liabilities measured on a recurring basis as of June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


			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)
June 30, 2020
Available-for-sale securities:
Debt securities:
States and political subdivisions	$	141,468	$	—	$	129,797	$	11,671
Corporate securities	29,752		—		29,752		—
U.S. Treasury obligations and direct obligations of U.S Government agencies	36,354		—		36,354		—
Mortgage-backed securities:
Residential - U.S. Government sponsored entities	714,477		—		714,477		—
Commercial - U.S. Government agencies and sponsored entities	80,665		—		80,665		—
Residential - Non-government agencies	32,086		—		32,086		—
Commercial - Non-government agencies	133,792		—		133,792		—

Total available-for-sale securities	1,168,594		—		1,156,923		11,671

Equity securities	1,209		1,209		—		—

Derivatives: Interest rate lock and forward sale commitments	(70)		—		(70)		—
Total	$	1,169,733	$	1,209	$	1,156,853	$	11,671

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)
June 30, 2019

Available-for-sale securities:

Debt securities:

States and political subdivisions $ 154,504
$ —
$ 143,099
$ 11,405
Corporate securities 30,797
—
30,797
—
U.S. Treasury obligations and direct obligations of U.S Government agencies 29,615
—
29,615
—
Mortgage-backed securities:

Residential - U.S. Government sponsored entities 755,373
—
755,373
—
Commercial - U.S. Government agencies and sponsored entities 106,354
—
106,354
—
Residential - Non-government agencies 40,517
—
40,517
—
Commercial - Non-government agencies 137,583
—
137,583
—
Total available-for-sale securities 1,254,743
—
1,243,338
11,405

Equity securities 1,034
1,034
—
—

Derivatives: Interest rate lock and forward sale commitments (63 ) —
(63 ) —
Total $ 1,255,714
$ 1,034
$ 1,243,275
$ 11,405

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 securities 54,849
—
54,849
—
U.S. Treasury obligations and direct obligations of U.S Government agencies 32,574
—
32,574
—
Mortgage-backed securities:

Residential - U.S. Government sponsored entities 717,052
—
717,052
—
Commercial - U.S. Government agencies and sponsored entities 41,118
—
41,118
—
Residential - Non-government agencies 51,483
—
51,483
—
Commercial - Non-government agencies 134,728
—
134,728
—
Total available-for-sale securities 1,205,478
—
1,194,309
11,169

Equity securities 826
826
—
—

Derivatives: Interest rate lock and forward sale commitments (84 ) —
(84 ) —
Total $ 1,206,220
$ 826
$ 1,194,225
$ 11,169


			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, 2019
Available-for-sale securities:
Debt securities:
States and political subdivisions	$	122,018	$	—	$	110,763	$	11,255
Corporate securities	30,529		—		30,529		—
U.S. Treasury obligations and direct obligations of U.S Government agencies	40,381		—		40,381		—
Mortgage-backed securities:
Residential - U.S. Government sponsored entities	677,822		—		677,822		—
Commercial - U.S. Government agencies and sponsored entities	81,225		—		81,225		—
Residential - Non-government agencies	37,191		—		37,191		—
Commercial - Non-government agencies	137,817		—		137,817		—

Total available-for-sale securities	1,126,983		—		1,115,728		11,255

Equity securities	1,127		1,127		—		—

Derivatives: Interest rate lock and forward sale commitments	(20)		—		(20)		—
Total	$	1,128,090	$	1,127	$	1,115,708	$	11,255

For the six months ended June 30, ~~2019~~2020 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 (204 )
Unrealized net gain (loss) included in other comprehensive income 440
Balance at June 30, 2019 $ 11,405

Balance at December 31, 2017 $ 11,794
Principal payments received (189 )
Unrealized net gain (loss) included in other comprehensive income (271 )
Balance at June 30, 2018 $ 11,334


(dollars in thousands)	Available-For-Sale Debt Securities: States and Political Subdivisions
Balance at December 31, 2019	$	11,255
Principal payments received	(212)
Unrealized net gain included in other comprehensive income	628

Balance at June 30, 2020	$	11,671

Balance at December 31, 2018	$	11,169
Principal payments received	(204)
Unrealized net gain included in other comprehensive income	440

Balance at June 30, 2019	$	11,405

Within the states and political subdivisions available-for-sale debt securities category, the Company holds ~~four~~4 mortgage revenue bonds issued by the City & County of Honolulu with an aggregate fair value of ~~$11.4~~$11.7 million and ~~$11.3~~$11.4 million at June 30, ~~2019~~2020 and June 30, ~~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 June 30, ~~2019,~~2020, the weighted average discount rate utilized was ~~4.27%~~2.82% compared to ~~5.16%~~4.27% at June 30, ~~2018~~2019 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.

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 June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


			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)
June 30, 2020


Other real estate ⁽¹⁾	$	—	$	—	$	—	$	—

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)
June 30, 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 Operations~~carried 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 policies~~appraised 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 tables for the periods indicated.~~

(dollars in thousands) Banking
Operations Treasury All Others Total
Three Months Ended June 30, 2019

Net interest income $ 42,589
$ 2,789
$ —
$ 45,378
Inter-segment net interest income (expense) 6,602
(2,688 ) (3,914 ) —
Credit (provision) for loan and lease losses (1,404 ) —
—
(1,404 )
Other operating income:
Mortgage banking income 957
—
644
1,601
Service charges on deposit accounts 2,041
—
—
2,041
Other service charges and fees 1,584
—
2,107
3,691
Income from fiduciary activities 1,129
—
—
1,129
Equity in earnings of unconsolidated subsidiaries 71
—
—
71
Fees on foreign exchange 25
193
—
218
Income from bank-owned life insurance —
914
—
914
Loan placement fees 107
—
—
107
Other 153
—
169
322
Other operating income 6,067
1,107
2,920
10,094
Other operating expense (15,903 ) (399 ) (19,805 ) (36,107 )
Administrative and overhead expense allocation (17,061 ) (211 ) 17,272
—
Income before taxes 20,890
598
(3,527 ) 17,961
Income tax (expense) benefit (5,142 ) (154 ) 869
(4,427 )
Net income (loss) $ 15,748
$ 444
$ (2,658 ) $ 13,534

(dollars in thousands) Banking
Operations Treasury All Others Total
Three Months Ended June 30, 2018

Net interest income $ 37,281
$ 5,391
$ —
$ 42,672
Inter-segment net interest income (expense) 6,915
(4,941 ) (1,974 ) —
Credit (provision) for loan and lease losses (532 ) —
—
(532 )
Other operating income:
Mortgage banking income 923
—
852
1,775
Service charges on deposit accounts 1,977
—
—
1,977
Other service charges and fees 1,287
8
2,082
3,377
Income from fiduciary activities 1,017
—
—
1,017
Equity in earnings of unconsolidated subsidiaries 37
—
—
37
Fees on foreign exchange 29
248

277
Income from bank-owned life insurance —
501
—
501
Loan placement fees 220
—
—
220
Other 200
2
247
449
Other operating income 5,690
759
3,181
9,630
Other operating expense (15,777 ) (358 ) (17,476 ) (33,611 )
Administrative and overhead expense allocation (15,167 ) (223 ) 15,390
—
Income before taxes 18,410
628
(879 ) 18,159
Income tax (expense) benefit (3,898 ) (133 ) 96
(3,935 )
Net income (loss) $ 14,512
$ 495
$ (783 ) $ 14,224

(dollars in thousands) Banking
Operations Treasury All Others Total
Six Months Ended June 30, 2019

Net interest income $ 84,269
$ 6,222
$ —
$ 90,491
Inter-segment net interest income (expense) 13,292
(5,294 ) (7,998 ) —
Credit (provision) for loan and lease losses (2,687 ) —
—
(2,687 )
Other operating income:
Mortgage banking income 1,607
—
1,418
3,025
Service charges on deposit accounts 4,122
—
—
4,122
Other service charges and fees 2,660
—
4,095
6,755
Income from fiduciary activities 2,094
—
—
2,094
Equity in earnings of unconsolidated subsidiaries 79
—
—
79
Fees on foreign exchange 47
322
—
369
Income from bank-owned life insurance —
1,866
—
1,866
Loan placement fees 256
—
—
256
Other 299
2,554
348
3,201
Other operating income 11,164
4,742
5,861
21,767
Other operating expense (31,807 ) (745 ) (37,903 ) (70,455 )
Administrative and overhead expense allocation (32,458 ) (420 ) 32,878
—
Income before taxes 41,773
4,505
(7,162 ) 39,116
Income tax (expense) benefit (10,194 ) (1,099 ) 1,748
(9,545 )
Net income (loss) $ 31,579
$ 3,406
$ (5,414 ) $ 29,571

(dollars in thousands) Banking
Operations Treasury All Others Total
Six Months Ended June 30, 2018

Net interest income $ 73,423
$ 11,571
$ —
$ 84,994
Inter-segment net interest income (expense) 13,836
(10,390 ) (3,446 ) —
Credit (provision) for loan and lease losses (321 ) —
—
(321 )
Other operating income:
Mortgage banking income 1,916
—
1,706
3,622
Service charges on deposit accounts 3,980
—
—
3,980
Other service charges and fees 2,430
14
3,967
6,411
Income from fiduciary activities 1,973
—
—
1,973
Equity in earnings of unconsolidated subsidiaries 80
—
—
80
Fees on foreign exchange 53
435

488
Income from bank-owned life insurance —
819
—
819
Loan placement fees 417
—
—
417
Other 355
2
437
794
Other operating income 11,204
1,270
6,110
18,584
Other operating expense (31,702 ) (743 ) (34,570 ) (67,015 )
Administrative and overhead expense allocation (30,113 ) (446 ) 30,559
—
Income before taxes 36,327
1,262
(1,347 ) 36,242
Income tax (expense) benefit (7,579 ) (263 ) 101
(7,741 )
Net income $ 28,748
$ 999
$ (1,246 ) $ 28,501

(dollars in thousands) Banking
Operations Treasury All Others Total
June 30, 2019
Investment securities $ —
$ 1,255,777
$ —
$ 1,255,777
Loans and leases (including loans held for sale) 4,253,961
—
—
4,253,961
Other 20,833
251,213
138,222
410,268
Total assets $ 4,274,794
$ 1,506,990
$ 138,222
$ 5,920,006

(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
Other 36,905
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~~but do not believe the ultimate disposition of those ~~matters~~actions will ~~not~~ have a material adverse ~~effect~~impact on our results of operations or consolidated financial statements.

17. SUBSEQUENT EVENTS

In July 2020, the Board of Directors of the Company approved a plan to consolidate 4 branches on the island of Oahu later this year. NaN of the branches are in-store branches, which have been temporarily closed since March 2020 due to the COVID-19 pandemic and are expected to close during the third quarter of 2020. These in-store branches have small square footage that do not allow for adequate social distancing. The fourth branch is a full-service branch that is expected to close during the fourth quarter of 2020. Our upcoming digital rollout is well-aligned with our branch consolidation initiative, and we expect that much of the transactional activity that was processed by these branches can be migrated to our digital channels. We also have other neighboring branches in close proximity that are available for customer full-service needs. The Company anticipates annual expense savings of approximately $1.8 million related to the consolidation of the 4 branches. The Company expects to incur total pre-tax expenses related to the consolidation of approximately $0.3 million and $1.4 million during the third and fourth quarters of 2020, respectively.

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, nine of which were temporarily closed to protect the health and 78well-being of the Company's employees and customers from the novel coronavirus pandemic ("COVID-19"), and 76 ATMs located throughout the state of ~~Hawaii.~~Hawaii as of June 30, 2020. In July 2020, the Company re-opened two additional branches. 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 ~~and~~real 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, ~~2018~~2019 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 estimate~~further 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 ~~incurred~~Credit 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 June 30, 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 ~~inherent~~on 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 include~~ACL is comprised of specific reserves ~~for individually impaired~~assigned to certain loans athat don’t share general ~~allowance for~~risk 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 external~~that do share general risk characteristics. Factors contributing to the ~~Company.~~

~~Specific Reserve~~

~~Individually impaired loans in all loan categories are evaluated using one~~determination 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 more~~specific 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. If~~in the ~~valuation~~value of pledged collateral. A reserve is recorded when the carrying amount of the ~~impaired~~ loan ~~is less than~~exceeds the ~~recorded investment in~~discounted estimated cash flows using the ~~loan,~~loan’s initial effective interest rate or the ~~deficiency will be charged off against~~fair 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 as~~collateral for certain collateral dependent loans. For purposes of ~~June 30, 2019 and December 31, 2018.~~

~~General Allowance~~

~~In determining~~establishing the general ~~allowance component of the Allowance, the Company utilizes a comprehensive approach to segment~~reserve, we stratify the loan portfolio into homogeneous ~~groups. The Company's methodology segments~~groups of loans that possess similar loss potential characteristics and calculate the ~~portfolio generally by FDIC Call Report codes. In~~net 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 length and frequency~~life 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 June 30, 2019, the look back period was nine years and six 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 captured~~portfolio. 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 nature~~consolidated financial statements in this report for further discussion of the ~~Company's primary markets and are reasonable, consistently determined and appropriately documented. Management reviews~~risk 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 June 30, ~~2019~~2020 was ~~$13.5~~$9.9 million, or ~~$0.47~~$0.35 per diluted share, compared to ~~$14.2~~net income of $13.5 million, or ~~$0.48~~$0.47 per diluted share for the three months ended June 30, ~~2018.~~2019. Net income for the six months ended June 30, ~~2019~~2020 was ~~$29.6~~$18.2 million, or ~~$1.03~~$0.65 per diluted share, compared to ~~$28.5~~net income of $29.6 million, or ~~$0.95~~$1.03 per diluted share for the six months ended June 30, ~~2018.~~2019. Earnings continue to be impacted by higher provision for credit loss expense due to deteriorating economic conditions brought on by the current COVID-19 pandemic.

Excluding the provision for credit losses and income tax expense, the Company's pre-tax, pre-provision income for the three and six months ended June 30, 2020 was $26.5 million and $49.8 million, respectively, compared to $23.8 million and $51.3 million for the three and six months ended June 30, 2019, respectively.

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 and six months ended June 30, 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 $11.2 million and $22.3 million, respectively, compared to $1.9 million and $3.3 million during the three and six months ended June 30, 2019, which impacted our 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 June 30,									Six Months Ended June 30,
	2020			2019			2020			2019
Return on average assets	0.61		%	0.92		%	0.58		%	1.01		%
Return on average shareholders’ equity	7.34			10.73			6.77			11.84

Basic earnings per common share	$	0.35		$	0.47		$	0.65		$	1.03
Diluted earnings per common share	0.35			0.47			0.65			1.03

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,

Three Months Ended
June 30, Six Months Ended
June 30,
2019 2018 2019 2018
Return on average assets 0.92 % 1.00 % 1.01 % 1.01 %
Return on average shareholders’ equity 10.73
11.83
11.84
11.72
Basic earnings per common share $ 0.47
$ 0.48
$ 1.03
$ 0.96
Diluted earnings per common share 0.47
0.48
1.03
0.95
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.

On March 4, 2020, Hawaii Governor David Ige issued a Proclamation declaring a state of emergency to support ongoing State and county responses to COVID-19.

Since then, Governor Ige issued the following supplemental emergency proclamations:

•on March 16, 2020, a Supplementary Proclamation suspending certain laws hindering State and county responses to COVID-19;

•on March 21, 2020, a Second Supplementary Proclamation and Emergency Rules Relating to COVID-19 implementing a mandatory 14-day self-quarantine for all persons entering the State, effective March 26, 2020. All individuals, both residents and visitors, arriving or returning to the State of Hawaii are 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, a Third Supplementary Proclamation - a "Stay-at-Home" order beginning on March 25, 2020 through April 30, 2020 - to mandate and effectuate social distancing measures throughout the State;

•on March 31, 2020, a Fourth Supplementary Proclamation implementing a mandatory 14-day self-quarantine for all persons traveling between any of the islands in the State, effective April 1, 2020;

•on April 16, 2020, a Fifth Supplementary Proclamation implementing enhanced social distancing requirements and an eviction moratorium;

•on April 25, 2020, a Sixth Supplementary Proclamation, which extended the Stay-at-Home order, the 14-day mandatory quarantine for all travelers arriving in the state of Hawaii and the eviction moratorium through May 31, 2020 and amended and restated all prior proclamations and executive orders related to the COVID-19 emergency;

•on May 5, 2020, a Seventh Supplementary Proclamation, which authorizes the first group of businesses to re-open since the COVID-19 pandemic forced the temporary closure of non-essential businesses across the state and allows residents to leave their homes to patronize certain businesses and activities under the new “Safer-at-Home” order;

•on May 29, 2020, an Eighth Supplementary Proclamation, which extended the mandatory 14-day quarantine for all travelers arriving in the state of Hawaii and the eviction moratorium through June 30, 2020;

•on June 10, 2020, a Ninth Supplementary Proclamation, which lifts the mandatory 14-day quarantine requirement for inter-island travelers – effective June 16, 2020 – but extends the mandatory 14-day quarantine for all travelers arriving in the state of Hawaii through July 31, 2020. Under the current "Act with Care" phase, all persons within the State of Hawaii who are not subject to the 14-day quarantine for arriving passengers may engage in permitted activities outside their home or place of residence.

Due to the recent uptick in COVID-19 cases in Hawaii and nationwide, on July 13, 2020, Governor Ige extended the mandatory 14-day quarantine to August 31, 2020 and delayed the launch of the state's pre-travel testing program. Beginning September 1, 2020, all travelers arriving in Hawaii from out-of-state will be required to get a valid COVID-19 Nucleic Acid Amplification Test ("NAAT") within 72 hours of boarding their flight to Hawaii, and to show proof of a negative test result upon arrival at the airport, to avoid the 14-day quarantine. The FDA-approved NAAT test from a CLIA-certified laboratory will need to be done prior to arrival. No testing will be provided upon arrival at the airport.

The infection rate in the State of Hawaii continues to remain very low. As of July 24, 2020, the Centers for Disease Control and Prevention reported there were 1,549 cases and 26 COVID-19-related deaths in Hawaii. Of those cases, 10% have required hospitalization, and 1,449 (94%) were residents of Hawaii.

During the first quarter of 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 were redeployed to work at the remaining branches, assist other areas of the bank or make customer telephone calls. The Company quickly responded to the changing environment by executing its business continuity plan and the majority of our support staff, even at the executive level, were working remotely on a full-time or rotating basis. The Company believes the

actions it has taken to date, allows it to meet the needs of its customers and community while ensuring the safety of all employees and customers. 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 and large group meetings. The Company has also reevaluated or postponed certain consulting projects. Hiring of new employees is on an exception basis, and the Company is evaluating our compensation plans.

The Company continues to prudently manage through the pandemic and has put in place preventative measures including face masks, plexiglass shields, social distancing and enhanced cleaning. During the second quarter of 2020, the Company re-opened four of its branches that were temporarily closed. In July 2020, the Company re-opened two additional branches. The Company is implementing a gradual, phased-in return-to-office plan that includes a portion of the workforce continuing with flexible, remote work schedules.

In July 2020, the Board of Directors of the Company approved a plan to consolidate four branches on the island of Oahu later this year. Three of the branches are in-store branches which have been temporarily closed since March 2020 due to the COVID-19 pandemic and are expected to close during the third quarter of 2020. These in-store branches have a small square footage which does not allow for adequate social distancing. The fourth branch is a full-service branch and is expected to close during the fourth quarter of 2020. Our upcoming digital rollout is well-aligned with our branch consolidation initiative, and we expect that much of the transactional activity that was processed by these branches can be migrated to our digital channels. We also have other neighboring branches in close proximity that are available for customer full-service needs. The Company anticipates annual expense savings of approximately $1.8 million related to the consolidation of the four branches. The Company expects to incur total pre-tax expenses related to the consolidation of approximately $0.3 million and $1.4 million during the third and fourth quarters of 2020, respectively.

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 99% during the month of May, compared to 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 13.9% during the month of June. 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 results of operations and 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.

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. As of June 30, 2020, the Company executed loan payment forbearance or deferrals of principal and interest or principal only on the following outstanding loan balances: 


	Loan			Accrued		% of Total		% of Total
	Count	Balance		Interest		Loans		Loans, excl. PPP
Commercial, financial and agricultural	678	$	116,382	$	962	10.8	%	21.2	%
Real estate:
Construction	7	6,601		25		6.4	%	6.4	%
Residential mortgage	355	176,645		1,547		10.7	%	10.7	%
Home equity	—	—		—		—	%	—	%
Commercial mortgage	98	202,447		1,262		17.9	%	17.9	%
Consumer	3,829	65,785		876		12.5	%	12.5	%

Total loans	4,967	$	567,860	$	4,672	11.3	%	12.7	%

The Company is continuing to grant or extend loan payment deferrals in the third quarter and therefore expects that the accrued interest receivable balance on the deferred loans will continue to increase. Interest and fees still accrue on amounts that are deemed collectible during the deferral period, however, 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 aggregate fee income could be reduced due to COVID-19. To support our customers during this difficult time, we waived non-CPB ATM fees and early withdrawal fees on our time deposits and granted temporary increases on debit card and mobile deposit transaction limits throughout Q2 2020. In addition, the Company has experienced a decline in transactional activity due to COVID-19. Beginning July 1, 2020, we reinstated the fees that were waived throughout Q2 2020, but the temporary increases on debit card and mobile deposit transaction limits remain in place.

Liquidity and capital

Through our past experience during the Great Recession in the late 2000s, we believe we have developed robust liquidity and capital stress tests and comprehensive liquidity and capital contingency plans. We further believe our liquidity and capital positions are strong. The Company currently estimates 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 or by a longer and deeper recession than we currently anticipate. 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. Requests for loan payment deferrals rose in the second quarter of 2020. While some loan payment deferrals will end in the third quarter of 2020, we anticipate some borrowers will be requesting second deferrals. 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 for 4 months 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 has 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 the 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.

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 believes it is well-setup with the 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 is implementing a gradual, phased-in return-to-office plan that includes a portion of the workforce continuing with flexible, remote work schedules. Due to the recent uptick in COVID-19 cases in Hawaii and nationwide, the return-to-office plan may be delayed as a precautionary measure. The Company may incur additional cost related to its continued deployment of the remote workforce plan. 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 waived non-CPB ATM fees and early withdrawal fees on our time deposits throughout Q2 2020 and increased spending cap limits on debit cards and mobile deposit limits to $10,000 daily. Beginning July 1, 2020, the previously waived fees have been reinstated but the increased spending cap limits will remain in place temporarily.

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 is part of the CARES Act. PPP loans have a two or five-year term and earn interest at 1%. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan, which the Company is recognizing over the life of the loan. The Company saw tremendous interest in the PPP. From April 3, 2020, the date the SBA began accepting submissions for the initial round of PPP loans through June 30, 2020, the Company funded over 7,200 PPP loans totaling over $550 million and received gross processing fees of over $21 million. Certain PPP loans paid-off shortly after funding resulting in a total balance as of June 30, 2020 of $543.7 million. The Company has developed a PPP forgiveness portal and is beginning the process of assisting our customers with applying for forgiveness from the SBA. The Company plans to engage a third party to assist with this process. 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 redeployed staff to handle and assist with loan processing. Additionally, the Company 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 calling 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 forbearances for our residential mortgage customers and 3-month principal and interest payment deferrals for our consumer customers. The Company is deferring either the full loan payment or the principal component of the loan payment for typically 3 to 6 months for its commercial real estate and commercial and industrial loan customers on a case-by-case basis depending on need. As of June 30, 2020, the Company had loan payment deferrals on outstanding balances of $567.9 million, or 11.3% of total loans (and 12.7% of total loans, excluding PPP loans). In accordance with the revised interagency guidance issued in April 2020 and Section 4013 of the CARES Act, banks are provided 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 February 29, 2020 and December 31, 2019, respectively. The Company identified nine consumer loans totaling $0.1 million that were modified during the quarter and did not meet the criteria under Section 4013 of the CARES Act or the interagency guidance. As a result, these loans are included in TDRs as of June 30, 2020. 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 requests for new or extended loan deferrals will continue through the third quarter of 2020.

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 has identified primary industries in which we lend to that will likely experience impact from the pandemic to include accommodation and food-service, retail trade, wholesale trade, manufacturing and healthcare. Many of the loans in these industries are to well-established, locally owned businesses that have weathered through the last downturn. We have long-term relationships with these borrowers averaging 12 years and the average outstanding loan amount is $150 thousand. These higher risk industries aggregate to $412 million and represent 9.2% of the total loan portfolio, excluding PPP loans. The Company has also identified secondary industries that may also experience impact, to a lesser degree, real estate and rental and leasing, transportation and warehousing, professional and administrative, and other industries. The Company also anticipates impact from its consumer loan portfolio, and is actively working with the borrowers in granting 90-day loan payment deferrals.

In the final week of March, the Company closely reviewed its commercial loan portfolio and actively reached out to its customers to determine the initial impact, if any, of COVID-19 on their businesses. The review continued throughout the second quarter. The Company proactively worked with many of its customers in providing loan payment deferrals as well as assisted in the application and approval of PPP loans.

The volume of loan payment deferrals granted peaked in May at approximately $605 million in total loan balances, and has since declined to $567.9 million, or 11.3% of total loans (and 12.7% of total loans, excluding PPP loans), at June 30, 2020. We continue to support our consumer and residential customers with a second 90-day loan payment deferral or forbearance, as needed. Our consumer loan payment deferrals totaled $65.8 million and residential loan payment forbearances totaled $176.6 million. The majority of the residential mortgage forbearances were still in their initial 90-day forbearance period at June 30, 2020; however, some borrowers are beginning to resume payments with the total count dropping from a peak of 467 at May 31, 2020 to 350 at June 30, 2020.

In our commercial, commercial real estate and construction loan portfolios, we provided loan payment deferrals of approximately $326 million in total loan balances. The highest amount was in the real estate and rental and leasing category of approximately $169 million which comprised of 132 loans. We have not begun a second round of loan payment deferrals yet, but expect to do so although at a lower volume and on a case-by-case basis.

Through our stepped-up assessment and monitoring as well as our outreach to our customers, we saw our Special Mention loans increase by approximately $7 million sequential quarter to $115.9 million. The largest exposure is in the real estate and rental and leasing category which totaled approximately $59 million, or 1.2% of the total loan portfolio. The loans in this category were downgraded due primarily to the closure of tenants in commercial properties; however, we believe we have strong sponsorship and seasoned investors, and are currently confident these borrowers will be able to weather through the economic downturn.

The Company believes that the residential, home equity, and commercial real estate loan portfolios are lower risk. The weighted average loan-to-values at origination in these portfolios are 61%, 63%, and 60%, respectively, and we believe they will be less impacted by the pandemic. These loans comprise of approximately $3.4 billion or 76% of our total loan portfolio, net of PPP loans. Overall, the Company's loan portfolio remains well diversified.

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 the economic forecasts utilized in upcoming interim financial periods will continue to reflect adverse economic conditions. 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 improve~~Hawaii tourism started the year strong with solid growth in ~~2018~~visitor arrivals and ~~through~~spending in the first ~~half~~two months of ~~2019, but at a slower pace. The growth of Hawaii's economy~~2020. However, the COVID-19 outbreak 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. Whileimpacted Hawaii’s tourism significantly since late February. Total visitor arrivals ~~to Hawaii grew during~~in the ~~six~~five months ended ~~June 30, 2019, visitor spending was down~~May 31, 2020, which includes an additional day associated with leap year, decreased 49.5% from the same prior year period. ~~According~~The mandated 14-day self-quarantine for arriving visitors and residents began on March 26, 2020. During April and May, total visitors were down approximately 99% from the same year-ago period.

A few airlines have announced temporary suspension of flights to ~~the Hawaii Tourism Authority ("HTA"), 5.2~~

~~million visitors visited~~international destinations. Many hotels throughout the state remain temporarily closed. Many shopping centers are still on reduced hours. However, some restaurants and bars are now open for indoor service, take-out, curbside pick-up and delivery.

The full or partial shutdown of tourism, restaurant, and retail industries has significantly impacted employment in the ~~six months ended June 30, 2019. This was an increase of 4.2% from the number of visitor arrivals in the~~ ~~six months ended June 30, 2018~~.state. The ~~HTA also reported total spending by visitors decreased to $8.9 billion in the~~ ~~six months ended June 30, 2019, or a decrease of $183.2 million, or 2.0%, from the~~ ~~six months ended June 30, 2018. According to DBEDT, total visitor arrivals and visitor spending are both expected to increase 2.6% and 1.1% in 2019, respectively, and 1.9% and 3.0% 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 1.3%, respectively, for 2020.

~~Hawaii's labor market continues to be among the best in the nation. The~~Hawai‘i State Department of Labor ~~and~~& Industrial Relations ~~reported~~("DLIR") announced that ~~Hawaii's seasonally adjusted annual unemployment rate was 2.8% in June 2019, compared to 2.4% in June 2018. Hawaii's unemployment rate in June 2019 remained below~~ the ~~national~~ seasonally adjusted unemployment rate for June was 13.9% compared to the revised rate of ~~3.7%. DBEDT projects Hawaii's~~23.5% in May. The significant decrease may be due to PPP funds and other government stimulus programs. There is potential for an increase in the unemployment rate in future months. Statewide, 527,600 were employed and 85,200 unemployed in June for a total seasonally adjusted ~~annual~~labor force of 612,800. Nationally, the seasonally adjusted unemployment rate ~~to be 3.0%~~was 11.1% in ~~2019 and 3.1%~~June, down from 13.3 percent in ~~2020.~~May.

~~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~~Oahu 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~~started the year ~~dropped. During~~strong with healthy year-over-year increases in closed sales of single-family homes and condominiums during the first ~~half of 2019, Oahu sales volume and median sales prices have slowed.~~quarter, however as expected slowed during the second quarter due to the challenges presented by COVID-19. According to the latest data available from the Honolulu Board of Realtors, Oahu unit sales volume ~~declined~~decreased by ~~3.7%~~4.8% for single-family homes and ~~8.8%~~22.0% for condominiums for the six months ended June 30, ~~2019,~~2020, compared to the same time period last year. For the six months ended June 30, ~~2019,~~2020, the median sales price for single-family homes on Oahu was ~~$775,000,~~$785,000, representing a ~~decrease of 0.5%~~1.3% increase from ~~$779,000~~$775,000 in the same prior year period. The median sales price for condominiums on Oahu for the six months ended June 30, ~~2019~~2020 was ~~$419,000,~~$427,750, representing ~~a decrease~~an increase of ~~1.4%~~2.1% from ~~$425,000~~$419,000 in the same prior year period.

As we have seen in the past, our operating results are significantly impacted by the economy in Hawaii and the composition of our loan portfolio. Loan demand, deposit growth, provision for loan and lease losses ("Provision"), asset quality, noninterest income and noninterest expense are all affected by changes in economic conditions. If the residential and commercial real estate markets we have exposure to deteriorate, our results of operations would be negatively impacted.

In late 2008, 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.

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 half of 2019 but cut the Federal Funds range by 25 basis points to 2.00%-2.25% at its July 2019 meeting. The Federal Reserve pledged future moves will be done patiently and with an eye toward how global economic and financial developments unfold.

Further decreases in the Federal Funds rate would likely result in lower overall interest rates and may support the continued expansion of the U.S. economy. 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 value of our assets and liabilities.

RISE2020

Commencing in the 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 efficiency ratio. RISE2020 includes initiatives in the following 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 several strategic areas. The Company plans to invest approximately $40 million in RISE2020 during the remainder of 2019 and throughout 2020. Some of these investments will be capitalized, while others are recurring annually. The Company expects annual operating expense to increase by approximately $7 million when RISE2020 is fully implemented by the start of 2021. During ~~the second quarter of~~ 2019, the ~~Company incurred approximately $1.0 million in RISE2020-related expenses~~outsourcing of the Company's residential mortgage loan servicing, the launch of its new website under the cpb.bank domain name and ~~expects to incur approximately $2.5 million in RISE2020-related expense during~~ the ~~second half~~implementation of ~~2019. While operating expenses~~its end-to-end commercial loan

origination system were completed. Despite several challenges resulting from the impact of COVID-19, the RISE2020 initiatives are ~~expected to increase,~~continuing and the Company is ~~forecasting enhanced revenue growth. As~~making good progress. During the first quarter of 2020, the Company opened its concept branch, providing its customers a ~~result, we expect our efficiency ratio~~glimpse into the future of Central Pacific Bank. The Company's revitalization of its building headquarters is in full steam with major parts of the construction underway and on track for an opening date of January 2021. Digital strategies continue to bepush forward. The development of the Company's new online and mobile banking platforms is in the ~~63-65% range in 2019~~final stages of pilot testing and ~~2020. Longer-term,~~ the Company is ~~targeting~~excited for the public launch scheduled in late August 2020. Digital technology is even more critical to businesses during crises like the current pandemic and will remain a ~~15% return on average shareholders' equity~~high priority strategy for the Company's future. The rollout of newly upgraded ATMs continues. The Company continues to see a decline in branch transaction activity and ~~a 57% efficiency ratio by~~its digital initiatives have been well-timed to meet the ~~end~~changing needs of ~~2022.~~its customers and the community.

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 and six months ended June 30, ~~2019~~2020 and ~~2018.~~2019. A comparison of net interest income on a taxable-equivalent basis ("net interest income") for the three and six months ended June 30, ~~2019~~2020 and ~~2018~~2019 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.


(dollars in thousands)	Three Months Ended June 30,
			2020															2019										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	$	15,777		0.10	%		3			$	8,002		2.34	%		46			$	7,775		(2.24)	%		(43)
Investment securities, excluding ACL:
Taxable (1)	1,042,441			2.43			6,327			1,147,759			2.63			7,544			(105,318)			(0.20)			(1,217)
Tax-exempt (1)	100,485			3.02			758			142,660			2.89			1,030			(42,175)			0.13			(272)
Total investment securities	1,142,926			2.48			7,085			1,290,419			2.66			8,574			(147,493)			(0.18)			(1,489)
Loans, including loans held for sale (2)	4,902,905			3.76			45,915			4,171,558			4.37			45,540			731,347			(0.61)			375
Federal Home Loan Bank stock	11,753			3.62			106			15,998			4.02			161			(4,245)			(0.40)			(55)
Total interest earning assets	6,073,361			3.51			53,109			5,485,977			3.97			54,321			587,384			(0.46)			(1,212)
Noninterest-earning assets	394,768									370,488									24,280
Total assets	$	6,468,129								$	5,856,465								$	611,664

Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	1,056,885		0.04	%		114			$	962,402		0.08	%		199			$	94,483		(0.04)	%		(85)
Savings and money market deposits	1,856,621			0.12			567			1,577,437			0.38			1,507			279,184			(0.26)			(940)
Time deposits under $100,000	161,874			0.65			261			173,556			0.70			305			(11,682)			(0.05)			(44)
Time deposits $100,000 and over	807,276			0.93			1,863			907,330			2.02			4,562			(100,054)			(1.09)			(2,699)
Total interest-bearing deposits	3,882,656			0.29			2,805			3,620,725			0.73			6,573			261,931			(0.44)			(3,768)
Short-term borrowings	63,104			0.48			74			175,347			2.57			1,123			(112,243)			(2.09)			(1,049)
Long-term debt	136,939			2.38			812			101,547			4.07			1,031			35,392			(1.69)			(219)
Total interest-bearing liabilities	4,082,699			0.36			3,691			3,897,619			0.90			8,727			185,080			(0.54)			(5,036)
Noninterest-bearing deposits	1,731,939									1,357,056									374,883
Other liabilities	112,687									97,041									15,646
Total liabilities	5,927,325									5,351,716									575,609
Shareholders’ equity	540,802									504,749									36,053
Non-controlling interest	2									—									2
Total equity	540,804									504,749									36,055
Total liabilities and equity	$	6,468,129								$	5,856,465								$	611,664

Net interest income							$	49,418								$	45,594								$	3,824

Interest rate spread				3.15	%								3.07	%								0.08	%

Net interest margin				3.26	%								3.33	%								(0.07)	%

(1) At amortized cost.
(2) Includes nonaccrual loans.


(dollars in thousands)	Three Months Ended June 30,																				(dollars in thousands)	Six Months Ended June 30,
	2019						2018						Variance											2020															2019										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						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																					Assets
Interest earning assets:																					Interest earning assets:
Interest-bearing deposits in other banks	$	8,002	2.34	%	46		$	26,300	1.78	%	117		$	(18,298	)	0.56	%	(71		)	Interest-bearing deposits in other banks	$	13,430		0.59	%		39			$	9,682		2.38	%		114			$	3,748		(1.79)	%		(75)
Investment securities, excluding valuation allowance:
Taxable (1)	1,147,759		2.63		7,544		1,341,717		2.60		8,720		(193,958		)	0.03		(1,176		)
Tax-exempt (1)	142,660		2.89		1,030		164,196		2.87		1,181		(21,536		)	0.02		(151		)
Investment securities, excluding ACL:																					Investment securities, excluding ACL:
Taxable investment securities (1)																					Taxable investment securities (1)	1,035,068			2.53			13,101			1,174,596			2.69			15,822			(139,528)			(0.16)			(2,721)
Tax-exempt investment securities (1)																					Tax-exempt investment securities (1)	102,907			3.12			1,604			147,899			2.88			2,127			(44,992)			0.24			(523)
Total investment securities	1,290,419		2.66		8,574		1,505,913		2.63		9,901		(215,494		)	0.03		(1,327		)	Total investment securities	1,137,975			2.58			14,705			1,322,495			2.71			17,949			(184,520)			(0.13)			(3,244)
Loans and leases, including loans held for sale (2)	4,171,558		4.37		45,540		3,836,739		4.04		38,699		334,819			0.33		6,841
Loans, including loans held for sale (2)																					Loans, including loans held for sale (2)	4,682,626			3.95			92,119			4,127,917			4.35			89,308			554,709			(0.40)			2,811
Federal Home Loan Bank stock	15,998		4.02		161		7,163		2.24		40		8,835			1.78		121			Federal Home Loan Bank stock	13,171			3.61			238			15,143			4.26			322			(1,972)			(0.65)			(84)
Total interest earning assets	5,485,977		3.97		54,321		5,376,115		3.63		48,757		109,862			0.34		5,564			Total interest earning assets	5,847,202			3.67			107,101			5,475,237			3.95			107,693			371,965			(0.28)			(592)
Noninterest-earning assets	370,488						287,582						82,906								Noninterest-earning assets	390,390									358,089									32,301
Total assets	$	5,856,465					$	5,663,697					$	192,768							Total assets	$	6,237,592								$	5,833,326								$	404,266

Liabilities and Equity																					Liabilities and Equity
Interest-bearing liabilities:																					Interest-bearing liabilities:
Interest-bearing demand deposits	$	962,402	0.08	%	199		$	951,597	0.08	%	193		$	10,805		—	%	6			Interest-bearing demand deposits	$	1,035,340		0.06	%		290			$	956,783		0.08	%		391			$	78,557		(0.02)	%		(101)
Savings and money market deposits	1,577,437		0.38		1,507		1,495,884		0.12		459		81,553			0.26		1,048			Savings and money market deposits	1,754,186			0.19			1,685			1,525,425			0.30			2,298			228,761			(0.11)			(613)
Time deposits under $100,000	173,556		0.70		305		178,459		0.48		214		(4,903		)	0.22		91			Time deposits under $100,000	163,074			0.67			546			174,683			0.68			592			(11,609)			(0.01)			(46)
Time deposits $100,000 and over	907,330		2.02		4,562		1,047,428		1.46		3,820		(140,098		)	0.56		742			Time deposits $100,000 and over	826,714			1.18			4,846			944,796			2.00			9,367			(118,082)			(0.82)			(4,521)
Total interest-bearing deposits	3,620,725		0.73		6,573		3,673,368		0.51		4,686		(52,643		)	0.22		1,887			Total interest-bearing deposits	3,779,314			0.39			7,367			3,601,687			0.71			12,648			177,627			(0.32)			(5,281)
Short-term borrowings	175,347		2.57		1,123		9,900		1.96		48		165,447			0.61		1,075			Short-term borrowings	101,459			1.15			582			156,550			2.60			2,016			(55,091)			(1.45)			(1,434)
Long-term debt	101,547		4.07		1,031		92,785		4.77		1,103		8,762			(0.70	)	(72		)	Long-term debt	119,243			2.91			1,726			101,547			4.15			2,091			17,696			(1.24)			(365)
Total interest-bearing liabilities	3,897,619		0.90		8,727		3,776,053		0.62		5,837		121,566			0.28		2,890			Total interest-bearing liabilities	4,000,016			0.49			9,675			3,859,784			0.88			16,755			140,232			(0.39)			(7,080)
Noninterest-bearing deposits	1,357,056						1,367,796						(10,740		)						Noninterest-bearing deposits	1,588,742									1,376,437									212,305
Other liabilities	97,041						38,863						58,178								Other liabilities	110,070									97,385									12,685
Total liabilities	5,351,716						5,182,712						169,004								Total liabilities	5,698,828									5,333,606									365,222
Shareholders’ equity	504,749						480,985						23,764								Shareholders’ equity	538,762									499,720									39,042
Non-controlling interest	—						—						—								Non-controlling interest	2									—									2
Total equity	504,749						480,985						23,764								Total equity	538,764									499,720									39,044
Total liabilities and equity	$	5,856,465					$	5,663,697					$	192,768							Total liabilities and equity	$	6,237,592								$	5,833,326								$	404,266

Net interest income					$	45,594					$	42,920						$	2,674		Net interest income							$	97,426								$	90,938								$	6,488

Interest rate spread			3.07	%					3.01	%						0.06	%				Interest rate spread				3.18	%								3.07	%								0.11	%

Net interest margin			3.33	%					3.20	%						0.13	%				Net interest margin				3.34	%								3.33	%								0.01	%

(1) At amortized cost.																					(1) At amortized cost.
(2) Includes nonaccrual loans.																					(2) Includes nonaccrual loans.

(dollars in thousands) Six Months Ended June 30,
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 $ 9,682
2.38 % 114
$ 24,555
1.65 % 201
$ (14,873 ) 0.73 % (87 )
Investment securities, excluding valuation allowance:
Taxable investment securities (1) 1,174,596
2.69
15,822
1,345,902
2.61
17,578
(171,306 ) 0.08
(1,756 )
Tax-exempt investment securities (1) 147,899
2.88
2,127
164,684
2.87
2,362
(16,785 ) 0.01
(235 )
Total investment securities 1,322,495
2.71
17,949
1,510,586
2.64
19,940
(188,091 ) 0.07
(1,991 )
Loans and leases, including loans held for sale (2) 4,127,917
4.35
89,308
3,813,169
4.01
76,089
314,748
0.34
13,219
Federal Home Loan Bank stock 15,143
4.26
322
7,001
2.42
85
8,142
1.84
237
Total interest earning assets 5,475,237
3.95
107,693
5,355,311
3.61
96,315
119,926
0.34
11,378
Noninterest-earning assets 358,089

295,710

62,379

Total assets $ 5,833,326

$ 5,651,021

$ 182,305

Liabilities and Equity

Interest-bearing liabilities:

Interest-bearing demand deposits $ 956,783
0.08 % 391
$ 943,584
0.08 % 373
$ 13,199
— % 18
Savings and money market deposits 1,525,425
0.30
2,298
1,497,642
0.11
828
27,783
0.19
1,470
Time deposits under $100,000 174,683
0.68
592
179,000
0.46
409
(4,317 ) 0.22
183
Time deposits $100,000 and over 944,796
2.00
9,367
1,038,748
1.37
7,050
(93,952 ) 0.63
2,317
Total interest-bearing deposits 3,601,687
0.71
12,648
3,658,974
0.48
8,660
(57,287 ) 0.23
3,988
Short-term borrowings 156,550
2.60
2,016
9,356
1.97
91
147,194
0.63
1,925
Long-term debt 101,547
4.15
2,091
92,785
4.51
2,074
8,762
(0.36 ) 17
Total interest-bearing liabilities 3,859,784
0.88
16,755
3,761,115
0.58
10,825
98,669
0.30
5,930
Noninterest-bearing deposits 1,376,437

1,361,776

14,661

Other liabilities 97,385

41,568

55,817

Total liabilities 5,333,606

5,164,459

169,147

Shareholders’ equity 499,720

486,554

13,166

Non-controlling interest —

8

(8 )

Total equity 499,720

486,562

13,158

Total liabilities and equity $ 5,833,326

$ 5,651,021

$ 182,305

Net interest income

$ 90,938

$ 85,490

$ 5,448

Interest rate spread 3.07 % 3.03 % 0.04 %

Net interest margin
3.33 %

3.20 %

0.13 %

(1) At amortized cost.
(2) Includes nonaccrual loans.

Net interest income (expressed on a taxable-equivalent basis) was ~~$45.6~~$49.4 million for the three months ended June 30, ~~2019,~~2020, representing an increase of ~~6.2%~~8.4% from ~~$42.9~~$45.6 million in the three months ended June 30, ~~2018.~~2019. Net interest income (expressed on a taxable-equivalent basis) was ~~$90.9~~$97.4 million for the six months ended June 30, ~~2019,~~2020, representing an increase of ~~6.4%~~7.1% from ~~$85.5~~$90.9 million in the six months ended June 30, ~~2018.~~2019. The increase in the three and six months ended June 30, ~~2019~~2020 was primarily due to loan growth, attributable to ~~a significant increase in average~~ loans originated under the Paycheck Protection Program ("PPP") and ~~leases balances~~organic loan growth, funded by runoff of the investment

securities portfolio and an increase in core deposits, combined with higher yields earned on the loans and leases and investment securities portfolios. In addition, average government time deposits (included in time deposits $100,000 and over) declined significantly. Partially offsetting this decrease were increases inlower rates paid on interest-bearing ~~deposits~~liabilities. Partially offsetting these increases were decreases in yields earned on interest-earning assets. Net interest income for the three months ended June 30, 2020 included $2.5 million in PPP net interest income and ~~short-term borrowings,~~net loan fees, which are accreted into income over the term of the loans and accelerated when the loans are forgiven or paid-off.The

decreases in yields earned on interest-earning assets and rates paid on interest-bearing liabilities were primarily attributable to the ~~25 basis point increases in~~five rate cuts by the Federal ~~Funds rate~~Reserve from August 2019 through March 2020. During the three months ended June 30, 2020, the Company had an average PPP loan balance of $379.9 million, which earned approximately 2.61% in ~~each of the four quarters of 2018, combined with a significant increase in short-term borrowings.~~net interest income and net loan fees.

Interest Income

Taxable-equivalent interest income was ~~$54.3~~$53.1 million for the three months ended June 30, ~~2019,~~2020, representing ~~an increase~~a decrease of ~~11.4%~~2.2% from ~~$48.8~~$54.3 million in the three months ended June 30, ~~2018.~~2019. The ~~increase was primarily attributable to a $334.8 million increase~~61 bp decrease in the average yields earned on loans ~~and leases~~during the three months ended June 30, 2020, compared to the three months ended June 30, ~~2018,~~2019, decreased interest income by approximately $5.5 million. In addition, run-off of the investment securities portfolio of $147.5 million, combined with the 18 bp decline in yields earned on investment securities during the three months ended June 30, 2020, compared to the three months ended June 30, 2019, decreased interest income by approximately $1.5 million. These decreases were partially offset by a $731.3 million increase in average loans compared to the three months ended June 30, 2019, accounting for an increase of approximately ~~$3.4~~$5.8 million ~~of the increase~~ in interest income during the three months ended June 30, ~~2019. In addition, the~~2020. The significant increase in average ~~yields earned on the~~ loans ~~and leases portfolio during the three months ended June 30, 2019 increased by 33 bp, compared~~was primarily attributable to the three months ended June 30, 2018, accounting for approximately $3.4 million of the increase in interest income. These increases were partially offset by a $215.5 million decline in average investment securities, which decreased interest income by approximately $1.4 million.aforementioned PPP loans.

Taxable-equivalent interest income was ~~$107.7~~$107.1 million for the six months ended June 30, ~~2019,~~2020, representing ~~an increase~~a decrease of ~~11.8%~~0.5% from ~~$96.3~~$107.7 million in the six months ended June 30, ~~2018.~~2019. The ~~increase was primarily attributable to a $314.7 million increase~~40 bp decrease in the average yields earned on loans ~~and leases~~during the six months ended June 30, 2020, compared to the six months ended June 30, ~~2018,~~2019, decreased interest income by approximately $9.8 million. In addition, run-off of the investment securities portfolio of $184.5 million, combined with the 13 bp decline in yields earned on investment securities during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, decreased interest income by approximately $3.2 million. These decreases were partially offset by a $554.7 million increase in average loans compared to the six months ended June 30, 2019, accounting for an increase of approximately ~~$6.3~~$12.6 million ~~of the increase~~ in interest income during the six months ended June 30, 2019. In addition, the average yields earned on the loans and leases and investment securities portfolios during the six months ended June 30, 2019 increased by 34 bp and 7 bp, respectively, compared to the six months ended June 30, 2018, accounting for approximately $7.0 million and $0.5 million of the increase in interest income, respectively. These increases were partially offset by a $188.1 million decline in average investment securities, which decreased interest income by approximately $2.5 million.2020.

Interest Expense

Interest expense for the three months ended June 30, ~~2019~~2020 was $3.7 million, representing a decrease of 57.7% from $8.7 million ~~representing an increase of 49.5% from~~in the three months ended June 30, ~~2018.~~2019. The ~~increase~~decrease was primarily attributable to 56declines in rates paid on savings and money market deposits, time deposits $100,000 and over, short-term borrowings and long-term debt of 26 bp, 109 bp, 209 bp and 26169 bp, ~~increases in~~respectively, which decreased interest expense by approximately $1.2 million, $2.2 million, $0.3 million and $0.6 million, respectively. In addition, average ~~rates paid on~~ time deposits $100,000 and over and ~~savings and money market deposits, respectively, combined with the 61 bp increase in average rates paid on~~ short-term borrowings ~~which increased~~declined by $100.1 million and $112.2 million resulting in a decrease in interest expense byof approximately ~~$1.3 million, $1.0~~$0.5 million and ~~$0.3~~$0.7 million, respectively. 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 $165.4 million, resulting in higher interest expense of approximately $0.8 million. These increases were partially offset by a $140.1 million decline in average time deposits $100,000 and over, which decreased interest expense by approximately $0.5 million.

Interest expense for the six months ended June 30, ~~2019~~2020 was $9.7 million, representing a decrease of 42.3% from $16.8 million ~~representing an increase of 54.8% from~~in the six months ended June 30, ~~2018.~~2019. The ~~increase~~decrease was primarily attributable to 63declines in rates paid on savings and money market deposits, time deposits $100,000 and over, short-term borrowings and long-term debt of 11 bp, 82 bp, 145 bp and 19124 bp, ~~increases in~~respectively, which decreased interest expense by approximately $1.0 million, $3.4 million, $0.7 million and $0.7 million, respectively. In addition, average ~~rates paid on~~ time deposits $100,000 and over and ~~savings and money market deposits, respectively, combined with a 63 bp increase in average rates paid on~~ short-term borrowings ~~which increased interest expense~~declined by ~~approximately $3.0 million, $1.4~~$118.1 million and ~~$0.5~~$55.1 million, ~~respectively. In addition, average short-term borrowings increased by $147.2 million,~~respectively, resulting in ~~higher~~a decrease in interest expense of approximately ~~$1.5 million. These increases were partially offset by a $94.0~~$1.2 million ~~decline in average time deposits $100,000~~ and ~~over, which decreased interest expense by approximately $0.6 million.~~$0.7 million, respectively.

Net Interest Margin

Our net interest margin of ~~3.33%~~3.26% for the three months ended June 30, ~~2019 increased~~2020 decreased by 137 bp from 3.33% in the three months ended June 30, ~~2018.~~ 2019.

The decline in net interest margin for the three months ended June 30, 2020 compared to the year-ago quarter is primarily due to lower yielding PPP loans and lower yields earned on average loans and investment securities, partially offset by lower rates paid on interest-bearing liabilities, primarily attributable to the five rate cuts by the Federal Reserve from August 2019 through March 2020.

Our net interest margin of ~~3.33%~~3.34% for the six months ended June 30, ~~2019~~2020 increased by 131 bp from 3.33% in the six months ended June 30, ~~2018.~~2019.

The average rates paid on our interest-bearing liabilities, which declined by 39 bp in the six months ended June 30, 2020, compared to the same prior year period, outpaced the decline in average yields earned on our interest-earning assets, which ~~increased~~declined by 3428 bp in the six months ended June 30, 2020, compared to the same prior year period.

Provision for Credit Losses

Our provision for credit losses on loans under ASC 326 was $10.6 million and $20.0 million during the three and six months ended June 30, ~~2019,~~2020, respectively, compared to ~~the same prior year periods, outpaced the increase in average rates paid on our interest-bearing liabilities, which increased by 28 bp~~an expense of $1.4 million and ~~30 bp~~$2.7 million in the three and six months ended June 30, 2019, respectively, ~~compared to the same prior year periods.~~under previous GAAP.

~~The aforementioned increases~~In addition, we recorded a provision for off-balance sheet credit exposures of $0.6 million and $2.4 million, included in ~~average yields earned on our loans and leases and taxable investment securities portfolios~~other operating expense, during the three and six months ended June 30, 2020, respectively, compared to a provision of $0.5 million and $0.7 million in the three and six months ended June 30, 2019, ~~was partially offset~~respectively, under previous GAAP. The increases in the provisions for credit losses and off-balance sheet credit exposures from the year-ago periods were primarily due to adverse economic conditions brought on by the ~~aforementioned increases in average rates paid~~COVID-19 pandemic.

We did not record a provision for credit losses on ~~our time deposits $100,000 and over and savings and money market deposits~~investment securities under ASC 326 during the three and six months ended June 30, ~~2019.~~2020.

~~Provision for Loan and Lease Losses~~

Our ~~Provision was a debit of $1.4~~net charge-offs were $2.9 million during the three months ended June 30, ~~2019,~~2020, compared to ~~a debit~~net charge-offs of ~~$0.5~~$0.4 million in the three months ended June 30, ~~2018.~~2019. Our ~~Provision was a debit of $2.7~~net charge-offs were $4.2 million during the six months ended June 30, ~~2019,~~2020, compared to ~~a debit~~net charge-offs of ~~$0.3~~$2.3 million in the six months ended June 30, ~~2018.~~2019.

~~Our net charge-offs were $0.4 million during the three months ended June 30, 2019, compared to net charge-offs of $1.6 million~~The disruptions in the ~~three months ended June 30, 2018. Our net charge-offs were $2.3 million during~~economy resulting from the ~~six months ended June 30, 2019, compared~~COVID-19 pandemic has impaired and will continue to ~~net charge-offs~~impair the ability of ~~$2.1 million~~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 ~~six months ended June 30, 2018.~~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.

Other Operating Income

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


	Three Months Ended
(dollars in thousands)	June 30, 2020		June 30, 2019		$ Change		% Change
Other operating income:
Mortgage banking income	$	3,566	$	1,708	$	1,858	108.8	%
Service charges on deposit accounts	1,149		2,041		(892)		-43.7	%
Other service charges and fees	2,916		3,909		(993)		-25.4	%
Income from fiduciary activities	1,270		1,129		141		12.5	%
Equity in earnings of unconsolidated subsidiaries	104		71		33		46.5	%

Investment securities gains	—		—		—		N.M.		*
Income from bank-owned life insurance	1,424		914		510		55.8	%

Net loss on sales of foreclosed assets	(6)		—		(6)		N.M.		*

Other:
Income recovered on nonaccrual loans previously charged-off	37		85		(48)		-56.5	%
Other recoveries	26		26		—		—	%
Commissions on sale of checks	56		79		(23)		-29.1	%
Gain on sale of MasterCard stock	—		—		—		N.M.		*
Other	150		132		18		13.6	%
Total other operating income	$	10,692	$	10,094	$	598	5.9	%

* Not meaningful ("N.M.")
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) June 30, 2019 June 30, 2018 $ Change % Change
Other operating income:
Mortgage banking income $ 1,601
$ 1,775
$ (174 ) -9.8 %
Service charges on deposit accounts 2,041
1,977
64
3.2 %
Other service charges and fees 3,691
3,377
314
9.3 %
Income from fiduciary activities 1,129
1,017
112
11.0 %
Equity in earnings of unconsolidated subsidiaries 71
37
34
91.9 %
Fees on foreign exchange 218
277
(59 ) -21.3 %
Income from bank-owned life insurance 914
501
413
82.4 %
Loan placement fees 107
220
(113 ) -51.4 %
Other:

Income recovered on nonaccrual loans previously charged-off 85
130
(45 ) -34.6 %
Other recoveries 26
49
(23 ) -46.9 %
Commissions on sale of checks 79
84
(5 ) -6.0 %
Gain on sale of MasterCard stock —
—
—
N.M.
Other 132
186
(54 ) -29.0 %
Total other operating income $ 10,094
$ 9,630
$ 464
4.8 %

For the three months ended June 30, ~~2019,~~2020, total other operating income of ~~$10.1~~$10.7 million increased by ~~$0.5~~$0.6 million, or ~~4.8%~~5.9%, from ~~$9.6~~$10.1 million in the year-ago quarter. The increase from the year-ago quarter was primarily due to higher mortgage banking income of $1.9 million and higher income from bank-owned life insurance of ~~$0.4~~$0.5 million in the current quarter. Strong residential mortgage demand enabled the Company to grow its residential mortgage portfolio and realize higher ~~commissions and fees~~gains on ~~investment services~~sales of ~~$0.3~~residential mortgage loans of $3.6 million (included in ~~other service charges and fees)~~mortgage banking income), which was partially offset by higher amortization of mortgage servicing rights of ~~$0.2~~$1.1 million (included in mortgage banking income)., attributable to the decline in market interest rates. The higher income from bank-owned life insurance was primarily attributable to ~~fluctuations~~current quarter gains in the equity ~~markets~~markets. These increases were partially offset by lower other service charges and fees of $1.0 million and lower service charges on deposit accounts of $0.9 million as certain service charges were suspended during the ~~quarter.~~quarter to support our customers through the pandemic. In addition, there was less transactional activity due to the pandemic.


	Six Months Ended
(dollars in thousands)	June 30, 2020		June 30, 2019		$ Change		% Change
Other operating income:
Mortgage banking income	$	3,903	$	3,281	$	622	19.0	%
Service charges on deposit accounts	3,199		4,122		(923)		-22.4	%
Other service charges and fees	7,813		7,124		689		9.7	%
Income from fiduciary activities	2,567		2,094		473		22.6	%
Equity in earnings of unconsolidated subsidiaries	130		79		51		64.6	%

Investment securities gains	—		—		—		N.M.		*
Income from bank-owned life insurance	1,405		1,866		(461)		-24.7	%

Net loss on sales of foreclosed assets	(6)		—		(6)		N.M.		*

Other:
Income recovered on nonaccrual loans previously charged-off	60		167		(107)		-64.1	%
Other recoveries	66		52		14		26.9	%
Commissions on sale of checks	137		159		(22)		-13.8	%
Gain on sale of MasterCard stock	—		2,555		(2,555)		-100.0	%
Other	304		268		36		13.4	%
Total other operating income	$	19,578	$	21,767	$	(2,189)	-10.1	%

* Not meaningful ("N.M.")

Six Months Ended
(dollars in thousands) June 30, 2019 June 30, 2018 $ Change % Change
Other operating income:
Mortgage banking income $ 3,025
$ 3,622
$ (597 ) -16.5 %
Service charges on deposit accounts 4,122
3,980
142
3.6 %
Other service charges and fees 6,755
6,411
344
5.4 %
Income from fiduciary activities 2,094
1,973
121
6.1 %
Equity in earnings of unconsolidated subsidiaries 79
80
(1 ) -1.3 %
Fees on foreign exchange 369
488
(119 ) -24.4 %
Income from bank-owned life insurance 1,866
819
1,047
127.8 %
Loan placement fees 256
417
(161 ) -38.6 %
Other:

Income recovered on nonaccrual loans previously charged-off 167
226
(59 ) -26.1 %
Other recoveries 52
95
(43 ) -45.3 %
Commissions on sale of checks 159
170
(11 ) -6.5 %
Gain on sale of MasterCard stock 2,555
—
2,555
N.M.
Other 268
303
(35 ) -11.6 %
Total other operating income $ 21,767
$ 18,584
$ 3,183
17.1 %

For the six months ended June 30, ~~2019,~~2020, total other operating income of ~~$21.8~~$19.6 million ~~increased~~decreased by ~~$3.2~~$2.2 million, or ~~17.1%~~10.1%, from ~~$18.6~~$21.8 million in the ~~year-ago period.~~six months ended June 30, 2019. The ~~increase~~decrease from the year-ago period was primarily due to ~~the conversion~~a $2.6 million gain on sale of MasterCard ~~Class B common~~ stock ~~received during their initial public offering to Class A common stock and immediate sale of the converted shares resulting in a gain of $2.6 million~~recognized in the ~~first quarter of 2019,~~year-ago period, combined with ~~higher~~lower service charges on deposit accounts of $0.9 million and lower income from bank-owned life insurance of ~~$1.0 million and higher commissions and fees on investment services of $0.3 million (included in other~~$0.5 million. As previously noted, certain service charges have been suspended to support our customers through the pandemic and ~~fees).~~there has been less transactional activity due to the pandemic resulting in lower service charges on deposit accounts. The ~~higher~~lower income from bank-owned life insurance was primarily ~~attributable~~due to ~~fluctuations~~volatility in the equity markets. ~~Partially offsetting the increases was lower~~These decreases were partially offset by higher other service charges and fees of $0.7 million, higher mortgage banking income of $0.6 million and higher income from fiduciary activities of $0.5 million.

The higher other charges and fees was primarily due to $1.3 million in income related to an interest rate swap recognized in the first quarter of 2020.

Other Operating Expense

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


	Three Months Ended
(dollars in thousands)	June 30, 2020		June 30, 2019		$ Change		% Change
Other operating expense:
Salaries and employee benefits	$	20,622	$	20,563	$	59	0.3	%
Net occupancy	3,645		3,525		120		3.4	%
Equipment	1,043		1,138		(95)		-8.3	%

Communication expense	774		903		(129)		-14.3	%
Legal and professional services	2,238		1,728		510		29.5	%
Computer software expense	3,035		2,560		475		18.6	%
Advertising expense	923		712		211		29.6	%
Foreclosed asset expense	—		49		(49)		-100.0	%

Other:
Charitable contributions	10		175		(165)		-94.3	%
FDIC insurance assessment	475		362		113		31.2	%
Miscellaneous loan expenses	399		317		82		25.9	%
ATM and debit card expenses	584		620		(36)		-5.8	%

Armored car expenses	229		211		18		8.5	%
Entertainment and promotions	165		1,023		(858)		-83.9	%
Stationery and supplies	220		279		(59)		-21.1	%
Directors’ fees and expenses	196		238		(42)		-17.6	%
Directors' deferred compensation plan expense	103		133		(30)		-22.6	%
Provision for residential mortgage loan repurchase losses	—		(403)		403		-100.0
Provision for off-balance sheet credit exposures	573		487		86		17.7	%

Other	1,193		1,487		(294)		-19.8	%
Total other operating expense	$	36,427	$	36,107	$	320	0.9	%

Three Months Ended
(dollars in thousands) June 30, 2019 June 30, 2018 $ Change % Change
Other operating expense:
Salaries and employee benefits $ 20,563
$ 18,783
$ 1,780
9.5 %
Net occupancy 3,525
3,360
165
4.9 %
Equipment 1,138
1,044
94
9.0 %
Amortization of core deposit premium —
668
(668 ) -100.0 %
Communication expense 903
746
157
21.0 %
Legal and professional services 1,728
1,769
(41 ) -2.3 %
Computer software expense 2,560
2,305
255
11.1 %
Advertising expense 712
617
95
15.4 %
Foreclosed asset expense 49
31
18
58.1 %
Other:

Charitable contributions 175
131
44
33.6 %
FDIC insurance assessment 362
434
(72 ) -16.6 %
Miscellaneous loan expenses 317
324
(7 ) -2.2 %
ATM and debit card expenses 620
698
(78 ) -11.2 %
Armored car expenses 211
233
(22 ) -9.4 %
Entertainment and promotions 1,023
273
750
274.7 %
Stationery and supplies 279
236
43
18.2 %
Directors’ fees and expenses 238
283
(45 ) -15.9 %
Provision for residential mortgage loan repurchase losses (403 ) —
(403 ) N.M.
Increase (decrease) to the reserve for unfunded commitments 487
66
421
637.9 %
Other 1,620
1,610
10
0.6 %
Total other operating expense $ 36,107
$ 33,611
$ 2,496
7.4 %

For the three months ended June 30, ~~2019,~~2020, total other operating expense was ~~$36.1~~$36.4 million and increased by ~~$2.5~~$0.3 million, or ~~7.4%~~0.9%, from ~~$33.6~~$36.1 million in the year-ago quarter. The increase was primarily due to higher ~~salaries~~legal and ~~employee benefits~~professional services of ~~$1.8~~$0.5 million, ~~higher entertainment and promotions expense of $0.8 million, and~~ higher computer software expense of ~~$0.3~~$0.5 million and higher advertising expense of $0.2 million. The ~~increase in salaries and employee benefits was partially attributable to the addition of positions in strategic areas and~~ higher ~~commissions, combined with annual merit increases effective in the second quarter of 2019. The higher entertainment and promotions expense in the second quarter of 2019 was~~expenses are primarily attributable to expenses related to ~~a core deposit gathering campaign. These increases~~our RISE2020 initiative and were partially offset by lower ~~amortization~~entertainment and promotions of $0.9 million and a provision for residential mortgage loan repurchase losses of $0.4 million recorded in the year-ago quarter, compared to none in the current quarter. The lower entertainment and promotions expense was primarily attributable to higher expenses in the year-ago quarter related to a core deposit ~~premium of $0.7 million, as the intangible asset was fully amortized as of September 30, 2018.~~gathering campaign.


	Six Months Ended
(dollars in thousands)	June 30, 2020		June 30, 2019		$ Change		% Change
Other operating expense:
Salaries and employee benefits	$	40,969	$	40,452	$	517	1.3	%
Net occupancy	7,317		6,983		334		4.8	%
Equipment	2,140		2,144		(4)		-0.2	%

Communication expense	1,611		1,637		(26)		-1.6	%
Legal and professional services	4,266		3,298		968		29.4	%
Computer software expense	5,978		5,157		821		15.9	%
Advertising expense	2,015		1,423		592		41.6	%
Foreclosed asset expense	67		208		(141)		-67.8	%

Other:
Charitable contributions	197		329		(132)		-40.1	%
FDIC insurance assessment	475		863		(388)		-45.0	%
Miscellaneous loan expenses	699		611		88		14.4	%
ATM and debit card expenses	1,218		1,270		(52)		-4.1	%

Armored car expenses	523		409		114		27.9	%
Entertainment and promotions	445		1,253		(808)		-64.5	%
Stationery and supplies	468		504		(36)		-7.1	%
Directors’ fees and expenses	437		480		(43)		-9.0	%
Directors’ deferred compensation plan expense	(1,380)		568		(1,948)		-343.0	%
Provision for residential mortgage loan repurchase losses	—		(403)		403		-100.0
Provision for off-balance sheet credit exposures	2,371		654		1,717		262.5	%

Other	2,851		2,615		236		9.0	%
Total other operating expense	$	72,667	$	70,455	$	2,212	3.1	%

Six Months Ended
(dollars in thousands) June 30, 2019 June 30, 2018 $ Change % Change
Other operating expense:
Salaries and employee benefits $ 40,452
$ 37,288
$ 3,164
8.5 %
Net occupancy 6,983
6,626
357
5.4 %
Equipment 2,144
2,112
32
1.5 %
Amortization of core deposit premium —
1,337
(1,337 ) -100.0 %
Communication expense 1,637
1,644
(7 ) -0.4 %
Legal and professional services 3,298
3,590
(292 ) -8.1 %
Computer software expense 5,157
4,572
585
12.8 %
Advertising expense 1,423
1,229
194
15.8 %
Foreclosed asset expense 208
325
(117 ) -36.0 %
Other:

Charitable contributions 329
331
(2 ) -0.6 %
FDIC insurance assessment 863
868
(5 ) -0.6 %
Miscellaneous loan expenses 611
623
(12 ) -1.9 %
ATM and debit card expenses 1,270
1,346
(76 ) -5.6 %
Armored car expenses 409
399
10
2.5 %
Entertainment and promotions 1,253
432
821
190.0 %
Stationery and supplies 504
437
67
15.3 %
Directors’ fees and expenses 480
514
(34 ) -6.6 %
Provision for residential mortgage loan repurchase losses (403 ) —
(403 ) N.M.
Increase (decrease) to the reserve for unfunded commitments 654
107
547
511.2 %
Other 3,183
3,235
(52 ) -1.6 %
Total other operating expense $ 70,455
$ 67,015
$ 3,440
5.1 %

For the six months ended June 30, ~~2019,~~2020, total other operating expense was ~~$70.5~~$72.7 million and increased by ~~$3.4~~$2.2 million, or ~~5.1%~~3.1%, from ~~$67.0~~$70.5 million in the ~~year-ago quarter.~~six months ended June 30, 2019. The increase was primarily due to a higher ~~salaries~~provision for off-balance sheet credit exposures of $1.7 million under ASC 326, higher legal and ~~employee benefits~~professional services of ~~$3.2~~$1.0 million, higher ~~entertainment and promotions~~computer software expense of $0.8 million and higher ~~computer software~~advertising expense of $0.6 ~~million. These increases were~~million, partially offset by ~~lower amortization of core deposit premium of $1.3~~a $1.9 million variance in the directors' deferred compensation plan expense and lower ~~legal~~entertainment and ~~professional services~~promotions of ~~$0.3 million compared~~$0.8 million. The lower directors' deferred compensation plan expense was primarily due to volatility in the ~~year-ago period.~~equity markets.

A key measure of operating efficiency tracked by management is the efficiency ratio, which is calculated by dividing total other operating ~~expenses~~expense 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.

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


	Three Months Ended June 30,									Six Months Ended June 30,
(dollars in thousands)	2020			2019			2020			2019
Total other operating expense	$	36,427		$	36,107		$	72,667		$	70,455

Net interest income	$	49,259		$	45,378		$	97,089		$	90,491
Total other operating income	10,692			10,094			19,578			21,767
Total revenue before provision for credit losses	$	59,951		$	55,472		$	116,667		$	112,258

Efficiency ratio	60.76		%	65.09		%	62.29		%	62.76		%

Three Months Ended
June 30, Six Months Ended
June 30,
(dollars in thousands) 2019 2018 2019 2018
Total other operating expense $ 36,107
$ 33,611
$ 70,455
$ 67,015

Net interest income $ 45,378
$ 42,672
$ 90,491
$ 84,994
Total other operating income 10,094
9,630
21,767
18,584
Total revenue $ 55,472
$ 52,302
$ 112,258
$ 103,578

Efficiency ratio 65.09 % 64.26 % 62.76 % 64.70 %

Our efficiency ratio ~~increased~~improved to ~~65.09%~~60.76% in the three months ended June 30, ~~2019~~2020, compared to ~~64.26%~~65.09% in the year-ago quarter. The efficiency ratio in the current quarter was positively impacted by the aforementioned higher net interest income during the quarter attributable to the PPP loans and lower rates paid on average interest-bearing liabilities. Our efficiency ratio improved slightly to 62.29% in the six months ended June 30, 2020, compared to 62.76% in the six months ended June 30, ~~2019 compared to 64.70% in the year-ago period. The efficiency ratio in the six months ended June 30, 2019 was positively impacted by the aforementioned $2.6 million gain on sale of MasterCard stock.~~2019.

Income Taxes

The Company recorded income tax expense of ~~$4.4~~$3.0 million and ~~$9.5~~$5.8 million for the three and six months ended June 30, ~~2019,~~2020, respectively, compared to ~~$3.9~~$4.4 million and ~~$7.7~~$9.5 million in the ~~same prior year periods,~~three and six months ended June 30, 2019, respectively. The effective tax rate for the three and six months ended June 30, ~~2019~~2020 was ~~24.7%~~23.03% and ~~24.4%~~24.09%, respectively, compared to ~~21.7%~~24.65% and ~~21.4% in the same prior year periods, respectively. The increases in income tax expense and the effective tax rate~~24.40% in the three and six months ended June 30, 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 and an income tax benefit of $0.6 million related to a tax accounting method change strategy recorded in the second quarter of 2018.2019.

The valuation allowance on our net deferred tax assets ("DTA") totaled ~~$3.3~~$3.4 million at June 30, ~~2019~~2020 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 June 30, ~~2019~~2020 and December 31, ~~2018~~2019 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 ~~$13.0~~$18.7 million at June 30, ~~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 June 30, ~~2019~~2020 of ~~$5.92~~$6.63 billion increased by ~~$113.0~~$620.3 million from ~~$5.81~~$6.01 billion at December 31, ~~2018.~~2019.

Investment Securities

Investment securities of ~~$1.26~~$1.17 billion at June 30, ~~2019 decreased~~2020 increased by ~~$99.0~~$41.7 million, or ~~7.3%~~3.7%, from December 31, ~~2018.~~2019. The ~~decrease~~increase reflects ~~$126.5~~$147.4 million in ~~principal runoff, offset by~~net purchases, combined with a ~~$27.4~~$22.4 million increase in the market valuation on the available-for-sale ~~portfolio.~~portfolio, partially offset by $128.0 million in principal runoff.

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)	June 30, 2020		December 31, 2019		$ Change		% Change
Hawaii:
Commercial, financial and agricultural:
SBA Paycheck Protection Program	$	483,827	$	—	$	483,827	—	%
Other	431,887		454,582		(22,695)		(5.0)
Real estate:
Construction	103,518		95,854		7,664		8.0
Residential mortgage	1,657,558		1,599,801		57,757		3.6
Home equity	510,962		490,734		20,228		4.1
Commercial mortgage	912,422		909,798		2,624		0.3
Consumer	350,414		373,451		(23,037)		(6.2)
Leases	—		—		—		—
Total loans	4,450,588		3,924,220		526,368		13.4
Allowance for credit losses ("ACL")	(59,765)		(42,592)		(17,173)		40.3
Loans, net of ACL	$	4,390,823	$	3,881,628	$	509,195	13.1

U.S. Mainland:
Commercial, financial and agricultural:
SBA Paycheck Protection Program	$	42,581	$	—	$	42,581	—	%
Other	115,971		115,722		249		0.2
Real estate:
Construction	—		—		—		—
Residential mortgage	—		—		—		—
Home equity	—		—		—		—
Commercial mortgage	217,747		213,617		4,130		1.9
Consumer	176,551		195,981		(19,430)		(9.9)
Leases	—		—		—		—
Total loans	552,850		525,320		27,530		5.2
ACL	(7,574)		(5,379)		(2,195)		40.8
Loans, net of ACL	$	545,276	$	519,941	$	25,335	4.9

Total:
Commercial, financial and agricultural:
SBA Paycheck Protection Program	$	526,408	$	—	$	526,408	—	%
Other	547,858		570,304		(22,446)		(3.9)
Real estate:
Construction	103,518		95,854		7,664		8.0
Residential mortgage	1,657,558		1,599,801		57,757		3.6
Home equity	510,962		490,734		20,228		4.1
Commercial mortgage	1,130,169		1,123,415		6,754		0.6
Consumer	526,965		569,432		(42,467)		(7.5)
Leases	—		—		—		—
Total loans	5,003,438		4,449,540		553,898		12.4
ACL	(67,339)		(47,971)		(19,368)		40.4
Loans, net of ACL	$	4,936,099	$	4,401,569	$	534,530	12.1

(dollars in thousands) June 30, 2019 December 31, 2018 $ Change % Change
Hawaii:

Commercial, financial and agricultural $ 435,353
$ 439,112
$ (3,759 ) (0.9 )%
Real estate:
Construction 72,427
64,654
7,773
12.0
Residential mortgage 1,516,936
1,428,205
88,731
6.2
Home equity 473,151
468,966
4,185
0.9
Commercial mortgage 905,479
861,086
44,393
5.2
Consumer 353,282
357,908
(4,626 ) (1.3 )
Leases 52
124
(72 ) (58.1 )
Total loans and leases 3,756,680
3,620,055
136,625
3.8
Allowance for loan and lease losses (42,414 ) (42,993 ) 579
(1.3 )
Net loans and leases $ 3,714,266
$ 3,577,062
$ 137,204
3.8

U.S. Mainland:

Commercial, financial and agricultural $ 155,130
$ 142,548
$ 12,582
8.8
Real estate:
Construction —
2,273
(2,273 ) (100.0 )
Residential mortgage —
—
—
—
Home equity —
—
—
—
Commercial mortgage 187,379
179,192
8,187
4.6
Consumer 147,924
134,298
13,626
10.1
Leases —
—
—
—
Total loans and leases 490,433
458,311
32,122
7.0
Allowance for loan and lease losses (5,853 ) (4,923 ) (930 ) 18.9
Net loans and leases $ 484,580
$ 453,388
$ 31,192
6.9

Total:

Commercial, financial and agricultural $ 590,483
$ 581,660
$ 8,823
1.5
Real estate:
Construction 72,427
66,927
5,500
8.2
Residential mortgage 1,516,936
1,428,205
88,731
6.2
Home equity 473,151
468,966
4,185
0.9
Commercial mortgage 1,092,858
1,040,278
52,580
5.1
Consumer 501,206
492,206
9,000
1.8
Leases 52
124
(72 ) (58.1 )
Total loans and leases 4,247,113
4,078,366
168,747
4.1
Allowance for loan and lease losses (48,267 ) (47,916 ) (351 ) 0.7
Net loans and leases $ 4,198,846
$ 4,030,450
$ 168,396
4.2

Loans, ~~and leases,~~ net of deferred costs, of ~~$4.25~~$5.00 billion at June 30, ~~2019~~2020 increased by ~~$168.7~~$553.9 million, or ~~4.1%~~12.4%, from December 31, ~~2018.~~2019. The increase reflects net increases in the following loan portfolios: Paycheck Protection Program loans of $526.4 million, residential mortgage of ~~$88.7~~$57.8 million, home equity of $20.2 million, construction of $7.7 million and commercial mortgage of ~~$52.6 million,~~

$6.8 million. These increases were partially offset by net decreases in the consumer and other commercial portfolios of ~~$9.0 million, commercial, financial and agricultural of $8.8 million, construction of $5.5~~$42.5 million and ~~home equity of $4.2 million.~~$22.4 million, respectively.

The Hawaii loan portfolio increased by ~~$136.6~~$526.4 million, or ~~3.8%~~13.4%, from December 31, ~~2018.~~2019. The increase reflects net increases in the following loan portfolios: Paycheck Protection Program loans of $483.8 million, residential mortgage of ~~$88.7~~$57.8 million, home equity of $20.2 million, construction of $7.7 million and commercial mortgage of ~~$44.4~~$2.6 million, ~~construction~~partially offset by net decreases in the consumer and other commercial portfolios of ~~$7.8~~$23.0 million and ~~home equity of $4.2 million.~~$22.7 million, respectively. 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: consumer of $4.6 million and commercial, financial and agricultural of $3.8 million.~~

The U.S. Mainland loan portfolio increased by ~~$32.1~~$27.5 million, or ~~7.0%~~5.2% from December 31, ~~2018.~~2019. The net increase was primarily attributable to net increases in the Paycheck Protection Program and commercial mortgage loan portfolios of $42.6 million and $4.1 million, respectively, partially offset by a net decrease in the consumer loan portfolio of ~~$13.6~~$19.4 million.

In the second quarter of 2020, we purchased U.S. Mainland unsecured consumer loans totaling $10.9 million, ~~commercial, financial~~which reflected a net discount of $0.5 million from the $11.4 million outstanding balance. At the time of purchase, the unsecured consumer loans had a weighted average remaining term of 115 months and ~~agricultural loan portfolio~~a weighted average yield, net of ~~$12.6 million, and commercial mortgage loan portfolio~~servicing costs, of ~~$8.2 million.~~3.18%.

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%. The purchases during the first and second quarters of 2020 were made under two forward flow purchase agreements.

In 2019, we purchased ~~U.S Mainland consumer loans~~an auto loan portfolio totaling $18.3 million which represented the outstanding balance at the time of purchase. In the second quarter of 2019, we purchased U.S Mainland consumer loans totaling $31.0 million which represented the outstanding balance at the time of purchase.

~~In 2018, we purchased U.S Mainland 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 at~~balance. 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%. The unsecured consumer loan purchases during 2019 were made under two forward flow purchase agreements.

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)	June 30, 2020			December 31, 2019			$ Change		% Change
Nonperforming Assets ("NPAs") [1]
Nonaccrual loans:
Commercial, financial and agricultural	$	934		$	467		$	467	100.0	%
Real estate:

Residential mortgage	3,215			979			2,236		228.4
Home equity	538			92			446		484.8

Consumer	54			17			37		217.6

Total nonaccrual loans	4,741			1,555			3,186		204.9

Other real estate owned ("OREO"):

Real estate:


Home equity	—			164			(164)		(100.0)



Total OREO	—			164			(164)		(100.0)
Total nonperforming assets	4,741			1,719			3,022		175.8

Accruing Loans Delinquent for 90 Days or More [1]

Real estate:

Residential mortgage	726			724			2		0.3


Consumer	444			286			158		55.2

Total accruing loans delinquent for 90 days or more	1,170			1,010			160		15.8

Restructured Loans Still Accruing Interest [1]
Commercial, financial and agricultural	172			135			37		27.4
Real estate:

Residential mortgage	5,290			5,502			(212)		(3.9)

Commercial mortgage	1,888			1,839			49		2.7
Consumer	145			—			145		—

Total restructured loans still accruing interest	7,495			7,476			19		0.3

Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest	$	13,406		$	10,205		$	3,201	31.4

Ratio of nonaccrual loans to total loans	0.09		%	0.03		%			0.06	%
Ratio of NPAs to total loans and OREO	0.09		%	0.04		%			0.05	%
Ratio of NPAs and accruing loans delinquent for 90 days or more to total loans and OREO	0.12		%	0.06		%			0.06	%
Ratio of NPAs, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO	0.27		%	0.23		%			0.04	%
Ratio of classified assets and OREO to tier 1 capital and ACL	7.28		%	6.75		%			0.53	%

[1] Section 4013 of the CARES Act and the revised Interagency Statement are being applied to loan modifications related to the COVID-19 pandemic as eligible and applicable. These loan modifications are not included in the delinquent, nonaccrual or restructured loan balances presented above.

(dollars in thousands) June 30, 2019 December 31, 2018 $ Change % Change
Nonperforming Assets

Nonaccrual loans (including loans held for sale):

Real estate:
Residential mortgage $ 738
$ 2,048
$ (1,310 ) (64.0 )
Home equity 244
275
(31 ) (11.3 )
Total nonaccrual loans 982
2,323
(1,341 ) (57.7 )

Other real estate owned ("OREO"):

Real estate:
Residential mortgage 276
414
(138 ) (33.3 )
Total OREO 276
414
(138 ) (33.3 )
Total nonperforming assets 1,258
2,737
(1,479 ) (54.0 )

Accruing Loans Delinquent for 90 Days or More
Real estate:
Home equity —
298
(298 ) (100.0 )
Consumer 267
238
29
12.2
Total accruing loans delinquent for 90 days or more 267
536
(269 ) (50.2 )

Restructured Loans Still Accruing Interest

Commercial, financial and agricultural 178
220
(42 ) (19.1 )
Real estate:
Construction —
2,273
(2,273 ) (100.0 )
Residential mortgage 6,831
8,026
(1,195 ) (14.9 )
Commercial mortgage 2,097
2,348
(251 ) (10.7 )
Total restructured loans still accruing interest 9,106
12,867
(3,761 ) (29.2 )

Total nonperforming assets, accruing loans delinquent for 90 days or more and restructured loans still accruing interest $ 10,631
$ 16,140
$ (5,509 ) (34.1 )

Ratio of nonaccrual loans to total loans and leases 0.02 % 0.06 % (0.04 )%
Ratio of nonperforming assets to total loans and leases and OREO 0.03 % 0.07 % (0.04 )%
Ratio of nonperforming assets and accruing loans delinquent for 90 days or more to total loans and leases and OREO 0.04 % 0.08 % (0.04 )%
Ratio of nonperforming assets, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and leases and OREO 0.25 % 0.40 % (0.15 )%

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


(dollars in thousands)
Balance at December 31, 2019	$	1,719
Additions	3,827
Reductions:
Payments	(427)
Return to accrual status	(123)
Sales of NPAs	(94)
Net charge-offs, valuation and other adjustments	(161)
Total reductions	(805)
Net increase	3,022
Balance at June 30, 2020	$	4,741

(dollars in thousands)
Balance at December 31, 2018 $ 2,737
Additions 810
Reductions:
Payments (2,126 )
Return to accrual status (25 )
Sales of nonperforming assets —
Charge-offs and/or valuation adjustments (138 )
Total reductions (2,289 )
Net increase (1,479 )
Balance at June 30, 2019 $ 1,258

Nonperforming assets, which includes nonaccrual loans and ~~leases and~~ other real estate owned, totaled ~~$1.3~~$4.7 million at June 30, ~~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 June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. The ~~decrease~~increase in nonperforming assets from December 31, ~~2018~~2019 was primarily attributable to ~~$2.1~~additions to nonaccrual loans totaling $3.8 million, offset by $0.4 million in repayments of nonaccrual loans, $0.2 million in net charge-offs, valuation and aother adjustments, $0.1 million ~~write-down~~in loans returned to accrual status, and the sale of a ~~Hawaii residential mortgage~~ foreclosed asset ~~offset by two additions to nonaccrual loans totaling $0.8~~of $0.1 million.

Troubled debt restructurings ("TDRs") included in nonperforming assets at June 30, ~~2019~~2020 consisted of ~~three~~ one Hawaii residential mortgage ~~loans~~ loan with a ~~combined~~ principal balance of ~~$0.4~~$0.3 million.

Concessions made to the original contractual terms of these loans consisted primarily of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. The principal balances on these TDRs had matured and/or were in default at the time of restructure and we have no commitments to lend additional funds to any of these borrowers. There were ~~$9.1~~$7.5 million of TDRs still accruing interest at June 30, ~~2019,~~2020, none of which were more than 90 days delinquent. At December 31, ~~2018,~~2019, there were ~~$12.9~~$7.5 million of TDRs still accruing interest, none of which were more than 90 days delinquent.

Loan payment forbearances or deferrals were made for borrowers impacted by the COVID-19 pandemic with loan balances totaling $567.9 million, or 11.3% of total loans (and 12.7% of total loans, excluding PPP loans), as of June 30, 2020.

The Company's ratio of classified assets and other real estate owned to tier 1 capital and the ACL increased from 6.75% at December 31, 2019 to 7.28% at June 30, 2020.

Allowance for ~~Loan and Lease~~Credit Losses

The following table sets forth certain information with respect to the ~~Allowance~~ACL as of the dates and for the periods indicated:


														Three Months Ended June 30,									Six Months Ended June 30,
(dollars in thousands)													(dollars in thousands)	2020			2019			2020			2019
Allowance for Credit Losses:													Allowance for Credit Losses:
Balance at beginning of period													Balance at beginning of period	$	59,645		$	47,267		$	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	59,645			47,267			51,537			47,916

Provision for credit losses													Provision for credit losses	10,640			1,404			19,969			2,687

Charge-offs:													Charge-offs:
Commercial, financial and agricultural													Commercial, financial and agricultural	1,103			839			1,540			1,302
Real estate:													Real estate:

Residential mortgage													Residential mortgage	52			—			52			—

	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2019			2018			2019			2018
Allowance for Loan and Lease Losses:
Balance at beginning of period	$	47,267		$	49,217		$	47,916		$	50,001

Provision (credit) for loan and lease losses	1,404			532			2,687			321
Consumer													Consumer	2,626			1,459			4,843			3,710

Charge-offs:
Commercial, financial and agricultural	839			742			1,302			1,240
Consumer	1,459			1,729			3,710			3,662
Total charge-offs	2,298			2,471			5,012			4,902			Total charge-offs	3,781			2,298			6,435			5,012

Recoveries:													Recoveries:
Commercial, financial and agricultural	315			295			548			439			Commercial, financial and agricultural	305			315			647			548
Real estate:													Real estate:
Construction	592			6			598			1,199			Construction	—			592			131			598
Residential mortgage	372			21			394			47			Residential mortgage	20			372			201			394
Home equity	9			9			18			12			Home equity	—			9			31			18
Commercial mortgage	25			29			25			44			Commercial mortgage	1			25			3			25

Consumer	581			543			1,093			1,020			Consumer	509			581			1,255			1,093

Total recoveries	1,894			903			2,676			2,761			Total recoveries	835			1,894			2,268			2,676

Net charge-offs	404			1,568			2,336			2,141			Net charge-offs	2,946			404			4,167			2,336

Balance at end of period	$	48,267		$	48,181		$	48,267		$	48,181		Balance at end of period	$	67,339		$	48,267		$	67,339		$	48,267

Allowance as a percentage of total loans and leases	1.14		%	1.24		%	1.14		%	1.24		%

Annualized ratio of net charge-offs to average loans and leases	0.04		%	0.16		%	0.11		%	0.11		%
ACL as a percentage of total loans													ACL as a percentage of total loans	1.35		%	1.14		%	1.35		%	1.14		%
ACL as a percentage of total loans, excluding PPP loans													ACL as a percentage of total loans, excluding PPP loans	1.50		%	1.14		%	1.50		%	1.14		%
Annualized ratio of net charge-offs to average loans													Annualized ratio of net charge-offs to average loans	0.24		%	0.04		%	0.18		%	0.11		%

Our ~~Allowance~~ACL at June 30, ~~2019~~2020 totaled ~~$48.3~~$67.3 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 June 30, ~~2019,~~2020, we recorded a ~~debit to the Provision~~provision for credit losses on loans of ~~$1.4~~$10.6 million ~~primarily due to the increase in our loan portfolio~~ and ~~reflects~~ net charge-offs of ~~$0.4~~$2.9 million. During the six months ended June 30, ~~2019,~~2020, we recorded a ~~debit to~~provision for credit losses on loans of $20.0 million and net charge-offs of $4.2 million. The provisions reflect the ~~Provision~~incorporation of ~~$2.7 million primarily~~estimated life-of-loan losses under ASC 326 and economic forecasts that anticipate deterioration due to the ~~increase in our loan portfolio and reflects net charge-offs of $2.3 million.~~COVID-19 pandemic.

Our ~~Allowance~~ACL as a percentage of total loans ~~and leases decreased~~increased from ~~1.17%~~1.08% at December 31, ~~2018~~2019 to ~~1.14%~~1.35% at June 30, ~~2019. The decrease in~~2020. Excluding the PPP loan portfolio, which is guaranteed by the SBA, our ~~Allowance~~ACL as a percentage of total loans ~~and leases~~was 1.50%. The increase in our ACL as a percentage of total loans reflects the ~~credit quality~~adoption of ~~the loan portfolio, real estate markets and general economic conditions both in Hawaii and the U.S. Mainland.~~ASU 2016-13. Our ~~Allowance~~ACL as a percentage of nonperforming assets ~~increased~~decreased from ~~1,750.68%~~2,791% at December 31, ~~2018~~2019 to ~~3,836.80%~~1,420% at June 30, ~~2019.~~2020.

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 ~~$17.8~~$9.2 million at June 30, ~~2019 increased~~2020 decreased by ~~$1.2~~$5.8 million, or ~~7.1%~~38.4%, from the FHLB stock balance at December 31, ~~2018.~~2019. FHLB stock has an activity-based stock requirement, thus as borrowings ~~increase,~~decline, so will our holdings of FHLB stock. There is a minimum requirement of $7.0 million in FHLB 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)	June 30, 2020		December 31, 2019		$ Change		% Change
Noninterest-bearing demand deposits	$	1,851,012	$	1,450,532	$	400,480	27.6	%
Interest-bearing demand deposits	1,067,483		1,043,010		24,473		2.3
Savings and money market deposits	1,945,744		1,600,028		345,716		21.6
Time deposits less than $100,000	159,739		165,755		(6,016)		(3.6)
Core deposits	5,023,978		4,259,325		764,653		18.0

Government time deposits	509,927		533,088		(23,161)		(4.3)
Other time deposits $100,000 to $250,000	96,633		107,550		(10,917)		(10.2)
Other time deposits greater than $250,000	164,147		220,060		(55,913)		(25.4)
Total time deposits $100,000 and greater	770,707		860,698		(89,991)		(10.5)






Total deposits	$	5,794,685	$	5,120,023	$	674,662	13.2

(dollars in thousands) June 30,
2019 December 31,
2018 $ Change % Change
Noninterest-bearing demand deposits $ 1,351,190
$ 1,436,967
$ (85,777 ) (6.0 )%
Interest-bearing demand deposits 1,002,706
954,011
48,695
5.1
Savings and money market deposits 1,573,805
1,448,257
125,548
8.7
Time deposits less than $100,000 171,106
176,707
(5,601 ) (3.2 )
Core deposits 4,098,807
4,015,942
82,865
2.1

Government time deposits 574,825
631,293
(56,468 ) (8.9 )
Other time deposits $100,000 to $250,000 105,382
106,783
(1,401 ) (1.3 )
Other time deposits greater than $250,000 197,835
192,472
5,363
2.8
Total time deposits $100,000 and greater 878,042
930,548
(52,506 ) (5.6 )

Total deposits $ 4,976,849
$ 4,946,490
$ 30,359
0.6

Total deposits of ~~$4.98~~$5.79 billion at June 30, ~~2019~~2020 increased by ~~$30.4~~$674.7 million from total deposits of ~~$4.95~~$5.12 billion at December 31, ~~2018.~~2019. Net increases in noninterest-bearing demand deposits of $400.5 million, savings and money market deposits of ~~$125.5~~$345.7 million and interest-bearing demand deposits of ~~$48.7~~$24.5 million, were partially offset by net decreases in ~~noninterest-bearing demand~~other time deposits greater than $250,000 of ~~$85.8~~$55.9 million, ~~and~~ government time deposits of ~~$56.5~~$23.2 million, other time deposits $100,000 to $250,000 of $10.9 million and time deposits less than $100,000 of $6.0 million.

Core deposits, which we define as demand deposits, savings and money market deposits, and time deposits less than $100,000, totaled ~~$4.10~~$5.02 billion at June 30, ~~2019~~2020 and increased by ~~$82.9~~$764.7 million, or ~~2.1%~~18.0%, from December 31, ~~2018.~~2019. The deposit of PPP funds into both new and existing deposit accounts largely contributed to the increase in core deposits. In addition, off-balance sheet investment funds from several large clients were brought back into deposit accounts. The addition of PPP funds may be temporary as the PPP monies are spent by the businesses in accordance with the program. Going forward the Company is focused on expanding banking relationships with the new businesses we assisted with PPP. Core deposits as a percentage of total deposits was ~~82.4%~~86.7% at June 30, ~~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 ~~$515.7~~$544.3 million at June 30, ~~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 ~~$29.6~~$18.2 million and other comprehensive income of ~~$23.7~~$17.1 million, partially offset by the repurchase of ~~490,700~~206,802 shares of common stock under our repurchase program, at a cost of ~~$14.0~~$4.7 million and cash dividends ~~paid~~declared of ~~$12.6~~$13.0 million in the six months ended June 30, ~~2019.~~2020. During the six months ended June 30, ~~2019,~~2020, we repurchased approximately ~~1.7%~~0.7% of our common stock outstanding as of December 31, ~~2018.~~2019.

Our total shareholders' equity to total assets ratio was ~~8.71%~~8.21% at June 30, ~~2019,~~2020, compared to ~~8.47%~~8.79% at December 31, ~~2018.~~2019. The decline in our total shareholders' equity to total assets ratio was primarily due to the significant increase in the total assets denominator attributable to $526.4 million in PPP loans, net of deferred fees and costs. Our book value per share was ~~$18.05~~$19.33 and ~~$16.97~~$18.68 at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, 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 June 30, ~~2019,~~2020, on a stand-alone basis, CPF had an available cash balance of approximately ~~$12.8~~$8.4 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 June 30, ~~2019,~~2020, the bank had Statutory Retained Earnings of ~~$55.2~~$68.4 million. On July ~~23, 2019,~~28, 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~~remained unchanged from the ~~$0.21~~$0.23 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 ~~1,155,157~~797,003 shares of common stock, at a cost of ~~$32.8~~$22.8 million, under the Company's repurchase plan.

In ~~June 2019,~~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 ~~$6.8~~$19.8 million in remaining repurchase authority. The Company's 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.

In the six months ended June 30, ~~2019,~~2020, a total of ~~490,700~~206,802 shares of common stock, at a cost of ~~$14.0~~$4.7 million, were repurchased under the Company's stock repurchase plans. As of June 30, ~~2019, $29.9~~2020, $26.6 million remained available for repurchase under the Company's Repurchase Plan. ~~The Company's~~We cannot provide any assurance when or to what extent we will resume repurchases under our Repurchase ~~Plan has no expiration date.~~Plan.

Trust Preferred Securities

OnIn December ~~17,~~ 2018 ~~the Company~~and January 2019 we completed the redemption of ~~$20.0~~an aggregate of $40 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 IIItwo 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.~~subsidiaries we previously had organized.

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 June 30, ~~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 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 ~~2018~~2019 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 June 30, 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 June 30, ~~2019~~2020 were above the levels required for a "well capitalized" regulatory designation.

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.


	Actual						Minimum Required for Capital Adequacy Purposes						Minimum Required to be Well Capitalized
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Company
At June 30, 2020:
Leverage capital	$	571,976	8.9	%	$	256,307	4.0	%			N/A
Tier 1 risk-based capital	571,976		12.5		274,997		6.0				N/A
Total risk-based capital	622,393		13.6		366,662		8.0				N/A
CET1 risk-based capital	521,976		11.4		206,247		4.5				N/A

At December 31, 2019:
Leverage capital	$	568,529	9.5	%	$	238,630	4.0	%			N/A
Tier 1 risk-based capital	568,529		12.6		271,788		6.0				N/A
Total risk-based capital	617,772		13.6		362,384		8.0				N/A
CET1 risk-based capital	518,529		11.5		203,841		4.5				N/A

Central Pacific Bank
At June 30, 2020:
Leverage capital	$	559,461	8.7	%	$	256,118	4.0	%	$	320,147	5.0	%
Tier 1 risk-based capital	559,461		12.2		274,739		6.0		366,319		8.0
Total risk-based capital	609,811		13.3		366,319		8.0		457,899		10.0
CET1 risk-based capital	559,461		12.2		206,055		4.5		297,634		6.5

At December 31, 2019:
Leverage capital	$	556,077	9.3	%	$	238,342	4.0	%	$	297,928	5.0	%
Tier 1 risk-based capital	556,077		12.3		271,350		6.0		361,800		8.0
Total risk-based capital	605,320		13.4		361,800		8.0		452,250		10.0
CET1 risk-based capital	556,077		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 June 30, 2019:

Leverage capital $ 556,403
9.5 % $ 234,568
4.0 %

N/A
Tier 1 risk-based capital 556,403
12.7
262,536
6.0

N/A
Total risk-based capital 606,567
13.9
350,048
8.0

N/A
CET1 risk-based capital 506,403
11.6
196,902
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 June 30, 2019:

Leverage capital $ 544,480
9.3 % $ 234,408
4.0 % $ 293,009
5.0 %
Tier 1 risk-based capital 544,480
12.5
262,283
6.0
349,711
8.0
Total risk-based capital 594,644
13.6
349,711
8.0
437,139
10.0
CET1 risk-based capital 544,480
12.5
196,713
4.5
284,140
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.

The following reflects our net interest income sensitivity analysis as of June 30, ~~2019, over a one-year horizon,~~2020. Net interest income is estimated assuming no balance sheet growth ~~and given both~~under 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 Change	Estimated Net Interest Income Sensitivity
+100 bp	~~1.54~~4.36	%
-100 bp	~~(4.24~~(0.43)	)%

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 ~~$1.74~~$1.97 billion line of credit with the FHLB as of June 30, ~~2019,~~2020, compared to ~~$1.43~~$1.84 billion at December 31, ~~2018. We had $221.0 million in~~2019. There were no short-term borrowings under this arrangement at June 30, ~~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 $248.5 million at June 30, 2020, compared to $78.9 million at December 31, 2019. Long-term borrowings under this arrangement totaled $50.0 million at June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. FHLB advances and standby letters of credit available at June 30, ~~2019~~2020 were secured by certain real estate loans with a carrying value of ~~$2.34~~$2.66 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB. At June 30, ~~2019, $1.40~~2020, $1.67 billion was undrawn under this arrangement, compared to ~~$1.18~~$1.57 billion at December 31, ~~2018.~~2019.

To bolster the effectiveness of the PPP, the Federal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provides loans to small businesses so that they can keep their workers on the payroll. The Paycheck Protection Program Liquidity Facility ("PPPLF") will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. At June 30, 2020, PPP loans pledged to the Federal Reserve Bank totaled $65.9 million and funds drawn from the Federal Reserve Bank as of June 30, 2020 totaled $65.9 million.

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 have been no ~~other~~ material changes in our contractual obligations since December 31, ~~2018.~~2019.

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 June 30, ~~2019~~2020 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 ~~end~~incurred 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, ~~our~~the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Certain claims and lawsuits have been filed or are pending against us arising in the ordinary course of business. In the opinion of management, all such matters are of a nature that, if disposed of unfavorably, would not have a material adverse effect on our consolidated results of operations or financial position.

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.

~~Our RISE2020 initiative may not be successful.~~

~~During~~The COVID-19 pandemic has significantly impacted the ~~second half~~State of ~~2019~~Hawaii and ~~throughout 2020, we intend to invest an aggregate of approximately $40 million to upgrade~~ our branch spaces, digital banking platforms and ATM network through a new initiative we call RISE2020. RISE2020 is intended to enhance customer experience, drive stronger long-term growth and profitability, improve shareholder returns and lower our efficiency ratio. However, we cannot provide any assurance that RISE2020 will achieve any of our objectives or will achieve our objectives to the extent we have forecasted. In particular, the costs of RISE2020 may exceed our expectations; we may not be able to attract new business from existing customers; new customers may not be attracted to our platform despite the amount of expense we incur; and implementation of RISE2020 initiatives may disrupt our operations. If our RISE2020 initiative is not successful, our overall noninterest expense will have increased without a corresponding increase in revenue and growth which could have a material adverse effectbusiness. The ultimate impact on our business and financial ~~condition~~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 which can negatively impact our results of operations, including our net income. 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, all of which impact our results of operations.

Loan payment deferrals are significant and we are still continuing to accrue interest and fees during the deferral period. Should we later determine that collection of payments is not expected and eventual credit losses on these deferred payments emerge, accrued and unpaid interest and fees will need to be reversed. In such a scenario, interest income in future periods could be negatively impacted.

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

In ~~June 2019,~~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 ~~$6.8~~$19.8 million in remaining repurchase authority. The current 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. As a result, the Company did not repurchase any shares of common stock under the Company's Repurchase Plan during the three months ended June 30, ~~2019, the Company repurchased 213,700 shares of common stock, at an aggregate cost of $6.2 million, under the Company's stock repurchase plans.~~2020. As of June 30, ~~2019,~~2020, a total of ~~$29.9~~$26.6 million remained available for repurchase under the Company's Repurchase Plan. ~~There is no expiration date on the~~We cannot provide any assurance as to when or if we will recommence our Repurchase Plan.


	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
April 1-30, 2020	—	$	—	—	$	26,600,028
May 1-31, 2020	—	—		—	26,600,028
June 1-30, 2020	—	—		—	26,600,028
Total	—	$	—	—	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
April 1-30, 2019 93,500
$ 29.54
93,500
$ 10,198,569
May 1-31, 2019 71,900
29.34
71,900
8,089,146
June 1-30, 2019 48,300
28.41
48,300
29,942,428
Total 213,700
$ 29.22
213,700
29,942,428

Item 6. Exhibits



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.INS						XBRL Instance Document*

101.SCH						XBRL Taxonomy Extension Schema Document*

101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB						XBRL Taxonomy Extension Label Linkbase Document*

101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document*

101.DEF						XBRL Taxonomy Extension Definition Linkbase Document*

104						Cover Page Interactive Data File (formatted as Inline XBRL and included within the Exhibit 101 attachments)

*						~~Filed herewith.~~
*						Filed herewith.
**						~~Furnished herewith.~~
**						Furnished herewith.

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:	~~August 6, 2019~~July 29, 2020	/s/ Paul K. Yonamine
		Paul K. Yonamine
		Chairman and Chief Executive Officer

Date:	~~August 6, 2019~~July 29, 2020	/s/ David S. Morimoto
		David S. Morimoto
		Executive Vice President and Chief Financial Officer



(dollars in thousands)	June 30, 2019		December 31, 2018
Commercial, financial and agricultural	$	590,071	$	581,177
Real estate:
Construction	72,835		67,269
Residential mortgage	1,513,104		1,424,384
Home equity	472,918		468,966
Commercial mortgage	1,094,256		1,041,685
Consumer	501,273		492,268
Leases	52		124
Gross loans and leases	4,244,509		4,075,873
Net deferred costs	2,604		2,493
Total loans and leases, net of deferred costs	$	4,247,113	$	4,078,366



			Real Estate
(dollars in thousands)	Comml, Fin & Ag		Constr			Resi Mortgage		Home Equity		Comml Mortgage			Consumer			Leases		Total
June 30, 2019
Allowance:
Individually evaluated for impairment	$	—	$	—		$	—	$	—	$	—		$	—		$	—	$	—
Collectively evaluated for impairment	8,109		1,313			13,367		4,313		11,668			9,497			—		48,267
Total ending balance	$	8,109	$	1,313		$	13,367	$	4,313	$	11,668		$	9,497		$	—	$	48,267

Loans and leases:
Individually evaluated for impairment	$	178	$	—		$	7,569	$	244	$	2,097		$	—		$	—	$	10,088
Collectively evaluated for impairment	589,893		72,835			1,505,535		472,674		1,092,159			501,273			52		4,234,421
Subtotal	590,071		72,835			1,513,104		472,918		1,094,256			501,273			52		4,244,509
Net deferred costs (income)	412		(408		)	3,832		233		(1,398		)	(67		)	—		2,604
Total loans and leases, net of deferred costs (income)	$	590,483	$	72,427		$	1,516,936	$	473,151	$	1,092,858		$	501,206		$	52	$	4,247,113



Year Ending December 31,
2019 (remainder)	$	4,018
2020	7,866
2021	94
2022	10
2023	10
2024	26
Thereafter	49
Total unfunded commitments	$	12,073



(dollars in thousands)	Three Months Ended June 30, 2019		Three Months Ended June 30, 2018		Six Months Ended June 30, 2019		Six Months Ended June 30, 2018
Proportional amortization method:
Amortization expense recognized in income tax expense	$	259	$	113	$	517	$	227
Tax credits recognized in income tax expense	338		153		615		305



(dollars in thousands)	Core Deposit Premium			Mortgage Servicing Rights			Total
Balance, January 1, 2018	$	2,006		$	15,843		$	17,849
Additions	—			807			807
Amortization	(1,337		)	(894		)	(2,231		)
Balance, June 30, 2018	$	669		$	15,756		$	16,425

Balance, January 1, 2019	$	—		$	15,596		$	15,596
Additions	—			742			742
Amortization	—			(1,072		)	(1,072		)
Balance, June 30, 2019	$	—		$	15,266		$	15,266



Year Ending December 31,
2019 (remainder)	$	1,481
2020	2,437
2021	1,941
2022	1,570
2023	1,297
2024	1,120
Thereafter	5,420
Total	$	15,266



(dollars in thousands)	Banking Operations			Treasury			All Others			Total
Three Months Ended June 30, 2019
Net interest income	$	42,589		$	2,789		$	—		$	45,378
Inter-segment net interest income (expense)	6,602			(2,688		)	(3,914		)	—
Credit (provision) for loan and lease losses	(1,404		)	—			—			(1,404		)
Other operating income:
Mortgage banking income	957			—			644			1,601
Service charges on deposit accounts	2,041			—			—			2,041
Other service charges and fees	1,584			—			2,107			3,691
Income from fiduciary activities	1,129			—			—			1,129
Equity in earnings of unconsolidated subsidiaries	71			—			—			71
Fees on foreign exchange	25			193			—			218
Income from bank-owned life insurance	—			914			—			914
Loan placement fees	107			—			—			107
Other	153			—			169			322
Other operating income	6,067			1,107			2,920			10,094
Other operating expense	(15,903		)	(399		)	(19,805		)	(36,107		)
Administrative and overhead expense allocation	(17,061		)	(211		)	17,272			—
Income before taxes	20,890			598			(3,527		)	17,961
Income tax (expense) benefit	(5,142		)	(154		)	869			(4,427		)
Net income (loss)	$	15,748		$	444		$	(2,658	)	$	13,534



(dollars in thousands)
Balance at December 31, 2018	$	2,737
Additions	810
Reductions:
Payments	(2,126		)
Return to accrual status	(25		)
Sales of nonperforming assets	—
Charge-offs and/or valuation adjustments	(138		)
Total reductions	(2,289		)
Net increase	(1,479		)
Balance at June 30, 2019	$	1,258