~~0000701347 us-gaap:OperatingSegmentsMember cpf:OtherServiceChargesandFeesMember us-gaap:CorporateAndOtherMember 2019-01-01 2019-09-30~~

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 ~~September 30, 2019~~March 31, 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 ~~October 31, 2019~~April 30, 2020 was ~~28,376,894~~28,115,353 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 - ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019		4

		Consolidated Statements of Income - Three months ended March 31, 2020 and ~~nine months ended September 30,~~ 2019 ~~and 2018~~		5

		Consolidated Statements of Comprehensive Income - Three months ended March 31, 2020 and ~~nine months ended September 30,~~ 2019 ~~and 2018~~		6

		Consolidated Statements of Changes in Equity - Three months ended March 31, 2020 and ~~nine months ended September 30,~~ 2019 ~~and 2018~~		7

		Consolidated Statements of Cash Flows - ~~Nine~~Three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~		98

		Notes to Consolidated Financial Statements (Unaudited)		109

Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations		4345

Item 3.		Quantitative and Qualitative Disclosures About Market Risk		6467

Item 4.		Controls and Procedures		6467

Part II.		Other Information		6568

Item 1A.		Risk Factors		6568

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		6568

Item 6.		Exhibits		6670

Signatures				6771

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; ~~current and projected levels of RISE2020-related expense, which include estimates of expense related to dedicated staff and management time and third-party expense;~~ 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)	September 30, 2019			December 31, 2018			(dollars in thousands)	March 31, 2020		December 31, 2019
Assets							Assets
Cash and due from banks	$	87,395		$	80,569		Cash and due from banks	$	81,972	$	78,418
Interest-bearing deposits in other banks	7,803			21,617			Interest-bearing deposits in other banks	11,021		24,554
Investment securities:							Investment securities:
Available-for-sale debt securities, at fair value	1,186,875			1,205,478			Available-for-sale debt securities, at fair value	1,184,023		1,126,983
Held-to-maturity debt securities, at amortized cost; fair value of: none at September 30, 2019 and $144,272 at December 31, 2018	—			148,508

Equity securities, at fair value	1,058			826			Equity securities, at fair value	1,002		1,127
Total investment securities	1,187,933			1,354,812			Total investment securities	1,185,025		1,128,110

Loans held for sale	7,016			6,647			Loans held for sale	3,910		9,083

Loans and leases	4,367,862			4,078,366
Allowance for loan and lease losses	(48,167		)	(47,916		)
Net loans and leases	4,319,695			4,030,450
Loans							Loans	4,511,998		4,449,540
Allowance for credit losses							Allowance for credit losses	(59,645)		(47,971)
Loans, net of allowance for credit losses							Loans, net of allowance for credit losses	4,452,353		4,401,569

Premises and equipment, net	44,095			45,285			Premises and equipment, net	50,447		46,343
Accrued interest receivable	16,220			17,000			Accrued interest receivable	16,851		16,500
Investment in unconsolidated subsidiaries	17,001			14,008			Investment in unconsolidated subsidiaries	16,721		17,115
Other real estate owned	466			414			Other real estate owned	100		164
Mortgage servicing rights	15,058			15,596			Mortgage servicing rights	13,345		14,718

Bank-owned life insurance	158,939			157,440			Bank-owned life insurance	159,637		159,656
Federal Home Loan Bank stock	17,183			16,645			Federal Home Loan Bank stock	18,109		14,983
Right-of-use lease asset	52,588			—			Right-of-use lease asset	51,198		52,348
Other assets	45,324			46,543			Other assets	47,859		49,111
Total assets	$	5,976,716		$	5,807,026		Total assets	$	6,108,548	$	6,012,672

Liabilities							Liabilities
Deposits:							Deposits:
Noninterest-bearing demand	$	1,399,200		$	1,436,967		Noninterest-bearing demand	$	1,430,540	$	1,450,532
Interest-bearing demand	998,037			954,011			Interest-bearing demand	1,018,508		1,043,010
Savings and money market	1,593,738			1,448,257			Savings and money market	1,693,280		1,600,028
Time	1,046,684			1,107,255			Time	993,741		1,026,453
Total deposits	5,037,659			4,946,490			Total deposits	5,136,069		5,120,023

Short-term borrowings	205,000			197,000			Short-term borrowings	222,000		150,000
Long-term debt	101,547			122,166			Long-term debt	101,547		101,547
Lease liability	52,807			—			Lease liability	51,541		52,632

Other liabilities	54,476			49,645			Other liabilities	63,561		59,950
Total liabilities	5,451,489			5,315,301			Total liabilities	5,574,718		5,484,152

Shareholders' Equity
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding: none at September 30, 2019 and December 31, 2018	—			—
Common stock, no par value, authorized 185,000,000 shares; issued and outstanding: 28,441,341 at September 30, 2019 and 28,967,715 at December 31, 2018	452,278			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, no par value, authorized 1,000,000 shares; issued and outstanding: none at March 31, 2020 and December 31, 2019							Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding: none at March 31, 2020 and December 31, 2019	—		—
Common stock, no par value, authorized 185,000,000 shares; issued and outstanding: 28,115,353 at March 31, 2020 and 28,289,257 at December 31, 2019							Common stock, no par value, authorized 185,000,000 shares; issued and outstanding: 28,115,353 at March 31, 2020 and 28,289,257 at December 31, 2019	442,853		447,602
Additional paid-in capital	90,604			88,876			Additional paid-in capital	92,284		91,611
Accumulated deficit	(26,782		)	(51,718		)	Accumulated deficit	(20,428)		(19,102)
Accumulated other comprehensive income (loss)	9,127			(16,093		)
Accumulated other comprehensive income							Accumulated other comprehensive income	19,072		8,409
Total shareholders' equity	525,227			491,725			Total shareholders' equity	533,781		528,520
Total liabilities and shareholders' equity	$	5,976,716		$	5,807,026
Non-controlling interest							Non-controlling interest	49		—
Total equity							Total equity	533,830		528,520
Total liabilities and equity							Total liabilities and equity	$	6,108,548	$	6,012,672

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	Three Months Ended September 30,					Nine Months Ended September 30,					Three Months Ended March 31,
(dollars in thousands, except per share data)	2019		2018			2019		2018		(dollars in thousands, except per share data)	2020		2019
Interest income:										Interest income:
Interest and fees on loans and leases	$	45,861	$	40,531		$	135,169	$	116,620	Interest and fees on loans and leases	$	46,204	$	43,768
Interest and dividends on investment securities:										Interest and dividends on investment securities:
Taxable interest	7,178		8,490			22,968		26,050		Taxable interest	6,757		8,260
Tax-exempt interest	708		920			2,388		2,786		Tax-exempt interest	668		866
Dividends	14		26			46		44		Dividends	17		18
Interest on deposits in other banks	33		109			147		310		Interest on deposits in other banks	36		68
Dividends on Federal Home Loan Bank stock	186		60			508		145		Dividends on Federal Home Loan Bank stock	132		161
Total interest income	53,980		50,136			161,226		145,955		Total interest income	53,814		53,141
Interest expense:										Interest expense:
Interest on deposits:										Interest on deposits:
Demand	207		181			598		554		Demand	176		192
Savings and money market	1,549		593			3,847		1,421		Savings and money market	1,118		791
Time	4,432		4,744			14,391		12,203		Time	3,268		5,092
Interest on short-term borrowings	1,130		146			3,146		237		Interest on short-term borrowings	508		893
Interest on long-term debt	1,013		1,147			3,104		3,221		Interest on long-term debt	914		1,060
Total interest expense	8,331		6,811			25,086		17,636		Total interest expense	5,984		8,028
Net interest income	45,649		43,325			136,140		128,319		Net interest income	47,830		45,113
Provision (credit) for loan and lease losses	1,532		(59		)	4,219		262
Net interest income after provision (credit) for loan and lease losses	44,117		43,384			131,921		128,057
Provision for credit losses										Provision for credit losses	9,329		1,283
Net interest income after provision for credit losses										Net interest income after provision for credit losses	38,501		43,830
Other operating income:										Other operating income:
Mortgage banking income	1,764		1,923			4,789		5,545		Mortgage banking income	337		1,573
Service charges on deposit accounts	2,125		2,189			6,247		6,169		Service charges on deposit accounts	2,050		2,081
Other service charges and fees	3,724		3,286			10,479		9,697		Other service charges and fees	4,897		3,215
Income from fiduciary activities	1,126		1,159			3,220		3,132		Income from fiduciary activities	1,297		965
Equity in earnings of unconsolidated subsidiaries	86		71			165		151		Equity in earnings of unconsolidated subsidiaries	26		8
Fees on foreign exchange	170		220			539		708
Investment securities gains	36		—			36		—
Income from bank-owned life insurance	645		1,055			2,511		1,874
Loan placement fees	230		115			486		532
Net gain on sales of foreclosed assets	17		—			17		—

Income (loss) from bank-owned life insurance										Income (loss) from bank-owned life insurance	(19)		952

Other	343		802			3,544		1,596		Other	298		2,879
Total other operating income	10,266		10,820			32,033		29,404		Total other operating income	8,886		11,673
Other operating expense:										Other operating expense:
Salaries and employee benefits	20,631		19,011			61,083		56,299		Salaries and employee benefits	20,347		19,889
Net occupancy	3,697		3,488			10,680		10,114		Net occupancy	3,672		3,458
Equipment	1,067		1,048			3,211		3,160		Equipment	1,097		1,006
Amortization of core deposit premium	—		669			—		2,006

Communication expense	1,008		903			2,645		2,547		Communication expense	837		734
Legal and professional services	1,933		1,528			5,231		5,118		Legal and professional services	2,028		1,570
Computer software expense	2,713		2,672			7,870		7,244		Computer software expense	2,943		2,597
Advertising expense	711		612			2,134		1,841		Advertising expense	1,092		711
Foreclosed asset expense	15		212			223		537		Foreclosed asset expense	67		159

Other	3,159		3,882			12,312		12,174		Other	4,157		4,224
Total other operating expense	34,934		34,025			105,389		101,040		Total other operating expense	36,240		34,348
Income before income taxes	19,449		20,179			58,565		56,421		Income before income taxes	11,147		21,155
Income tax expense	4,895		4,986			14,440		12,727		Income tax expense	2,821		5,118
Net income	$	14,554	$	15,193		$	44,125	$	43,694	Net income	$	8,326	$	16,037
Per common share data:										Per common share data:
Basic earnings per common share	$	0.51	$	0.52		$	1.54	$	1.48	Basic earnings per common share	$	0.30	$	0.56
Diluted earnings per common share	$	0.51	$	0.52		$	1.53	$	1.47	Diluted earnings per common share	$	0.29	$	0.55
Cash dividends declared	$	0.23	$	0.21		$	0.67	$	0.61	Cash dividends declared	$	0.23	$	0.21
Weighted average common shares outstanding used in computation:										Weighted average common shares outstanding used in computation:
Basic shares	28,424,898		29,297,465			28,575,369		29,536,536		Basic shares	28,126,400		28,758,310
Diluted shares	28,602,338		29,479,812			28,762,057		29,743,238		Diluted shares	28,277,753		28,979,855

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended March 31,
(dollars in thousands)	2019		2018			2019		2018			(dollars in thousands)	2020		2019
Net income	$	14,554	$	15,193		$	44,125	$	43,694		Net income	$	8,326	$	16,037
Other comprehensive income (loss), net of tax:
Net change in unrealized gain (loss) on investment securities	4,386		(6,072		)	27,547		(24,712		)
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	10,147		10,996
Defined benefit plans	283		217			773		623			Defined benefit plans	516		242
Total other comprehensive income (loss), net of tax	4,669		(5,855		)	28,320		(24,089		)
Total other comprehensive income, net of tax											Total other comprehensive income, net of tax	10,663		11,238
Comprehensive income	$	19,223	$	9,338		$	72,445	$	19,605		Comprehensive income	$	18,989	$	27,275

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	28,289,257	$	—	$	447,602	$	91,611	$	(19,102)	$	8,409	$	—	$	528,520
Impact of the adoption of new accounting standards (1)	—	—		—		—		(3,156)		—		—		(3,156)
Adjusted balance at January 1, 2020	28,289,257	—		447,602		91,611		(22,258)		8,409		—		525,364
Net income	—	—		—		—		8,326		—		—		8,326
Other comprehensive income	—	—		—		—		—		10,663		—		10,663
Cash dividends declared ($0.23 per share)	—	—		—		—		(6,496)		—		—		(6,496)

Common stock repurchased and retired and other related costs	(206,802)	—		(4,749)		—		—		—		—		(4,749)
Share-based compensation	32,898	—		—		673		—		—		—		673
Non-controlling interest	—	—		—		—		—		—		49		49
Balance at March 31, 2020	28,115,353	$	—	$	442,853	$	92,284	$	(20,428)	$	19,072	$	49	$	533,830

Common
Shares
Outstanding Preferred
Stock Common
Stock Additional Paid-In Capital 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 ) —
(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 ) —
(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
Net income —
—
—
—
14,554
—
—
14,554
Other comprehensive income —
—
—
—
—
4,669
—
4,669
Cash dividends declared ($0.23 per share) —
—
—
—
(6,556 ) —
—
(6,556 )
Common stock repurchased and retired and other related costs (140,600 ) —
(4,015 ) —
—
—
—
(4,015 )
Share-based compensation 14,164
—
880
—
—
—
880
Balance at September 30, 2019 28,441,341
$ —
$ 452,278
$ 90,604
$ (26,782 ) $ 9,127
$ —
$ 525,227


	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

























(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.

~~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, 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
Net income —
—
—
—
15,193
—
—
15,193
Other comprehensive income —
—
—
—
—
(5,855 ) —
(5,855 )
Cash dividends declared ($0.21 per share) —
—
—
—
(6,164 ) —
—
(6,164 )
Common stock repurchased and retired and other related costs (235,043 shares) (235,043 ) —
(6,681 ) —
—
—
—
(6,681 )
Share-based compensation 15,487
—
990
—
—
—
990
Balance at September 30, 2018 29,270,398
$ —
$ 478,721
$ 87,939
$ (61,406 ) $ (27,103 ) $ —
$ 478,151

(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.

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Three Months Ended March 31,
(dollars in thousands)	2020		2019
Cash flows from operating activities:
Net income	$	8,326	$	16,037
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	9,329		1,283
Depreciation and amortization of premises and equipment	1,504		1,540
Non-cash lease expense	59		79
Cash flows from operating leases	(1,594)		(1,549)

Loss on sale of other real estate, net of write-downs	64		138
Amortization of mortgage servicing rights	1,547		471
Net amortization and accretion of premium/discounts on investment securities	1,982		2,211
Share-based compensation expense	673		498

Net gain on sales of residential mortgage loans	(727)		(611)
Proceeds from sales of loans held for sale	31,498		31,877
Originations of loans held for sale	(25,598)		(28,158)
Equity in earnings of unconsolidated subsidiaries	(26)		(8)
Distributions from unconsolidated subsidiaries	73		82
Net decrease (increase) in cash surrender value of bank-owned life insurance	19		(952)
Deferred income taxes	(406)		5,013
Net tax benefits from share-based compensation	(48)		105
Net change in other assets and liabilities	4,570		(2,173)
Net cash provided by operating activities	31,245		25,883
Cash flows from investing activities:
Proceeds from maturities of and calls on investment securities available-for-sale	50,878		43,093

Purchases of investment securities available-for-sale	(96,068)		—


Proceeds from sale of MasterCard stock	—		2,555
Net loan originations	(41,339)		(6,851)
Purchases of loan portfolios	(22,340)		(18,286)




Net purchases of premises, equipment and land	(5,608)		(782)
Net return of capital from unconsolidated subsidiaries	—		622
Contributions to unconsolidated subsidiaries	(422)		—
Net (purchases of) proceeds from redemption of FHLB stock	(3,126)		500
Net cash (used in) / provided by investing activities	(118,025)		20,851
Cash flows from financing activities:
Net increase in deposits	16,046		1,638

Repayments of long-term debt	—		(20,619)
Net increase (decrease) in short-term borrowings	72,000		(18,000)
Cash dividends paid on common stock	(6,496)		(6,052)
Repurchases of common stock and other related costs	(4,749)		(7,708)

Net cash provided by financing activities	76,801		(50,741)
Net decrease in cash and cash equivalents	(9,979)		(4,007)
Cash and cash equivalents at beginning of period	102,972		102,186
Cash and cash equivalents at end of period	$	92,993	$	98,179

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	6,140	$	8,402
Income taxes	170		—


Supplemental disclosure of non-cash information:



Net transfer of investment securities held-to-maturity to available-for-sale	—		(149,042)
Right-of-use lease assets obtained in exchange for lease liabilities	—		55,887

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

Net income $ 44,125
$ 43,694
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses 4,219
262
Depreciation and amortization of premises and equipment 4,628
4,700
Non-cash lease expense 220
—
Cash flows from operating leases (4,663 ) —
Loss on sale of other real estate, net of write-downs 138
431
Amortization of core deposit premium and mortgage servicing rights 1,727
3,419
Net amortization and accretion of premium/discounts on investment securities 6,808
8,465
Share-based compensation expense 1,728
1,841
Net (gain) on sales of investment securities (36 ) —
Net gain on sales of residential mortgage loans (2,836 ) (3,013 )
Proceeds from sales of loans held for sale 152,684
183,967
Originations of loans held for sale (150,217 ) (169,078 )
Equity in earnings of unconsolidated subsidiaries (165 ) (151 )
Distributions from unconsolidated subsidiaries 175
614
Net increase in cash surrender value of bank-owned life insurance (1,499 ) (792 )
Deferred income taxes 7,548
12,542
Net tax benefits from share-based compensation 209
185
Net change in other assets and liabilities (12,309 ) (8,266 )
Net cash provided by operating activities 52,484
78,820
Cash flows from investing activities:

Proceeds from maturities of and calls on investment securities available-for-sale 194,626
114,508
Proceeds from sales of investment securities available-for-sale 53,935
—
Purchases of investment securities available-for-sale (54,975 ) (85,334 )
Proceeds from maturities of and calls on investment securities held-to-maturity —
38,491
Proceeds from sale of MasterCard stock 2,555
—
Net loan proceeds (originations) (214,834 ) (190,022 )
Purchases of loan portfolios (78,820 ) (20,867 )
Proceeds from sale of foreclosed loans/other real estate owned —
46
Net purchases of premises and equipment (3,438 ) (2,536 )
Net return of capital from unconsolidated subsidiaries 622
—
Net (purchases of) proceeds from redemption of FHLB stock (538 ) (3,204 )
Net cash used in investing activities (100,867 ) (148,918 )
Cash flows from financing activities:

Net increase in deposits 91,169
47,326
Repayments of long-term debt (20,619 ) —
Net increase (decrease) in short-term borrowings 8,000
73,000
Cash dividends paid on common stock (19,189 ) (18,039 )
Repurchases of common stock and other related costs (17,966 ) (24,763 )
Net cash provided by financing activities 41,395
77,524
Net (decrease) increase in cash and cash equivalents (6,988 ) 7,426
Cash and cash equivalents at beginning of period 102,186
82,293
Cash and cash equivalents at end of period $ 95,198
$ 89,719

Supplemental disclosure of cash flow information:

Cash paid during the period for:

Interest $ 24,735
$ 15,969
Income taxes 17,601
23
Supplemental disclosure of non-cash information:
Net change in common stock held by directors’ deferred compensation plan 416
504
Net reclassification of loans to foreclosed loans/other real estate owned 190
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 January 2020, we acquired a 50% ownership interest in a mortgage loan origination and brokerage company, 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 has been consolidated into our financial statements.

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~~$0.1 million, ~~$15.2~~$15.0 million and $1.6 million, respectively, at ~~September 30, 2019~~March 31, 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 extent to which the COVID-19 pandemic negatively impacts the Company's business, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, is unknown at this time and will depend on future developments, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. If the pandemic is sustained, it may further adversely impact the Company and the State of Hawaii and impair the ability of the Company's customers to fulfill their contractual obligations to the Company. This could cause the Company to experience a material adverse effect on its business operations, asset valuations, financial condition, and

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

Change in Operating Segments and Reclassifications

In the first quarter of 2020, the Company reassessed the alignment of its reportable segments and combined its three reportable segments (Banking Operations, Treasury and All Others segments) into a single operating segment. We believe this change better reflects how the Company's Executive Committee, or its chief operating decision maker ("CODM"), manages, allocates resources and assesses performance of the activities of the Company. The Company also believes that this change is better aligned with how the Company's CODM manages its business. Segment results for 2019 have been reclassified to ~~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 March 31, 2020 and the Company did not reverse any accrued interest against interest income during the three months ended March 31, 2020.

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

AFS debt securities in an unrealized loss position are evaluated for impairment at least quarterly. For AFS debt securities in an unrealized loss position, the Company first assesses whether or not it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the investment security’s amortized cost basis is written down to fair value through net income.

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

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

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

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

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

ACL for HTM Debt Securities

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

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

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

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

Federal Home Loan Bank Stock

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

Loans

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

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

Nonaccrual Loans

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

Troubled Debt Restructuring (“TDR”)

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

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

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

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 straight-line basis over one year when its forecast is no longer deemed reasonable and supportable.

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

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

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

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

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

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

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

Other consumer

Loss-Rate Migration

2008-Present

Purchased dealer loans

Weighted-Average Remaining Maturity ("WARM")

2008-Present

Purchased consumer unsecured loans

Loss-Rate Migration/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.

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 then further sub-segmented by risk characteristics such as Risk Rating to measure losses accurately. PD measures the count or dollar amount of loans that defaulted in a given cohort. LGD measures the losses related to the loans that defaulted. Total loss rate is calculated using the formula ‘PD times LGD’.

Migration

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

WARM

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

Other

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

Determining the Contractual Term

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

Reserve for Off-Balance Sheet Credit Exposures

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

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

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

Purchased Credit Deteriorated (“PCD”) Financial Assets

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

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

2. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Adopted in ~~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 September 30, 2019, the ROU lease asset and lease liability was $52.6 million and $52.8 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 and enhancing internal controls, having its CECL framework independently validated by a third-party expert, performing parallel runs, and addressing remaining gaps. 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, the underlying assumptions embedded in its methodology, as well as economic condition expectations as of the date of adoption. The Company also anticipates significant changes to its reserve calculation processesASC 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

~~and procedures and continues to evaluate the potential impact on our consolidated financial statements through sensitivity analysis of underlying assumptions and economic scenarios.~~

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.

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 of our available-for-sale investment~~The amortized cost, gross unrealized gains and losses, fair value and related ACL on AFS debt securities isare as follows:


(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		ACL
March 31, 2020
Available-for-sale:
Debt securities:
States and political subdivisions	$	131,539	$	2,955	$	(284)	$	134,210	$	—
Corporate securities	30,116		111		—		30,227		—
U.S. Treasury obligations and direct obligations of U.S Government agencies	38,244		43		(781)		37,506		—
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	716,398		18,861		(209)		735,050		—
Commercial - U.S. Government agencies and sponsored entities	77,612		2,707		—		80,319		—
Residential - Non-government agencies	34,113		608		(49)		34,672		—
Commercial - Non-government agencies	131,705		1,265		(931)		132,039		—
Total available-for-sale securities	$	1,159,727	$	26,550	$	(2,254)	$	1,184,023	$	—

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

Available-for-sale:

Debt securities:

States and political subdivisions $ 122,171
$ 2,593
$ (53 ) $ 124,711
Corporate securities 30,436
277
—
30,713
U.S. Treasury obligations and direct obligations of U.S Government agencies 43,213
17
(333 ) 42,897
Mortgage-backed securities:

Residential - U.S. Government-sponsored entities 721,081
5,796
(3,233 ) 723,644
Commercial - U.S. Government agencies and sponsored entities 86,697
1,431
(386 ) 87,742
Residential - Non-government agencies 38,140
969
—
39,109
Commercial - Non-government agencies 134,724
3,335
—
138,059
Total available-for-sale securities $ 1,176,462
$ 14,418
$ (4,005 ) $ 1,186,875

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, 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


(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 securities is as follows:

(dollars in thousands) Amortized Cost Fair Value
September 30, 2019
Equity securities $ 898
$ 1,058

December 31, 2018
Equity securities 826
826


(dollars in thousands)	Amortized Cost		Fair Value
March 31, 2020
Equity securities	$	961	$	1,002

December 31, 2019
Equity securities	935		1,127

~~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 our ~~available-for-sale investment~~AFS debt securities at ~~September 30, 2019~~March 31, 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.


	March 31, 2020
(dollars in thousands)	Amortized Cost		Fair Value






Available-for-sale:
Due in one year or less	$	48,598	$	48,784
Due after one year through five years	46,887		47,163
Due after five years through ten years	63,133		64,548
Due after ten years	41,281		41,448

Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	716,398		735,050
Commercial - U.S. Government agencies and sponsored entities	77,612		80,319
Residential - Non-government agencies	34,113		34,672
Commercial - Non-government agencies	131,705		132,039

Total available-for-sale securities	$	1,159,727	$	1,184,023

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

Due in one year or less $ 32,455
$ 32,658
Due after one year through five years 60,696
61,195
Due after five years through ten years 63,661
64,715
Due after ten years 39,008
39,753

Mortgage-backed securities:
Residential - U.S. Government-sponsored entities 721,081
723,644
Commercial - U.S. Government agencies and sponsored entities 86,697
87,742
Residential - Non-government agencies 38,140
39,109
Commercial - Non-government agencies 134,724
138,059
Total available-for-sale securities $ 1,176,462
$ 1,186,875

~~For the three and nine months ended September 30, 2019, proceeds from the sale of available-for-sale investment securities were $53.9 million and resulted in a gross realized gain of $36 thousand.~~ We did not sell any available-for-sale securities during the three ~~and nine~~ months ended ~~September 30, 2018.~~March 31, 2020 and March 31, 2019.

Investment securities of ~~$662.2~~$617.9 million and ~~$980.2~~$719.8 million at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, were pledged to secure public funds on deposit and other short-term borrowings.

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

There were a ~~summary~~total of ~~the 98~~50 and ~~336 investment~~81 AFS debt securities which were in an unrealized or unrecognized loss position, without an ACL, at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018, respectively,~~2019, respectively. The following tables summarize AFS debt securities which were in an unrealized loss position at March 31, 2020 and December 31, 2019, aggregated by major security type and length of time in a continuous unrealized or unrecognized loss position.


	Less Than 12 Months						12 Months or Longer						Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2020
Debt securities:
States and political subdivisions	$	6,953	$	(278)	$	803	$	(6)	$	7,756	$	(284)
Corporate securities	—		—		—		—		—		—
U.S. Treasury obligations and direct obligations of U.S Government agencies	14,879		(325)		17,437		(456)		32,316		(781)
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	4,764		(28)		17,967		(181)		22,731		(209)
Residential - Non-government agencies	7,495		(49)		—		—		7,495		(49)
Commercial - U.S. Government agencies and sponsored entities	—		—		—		—		—		—
Commercial - Non-government agencies	78,904		(931)		—		—		78,904		(931)
Total temporarily impaired securities	$	112,995	$	(1,611)	$	36,207	$	(643)	$	149,202	$	(2,254)

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

Debt securities:

States and political subdivisions $ 7,007
$ (26 ) $ 1,253
$ (27 ) $ 8,260
$ (53 )
Corporate securities —
—
—
—
—
—
U.S. Treasury obligations and direct obligations of U.S Government agencies 16,815
(122 ) 20,507
(211 ) 37,322
(333 )
Mortgage-backed securities:

Residential - U.S. Government-sponsored entities 103,254
(631 ) 247,482
(2,602 ) 350,736
(3,233 )
Residential - Non-government agencies —
—
—
—
—
—
Commercial - U.S. Government agencies and sponsored entities 36,068
(386 ) —
—
36,068
(386 )
Commercial - Non-government agencies —
—
—
—
—
—
Total temporarily impaired securities $ 163,144
$ (1,165 ) $ 269,242
$ (2,840 ) $ 432,386
$ (4,005 )


	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 ~~September 30, 2019,~~March 31, 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, net of ACL under ASC 326 as of March 31, 2020 and loans, excluding loans held for sale, net of ACL under previous GAAP as of December 31, 2019 consisted of the ~~following as of September 30, 2019 and December 31, 2018:~~following:

(dollars in thousands) September 30, 2019 December 31, 2018
Commercial, financial and agricultural $ 576,343
$ 581,177
Real estate:

Construction 96,996
67,269
Residential mortgage 1,554,752
1,424,384
Home equity 475,211
468,966
Commercial mortgage 1,135,408
1,041,685
Consumer 526,429
492,268
Leases 31
124
Gross loans and leases 4,365,170
4,075,873
Net deferred costs 2,692
2,493
Total loans and leases, net of deferred costs $ 4,367,862
$ 4,078,366


(dollars in thousands)	March 31, 2020		December 31, 2019
Commercial, financial and agricultural	$	575,169	$	570,089
Real estate:
Construction	100,959		96,139
Residential mortgage	1,628,502		1,595,801
Home equity	504,061		490,239
Commercial mortgage	1,140,611		1,124,911


Consumer	559,765		569,516

Gross loans and leases	4,509,067		4,446,695
Net deferred costs	2,931		2,845
Loans	4,511,998		4,449,540
Allowance for credit losses	(59,645)		(47,971)
Loans, net of allowance for credit losses	$	4,452,353	$	4,401,569

~~During the nine months ended September 30, 2019, we foreclosed on 1 loan totaling $0.2 million.~~

~~During the nine months ended September 30, 2018, we foreclosed on 1 loan totaling $40 thousand.~~

~~During the nine months ended September 30, 2019 and 2018, we~~The Company did not transfer any loans to the held-for-sale ~~category.~~category during the three months ended March 31, 2020 and 2019.

WeThe Company did not sell any ~~portfolio~~ loans originally held for investment during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.

~~Through the third quarter~~The Company has purchased loan portfolios, none of ~~2019, we purchased consumer loans with outstanding balances at the time of purchases totaling $80.0 million for $78.8 million, or a net discount of $1.2 million.~~

~~In 2018, we purchased consumer loans totaling $58.6 million,~~ which ~~included a $0.1 million premium over the $58.5 million outstanding balance~~were credit deteriorated since origination, 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 March 31, 2020
Purchases:
Outstanding balance	$	22,953
Purchase premium (discount)	(613)
Purchase price	$	22,340

Three Months Ended March 31, 2019
Purchases:
Outstanding balance	$	18,286
Purchase premium (discount)	—
Purchase price	$	18,286

Collateral-Dependent Loans

In accordance with ASC 326, a loan is considered collateral-dependent when the ~~allowance for 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 ~~September 30, 2019 and December~~March 31, ~~2018:~~2020:

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

Allowance:

Individually evaluated for impairment $ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
Collectively evaluated for impairment 7,781
1,693
13,546
4,287
12,209
8,651
—
48,167
Total ending balance $ 7,781
$ 1,693
$ 13,546
$ 4,287
$ 12,209
$ 8,651
$ —
$ 48,167

Loans and leases:

Individually evaluated for impairment $ 157
$ —
$ 7,516
$ 95
$ 1,985
$ —
$ —
$ 9,753
Collectively evaluated for impairment 576,186
96,996
1,547,236
475,116
1,133,423
526,429
31
4,355,417
Subtotal 576,343
96,996
1,554,752
475,211
1,135,408
526,429
31
4,365,170
Net deferred costs (income) 269
(335 ) 3,983
354
(1,496 ) (83 ) —
2,692
Total loans and leases, net of deferred costs (income) $ 576,612
$ 96,661
$ 1,558,735
$ 475,565
$ 1,133,912
$ 526,346
$ 31
$ 4,367,862

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
Three Months Ended March 31, 2020
Commercial, financial and agricultural	$	—	$	—	$	667	$	667	$	231
Real estate:

Residential mortgage	7,718		—		—		7,718		—
Home equity	545		—		—		545		—
Commercial mortgage	—		512		—		512		—


Total	$	8,263	$	512	$	667	$	9,442	$	231

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

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

September 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 $ 267
$ 157
$ —
$ 330
$ 220
$ —
Real estate:
Construction —
—
—
3,076
2,273
—
Residential mortgage 8,239
7,516
—
11,019
10,075
—
Home equity 95
95
—
275
275
—
Commercial mortgage 1,985
1,985
—
2,348
2,348
—
Total impaired loans $ 10,586
$ 9,753
$ —
$ 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 nine~~ months ended ~~September 30,~~March 31, 2019, ~~and 2018:~~as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:


	Three Months Ended
	March 31, 2019
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized
Commercial, financial and agricultural	$	209	$	3
Real estate:
Construction	2,233		30
Residential mortgage	9,818		106
Home equity	497		—
Commercial mortgage	2,285		23

Total	$	15,042	$	162

Three Months Ended Nine Months Ended
September 30, 2019 September 30, 2018 September 30, 2019 September 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 $ 164
$ 2
$ 399
$ 12
$ 188
$ 7
$ 498
$ 17
Real estate:

Construction —
—
2,382
30
1,323
62
2,476
84
Residential mortgage 7,536
63
12,857
123
8,763
776
13,208
419
Home equity 190
—
447
—
332
13
516
—
Commercial mortgage 2,021
22
3,483
36
2,162
68
3,653
110
Total $ 9,911
$ 87
$ 19,568
$ 201
$ 12,768
$ 926
$ 20,351
$ 630

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019, ~~and 2018,~~ the amount of interest income recognized on impaired loans within the period that the loans were impaired were primarily related to loans modified in a troubled debt restructuring ("TDR") that were on accrual status. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019, ~~and 2018,~~ the amount of interest income recognized using a cash-based method of accounting during the period that the loans were impaired was not material.

Foreclosure Proceedings

The Company had ~~$0.3~~$0.7 million and ~~$0.7~~$0.6 million of residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

The Company did not foreclose on any loans during the three months ended March 31, 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 ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019. The following tables also present the amortized cost of loans on onaccrual status for which there was no related ACL under ASC 326 as of March 31, 2020 and under previous GAAP as of December 31, 2019.


(dollars in thousands)	Accruing Loans 30 - 59 Days Past Due		Accruing Loans 60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due and Nonaccrual		Loans and Leases Not Past Due		Total		Nonaccrual Loans With No ACL
March 31, 2020
Commercial, financial and agricultural	$	7,050	$	712	$	—	$	667	$	8,429	$	566,895	$	575,324	$	—
Real estate:
Construction	478		—		—		—		478		100,139		100,617		—
Residential mortgage	4,371		82		1,221		2,287		7,961		1,624,575		1,632,536		2,287
Home equity	573		—		—		545		1,118		503,568		504,686		545
Commercial mortgage	287		—		—		—		287		1,138,850		1,139,137		—


Consumer	4,739		1,167		352		48		6,306		553,392		559,698		—

Total	$	17,498	$	1,961	$	1,573	$	3,547	$	24,579	$	4,487,419	$	4,511,998	$	2,832

(dollars in thousands) Accruing
Loans
30 - 59 Days
Past Due Accruing
Loans
60 - 89 Days
Past Due Accruing
Loans
Greater Than
90 Days
Past Due Nonaccrual
Loans Total
Past Due
and
Nonaccrual Loans and
Leases
Not
Past Due Total
September 30, 2019

Commercial, financial and agricultural $ 5,845
$ 87
$ —
$ —
$ 5,932
$ 570,680
$ 576,612
Real estate:

Construction —
—
—
—
—
96,661
96,661
Residential mortgage —
2,327
—
799
3,126
1,555,609
1,558,735
Home equity 320
250
—
95
665
474,900
475,565
Commercial mortgage —
—
—
—
—
1,133,912
1,133,912
Consumer 2,974
1,296
235
—
4,505
521,841
526,346
Leases —
—
—
—
—
31
31
Total $ 9,139
$ 3,960
$ 235
$ 894
$ 14,228
$ 4,353,634
$ 4,367,862

(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


(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

~~Modifications~~Troubled Debt Restructurings

Troubled debt restructurings ("TDRs") included in nonperforming assets at ~~September 30, 2019~~March 31, 2020 consisted of 1 Hawaii residential mortgage loan with a principal balance of $0.3 million. There were $7.3 million of TDRs still accruing interest at March 31, 2020, none of which were more than 90 days delinquent. At December 31, 2019, there were $7.5 million of TDRs still accruing interest, none of which were more than 90 days delinquent.

As discussed in Note 1 to these ~~borrowers. There~~financial statements, the CARES Act provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were ~~$8.9 million of TDRs still accruing interest at September 30, 2019, none of which were~~not more than 9030 days ~~delinquent. At~~past due as of December 31, ~~2018, there~~2019. The TDRs disclosed above were ~~$12.9~~not related to COVID-19 modifications. The Company executed loan deferrals on outstanding balances of approximately $65 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~~resulting from 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. LoansCOVID-19 pandemic that were not ~~on nonaccrual status when modified in~~classified as a TDR may have the financial effect of increasing the specific allowance associated with the loan. The loans modified in a TDR did not have a material effect on our provision for loan and lease losses (the "Provision") and the Allowance during the three and nine months ended September 30, 2019.at March 31, 2020.

No loans were modified in a TDR during the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.

NaN loans were modified as a TDR within the previous twelve months that subsequently defaulted during the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.

We had no commitments on TDRs during the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 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 March 31, 2020. Revolving loans converted to term as of and during the three months ended March 31, 2020 were not material to the total loan portfolio.


	Amortized Cost of Term Loans by Origination Year
	2020		2019		2018		2017		2016		Prior		Amortized Cost of Revolving Loans		Total
	(dollars in thousands)
March 31, 2020
Commercial, financial and agricultural
Risk Rating
Pass	$	40,976	$	77,593	$	64,288	$	59,642	$	50,144	$	125,599	$	97,073	$	515,315
Special Mention	2,865		9,777		5,627		15,376		1,006		9,153		3,280		47,084
Substandard	—		7,497		526		1,229		2,097		1,576		—		12,925

Subtotal	43,841		94,867		70,441		76,247		53,247		136,328		100,353		575,324
Construction
Risk Rating
Pass	7,923		12,157		50,181		6,920		2,277		21,159		—		100,617




Residential mortgage
Risk Rating
Pass	80,293		364,858		186,851		201,685		227,341		566,829		—		1,627,857
Special Mention	—		—		—		—		159		835		—		994
Substandard	—		—		550		929		302		1,904		—		3,685

Subtotal	80,293		364,858		187,401		202,614		227,802		569,568		—		1,632,536
Home equity
Risk Rating
Pass	4,927		21,426		22,858		493		249		3,951		450,237		504,141

Substandard	—		—		—		—		207		338		—		545

Subtotal	4,927		21,426		22,858		493		456		4,289		450,237		504,686
Commercial mortgage
Risk Rating
Pass	36,503		153,355		170,779		172,937		118,087		396,221		17,463		1,065,345
Special Mention	—		—		2,392		12,597		13,220		32,666		—		60,875
Substandard	—		7,434		—		—		—		5,483		—		12,917

Subtotal	36,503		160,789		173,171		185,534		131,307		434,370		17,463		1,139,137
Consumer
Risk Rating
Pass	47,522		206,573		111,490		68,480		31,287		17,520		76,277		559,149
Special Mention	—		—		—		—		—		—		150		150
Substandard	—		11		26		11		—		237		—		285
Loss	—		—		—		—		—		114		—		114
Subtotal	47,522		206,584		111,516		68,491		31,287		17,871		76,427		559,698
Total	$	221,009	$	860,681	$	615,568	$	540,299	$	446,376	$	1,183,585	$	644,480	$	4,511,998

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 ~~September 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
September 30, 2019

Commercial, financial and agricultural $ 561,372
$ 3,318
$ 11,653
$ —
$ 576,343
$ 269
$ 576,612
Real estate:

Construction 96,996
—
—
—
96,996
(335 ) 96,661
Residential mortgage 1,553,869
—
883
—
1,554,752
3,983
1,558,735
Home equity 475,116
—
95
—
475,211
354
475,565
Commercial mortgage 1,096,341
25,757
13,310
—
1,135,408
(1,496 ) 1,133,912
Consumer 526,193
—
149
87
526,429
(83 ) 526,346
Leases 31
—
—
—
31
—
31
Total $ 4,309,918
$ 29,075
$ 26,090
$ 87
$ 4,365,170
$ 2,692
$ 4,367,862

(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 months ended March 31, 2020 and under previous GAAP during the three months ended March 31, 2019:


			Real Estate																						Real Estate
(dollars in thousands)	Commercial, Financial & Agricultural		Construction			Residential Mortgage			Home Equity			Commercial Mortgage			Consumer		Leases		Total			(dollars in thousands)	Commercial, Financial & Agricultural		Construction		Residential Mortgage		Home Equity		Commercial Mortgage		Consumer		Total
Three Months Ended September 30, 2019
Beginning balance	$	8,109	$	1,313		$	13,367		$	4,313		$	11,668		$	9,497	$	—	$	48,267
Provision (credit) for loan and lease losses	107		374			75			(45		)	541			480		—		1,532
Three Months Ended March 31, 2020																						Three Months Ended March 31, 2020
Beginning balance prior to ASC 326																						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																						Impact of adoption of ASC 326	(627)		479		608		(1,614)		2,624		2,096		3,566
Balance after adoption of ASC 326																						Balance after adoption of ASC 326	7,509		2,271		13,935		2,592		13,737		11,493		51,537
Provision for credit losses																						Provision for credit losses	1,231		655		(935)		(314)		5,779		2,913		9,329
	8,216		1,687			13,442			4,268			12,209			9,977		—		49,799
Charge-offs	797		—			—			5			—			1,832		—		2,634			Charge-offs	437		—		—��		—		—		2,217		2,654
Recoveries	362		6			104			24			—			506		—		1,002			Recoveries	342		131		181		31		2		746		1,433
Net charge-offs (recoveries)	435		(6		)	(104		)	(19		)	—			1,326		—		1,632			Net charge-offs (recoveries)	95		(131)		(181)		(31)		(2)		1,471		1,221
Ending balance	$	7,781	$	1,693		$	13,546		$	4,287		$	12,209		$	8,651	$	—	$	48,167		Ending balance	$	8,645	$	3,057	$	13,181	$	2,309	$	19,518	$	12,935	$	59,645

Three Months Ended September 30, 2018
Three Months Ended March 31, 2019																						Three Months Ended March 31, 2019
Beginning balance	$	7,525	$	1,811		$	14,252		$	3,168		$	15,094		$	6,331	$	—	$	48,181		Beginning balance	$	8,027	$	1,202	$	14,349	$	3,788	$	13,358	$	7,192	$	47,916
Provision (credit) for loan and lease losses	495		(526		)	(168		)	544			(1,632		)	1,228		—		(59		)
Provision for credit losses																						Provision for credit losses	50		91		(1,520)		481		(1,322)		3,503		1,283
	8,020		1,285			14,084			3,712			13,462			7,559		—		48,122				8,077		1,293		12,829		4,269		12,036		10,695		49,199
Charge-offs	731		—			—			—			—			1,762		—		2,493			Charge-offs	463		—		—		—		—		2,251		2,714
Recoveries	578		6			51			6			8			548		—		1,197			Recoveries	233		6		22		9		—		512		782
Net charge-offs (recoveries)	153		(6		)	(51		)	(6		)	(8		)	1,214		—		1,296			Net charge-offs (recoveries)	230		(6)		(22)		(9)		—		1,739		1,932
Ending balance	$	7,867	$	1,291		$	14,135		$	3,718		$	13,470		$	6,345	$	—	$	46,826		Ending balance	$	7,847	$	1,299	$	12,851	$	4,278	$	12,036	$	8,956	$	47,267

Real Estate
(dollars in thousands) Commercial,
Financial &
Agricultural Construction Residential Mortgage Home Equity Commercial Mortgage Consumer Leases Total
Nine Months Ended September 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 943
(113 ) (1,301 ) 462
(1,174 ) 5,402
—
4,219
8,970
1,089
13,048
4,250
12,184
12,594
—
52,135
Charge-offs 2,099
—
—
5
—
5,542
—
7,646
Recoveries 910
604
498
42
25
1,599
—
3,678
Net charge-offs (recoveries) 1,189
(604 ) (498 ) (37 ) (25 ) 3,943
—
3,968
Ending balance $ 7,781
$ 1,693
$ 13,546
$ 4,287
$ 12,209
$ 8,651
$ —
$ 48,167

Nine Months Ended September 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 1,227
(1,749 ) (291 ) 383
(3,383 ) 4,075
—
262
8,821
86
14,037
3,700
13,418
10,201
—
50,263
Charge-offs 1,971
—
—
—
—
5,424
—
7,395
Recoveries 1,017
1,205
98
18
52
1,568
—
3,958
Net charge-offs (recoveries) 954
(1,205 ) (98 ) (18 ) (52 ) 3,856
—
3,437
Ending balance $ 7,867
$ 1,291
$ 14,135
$ 3,718
$ 13,470
$ 6,345
$ —
$ 46,826

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


Three Months Ended March 31, 2020
Beginning balance prior to ASC 326	$	1,272
Impact of adoption of ASC 326	740
Balance after adoption of ASC 326	2,012
Provision for off-balance sheet credit exposures	1,798
Ending Balance	$	3,810

Three Months Ended March 31, 2019
Beginning balance	$	1,242


Provision for off-balance sheet credit exposures	167
Ending balance	$	1,409

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

Our ~~Provision~~provision for credit losses on loans was ~~a debit of $1.5 million and a debit of $4.2~~$9.3 million in the three ~~and nine~~ months ended ~~September 30, 2019, respectively,~~March 31, 2020 under ASC 326, compared to ~~a credit of $0.1 million and a debit of $0.3~~$1.3 million in the three ~~and nine~~ months ended ~~September 30, 2018, respectively.~~March 31, 2019 under previous GAAP.

6. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

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


(dollars in thousands)	March 31, 2020		December 31, 2019
Investments in low income housing tax credit partnerships	$	14,974	$	15,322
Investments in common securities of statutory trusts	1,547		1,547
Investments in affiliates	146		192
Other	54		54
Total	$	16,721	$	17,115

(dollars in thousands) September 30, 2019 December 31, 2018
Investments in low income housing tax credit partnerships $ 15,228
$ 11,603
Investments in common securities of statutory trusts 1,547
2,169
Investments in affiliates 172
182
Other 54
54
Total $ 17,001
$ 14,008

The Company invests in low-income housing tax credit ("LIHTC") partnerships. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company had ~~$11.7~~$11.0 million and ~~$8.3~~$11.5 million, respectively, in unfunded commitments related to the LIHTC partnerships. The expected payments for the unfunded commitments as of ~~September 30, 2019~~March 31, 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)	$	6,452
2021	1,494
2022	3,010
2023	10
2024	26
2025	6
Thereafter	42
Total unfunded commitments	$	11,040

Year Ending December 31,
2019 (remainder) $ 3,669
2020 3,466
2021 1,494
2022 3,010
2023 10
2024 26
Thereafter 49
Total unfunded commitments $ 11,724

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 nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~September 30, 2018:~~March 31, 2019:

(dollars in thousands) Three Months Ended
September 30, 2019 Three Months Ended
September 30, 2018 Nine Months Ended
September 30, 2019 Nine Months Ended
September 30, 2018
Proportional amortization method:
Amortization expense recognized in income tax expense $ 259
$ 114
$ 776
$ 341
Tax credits recognized in income tax expense 307
152
922
457


(dollars in thousands)	Three Months Ended March 31, 2020		Three Months Ended March 31, 2019
Proportional amortization method:
Amortization expense recognized in income tax expense	$	348	$	258
Tax credits recognized in income tax expense	400		277

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	222
Amortization	(471)
Balance, March 31, 2019	$	15,347

Balance, January 1, 2020	$	14,718
Additions	174
Amortization	(1,547)
Balance, March 31, 2020	$	13,345

(dollars in thousands) Core
Deposit
Premium Mortgage
Servicing
Rights Total
Balance, January 1, 2018 $ 2,006
$ 15,843
$ 17,849
Additions —
1,204
1,204
Amortization (2,006 ) (1,413 ) (3,419 )
Balance, September 30, 2018 $ —
$ 15,634
$ 15,634

Balance, January 1, 2019 $ —
$ 15,596
$ 15,596
Additions —
1,189
1,189
Amortization —
(1,727 ) (1,727 )
Balance, September 30, 2019 $ —
$ 15,058
$ 15,058

Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans and totaled ~~$0.4 million and $1.2~~$0.2 million for the three ~~and nine~~ months ended ~~September 30, 2019, respectively,~~March 31, 2020 compared to ~~$0.4 million and $1.2~~$0.2 million for the three ~~and nine~~ months ended ~~September 30, 2018, respectively.~~March 31, 2019.

Amortization of mortgage servicing rights totaled ~~$0.7 million and $1.7~~$1.5 million for the three ~~and nine~~ months ended ~~September 30, 2019, respectively,~~March 31, 2020 compared to $0.5 million ~~and $1.4 million~~ for the three ~~and nine~~ months ended ~~September 30, 2018, respectively.~~March 31, 2019.

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

Nine Months Ended Nine Months Ended
(dollars in thousands) September 30, 2019 September 30, 2018
Fair market value, beginning of period $ 17,696
$ 17,161
Fair market value, end of period 15,965
18,315
Weighted average discount rate 9.5 % 9.5 %
Forecasted constant prepayment rate assumption ⁽¹⁾
14.6
14.0


	Three Months Ended			Three Months Ended
(dollars in thousands)	March 31, 2020			March 31, 2019
Fair market value, beginning of period	$	15,820		$	17,696
Fair market value, end of period	13,525			16,541
Weighted average discount rate	9.5		%	9.5		%
Forecasted constant prepayment rate assumption ⁽¹⁾	16.1		%	16.2		%

⁽¹⁾ Represents annualized average life loan prepayment rate assumption.

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

September 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 67,202
(52,144 ) 15,058
66,013
(50,417 ) 15,596
Total $ 111,844
$ (96,786 ) $ 15,058
$ 110,655
$ (95,059 ) $ 15,596


	March 31, 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	$	67,769	$	(54,424)	$	13,345	$	67,595	$	(52,877)	$	14,718

Based on the mortgage servicing rights held as of ~~September 30, 2019,~~March 31, 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) $ 669
2020 2,373
2021 1,918
2022 1,585
2023 1,319
2024 1,118
Thereafter 6,076
Total $ 15,058


Year Ending December 31,
2020 (remainder)	$	4,400
2021	4,764
2022	3,856
2023	325
2024	—
2025	—
Thereafter	—
Total	$	13,345

We perform an impairment assessment of our mortgage servicing rights whenever events or changes in circumstance indicate that the carrying value of the asset may not be recoverable.

8. DERIVATIVES

We utilize various designated and undesignated derivative financial instruments to reduce our exposure to movements in interest rates including interest rate lock commitments and forward sale commitments. We measure all derivatives at fair value on our consolidated balance sheet. In each reporting period, we record the derivative instruments in other assets or other liabilities depending on whether the derivatives are in an asset or liability position. For derivative instruments that are designated as cash flow hedging instruments, we record the effective portion of the changes in the fair value of the derivative in AOCI, net of tax, until earnings are affected by the variability of cash flows of the hedged transaction. We immediately recognize the portion of the gain or loss in the fair value of the derivative that represents hedge ineffectiveness in current period earnings. For derivative instruments that are not designated as hedging instruments, changes in the fair value of the derivative are included in current period earnings. At ~~September 30, 2019~~March 31, 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 ~~September 30, 2019,~~March 31, 2020, we were a party to interest rate lock and forward sale commitments on ~~$1.6~~$4.2 million and ~~$8.4~~$8.1 million of mortgage loans, respectively.

The following table presents the location of all assets and liabilities associated with our derivative instruments within the consolidated balance sheets:

Derivatives Financial Instruments Not Designated as Hedging Instruments

Asset Derivatives

Liability Derivatives

Fair Value at

(dollars in thousands)

Balance Sheet Location

March 31,
2020

December 31,
2019

March 31,
2020

December 31,
2019

Interest rate lock and forward sale commitments

Other assets / other liabilities

115

Derivatives Financial Instruments Not Designated as Hedging Instruments Asset Derivatives Liability Derivatives
Fair Value at Fair Value at
(dollars in thousands) Balance Sheet Location September 30,
2019 December 31,
2018 September 30,
2019 December 31,
2018
Interest rate lock and forward sale commitments Other assets / other liabilities $ 49
$ 11
$ 3
$ 95

Risk Participation Agreement

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

The following table presents the impact of derivative instruments and their location within the consolidated statements of income:

Derivatives Financial Instruments
Not Designated as Hedging Instruments

Location of Gain (Loss)
Recognized in
Earnings on Derivatives

Amount of Gain (Loss)
Recognized in
Earnings on Derivatives

(dollars in thousands)

Three Months Ended March 31, 2020

Interest rate lock and forward sale commitments

Mortgage banking income

Risk participation agreement

Other service charges and fees

1,288

Three Months Ended March 31, 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 September 30, 2019
Interest rate lock and forward sale commitments Mortgage banking income $ 110
Loans held for sale Other income (1 )

Three Months Ended September 30, 2018
Interest rate lock and forward sale commitments Mortgage banking income 91
Loans held for sale Other income (6 )

Nine Months Ended September 30, 2019
Interest rate lock and forward sale commitments Mortgage banking income 131
Loans held for sale Other income (1 )

Nine Months Ended September 30, 2018
Interest rate lock and forward sale commitments Mortgage banking income 76
Loans held for sale Other income (6 )

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 ~~$1.80~~$1.87 billion line of credit as of ~~September 30, 2019,~~March 31, 2020, compared to ~~$1.43~~$1.84 billion at December 31, ~~2018.~~2019. At ~~September 30, 2019, $1.43~~March 31, 2020, $1.41 billion was undrawn under this arrangement, compared to ~~$1.18~~$1.57 billion at December 31, ~~2018.~~2019. Short-term borrowings under this arrangement totaled ~~$205.0~~$222.0 million at ~~September 30, 2019,~~March 31, 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 ~~$118.9~~$187.4 million at ~~September 30, 2019,~~March 31, 2020, compared to ~~$4.6~~$78.9 million at December 31, ~~2018.~~2019. Long-term borrowings under this arrangement totaled $50.0 million at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. FHLB advances and standby letters of credit available at ~~September 30, 2019~~March 31, 2020 were secured by certain real estate loans with a carrying value of ~~$2.42~~$2.51 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB.

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, our bank had additional unused borrowings available at the Federal Reserve discount window of ~~$65.6~~$60.3 million and ~~$73.9~~$65.3 million, respectively. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, certain commercial and commercial real estate loans with a carrying value totaling ~~$118.9~~$125.2 million and ~~$123.3~~$126.1 million, respectively, were pledged as collateral on our line of credit with the Federal Reserve discount window. The Federal Reserve does not have the right to sell or repledge these loans.

Subordinated Debentures

In October 2003, we created 2 wholly-owned statutory trusts, CPB Capital Trust II ("Trust II") and CPB Statutory Trust III ("Trust III"). Trust II issued $20.0 million in floating rate trust preferred securities bearing an interest rate of three-month LIBOR plus 2.85% and maturing on October 7, 2033. The principal assets of Trust II were $20.6 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust II trust preferred securities. Trust II issued $0.6 million of common securities to the Company.

On January 7, 2019, the Company completed the redemption of $20.0 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 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 ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~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) September 30, 2019
Name of Trust Amount of 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, 2018
Name of Trust Amount of Subordinated Debentures Interest Rate
Trust II $ 20,619
Three month LIBOR + 2.85%
Trust IV 30,928
Three month LIBOR + 2.45%
Trust V 20,619
Three month LIBOR + 1.87%
Total $ 72,166

(dollars in thousands)

March 31, 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 nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.

Three Months Ended
September 30, Nine Months Ended
September 30,
(dollars in thousands) 2019 2018 2019 2018
Other operating income:
In-scope of ASC 606
Service charges on deposit accounts $ 2,125
$ 2,189
$ 6,247
$ 6,169
Other service charges and fees 3,260
2,778
9,021
8,169
Income on fiduciary activities 1,126
1,159
3,220
3,132
Fees on foreign exchange 21
26
75
86
Loan placement fees 230
115
486
532
Net gain on sales of foreclosed assets 17
—
17
—
In-scope other operating income 6,779
6,267
19,066
18,088
Out-of-scope other operating income 3,487
4,553
12,967
11,316
Total other operating income $ 10,266
$ 10,820
$ 32,033
$ 29,404


	Three Months Ended March 31,
(dollars in thousands)	2020		2019
Other operating income:
In-scope of ASC 606
Mortgage banking income	$	229	$	149
Service charges on deposit accounts	2,050		2,081
Other service charges and fees	2,996		2,594
Income on fiduciary activities	1,297		965


In-scope other operating income	6,572		5,789
Out-of-scope other operating income	2,314		5,884
Total other operating income	$	8,886	$	11,673

11. SHARE-BASED COMPENSATION

Restricted Stock Units

The table below presents the activity of restricted stock units for the ~~nine~~three months ended ~~September 30, 2019:~~March 31, 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	78,697	28.10
Vested	(46,050)	30.43
Forfeited	(5,813)	29.55
Non-vested restricted stock units, end of period	393,301	28.54

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

Granted 181,431
28.89
Vested (155,474 ) 24.40
Forfeited (15,205 ) 29.24
Non-vested restricted stock units, end of period 373,477
28.89

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 include any short term 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 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.

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
September 30, Nine Months Ended
September 30,
(dollars in thousands) 2019 2019
Lease cost:
Operating lease cost $ 1,627
$ 4,883
Variable lease cost 699
1,950
Less: sublease income (11 ) (33 )
Total lease cost $ 2,315
6,800

Other information:
Operating cash flows from operating leases $ (1,558 ) $ (4,663 )
Weighted-average remaining lease term - operating leases 13.80 years
13.80 years
Weighted-average discount rate - operating leases 3.92 % 3.92 %


	Three Months Ended March 31,
(dollars in thousands)	2020			2019
Lease cost:
Operating lease cost	$	1,653		$	1,628
Variable lease cost	678			647
Less: sublease income	(12)			(11)
Total lease cost	$	2,319		2,264

Other information:
Operating cash flows from operating leases	$	(1,594)		$	(1,549)
Weighted-average remaining lease term - operating leases	13.36 years			14.10 years
Weighted-average discount rate - operating leases	3.92		%	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) $ 1,550
$ 512
$ 1,038
2020 6,018
1,939
4,079
2021 5,708
1,787
3,921
2022 5,271
1,645
3,626
2023 4,973
1,512
3,461
2024 4,814
1,383
3,431
Thereafter 40,920
7,669
33,251
Total $ 69,254
$ 16,447
$ 52,807


Year Ending December 31,	Undiscounted Cash Flows		Lease Liability Expense		Lease Liability Reduction
2020 (remainder)	$	4,622	$	1,462	$	3,160
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	$	67,042	$	15,501	$	51,541

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
September 30, Nine Months Ended
September 30,
(dollars in thousands) 2019 2019
Total rental income recognized $ 522
1,576


	Three Months Ended March 31,
(dollars in thousands)	2020		2019
Total rental income recognized	$	533	535

Based on the Company's leases as lessor as of ~~September 30, 2019,~~March 31, 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) $ 503
2020 1,837
2021 1,868
2022 1,308
2023 449
2024 97
Thereafter 262
Total $ 6,324


Year Ending December 31,
2020 (remainder)	$	1,710
2021	2,263
2022	1,657
2023	644
2024	155
2025	72
Thereafter	190
Total	$	6,691

13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the components of other comprehensive income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ by component:


(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Three Months Ended March 31, 2020
Net unrealized gains on investment securities:
Net unrealized gains arising during the period	$	13,858	$	3,711	$	10,147
Less: Reclassification adjustments from AOCI realized in net income	—		—		—
Net unrealized gains on investment securities	13,858		3,711		10,147

Defined benefit plans:
Net actuarial gains arising during the period	427		114		313
Amortization of net actuarial loss	268		72		196
Amortization of net transition obligation	5		1		4
Amortization of prior service cost	4		1		3

Defined benefit plans, net	704		188		516

Other comprehensive income	$	14,562	$	3,899	$	10,663

(dollars in thousands) Before Tax Tax Effect Net of Tax
Three Months Ended September 30, 2019

Net unrealized gains on investment securities:

Net unrealized gains arising during the period $ 6,027
$ 1,615
$ 4,412
Less: Reclassification adjustments from AOCI realized in net income (36 ) (10 ) (26 )
Net unrealized gains on investment securities 5,991
1,605
4,386

Defined benefit plans:

Amortization of net actuarial loss 310
31
279
Amortization of net transition obligation 5
3
2
Amortization of prior service cost 4
2
2
Defined benefit plans, net 319
36
283

Other comprehensive income $ 6,310
$ 1,641
$ 4,669

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

Net unrealized losses on investment securities:

Net unrealized losses arising during the period $ (8,297 ) $ (2,225 ) $ (6,072 )
Less: Reclassification adjustments from AOCI realized in net income —
—
—
Net unrealized losses on investment securities (8,297 ) (2,225 ) (6,072 )

Defined benefit plans:

Amortization of net actuarial loss 289
78
211
Amortization of net transition obligation 5
2
3
Amortization of prior service cost 4
1
3
Defined benefit plans, net 298
81
217

Other comprehensive loss $ (7,999 ) $ (2,144 ) $ (5,855 )

(dollars in thousands) Before Tax Tax Effect Net of Tax
Nine Months Ended September 30, 2019

Net unrealized gains on investment securities:

Net unrealized gains arising during the period $ 37,671
$ 10,098
$ 27,573
Less: Reclassification adjustments from AOCI realized in net income (36 ) (10 ) (26 )
Net unrealized gains on investment securities 37,635
10,088
27,547

Defined benefit plans:

Amortization of net actuarial loss 837
84
753
Amortization of net transition obligation 14
4
10
Amortization of prior service cost 13
3
10
Defined benefit plans, net 864
91
773

Other comprehensive income
$ 38,499
$ 10,179
$ 28,320


(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Three Months Ended March 31, 2019
Net unrealized gains on investment securities:
Net unrealized gains arising during the period	$	15,024	$	4,028	$	10,996
Less: Reclassification adjustments from AOCI realized in net income	—		—		—
Net unrealized gains on investment securities	15,024		4,028		10,996

Defined benefit plans:

Amortization of net actuarial loss	263		29		234
Amortization of net transition obligation	5		1		4
Amortization of prior service cost	5		1		4

Defined benefit plans, net	273		31		242

Other comprehensive income	$	15,297	$	4,059	$	11,238

(dollars in thousands) Before Tax Tax Effect Net of Tax
Nine Months Ended September 30, 2018

Net unrealized losses on investment securities:

Net unrealized losses arising during the period $ (33,809 ) $ (9,097 ) $ (24,712 )
Less: Reclassification adjustments from AOCI realized in net income —
—
—
Net unrealized losses on investment securities (33,809 ) (9,097 ) (24,712 )

Defined benefit plans:

Amortization of net actuarial loss 865
262
603
Amortization of net transition obligation 14
4
10
Amortization of prior service cost 13
3
10
Defined benefit plans, net 892
269
623

Other comprehensive loss $ (32,917 ) $ (8,828 ) $ (24,089 )

The following tables present the changes in each component of AOCI, net of tax, for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018:~~2019:


(dollars in thousands)	Investment Securities		Defined Benefit Plans		AOCI
Three Months Ended March 31, 2020


Balance at beginning of period	14,825		(6,416)		8,409



Other comprehensive income before reclassifications	10,147		313		10,460
Reclassification adjustments from AOCI	—		203		203
Total other comprehensive income	10,147		516		10,663

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

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

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

Other comprehensive income before reclassifications 4,412
—
4,412
Reclassification adjustments from AOCI (26 ) 283
257
Total other comprehensive income 4,386
283
4,669

Balance at end of period $ 14,804
$ (5,677 ) $ 9,127


(dollars in thousands)	Investment Securities		Defined Benefit Plans		AOCI
Three Months Ended March 31, 2019
Balance at beginning of period	$	(9,643)	$	(6,450)	$	(16,093)
Impact of the adoption of new accounting standards	(3,100)		—		(3,100)
Adjusted balance at beginning of period	(12,743)		(6,450)		(19,193)



Other comprehensive loss before reclassifications	10,996		—		10,996
Reclassification adjustments from AOCI	—		242		242
Total other comprehensive income	10,996		242		11,238

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

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

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

Other comprehensive loss before reclassifications (6,072 ) —
(6,072 )
Reclassification adjustments from AOCI —
217
217
Total other comprehensive income (loss) (6,072 ) 217
(5,855 )

Balance at end of period $ (20,233 ) $ (6,870 ) $ (27,103 )

(dollars in thousands) Investment
Securities Defined
Benefit
Plans AOCI
Nine Months Ended September 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 before reclassifications 27,573
—
27,573
Reclassification adjustments from AOCI (26 ) 773
747
Total other comprehensive income 27,547
773
28,320

Balance at end of period $ 14,804
$ (5,677 ) $ 9,127

(dollars in thousands) Investment
Securities Defined
Benefit
Plans AOCI
Nine Months Ended September 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 loss before reclassifications (24,712 ) —
(24,712 )
Reclassification adjustments from AOCI —
623
623
Total other comprehensive income (loss) (24,712 ) 623
(24,089 )

Balance at end of period $ (20,233 ) $ (6,870 ) $ (27,103 )

The following table presents the amounts reclassified out of each component of AOCI for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 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 March 31,
(dollars in thousands)	2020		2019





Defined benefit retirement and supplemental executive retirement plan items:
Amortization of net actuarial loss	$	(268)	$	(263)	Salaries and employee benefits
Amortization of net transition obligation	(5)		(5)		Salaries and employee benefits
Amortization of prior service cost	(4)		(5)		Salaries and employee benefits

Total before tax	(277)		(273)
Tax effect	74		31		Income tax benefit (expense)
Net of tax	$	(203)	$	(242)

Total reclassification adjustments from AOCI for the period, net of tax	$	(203)	$	(242)

Amount Reclassified from AOCI Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI Components Three months ended September 30,
(dollars in thousands) 2019 2018
Sale of investment securities available-for-sale:
Realized gains (losses) on securities available-for-sale $ 36
$ —
Investment securities gains (losses)
Tax effect (10 ) —
Income tax benefit (expense)
Net of tax $ 26
$ —

Defined benefit retirement and supplemental executive retirement plan items:

Amortization of net actuarial loss $ (310 ) $ (289 ) Salaries and employee benefits
Amortization of net transition obligation (5 ) (5 ) Salaries and employee benefits
Amortization of prior service cost (4 ) (4 ) Salaries and employee benefits
Total before tax (319 ) (298 )
Tax effect 36
81
Income tax benefit (expense)
Net of tax $ (283 ) $ (217 )

Total reclassification adjustments from AOCI for the period, net of tax $ (257 ) $ (217 )

Amount Reclassified from AOCI Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI Components Nine months ended September 30,
(dollars in thousands) 2019 2018
Sale of investment securities available-for-sale:
Realized gains (losses) on securities available-for-sale $ 36
$ —
Investment securities gains (losses)
Tax effect (10 ) —
Income tax benefit (expense)
Net of tax $ 26
$ —

Defined benefit retirement and supplemental executive retirement plan items:

Amortization of net actuarial loss $ (837 ) $ (865 ) Salaries and employee benefits
Amortization of net transition obligation (14 ) (14 ) Salaries and employee benefits
Amortization of prior service cost (13 ) (13 ) Salaries and employee benefits
Total before tax (864 ) (892 )
Tax effect 91
269
Income tax benefit (expense)
Net of tax $ (773 ) $ (623 )

Total reclassification adjustments from AOCI for the period $ (747 ) $ (623 ) 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 March 31,
(dollars in thousands, except per share data)	2020		2019
Net income	$	8,326	$	16,037

Weighted average common shares outstanding - basic	28,126,400		28,758,310
Dilutive effect of employee stock options and awards	151,353		221,545
Weighted average common shares outstanding - diluted	28,277,753		28,979,855

Basic earnings per common share	$	0.30	$	0.56
Diluted earnings per common share	$	0.29	$	0.55

Anti-dilutive employee stock options and awards outstanding	—		—

Three Months Ended
September 30, Nine Months Ended
September 30,
(dollars in thousands, except per share data) 2019 2018 2019 2018
Net income $ 14,554
$ 15,193
$ 44,125
$ 43,694

Weighted average common shares outstanding - basic 28,424,898
29,297,465
28,575,369
29,536,536
Dilutive effect of employee stock options and awards 177,440
182,347
186,688
206,702
Weighted average common shares outstanding - diluted 28,602,338
29,479,812
28,762,057
29,743,238

Basic earnings per common share $ 0.51
$ 0.52
$ 1.54
$ 1.48
Diluted earnings per common share $ 0.51
$ 0.52
$ 1.53
$ 1.47

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

15. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

Disclosures about Fair Value of Financial Instruments

Fair value estimates, methods and assumptions are set forth below for our financial instruments.

Short-Term Financial Instruments

The carrying values of short-term financial instruments are deemed to approximate fair values. Such instruments are considered readily convertible to cash and include cash and due from financial institutions, interest-bearing deposits in other financial institutions, accrued interest receivable, the majority of Federal Home Loan Bank advances and other short-term borrowings, and accrued interest payable.

Investment Securities

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

Loans

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

Loans Held for Sale

The fair value of loans classified as held for sale are generally based upon quoted prices for similar assets in active markets, acceptance of firm offer letters with agreed upon purchase prices, discounted cash flow models that take into account market observable assumptions, or independent appraisals of the underlying collateral securing the loans. We report the fair values of Hawaii and U.S. Mainland construction and commercial real estate loans, if any, net of applicable selling costs on our consolidated balance sheets.

Deposit Liabilities

The fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits and interest-bearing demand and savings accounts, are equal to the amount payable on demand. The fair value of time deposits is estimated using discounted cash flow analyses. As of March 31, 2020, the weighted average discount rate used in the valuation of time deposits was 0.52%. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Long-Term Debt

The fair value of our long-term debt is estimated by discounting scheduled cash flows over the contractual borrowing period at the estimated market rate for similar borrowing arrangements.

Derivatives

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

Off-Balance Sheet Financial Instruments

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

Limitations

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

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)
September 30, 2019

Financial assets:

Cash and due from banks $ 87,395
$ 87,395
$ 87,395
$ —
$ —
Interest-bearing deposits in other banks 7,803
7,803
7,803
—
—
Investment securities 1,187,933
1,187,933
1,058
1,175,373
11,502
Loans held for sale 7,016
7,016
—
7,016
—
Net loans and leases 4,319,695
4,328,177
—
9,752
4,318,425
Accrued interest receivable 16,220
16,220
16,220
—
—

Financial liabilities:

Deposits:

Noninterest-bearing demand 1,399,200
1,399,200
1,399,200
—
—
Interest-bearing demand and savings and money market 2,591,775
2,591,775
2,591,775
—
—
Time 1,046,684
1,043,147
—
—
1,043,147
Short-term borrowings 205,000
205,000
—
205,000
—
Long-term debt 101,547
97,324
—
97,324
—
Accrued interest payable (included in other liabilities) 5,402
5,402
5,402

—


					Fair Value Measurement Using
(dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2020
Financial assets:
Cash and due from banks	$	81,972	$	81,972	$	81,972	$	—	$	—
Interest-bearing deposits in other banks	11,021		11,021		11,021		—		—
Investment securities	1,185,025		1,185,025		1,002		1,172,451		11,572
Loans held for sale	3,910		3,910		—		3,910		—
Net loans and leases	4,452,353		4,204,383		—		—		4,204,383

Accrued interest receivable (included in other assets)	16,851		16,851		16,851		—		—

Financial liabilities:
Deposits:
Noninterest-bearing demand	1,430,540		1,430,540		1,430,540		—		—
Interest-bearing demand and savings and money market	2,711,788		2,711,788		2,711,788		—		—
Time	993,741		996,284		—		—		996,284
Short-term borrowings	222,000		222,000		—		222,000		—
Long-term debt	101,547		91,032		—		91,032		—
Accrued interest payable (included in other liabilities)	4,132		4,132		4,132		—		—

Fair Value Measurement Using
(dollars in thousands) Notional
Amount Carrying
Amount Estimated
Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant
Unobservable
Inputs
(Level 3)
September 30, 2019

Derivatives:
Interest rate lock commitments $ 1,569
$ 49
$ 49
$ —
$ 49
$ —
Forward sale commitments 8,412
(3 ) (3 ) —
(3 ) —

Off-balance sheet financial instruments:

Commitments to extend credit 1,106,657
1,295
1,295
—
1,295
—
Standby letters of credit and financial guarantees written 11,275
169
169
—
169
—

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)
March 31, 2020
Derivatives:
Interest rate lock commitments	$	4,237	$	115		$	115	$	—	$	115	$	—
Forward sale commitments	8,118		(37)		��	(37)		—		(37)		—

Off-balance sheet financial instruments:
Commitments to extend credit	1,186,476		1,414			1,414		—		1,414		—
Standby letters of credit and financial guarantees written	9,424		141			141		—		141		—
Risk participation agreement	28,800		32			32		—		—		32

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 (included in other assets)	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 into or out of a level as of the end of the reporting period.~~ There ~~were 0 transfers of financial assets and liabilities between Level 1 and Level 2 of the fair value hierarchy during the three and nine months ended September 30, 2019. Also, there~~ were 0 transfers of financial assets and liabilities into or out of Level 3 of the fair value hierarchy during the three ~~and nine~~ months ended ~~September 30, 2019.~~March 31, 2020.

The following tables present the fair value of assets and liabilities measured on a recurring basis as of ~~September 30, 2019~~March 31, 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)
March 31, 2020
Available-for-sale securities:
Debt securities:
States and political subdivisions	$	134,210	$	—	$	122,638	$	11,572
Corporate securities	30,227		—		30,227		—
U.S. Treasury obligations and direct obligations of U.S Government agencies	37,506		—		37,506		—
Mortgage-backed securities:
Residential - U.S. Government sponsored entities	735,050		—		735,050		—
Commercial - U.S. Government agencies and sponsored entities	80,319		—		80,319		—
Residential - Non-government agencies	34,672		—		34,672		—
Commercial - Non-government agencies	132,039		—		132,039		—

Total available-for-sale securities	1,184,023		—		1,172,451		11,572

Equity securities	1,002		1,002		—		—

Derivatives: Interest rate lock and forward sale commitments	78		—		78		—
Total	$	1,185,103	$	1,002	$	1,172,529	$	11,572

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)
September 30, 2019

Available-for-sale securities:

Debt securities:

States and political subdivisions $ 124,711
$ —
$ 113,209
$ 11,502
Corporate securities 30,713
—
30,713
—
U.S. Treasury obligations and direct obligations of U.S Government agencies 42,897
—
42,897
—
Mortgage-backed securities:

Residential - U.S. Government sponsored entities 723,644
—
723,644
—
Commercial - U.S. Government agencies and sponsored entities 87,742
—
87,742
—
Residential - Non-government agencies 39,109
—
39,109
—
Commercial - Non-government agencies 138,059
—
138,059
—
Total available-for-sale securities 1,186,875
—
1,175,373
11,502

Equity securities 1,058
1,058
—
—

Derivatives: Interest rate lock and forward sale commitments 46
—
46
—
Total $ 1,187,979
$ 1,058
$ 1,175,419
$ 11,502

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 ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ 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 (285 )
Unrealized net gain included in other comprehensive income 618
Balance at September 30, 2019 $ 11,502

Balance at December 31, 2017 $ 11,794
Principal payments received (280 )
Unrealized net loss included in other comprehensive income (370 )
Balance at September 30, 2018 $ 11,144


(dollars in thousands)	Available-For-Sale Debt Securities: States and Political Subdivisions
Balance at December 31, 2019	$	11,255
Principal payments received	(109)
Unrealized net gain included in other comprehensive income	426

Balance at March 31, 2020	$	11,572

Balance at December 31, 2018	$	11,169
Principal payments received	(105)
Unrealized net loss included in other comprehensive income	200

Balance at March 31, 2019	$	11,264

Within the states and political subdivisions available-for-sale debt securities category, the Company holds 4 mortgage revenue bonds issued by the City & County of Honolulu with an aggregate fair value of ~~$11.5~~$11.6 million and ~~$11.1~~$11.3 million at ~~September 30,~~March 31, 2020 and March 31, 2019, ~~and September 30, 2018,~~ 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 ~~September 30, 2019,~~March 31, 2020, the weighted average discount rate utilized was ~~3.94%~~3.25% compared to ~~5.28%~~4.71% at ~~September 30, 2018~~March 31, 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 ~~September 30, 2019~~March 31, 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)
March 31, 2020


Other real estate ⁽¹⁾	$	100	$	—	$	100	$	—

December 31, 2019


Other real estate ⁽¹⁾	$	164	$	—	$	164	$	—

Fair Value Measurements Using
(dollars in thousands) Fair Value Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
September 30, 2019

Other real estate ⁽¹⁾
$ 466
$ —
$ 466
$ —

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 3 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 September 30, 2019

Net interest income $ 42,790
$ 2,859
$ —
$ 45,649
Inter-segment net interest income (expense) 4,788
(2,825 ) (1,963 ) —
Credit (provision) for loan and lease losses (1,532 ) —
—
(1,532 )
Other operating income:
Mortgage banking income 1,360
—
404
1,764
Service charges on deposit accounts 2,125
—
—
2,125
Other service charges and fees 1,470
—
2,254
3,724
Income from fiduciary activities 1,126
—
—
1,126
Equity in earnings of unconsolidated subsidiaries 86
—
—
86
Fees on foreign exchange 20
150
—
170
Investments securities gains (losses) —
36
—
36
Income from bank-owned life insurance —
645
—
645
Loan placement fees 230
—
—
230
Net gain (loss) sale of foreclosed assets —
—
17
17
Other 154
4
185
343
Other operating income 6,571
835
2,860
10,266
Other operating expense (16,482 ) (352 ) (18,100 ) (34,934 )
Administrative and overhead expense allocation (17,495 ) (204 ) 17,699
—
Income before taxes 18,640
313
496
19,449
Income tax (expense) benefit (4,702 ) (89 ) (104 ) (4,895 )
Net income (loss) $ 13,938
$ 224
$ 392
$ 14,554

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

Net interest income $ 38,872
$ 4,453
$ —
$ 43,325
Inter-segment net interest income (expense) 7,524
(4,327 ) (3,197 ) —
Credit (provision) for loan and lease losses 59
—
—
59
Other operating income:
Mortgage banking income 1,173
—
750
1,923
Service charges on deposit accounts 2,189
—
—
2,189
Other service charges and fees 1,318
8
1,960
3,286
Income from fiduciary activities 1,159
—
—
1,159
Equity in earnings of unconsolidated subsidiaries 71
—
—
71
Fees on foreign exchange 22
198

220
Income from bank-owned life insurance —
1,055
—
1,055
Loan placement fees 115
—
—
115
Other 448
58
296
802
Other operating income 6,495
1,319
3,006
10,820
Other operating expense (16,265 ) (335 ) (17,425 ) (34,025 )
Administrative and overhead expense allocation (15,481 ) (206 ) 15,687
—
Income before taxes 21,204
904
(1,929 ) 20,179
Income tax (expense) benefit (5,128 ) (215 ) 357
(4,986 )
Net income (loss) $ 16,076
$ 689
$ (1,572 ) $ 15,193

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

Net interest income $ 127,059
$ 9,081
$ —
$ 136,140
Inter-segment net interest income (expense) 18,080
(8,119 ) (9,961 ) —
Credit (provision) for loan and lease losses (4,219 ) —
—
(4,219 )
Other operating income:
Mortgage banking income 2,967
—
1,822
4,789
Service charges on deposit accounts 6,247
—
—
6,247
Other service charges and fees 4,130
—
6,349
10,479
Income from fiduciary activities 3,220
—
—
3,220
Equity in earnings of unconsolidated subsidiaries 165
—
—
165
Fees on foreign exchange 67
472
—
539
Investments securities gains (losses) —
36
—
36
Income from bank-owned life insurance —
2,511
—
2,511
Loan placement fees 486
—
—
486
Net gain (loss) sale of foreclosed assets —
—
17
17
Other 453
2,558
533
3,544
Other operating income 17,735
5,577
8,721
32,033
Other operating expense (48,289 ) (1,097 ) (56,003 ) (105,389 )
Administrative and overhead expense allocation (49,953 ) (624 ) 50,577
—
Income before taxes 60,413
4,818
(6,666 ) 58,565
Income tax (expense) benefit (14,896 ) (1,188 ) 1,644
(14,440 )
Net income (loss) $ 45,517
$ 3,630
$ (5,022 ) $ 44,125

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

Net interest income $ 112,295
$ 16,024
$ —
$ 128,319
Inter-segment net interest income (expense) 21,360
(14,717 ) (6,643 ) —
Credit (provision) for loan and lease losses (262 ) —
—
(262 )
Other operating income:
Mortgage banking income 3,089
—
2,456
5,545
Service charges on deposit accounts 6,169
—
—
6,169
Other service charges and fees 3,748
22
5,927
9,697
Income from fiduciary activities 3,132
—
—
3,132
Equity in earnings of unconsolidated subsidiaries 151
—
—
151
Fees on foreign exchange 75
633

708
Income from bank-owned life insurance —
1,874
—
1,874
Loan placement fees 532
—
—
532
Other 803
60
733
1,596
Other operating income 17,699
2,589
9,116
29,404
Other operating expense (47,967 ) (1,078 ) (51,995 ) (101,040 )
Administrative and overhead expense allocation (45,594 ) (652 ) 46,246
—
Income before taxes 57,531
2,166
(3,276 ) 56,421
Income tax (expense) benefit (12,707 ) (478 ) 458
(12,727 )
Net income $ 44,824
$ 1,688
$ (2,818 ) $ 43,694

(dollars in thousands) Banking
Operations Treasury All Others Total
September 30, 2019
Investment securities $ —
$ 1,187,933
$ —
$ 1,187,933
Loans and leases (including loans held for sale) 4,374,878
—
—
4,374,878
Other assets 25,867
250,474
137,564
413,905
Total assets $ 4,400,745
$ 1,438,407
$ 137,564
$ 5,976,716

(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 assets 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 the ultimate disposition of those matters will not have a material adverse effect on our consolidated financial statements.

17. SUBSEQUENT EVENTS

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

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

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

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

Overview

Central Pacific Financial Corp. ("CPF") is a Hawaii corporation and a bank holding company. Our principal business is to serve as a holding company for our bank subsidiary, Central Pacific Bank. We refer to Central Pacific Bank herein as "our bank" or "the bank," and when we say "the Company," "we," "us" or "our," we mean the holding company on a consolidated basis with the bank and our other consolidated subsidiaries.

Central Pacific Bank is a full-service community bank with 35 branches ,13 of which are temporarily closed to protect the health and 78well-being of the Company's employees and customers from the novel coronavirus pandemic ("COVID-19"), and 75 ATMs located throughout the state of ~~Hawaii.~~Hawaii as of March 31, 2020. The bank offers a broad range of products and services including accepting time, savings, money market, and demand deposits and originating loans, including commercial loans, construction loans, commercial 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 March 31, 2020, the significant accounting policy which we believe to be the most critical in preparing our consolidated financial statements is the determination of the allowance for credit losses ~~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 ~~September 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 September 30, 2019, the look back period was nine years and nine 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 ~~September 30, 2019~~March 31, 2020 was ~~$14.6~~$8.3 million, or ~~$0.51~~$0.29 per diluted share, compared to ~~$15.2~~net income of $16.0 million, or ~~$0.52~~$0.55 per diluted share for the three months ended ~~September 30, 2018. Net income~~March 31, 2019. On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” ("CECL") and, as a result, recorded increases of $3.6 million to the allowance for credit losses on loans and $0.7 million to the ~~nine~~reserve for off-balance sheet credit exposures, included in other liabilities. The transition adjustments recorded on January 1, 2020 were offset to retained earnings of $3.2 million and net deferred tax assets of $1.1 million. During the three months ended ~~September 30, 2019 was $44.1~~March 31, 2020, the Company recorded total credit loss expense under ASC 326, which includes the provisions for credit losses and off-balance sheet credit exposures, of $11.1 million ~~or $1.53 per diluted share, compared to $43.7 million, or $1.47 per diluted share for the nine months ended September 30, 2018.~~which impacted our first quarter operating results.

The following table presents annualized returns on average assets and average shareholders' equity, and basic and diluted earnings per share for the periods indicated. Returns on average assets and average shareholders' equity are annualized based on a 30/360 day convention.


	Three Months Ended March 31,
	2020			2019
Return on average assets	0.55		%	1.10		%
Return on average shareholders’ equity	6.21			12.97

Basic earnings per common share	$	0.30		$	0.56
Diluted earnings per common share	0.29			0.55

COVID-19 Pandemic

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

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

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

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Return on average assets 0.99 % 1.06 % 1.00 % 1.03 %
Return on average shareholders’ equity 11.11
12.54
11.58
11.99
Basic earnings per common share $ 0.51
$ 0.52
$ 1.54
$ 1.48
Diluted earnings per common share 0.51
0.52
1.53
1.47
On March 4, 2020, Hawaii Governor David Ige declared a state of emergency allowing Hawaii to use funds to act quickly in containing the spread of the coronavirus when an outbreak occurs in the islands. The measure allows for “funding flexibility” to buy supplies and equipment and gives the governor authority to suspend any laws that may impede emergency functions.

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

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

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

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

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

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

Financial position and results of operations

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

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

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

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

Liquidity and capital

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

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

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

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

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

Asset valuation

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

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

Processes, controls and business continuity plan

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

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

Lending operations and accommodations to borrowers

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

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

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

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

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

Credit

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

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

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

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

Material Trends

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

~~Hawaii's economy depends significantly on conditions~~Hawaii tourism started the year strong with solid growth in visitor arrivals and spending in the ~~U.S. economy and key international economies, especially Japan. The growth~~first two months 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 through the remainder of 2019 and in 2020. 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 ~~eight~~two months ended ~~August 30, 2019, visitor spending was down~~February 29, 2020, which includes an additional day associated with leap year, increased 5.5% from the same prior year period. Total visitor expenditures in the two months ended February 29, 2020 increased by 4.8% from the same prior year period. The mandated 14-day self-quarantine for arriving visitors and residents began on March 26, 2020. Total arrivals on that day were down to 1,580 from a historical daily average of 30,000 passengers during last March. During the first week of April, total visitors were down approximately 98% from the same year-ago period.

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

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

Oahu home sales started the year strong with healthy year-over-year increases in closed sales of single-family homes and condominiums. According to the ~~Hawaii Tourism~~

~~Authority ("HTA"), 7.1 million visitors visited the state in the~~ ~~eight months ended August 30, 2019. This was an increase of 5.2%~~latest data available from ~~the number of visitor arrivals in the~~ ~~eight months ended August 31, 2018. The HTA also reported total spending by visitors decreased to $12.1 billion in the~~ ~~eight months ended August 30, 2019, or a decrease of $61.5 million, or 0.5%, from the~~ ~~eight months ended August 31, 2018~~. According to DBEDT, total visitor arrivals are expected to increase 3.5%, while visitor spending is expected to decrease 0.2% in 2019. Total visitor arrivals and visitor spending are both expected to increase 2.0% and 2.3% 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 1.2% and 1.1%, respectively, for 2019 and 1.1% and 1.2%, respectively, for 2020.

Hawaii's labor market continues to be among the best in the nation. The Department of Labor and Industrial Relations reported that Hawaii's seasonally adjusted annual unemployment rate was 2.7% in September 2019, compared to 2.6% in September 2018. Hawaii's unemployment rate in September 2019 remained below the national seasonally adjusted unemployment rate of 3.5%. DBEDT projects Hawaii's seasonally adjusted annual unemployment rate to be 3.0% in 2019 and 3.2% in 2020.

Real estate lending is a primary focus for us, including residential mortgage and commercial mortgage loans. As a result, we are dependent on the strength of Hawaii's real estate market. Home sales in Hawaii remained strong in 2018. The Oahu real estate market closed out 2018 with its eighth straight year of appreciation, however the sales volume for the year dropped. During the nine months ended September 30, 2019, Oahu sales volume and median sales prices have slowed. According to the Honolulu Board of Realtors, Oahu unit sales volume increased ~~slightly~~ by ~~0.8%~~11.6% for single-family homes ~~but declined by 6.7%~~and were stable for condominiums for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, compared to the same time period last year. For the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the median sales price for single-family homes on Oahu was ~~$785,000, representing a decrease of 0.5%~~$780,000, and remained unchanged from ~~$789,000 in~~ the same prior year period. The median sales price for condominiums on

Oahu for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 was ~~$425,000,~~$430,000, representing ~~a decrease~~an increase of ~~1.0%~~4.6% from ~~$429,500~~$411,250 in the same prior year period.

~~As we have seen in~~ While 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 exposurenumbers appear 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 at the July 2019 meeting and again by 25 basis points at the September 2019 meeting to 1.75%-2.00%. 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~~strong, many of the ~~U.S. economy. Changes~~sales which closed in ~~monetary policy, including changes~~March were in ~~interest rates, could influence, among other things, (i)~~escrow at least 30 days before the ~~amount~~State's stay-at-home order. The impact of ~~interest we receive~~COVID-19 on ~~loans and securities, (ii)~~ the ~~amount of interest we pay on deposits and borrowings, (iii) our ability~~housing market remains to ~~originate loans and obtain deposits and (iv) the fair value of our assets and liabilities.~~be seen.

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. During ~~the third quarter of~~ 2019, the outsourcing of the Company's residential mortgage loan servicing, ~~was completed. The Company is on track to complete~~ the launch of its new website under the cpb.bank domain name ~~the employee pilot phase of our upgraded online and mobile banking platforms~~ and the implementation of its end-to-end commercial loan origination system inwere completed. Despite several challenges resulting from the ~~fourth~~impact of COVID-19, the Company will continue the revitalization of its building headquarters. Digital strategies will continue to push forward. The Company may postpone other initiatives such as branch modernization for the remaining branch network. During the first quarter of ~~2019. The Company believes its efforts to meet its~~ 2020, ~~milestones in its branch modernization and digital banking initiatives are progressing on schedule.~~

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 RISE2020-related expense to approximate $7 million by the start of 2021. During the third quarter of 2019, the Company ~~incurred approximately $1.2 million in RISE2020-related expenses. While operating expenses are expected~~opened its concept branch providing its customers a glimpse into the future of Central Pacific Bank. The rollout of our new ATMs has begun. The development of the Company's new online and mobile banking platforms is progressing, with a pilot of the new platforms scheduled for June 2020. Digital technology is even more critical to ~~increase,~~our business during crises like the ~~Company is forecasting enhanced revenue growth. As~~current pandemic and will remain a ~~result, we expect~~high priority strategy for our ~~efficiency ratio to be in the 63-65% range in 2019 and 2020. Longer-term, the Company is targeting a 15% return on average shareholders' equity and a 57% efficiency ratio by the end of 2022.~~future.

Results of Operations

Net Interest Income

Net interest income, when annualized and expressed as a percentage of average interest earning assets, is referred to as "net interest margin." Interest income, which includes loan fees and resultant yield information, is expressed on a taxable equivalent basis using a federal statutory tax rate of 21% for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019. A comparison of net interest income on a taxable-equivalent basis ("net interest income") for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ 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 March 31,
			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	$	11,082		1.29	%		36			$	11,380		2.41	%		68			$	(298)		(1.12)	%		(32)
Investment securities, excluding valuation allowance:
Taxable (1)	1,027,695			2.64			6,774			1,201,732			2.76			8,278			(174,037)			(0.12)			(1,504)
Tax-exempt (1)	105,330			3.21			845			153,196			2.86			1,096			(47,866)			0.35			(251)
Total investment securities	1,133,025			2.69			7,619			1,354,928			2.67			9,374			(221,903)			0.02			(1,755)
Loans, including loans held for sale (2)	4,462,347			4.16			46,204			4,083,791			4.33			43,768			378,556			(0.17)			2,436
Federal Home Loan Bank stock	14,589			3.61			132			14,278			4.52			161			311			(0.91)			(29)
Total interest earning assets	5,621,043			3.85			53,991			5,464,377			3.94			53,371			156,666			(0.09)			620
Noninterest-earning assets	386,194									345,554									40,640
Total assets	$	6,007,237								$	5,809,931								$	197,306

Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	1,013,795		0.07	%		176			$	951,101		0.08	%		192			$	62,694		(0.01)	%		(16)
Savings and money market deposits	1,651,751			0.27			1,118			1,472,835			0.22			791			178,916			0.05			327
Time deposits under $100,000	164,274			0.70			284			175,823			0.66			287			(11,549)			0.04			(3)
Time deposits $100,000 and over	846,152			1.42			2,984			982,678			1.98			4,805			(136,526)			(0.56)			(1,821)
Total interest-bearing deposits	3,675,972			0.50			4,562			3,582,437			0.69			6,075			93,535			(0.19)			(1,513)
Short-term borrowings	139,813			1.46			508			137,544			2.63			893			2,269			(1.17)			(385)
Long-term debt	101,547			3.62			914			101,547			4.23			1,060			—			(0.61)			(146)
Total interest-bearing liabilities	3,917,332			0.61			5,984			3,821,528			0.85			8,028			95,804			(0.24)			(2,044)
Noninterest-bearing deposits	1,445,724									1,396,033									49,691
Other liabilities	107,458									97,735									9,723
Total liabilities	5,470,514									5,315,296									155,218
Shareholders’ equity	536,721									494,635									42,086
Non-controlling interest	2									—									2
Total equity	536,723									494,635									42,088
Total liabilities and equity	$	6,007,237								$	5,809,931								$	197,306

Net interest income							$	48,007								$	45,343								$	2,664

Interest rate spread				3.24	%								3.09	%								0.15	%

Net interest margin				3.43	%								3.34	%								0.09	%

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

(dollars in thousands) Three Months Ended September 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 $ 6,295
2.05 % 33
$ 22,057
1.97 % 109
$ (15,762 ) 0.08 % (76 )
Investment securities, excluding valuation allowance:
Taxable (1) 1,093,352
2.63
7,192
1,284,411
2.65
8,516
(191,059 ) (0.02 ) (1,324 )
Tax-exempt (1) 117,784
3.04
896
163,172
2.86
1,165
(45,388 ) 0.18
(269 )
Total investment securities 1,211,136
2.67
8,088
1,447,583
2.67
9,681
(236,447 ) —
(1,593 )
Loans and leases, including loans held for sale (2) 4,293,455
4.25
45,861
3,941,511
4.09
40,531
351,944
0.16
5,330
Federal Home Loan Bank stock 16,646
4.46
186
7,773
3.11
60
8,873
1.35
126
Total interest earning assets 5,527,532
3.90
54,168
5,418,924
3.70
50,381
108,608
0.20
3,787
Noninterest-earning assets 379,675

290,901

88,774

Total assets $ 5,907,207

$ 5,709,825

$ 197,382

Liabilities and Equity
Interest-bearing liabilities:

Interest-bearing demand deposits $ 1,002,875
0.08 % 207
$ 933,405
0.08 % 181
$ 69,470
— % 26
Savings and money market deposits 1,582,795
0.39
1,549
1,524,121
0.15
593
58,674
0.24
956
Time deposits under $100,000 167,331
0.69
293
177,108
0.53
236
(9,777 ) 0.16
57
Time deposits $100,000 and over 874,192
1.88
4,139
1,049,446
1.70
4,508
(175,254 ) 0.18
(369 )
Total interest-bearing deposits 3,627,193
0.68
6,188
3,684,080
0.59
5,518
(56,887 ) 0.09
670
Short-term borrowings 191,564
2.34
1,130
25,163
2.30
146
166,401
0.04
984
Long-term debt 101,547
3.96
1,013
92,785
4.90
1,147
8,762
(0.94 ) (134 )
Total interest-bearing liabilities 3,920,304
0.84
8,331
3,802,028
0.71
6,811
118,276
0.13
1,520
Noninterest-bearing deposits 1,360,221

1,378,981

(18,760 )
Other liabilities 102,599

44,079

58,520

Total liabilities 5,383,124

5,225,088

158,036

Shareholders’ equity 524,083

484,737

39,346

Non-controlling interest —

—

—

Total equity 524,083

484,737

39,346

Total liabilities and equity $ 5,907,207

$ 5,709,825

$ 197,382

Net interest income

$ 45,837

$ 43,570

$ 2,267

Interest rate spread 3.06 % 2.99 % 0.07 %

Net interest margin
3.30 %

3.20 %

0.10 %

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

(dollars in thousands) Nine Months Ended September 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 $ 8,540
2.30 % 147
$ 23,713
1.75 % 310
$ (15,173 ) 0.55 % (163 )
Investment securities, excluding valuation allowance:
Taxable investment securities (1) 1,147,217
2.67
23,014
1,325,180
2.63
26,094
(177,963 ) 0.04
(3,080 )
Tax-exempt investment securities (1) 137,750
2.93
3,023
164,174
2.86
3,527
(26,424 ) 0.07
(504 )
Total investment securities 1,284,967
2.70
26,037
1,489,354
2.65
29,621
(204,387 ) 0.05
(3,584 )
Loans and leases, including loans held for sale (2) 4,183,703
4.32
135,169
3,856,420
4.04
116,620
327,283
0.28
18,549
Federal Home Loan Bank stock 15,650
4.33
508
7,261
2.67
145
8,389
1.66
363
Total interest earning assets 5,492,860
3.94
161,861
5,376,748
3.64
146,696
116,112
0.30
15,165
Noninterest-earning assets 365,364

294,090

71,274

Total assets $ 5,858,224

$ 5,670,838

$ 187,386

Liabilities and Equity

Interest-bearing liabilities:

Interest-bearing demand deposits $ 972,316
0.08 % 598
$ 940,154
0.08 % 554
$ 32,162
— % 44
Savings and money market deposits 1,544,759
0.33
3,847
1,506,565
0.13
1,421
38,194
0.20
2,426
Time deposits under $100,000 172,204
0.69
884
178,363
0.48
645
(6,159 ) 0.21
239
Time deposits $100,000 and over 921,003
1.96
13,507
1,042,353
1.48
11,558
(121,350 ) 0.48
1,949
Total interest-bearing deposits 3,610,282
0.70
18,836
3,667,435
0.52
14,178
(57,153 ) 0.18
4,658
Short-term borrowings 168,350
2.50
3,146
14,683
2.16
237
153,667
0.34
2,909
Long-term debt 101,547
4.09
3,104
92,785
4.64
3,221
8,762
(0.55 ) (117 )
Total interest-bearing liabilities 3,880,179
0.86
25,086
3,774,903
0.62
17,636
105,276
0.24
7,450
Noninterest-bearing deposits 1,370,972

1,367,574

3,398

Other liabilities 99,143

42,414

56,729

Total liabilities 5,350,294

5,184,891

165,403

Shareholders’ equity 507,930

485,942

21,988

Non-controlling interest —

5

(5 )

Total equity 507,930

485,947

21,983

Total liabilities and equity $ 5,858,224

$ 5,670,838

$ 187,386

Net interest income

$ 136,775

$ 129,060

$ 7,715

Interest rate spread 3.08 % 3.02 % 0.06 %

Net interest margin
3.32 %

3.20 %

0.12 %

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

Net interest income (expressed on a taxable-equivalent basis) was ~~$45.8~~$48.0 million for the three months ended ~~September 30, 2019,~~March 31, 2020, representing an increase of ~~5.2%~~5.9% from ~~$43.6~~$45.3 million in the three months ended September 30, 2018. Net interest income (expressed on a taxable-equivalent basis) was $136.8 million for the nine months ended September 30, 2019, representing an increase of 6.0% from $129.1 million in the nine months ended September 30, 2018.March 31, 2019. The increase in the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 was primarily attributable to ~~a significant increase in average loans and leases balances~~loan growth funded by

runoff of the investment securities portfolio and ~~short-term borrowings,~~an increase in core deposits, combined with higher yields earned on the loans and leases portfolio. 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. The decreases in yields earned on interest-earning assets and ~~short-term borrowings,~~rates paid on interest-bearing liabilities were primarily attributable to the ~~25 basis point increases in~~five rate cuts by the Federal ~~Funds rate in each of the four quarters of 2018, combined with a significant increase in short-term borrowings.~~Reserve from August 2019 through March 2020.

Interest Income

Taxable-equivalent interest income was ~~$54.2~~$54.0 million for the three months ended ~~September 30, 2019,~~March 31, 2020, representing an increase of ~~7.5%~~1.2% from ~~$50.4~~$53.4 million in the three months ended ~~September 30, 2018.~~March 31, 2019. The increase was primarily attributable to a ~~$351.9~~$378.6 million increase in average loans ~~and leases~~ compared to the three months ended ~~September 30, 2018,~~March 31, 2019, accounting for approximately ~~$3.6~~$4.5 million of the increase in interest income during the three months ended ~~September 30, 2019. In addition,~~March 31, 2020. This increase was partially offset by a decrease in the average yields earned on ~~the~~ loans ~~and leases portfolio~~ during the three months ended ~~September 30, 2019 increased by 16~~March 31, 2020 of 17 bp, compared to the three months ended ~~September 30, 2018, accounting for approximately $1.7 million of the increase in interest income. These increases were partially offset by a $236.4 million decline in average investment securities,~~March 31, 2019, which decreased interest income by approximately ~~$1.6~~$2.1 million.

Taxable-equivalent interest income was $161.9 million for the nine months ended September 30, 2019, representing an increase of 10.3% from $146.7 million in the nine months ended September 30, 2018. The increase was primarily attributable to a $327.3 million increase in average loans and leases compared to the nine months ended September 30, 2018, accounting for approximately $9.9 million of the increase in interest income during the nine months ended September 30, 2019. In addition, ~~the~~ average ~~yields earned on the loans and leases and~~ investment securities ~~portfolios during the nine months ended September 30, 2019 increased~~declined by ~~28 bp and 5 bp, respectively, compared to the nine months ended September 30, 2018, accounting for approximately $8.8~~$221.9 million, ~~and $0.4 million of the increase in interest income, respectively. These increases were partially offset by a $204.4 million decline in average investment securities,~~ which decreased interest income by approximately ~~$4.1~~$1.5 million.

Interest Expense

Interest expense for the three months ended ~~September 30, 2019~~March 31, 2020 was ~~$8.3~~$6.0 million, representing ~~an increase~~a decrease of ~~22.3%~~25.5% from $8.0 million in the three months ended ~~September 30, 2018.~~March 31, 2019. The ~~increase~~decrease was primarily attributable to ~~an increase~~declines in ~~average short-term borrowings of $166.4 million, resulting in higher interest expense of approximately $1.0 million. In addition, increases in average~~ rates paid on time deposits $100,000 and over, short-term borrowings and ~~savings and money market deposits~~long-term debt of 1856 bp, 117 bp and 2461 bp, respectively, ~~increased~~which decreased interest expense by approximately $1.2 million, $0.4 million and ~~$1.0~~$0.1 million, respectively. In addition, average time deposits $100,000 and over declined by $136.5 million resulting in a decrease in interest expense of approximately $0.7 million. Time deposits $100,000 and over primarily consists of public funds which may be opportunistic sources of funding, but fluctuate more directly with changes in the Federal Funds rate. These increases were partially offset by a $175.3 million decline in average time deposits $100,000 and over, which decreased interest expense by approximately $0.7 million and a 94 bp decrease in rates paid on long-term debt, which decreased interest expense by approximately $0.2 million.

Interest expense for the nine months ended September 30, 2019 was $25.1 million, representing an increase of 42.2% from the nine months ended September 30, 2018. The increase was primarily attributable to 48 bp and 20 bp increases in average rates paid on time deposits $100,000 and over and savings and money market deposits, respectively, combined with a 34 bp increase in average rates paid on short-term borrowings, which increased interest expense by approximately $3.3 million, $2.3 million and $0.4 million, respectively. In addition, average short-term borrowings increased by $153.7 million, resulting in higher interest expense of approximately $2.5 million. These increases were partially offset by a $121.4 million decline in average time deposits $100,000 and over, which decreased interest expense by approximately $1.3 million, and a 55 bp decrease in rates paid on long-term debt, which decreased interest expense by approximately $0.4 million.

Net Interest Margin

Our net interest margin of ~~3.30%~~3.43% for the three months ended ~~September 30, 2019~~March 31, 2020 increased by 109 bp from ~~3.20%~~3.34% in the three months ended ~~September 30, 2018. Our net interest margin of 3.32% for~~March 31, 2019.

The average rates paid on our interest-bearing liabilities, which declined by 24 bp in the ~~nine~~three months ended ~~September 30, 2019 increased by 12 bp from 3.20%~~March 31, 2020, compared to the same prior year period, outpaced the decline in ~~the nine months ended September 30, 2018.~~

~~The~~ average yields earned on our interest-earning assets, which ~~increased~~declined by ~~20 bp and 30~~9 bp in the three ~~and nine~~ months ended ~~September 30, 2019, respectively,~~March 31, 2020, compared to the same prior year periods, outpaced the increase in average rates paid on our interest-bearing liabilities, which increased by 13 bp and 24 bp in the three and nine months ended September 30, 2019, respectively, compared to the same prior year periods.period.

The aforementioned increases in average yields earned on our loans and leases portfolio during the three and nine months ended September 30, 2019 was partially offset by the aforementioned increases in average rates paid on our time deposits $100,000 and over and savings and money market deposits during the three and nine months ended September 30, 2019.

Provision for ~~Loan and Lease~~Credit Losses

Our ~~Provision expense~~provision for credit losses on loans under ASC 326 was ~~$1.5~~$9.3 million during the three months ended ~~September 30, 2019,~~March 31, 2020, compared to ~~a Provision reversal of $0.1 million in the three months ended September 30, 2018. Our Provision~~an expense ~~was $4.2 million during the nine months ended September 30, 2019, compared to expense of $0.3 million in the nine months ended September 30, 2018.~~

~~Our net charge-offs were $1.6 million during the three months ended September 30, 2019, compared to net charge-offs~~ of $1.3 million in the three months ended ~~September 30, 2018.~~ March 31, 2019 under previous GAAP.

In addition, we recorded a provision for off-balance sheet credit exposures of $1.8 million, included in other operating expense, during the three months ended March 31, 2020, compared to a provision of $0.2 million in the three months ended March 31, 2019 under previous GAAP.

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

Our net charge-offs were ~~$4.0~~$1.2 million during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, compared to net charge-offs of ~~$3.4~~$1.9 million in the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019.

The disruptions in the economy resulting from the COVID-19 pandemic 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 ACL, particularly as businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize an allowance for credit losses in future periods on the securities we hold as well as reductions in other comprehensive income. At this time, the Company is unable to project the probability and materiality of such credit losses and the impact its financial position and results of operation.

Other Operating Income

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


	Three Months Ended
(dollars in thousands)	March 31, 2020		March 31, 2019		$ Change		% Change
Other operating income:
Mortgage banking income	$	337	$	1,573	$	(1,236)	-78.6	%
Service charges on deposit accounts	2,050		2,081		(31)		-1.5	%
Other service charges and fees	4,897		3,215		1,682		52.3	%
Income from fiduciary activities	1,297		965		332		34.4	%
Equity in earnings of unconsolidated subsidiaries	26		8		18		225.0	%


Income (loss) from bank-owned life insurance	(19)		952		(971)		-102.0	%



Other:
Income recovered on nonaccrual loans previously charged-off	23		82		(59)		-72.0	%
Other recoveries	40		26		14		53.8	%
Commissions on sale of checks	81		80		1		1.3	%
Gain on sale of MasterCard stock	—		2,555		(2,555)		-100.0	%
Other	154		136		18		13.2	%
Total other operating income	$	8,886	$	11,673	$	(2,787)	-23.9	%


Note: Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period.

Three Months Ended
(dollars in thousands) September 30, 2019 September 30, 2018 $ Change % Change
Other operating income:
Mortgage banking income $ 1,764
$ 1,923
$ (159 ) -8.3 %
Service charges on deposit accounts 2,125
2,189
(64 ) -2.9 %
Other service charges and fees 3,724
3,286
438
13.3 %
Income from fiduciary activities 1,126
1,159
(33 ) -2.8 %
Equity in earnings of unconsolidated subsidiaries 86
71
15
21.1 %
Fees on foreign exchange 170
220
(50 ) -22.7 %
Investment securities gains 36
—
36
N.M.
*
Income from bank-owned life insurance 645
1,055
(410 ) -38.9 %
Loan placement fees 230
115
115
100.0 %
Net gain on sales of foreclosed assets 17
—
17
N.M.
*
Other:

Income recovered on nonaccrual loans previously charged-off 73
395
(322 ) -81.5 %
Other recoveries 42
101
(59 ) -58.4 %
Commissions on sale of checks 75
79
(4 ) -5.1 %
Other 153
227
(74 ) -32.6 %
Total other operating income $ 10,266
$ 10,820
$ (554 ) -5.1 %

* Not meaningful ("N.M.")

For the three months ended ~~September 30, 2019,~~March 31, 2020, total other operating income of ~~$10.3~~$8.9 million decreased by ~~$0.6~~$2.8 million, or ~~5.1%~~23.9%, from ~~$10.8~~$11.7 million in the year-ago quarter. The decrease from the year-ago quarter was primarily due to a $2.6 million gain on the sale of MasterCard Class B common stock recorded in the year-ago quarter, combined with lower mortgage banking income of $1.2 million and lower income from bank-owned life insurance of ~~$0.4~~$1.0 million ~~lower income recovered on nonaccrual loans previously charged-off of $0.3 million and~~in the current quarter. The lower mortgage banking income was primarily attributable to higher amortization of ~~$0.2 million.~~mortgage servicing rights of $1.1 million, primarily attributable to the decline in market interest rates. The lower income from bank-owned life insurance was primarily attributable to ~~fluctuations~~volatility in the equity markets during the quarter. This included a loss on corporate-owned life insurance, which had an offsetting decrease in the Company's employee deferred compensation expense due to the market movements during the quarter. These decreases were partially offset by ~~higher merchant and bank card fees of $0.3~~$1.3 million in income related to an interest rate swap (included in other service charges and fees).

Nine Months Ended
(dollars in thousands) September 30, 2019 September 30, 2018 $ Change % Change
Other operating income:
Mortgage banking income $ 4,789
$ 5,545
$ (756 ) -13.6 %
Service charges on deposit accounts 6,247
6,169
78
1.3 %
Other service charges and fees 10,479
9,697
782
8.1 %
Income from fiduciary activities 3,220
3,132
88
2.8 %
Equity in earnings of unconsolidated subsidiaries 165
151
14
9.3 %
Fees on foreign exchange 539
708
(169 ) -23.9 %
Investment securities gains 36
—
36
N.M.
*
Income from bank-owned life insurance 2,511
1,874
637
34.0 %
Loan placement fees 486
532
(46 ) -8.6 %
Net gain on sales of foreclosed assets 17
—
17
N.M.

Other:

Income recovered on nonaccrual loans previously charged-off 240
621
(381 ) -61.4 %
Other recoveries 94
196
(102 ) -52.0 %
Commissions on sale of checks 234
249
(15 ) -6.0 %
Gain on sale of MasterCard stock 2,555
—
2,555
N.M.
*
Other 421
530
(109 ) -20.6 %
Total other operating income $ 32,033
$ 29,404
$ 2,629
8.9 %

* Not meaningful ("N.M.")

For the nine months ended September 30, 2019, total other operating income of $32.0 million increased by $2.6 million, or 8.9%, from $29.4 million in the year-ago period. The increase from the year-ago period was primarily due to the conversion 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 in the first quarter of 2019, combined with higher income from bank-owned life insurance of $0.6 million, higher merchant and bank card fees of $0.4 million (included in other service charges and fees) and higher commissions and fees on investment services of $0.4 million (included in other service charges and fees). The higher income from bank-owned life insurance was primarily attributable to fluctuations in the equity markets. These increases were partially offset by lower mortgage banking income of $0.8 million and lower income recovered on nonaccrual loans previously charged-off of $0.4 million.

Other Operating Expense

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


	Three Months Ended
(dollars in thousands)	March 31, 2020		March 31, 2019		$ Change		% Change
Other operating expense:
Salaries and employee benefits	$	20,347	$	19,889	$	458	2.3	%
Net occupancy	3,672		3,458		214		6.2	%
Equipment	1,097		1,006		91		9.0	%

Communication expense	837		734		103		14.0	%
Legal and professional services	2,028		1,570		458		29.2	%
Computer software expense	2,943		2,597		346		13.3	%
Advertising expense	1,092		711		381		53.6	%
Foreclosed asset expense	67		159		(92)		-57.9	%

Other:
Charitable contributions	187		154		33		21.4	%
FDIC insurance assessment	—		501		(501)		-100.0	%
Miscellaneous loan expenses	300		294		6		2.0	%
ATM and debit card expenses	634		650		(16)		-2.5	%

Armored car expenses	294		198		96		48.5	%
Entertainment and promotions	280		230		50		21.7	%
Stationery and supplies	248		225		23		10.2	%
Directors’ fees and expenses	241		242		(1)		-0.4	%
Directors' deferred compensation plan expense	(1,483)		435		(1,918)		-440.9	%

Provision for off-balance sheet credit exposures	1,798		167		1,631		976.6	%

Other	1,658		1,128		530		47.0	%
Total other operating expense	$	36,240	$	34,348	$	1,892	5.5	%

Three Months Ended
(dollars in thousands) September 30, 2019 September 30, 2018 $ Change % Change
Other operating expense:
Salaries and employee benefits $ 20,631
$ 19,011
$ 1,620
8.5 %
Net occupancy 3,697
3,488
209
6.0 %
Equipment 1,067
1,048
19
1.8 %
Amortization of core deposit premium —
669
(669 ) -100.0 %
Communication expense 1,008
903
105
11.6 %
Legal and professional services 1,933
1,528
405
26.5 %
Computer software expense 2,713
2,672
41
1.5 %
Advertising expense 711
612
99
16.2 %
Foreclosed asset expense 15
212
(197 ) -92.9 %
Other:

Charitable contributions 230
166
64
38.6 %
FDIC insurance assessment 5
437
(432 ) -98.9 %
Miscellaneous loan expenses 274
403
(129 ) -32.0 %
ATM and debit card expenses 660
686
(26 ) -3.8 %
Armored car expenses 220
185
35
18.9 %
Entertainment and promotions 323
185
138
74.6 %
Stationery and supplies 240
206
34
16.5 %
Directors’ fees and expenses 242
263
(21 ) -8.0 %
Provision for residential mortgage loan repurchase losses —
331
(331 ) -100.0 %
Increase (decrease) to the reserve for unfunded commitments (465 ) (71 ) (394 ) 554.9 %
Other 1,430
1,091
339
31.1 %
Total other operating expense $ 34,934
$ 34,025
$ 909
2.7 %

For the three months ended ~~September 30, 2019,~~March 31, 2020, total other operating expense was ~~$34.9~~$36.2 million and increased by ~~$0.9~~$1.9 million, or ~~2.7%~~5.5%, from ~~$34.0~~$34.3 million in the year-ago quarter. The increase was primarily due to a higher provision for off-balance sheet credit exposures of $1.6 million under ASC 326, combined with higher salaries and employee benefits of ~~$1.6~~$0.5 million and higher legal and professional services of ~~$0.4 million. The increase in salaries and employee benefits was partially~~$0.5 million, primarily attributable to ~~the addition of positions in strategic areas and higher commissions, combined with annual merit increases effective in the second quarter of 2019.~~our RISE2020 initiative. These increases were partially offset by ~~lower amortization of core deposit premium of $0.7~~a $1.5 million ~~as the intangible asset was fully amortized as of September 30, 2018, a~~ credit related to the ~~reserve for unfunded loan commitments during~~fair value of our directors' deferred compensation obligation recorded in the current quarter, ~~of $0.5~~compared to a $0.4 million ~~and lower FDIC insurance~~ expense ~~of $0.4 million.~~recorded in the year-ago quarter. The variance is primarily attributable to volatility in the equity markets. In addition, FDIC insurance expense includes a $0.4 million assessment credit received in the current quarter.

Nine Months Ended
(dollars in thousands) September 30, 2019 September 30, 2018 $ Change % Change
Other operating expense:
Salaries and employee benefits $ 61,083
$ 56,299
$ 4,784
8.5 %
Net occupancy 10,680
10,114
566
5.6 %
Equipment 3,211
3,160
51
1.6 %
Amortization of core deposit premium —
2,006
(2,006 ) -100.0 %
Communication expense 2,645
2,547
98
3.8 %
Legal and professional services 5,231
5,118
113
2.2 %
Computer software expense 7,870
7,244
626
8.6 %
Advertising expense 2,134
1,841
293
15.9 %
Foreclosed asset expense 223
537
(314 ) -58.5 %
Other:

Charitable contributions 559
497
62
12.5 %
FDIC insurance assessment 868
1,305
(437 ) -33.5 %
Miscellaneous loan expenses 885
1,026
(141 ) -13.7 %
ATM and debit card expenses 1,930
2,032
(102 ) -5.0 %
Armored car expenses 629
584
45
7.7 %
Entertainment and promotions 1,576
617
959
155.4 %
Stationery and supplies 744
643
101
15.7 %
Directors’ fees and expenses 722
777
(55 ) -7.1 %
Provision for residential mortgage loan repurchase losses (403 ) 331
(734 ) -221.8 %
Increase (decrease) to the reserve for unfunded commitments 189
36
153
425.0 %
Other 4,613
4,326
287
6.6 %
Total other operating expense $ 105,389
$ 101,040
$ 4,349
4.3 %

For the nine months ended September 30, 2019, total other operating expense was $105.4 million and increased by $4.3 million, or 4.3%, from $101.0 million in the year-ago quarter. The increase was primarily due to higher salaries and employee benefits of $4.8 million, higher entertainment and promotions expense of $1.0 million, higher computer software expense of $0.6 million and higher net occupancy expense of $0.6 million. The higher entertainment and promotions expense was primarily attributable to expenses related to a core deposit gathering campaign in the second quarter of 2019. These increases were partially offset by lower amortization of core deposit premium of $2.0 million, a credit to the reserve for residential mortgage loan repurchase losses of $0.4 million, compared to an increase to the reserve of $0.3 million in the year-ago period, and lower FDIC insurance expense of $0.4 million.

A key measure of operating efficiency tracked by management is the efficiency ratio, which is calculated by dividing total other operating 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 March 31,
(dollars in thousands)	2020			2019
Total other operating expense	$	36,240		$	34,348

Net interest income	$	47,830		$	45,113
Total other operating income	8,886			11,673
Total revenue before provision for credit losses	$	56,716		$	56,786

Efficiency ratio	63.90		%	60.49		%

Three Months Ended
September 30, Nine Months Ended
September 30,
(dollars in thousands) 2019 2018 2019 2018
Total other operating expense $ 34,934
$ 34,025
$ 105,389
$ 101,040

Net interest income $ 45,649
$ 43,325
$ 136,140
$ 128,319
Total other operating income 10,266
10,820
32,033
29,404
Total pre-provision revenue $ 55,915
$ 54,145
$ 168,173
$ 157,723

Efficiency ratio 62.48 % 62.84 % 62.67 % 64.06 %

Our efficiency ratio ~~improved~~increased to ~~62.48%~~63.90% in the three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~62.84%~~60.49% in the year-ago ~~quarter and improved to 62.67% in the nine months ended September 30, 2019 compared to 64.06% in the year-ago period.~~quarter. The efficiency ratio in the ~~nine months ended September 30, 2019~~year-ago quarter was positively impacted by the aforementioned $2.6 million gain on sale of MasterCard stock.

Income Taxes

The Company recorded income tax expense of ~~$4.9 million and $14.4~~$2.8 million for the three ~~and nine~~ months ended ~~September 30, 2019, respectively,~~March 31, 2020, compared to ~~$5.0 million and $12.7~~$5.1 million in the ~~same prior year periods, respectively.~~year-ago quarter. The effective tax rate for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 was ~~25.2% and 24.7%~~25.3%, ~~respectively,~~ compared to ~~24.7% and 22.6%~~24.2% in the same prior year periods, respectively. The increases in income tax expense and the effective tax rate in the three and nine months ended September 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.year-ago quarter.

The valuation allowance on our net deferred tax assets ("DTA") totaled ~~$3.3~~$3.4 million at ~~September 30, 2019~~March 31, 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 ~~September 30, 2019~~March 31, 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 ~~$14.0~~$16.9 million at ~~September 30, 2019,~~March 31, 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 ~~September 30, 2019~~March 31, 2020 of ~~$5.98~~$6.11 billion increased by ~~$169.7~~$95.9 million from ~~$5.81~~$6.01 billion at December 31, ~~2018.~~2019.

Investment Securities

Investment securities of $1.19 billion at ~~September 30, 2019 decreased~~March 31, 2020 increased by ~~$166.9~~$56.9 million, or ~~12.3%~~5.0%, from December 31, ~~2018.~~2019. The ~~decrease~~increase reflects ~~$201.4~~$96.1 million in ~~principal runoff, offset by~~net purchases and a ~~$33.4~~$13.9 million increase in the market valuation on the available-for-sale portfolio, ~~and $1.0~~partially offset by $52.9 million in ~~net purchases.~~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)	March 31, 2020		December 31, 2019		$ Change		% Change
Hawaii:
Commercial, financial and agricultural	$	454,817	$	454,582	$	235	0.1	%
Real estate:
Construction	100,617		95,854		4,763		5.0
Residential mortgage	1,632,536		1,599,801		32,735		2.0
Home equity	504,686		490,734		13,952		2.8
Commercial mortgage	917,886		909,798		8,088		0.9


Consumer	367,960		373,451		(5,491)		(1.5)

Total loans	3,978,502		3,924,220		54,282		1.4
Allowance for credit losses ("ACL")	(51,646)		(42,592)		(9,054)		21.3
Loans, net of ACL	$	3,926,856	$	3,881,628	$	45,228	1.2

U.S. Mainland:
Commercial, financial and agricultural	$	120,507	$	115,722	$	4,785	4.1
Real estate:
Construction	—		—		—		—
Residential mortgage	—		—		—		—
Home equity	—		—		—		—
Commercial mortgage	221,251		213,617		7,634		3.6


Consumer	191,738		195,981		(4,243)		(2.2)

Total loans	533,496		525,320		8,176		1.6
ACL	(7,999)		(5,379)		(2,620)		48.7
Loans, net of ACL	$	525,497	$	519,941	$	5,556	1.1

Total:
Commercial, financial and agricultural	$	575,324	$	570,304	$	5,020	0.9
Real estate:
Construction	100,617		95,854		4,763		5.0
Residential mortgage	1,632,536		1,599,801		32,735		2.0
Home equity	504,686		490,734		13,952		2.8
Commercial mortgage	1,139,137		1,123,415		15,722		1.4


Consumer	559,698		569,432		(9,734)		(1.7)

Total loans	4,511,998		4,449,540		62,458		1.4
ACL	(59,645)		(47,971)		(11,674)		24.3
Loans, net of ACL	$	4,452,353	$	4,401,569	$	50,784	1.2

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

Commercial, financial and agricultural $ 439,296
$ 439,112
$ 184
— %
Real estate:
Construction 96,661
64,654
32,007
49.5
Residential mortgage 1,558,735
1,428,205
130,530
9.1
Home equity 475,565
468,966
6,599
1.4
Commercial mortgage 909,987
861,086
48,901
5.7
Consumer 369,511
357,908
11,603
3.2
Leases 31
124
(93 ) (75.0 )
Total loans and leases 3,849,786
3,620,055
229,731
6.3
Allowance for loan and lease losses (42,286 ) (42,993 ) 707
(1.6 )
Net loans and leases $ 3,807,500
$ 3,577,062
$ 230,438
6.4

U.S. Mainland:

Commercial, financial and agricultural $ 137,316
$ 142,548
$ (5,232 ) (3.7 )
Real estate:
Construction —
2,273
(2,273 ) (100.0 )
Residential mortgage —
—
—
—
Home equity —
—
—
—
Commercial mortgage 223,925
179,192
44,733
25.0
Consumer 156,835
134,298
22,537
16.8
Leases —
—
—
—
Total loans and leases 518,076
458,311
59,765
13.0
Allowance for loan and lease losses (5,881 ) (4,923 ) (958 ) 19.5
Net loans and leases $ 512,195
$ 453,388
$ 58,807
13.0

Total:

Commercial, financial and agricultural $ 576,612
$ 581,660
$ (5,048 ) (0.9 )
Real estate:
Construction 96,661
66,927
29,734
44.4
Residential mortgage 1,558,735
1,428,205
130,530
9.1
Home equity 475,565
468,966
6,599
1.4
Commercial mortgage 1,133,912
1,040,278
93,634
9.0
Consumer 526,346
492,206
34,140
6.9
Leases 31
124
(93 ) (75.0 )
Total loans and leases 4,367,862
4,078,366
289,496
7.1
Allowance for loan and lease losses (48,167 ) (47,916 ) (251 ) 0.5
Net loans and leases $ 4,319,695
$ 4,030,450
$ 289,245
7.2

Loans, ~~and leases,~~ net of deferred costs, of ~~$4.37~~$4.51 billion at ~~September 30, 2019~~March 31, 2020 increased by ~~$289.5~~$62.5 million, or ~~7.1%~~1.4%, from December 31, ~~2018.~~2019. The increase reflects net increases in the following loan portfolios: residential mortgage of ~~$130.5~~$32.7 million, commercial mortgage of ~~$93.6~~$15.7 million, ~~consumer of $34.1 million, construction of $29.7 million, and~~ home equity of ~~$6.6~~$14.0 million, commercial, financial and agricultural of $5.0 million and construction of $4.8 million. These increases were partially offset by a net decrease in the ~~commercial, financial and agricultural~~consumer portfolio of ~~$5.0~~$9.7 million.

The Hawaii loan portfolio increased by ~~$229.7~~$54.3 million, or ~~6.3%~~1.4%, from December 31, ~~2018.~~2019. The increase reflects net increases in the following loan portfolios: residential mortgage of ~~$130.5~~$32.7 million, home equity of $14.0 million, commercial mortgage of ~~$48.9 million, construction of~~

~~$32.0 million, consumer of $11.6~~$8.1 million and ~~home equity~~construction of ~~$6.6~~$4.8 million, partially offset by a net decrease in the consumer portfolio of $5.5 million. The increases in the portfolios were primarily due to an increased demand from both new and existing customers.

The U.S. Mainland loan portfolio increased by ~~$59.8~~$8.2 million, or ~~13.0%~~1.6% from December 31, ~~2018.~~2019. The net increase was primarily attributable to net increases in the commercial mortgage loan portfolio of ~~$44.7~~$7.6 million and commercial, financial and agricultural loan portfolio of $4.8 million, partially offset by a net decrease in the consumer loan portfolio of ~~$22.5~~$4.2 million. ~~These increases were partially offset by net decreases in commercial, financial and agricultural and construction loan portfolios of $5.2 million and $2.3 million, respectively.~~

~~Through~~

In the ~~third~~first quarter of ~~2019,~~2020, we purchased U.S. Mainland unsecured consumer loans ~~with outstanding balances at the time of purchases~~ totaling ~~$80.0~~$22.3 million, ~~for $78.8 million, or~~which reflected a net discount of ~~$1.2 million.~~$0.6 million from the $23.0 million outstanding balance. At the time of purchase, the unsecured consumer loans had a weighted average remaining term of 87 months and a weighted average yield, net of servicing costs, of 5.03%.

In ~~2018,~~2019, we purchased ~~U.S Mainland consumer loans~~an auto loan portfolio 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%.

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

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


(dollars in thousands)	March 31, 2020			December 31, 2019			$ Change		% Change
Nonperforming Assets
Nonaccrual loans:
Commercial, financial and agricultural	$	667		$	467		$	200	42.8	%
Real estate:

Residential mortgage	2,287			979			1,308		133.6
Home equity	545			92			453		492.4



Consumer	48			17			31		182.4

Total nonaccrual loans	3,547			1,555			1,992		128.1

Other real estate owned ("OREO"):

Real estate:


Home equity	100			164			(64)		(39.0)





Total OREO	100			164			(64)		(39.0)
Total nonperforming assets	3,647			1,719			1,928		112.2

Accruing Loans Delinquent for 90 Days or More

Real estate:

Residential mortgage	1,221			724			497		68.6




Consumer	352			286			66		23.1

Total accruing loans delinquent for 90 days or more	1,573			1,010			563		55.7

Restructured Loans Still Accruing Interest
Commercial, financial and agricultural	113			135			(22)		(16.3)
Real estate:

Residential mortgage	5,431			5,502			(71)		(1.3)

Commercial mortgage	1,709			1,839			(130)		(7.1)




Total restructured loans still accruing interest	7,253			7,476			(223)		(3.0)

Total nonperforming assets, accruing loans delinquent for 90 days or more and restructured loans still accruing interest	$	12,473		$	10,205		$	2,268	22.2

Ratio of nonaccrual loans to total loans	0.08		%	0.03		%			0.05	%
Ratio of nonperforming assets to total loans and OREO	0.08		%	0.04		%			0.04	%
Ratio of nonperforming assets and accruing loans delinquent for 90 days or more to total loans and OREO	0.12		%	0.06		%			0.06	%
Ratio of nonperforming assets, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO	0.28		%	0.23		%			0.05	%

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

Nonaccrual loans:

Real estate:
Residential mortgage $ 799
$ 2,048
$ (1,249 ) (61.0 )
Home equity 95
275
(180 ) (65.5 )
Total nonaccrual loans 894
2,323
(1,429 ) (61.5 )

Other real estate owned ("OREO"):

Real estate:
Residential mortgage 302
414
(112 ) (27.1 )
Home equity 164
—
164
—
Total OREO 466
414
52
12.6
Total nonperforming assets 1,360
2,737
(1,377 ) (50.3 )

Accruing Loans Delinquent for 90 Days or More
Real estate:
Home equity —
298
(298 ) (100.0 )
Consumer 235
238
(3 ) (1.3 )
Total accruing loans delinquent for 90 days or more 235
536
(301 ) (56.2 )

Restructured Loans Still Accruing Interest

Commercial, financial and agricultural 157
220
(63 ) (28.6 )
Real estate:
Construction —
2,273
(2,273 ) (100.0 )
Residential mortgage 6,717
8,026
(1,309 ) (16.3 )
Commercial mortgage 1,985
2,348
(363 ) (15.5 )
Total restructured loans still accruing interest 8,859
12,867
(4,008 ) (31.1 )

Total nonperforming assets, accruing loans delinquent for 90 days or more and restructured loans still accruing interest $ 10,454
$ 16,140
$ (5,686 ) (35.2 )

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 0.24 % 0.40 % (0.16 )%

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	2,056
Reductions:
Payments	(60)
Return to accrual status	—

Net charge-offs, valuation and other adjustments	(68)
Total reductions	(128)
Net increase	1,928
Balance at March 31, 2020	$	3,647

(dollars in thousands)
Balance at December 31, 2018 $ 2,737
Additions 922
Reductions:
Payments (2,177 )
Return to accrual status (27 )
Net charge-offs, valuation and other adjustments (95 )
Total reductions (2,299 )
Net increase (1,377 )
Balance at September 30, 2019 $ 1,360

Nonperforming assets, which includes nonaccrual loans and ~~leases and~~ other real estate owned, totaled ~~$1.4~~$3.6 million at ~~September 30, 2019,~~March 31, 2020, compared to ~~$2.7~~$1.7 million at December 31, ~~2018.~~2019. There were no nonperforming loans classified as held for sale at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. The ~~decrease~~increase in nonperforming assets from December 31, ~~2018~~2019 was primarily attributable to ~~$2.2~~additions to nonaccrual loans totaling $2.1 million, offset by $0.1 million in repayments of nonaccrual loans and $0.1 million in net charge-offs, valuation and other ~~adjustments, offset by four additions to nonperforming assets totaling $0.9 million.~~adjustments.

Troubled debt restructurings ("TDRs") included in nonperforming assets at ~~September 30, 2019~~March 31, 2020 consisted of one Hawaii residential mortgage loan with a ~~combined~~ principal balance of $0.3 million. There were $7.3 million of TDRs still accruing interest at March 31, 2020, none of which were more than 90 days delinquent. At December 31, 2019, there were $7.5 million of TDRs still accruing interest, none of which were more than 90 days delinquent.

The Company offers various types of concessions when modifying a loan. Concessions made to the original contractual terms of ~~these loans consisted 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 are no commitments to lend additional funds to any of these borrowers. There were $8.9 million of TDRs still accruing interest at September 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.the borrower.

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 March 31,
(dollars in thousands)													(dollars in thousands)	2020			2019
Allowance for Credit Losses:													Allowance for Credit Losses:
Balance at beginning of period													Balance at beginning of period	$	47,971		$	47,916
Adoption of ASU 2016-13													Adoption of ASU 2016-13	3,566			—
Adjusted balance at beginning of period													Adjusted balance at beginning of period	51,537			47,916

Provision for credit losses													Provision for credit losses	9,329			1,283

Charge-offs:													Charge-offs:
Commercial, financial and agricultural													Commercial, financial and agricultural	437			463

	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2019			2018			2019			2018
Allowance for Loan and Lease Losses:
Balance at beginning of period	$	48,267		$	48,181		$	47,916		$	50,001

Provision (credit) for loan and lease losses	1,532			(59		)	4,219			262

Charge-offs:
Commercial, financial and agricultural	797			731			2,099			1,971
Real estate:
Home equity	5			—			5			—

Consumer	1,832			1,762			5,542			5,424			Consumer	2,217			2,251

Total charge-offs	2,634			2,493			7,646			7,395			Total charge-offs	2,654			2,714

Recoveries:													Recoveries:
Commercial, financial and agricultural	362			578			910			1,017			Commercial, financial and agricultural	342			233
Real estate:													Real estate:
Construction	6			6			604			1,205			Construction	131			6
Residential mortgage	104			51			498			98			Residential mortgage	181			22
Home equity	24			6			42			18			Home equity	31			9
Commercial mortgage	—			8			25			52			Commercial mortgage	2			—

Consumer	506			548			1,599			1,568			Consumer	746			512

Total recoveries	1,002			1,197			3,678			3,958			Total recoveries	1,433			782

Net charge-offs	1,632			1,296			3,968			3,437			Net charge-offs	1,221			1,932

Balance at end of period	$	48,167		$	46,826		$	48,167		$	46,826		Balance at end of period	$	59,645		$	47,267

Allowance as a percentage of total loans and leases	1.10		%	1.18		%	1.10		%	1.18		%
ACL as a percentage of total loans													ACL as a percentage of total loans	1.32		%	1.15		%

Annualized ratio of net charge-offs to average loans and leases	0.15		%	0.13		%	0.13		%	0.12		%
Annualized ratio of net charge-offs to average loans													Annualized ratio of net charge-offs to average loans	0.11		%	0.19		%

Our ~~Allowance~~ACL at ~~September 30, 2019~~March 31, 2020 totaled ~~$48.2~~$59.6 million compared to ~~$47.9~~$48.0 million at December 31, ~~2018.~~ 2019.

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

During the three months ended ~~September 30, 2019,~~March 31, 2020, we recorded ~~Provision expense~~a provision for credit losses on loans of ~~$1.5~~$9.3 million ~~primarily~~and net charge-offs of $1.2 million. The provision reflects the incorporation of life of loan estimated losses under ASC 326 and economic forecasts that anticipate deterioration due to the increase in our loan portfolio and reflects net charge-offs of $1.6 million. During the nine months ended September 30, 2019, we recorded Provision expense of $4.2 million primarily due to the increase in our loan portfolio and reflects net charge-offs of $4.0 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 ~~1.10%~~1.32% at ~~September 30, 2019.~~March 31, 2020. The ~~decrease~~increase in our ~~Allowance~~ACL as a percentage of total loans ~~and leases~~ 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 ~~1,751%~~2,791% at December 31, ~~2018~~2019 to ~~3,542%~~1,635% at ~~September 30, 2019.~~March 31, 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 ~~$17.2~~$18.1 million at ~~September 30, 2019~~March 31, 2020 increased by ~~$0.5~~$3.1 million, or ~~3.2%~~20.9%, from the FHLB stock balance at December 31, ~~2018.~~2019. FHLB stock has an activity-based stock requirement, thus as borrowings increase, 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)	March 31, 2020		December 31, 2019		$ Change		% Change
Noninterest-bearing demand deposits	$	1,430,540	$	1,450,532	$	(19,992)	(1.4)	%
Interest-bearing demand deposits	1,018,508		1,043,010		(24,502)		(2.3)
Savings and money market deposits	1,693,280		1,600,028		93,252		5.8
Time deposits less than $100,000	162,399		165,755		(3,356)		(2.0)
Core deposits	4,304,727		4,259,325		45,402		1.1

Government time deposits	523,343		533,088		(9,745)		(1.8)
Other time deposits $100,000 to $250,000	100,047		107,550		(7,503)		(7.0)
Other time deposits greater than $250,000	207,952		220,060		(12,108)		(5.5)
Total time deposits $100,000 and greater	831,342		860,698		(29,356)		(3.4)







Total deposits	$	5,136,069	$	5,120,023	$	16,046	0.3

(dollars in thousands) September 30,
2019 December 31,
2018 $ Change % Change
Noninterest-bearing demand deposits $ 1,399,200
$ 1,436,967
$ (37,767 ) (2.6 )%
Interest-bearing demand deposits 998,037
954,011
44,026
4.6
Savings and money market deposits 1,593,738
1,448,257
145,481
10.0
Time deposits less than $100,000 165,687
176,707
(11,020 ) (6.2 )
Core deposits 4,156,662
4,015,942
140,720
3.5

Government time deposits 552,470
631,293
(78,823 ) (12.5 )
Other time deposits $100,000 to $250,000 103,959
106,783
(2,824 ) (2.6 )
Other time deposits greater than $250,000 224,568
192,472
32,096
16.7
Total time deposits $100,000 and greater 880,997
930,548
(49,551 ) (5.3 )

Total deposits $ 5,037,659
$ 4,946,490
$ 91,169
1.8

Total deposits of ~~$5.04~~$5.14 billion at ~~September 30, 2019~~March 31, 2020 increased by ~~$91.2~~$16.0 million from total deposits of ~~$4.95~~$5.12 billion at December 31, ~~2018.~~2019. Net increases in savings and money market deposits of ~~$145.5 million, interest-bearing demand deposits of $44.0 million and other time deposits greater than $250,000 of $32.1~~$93.3 million, were partially offset by net decreases in ~~government time~~interest-bearing demand deposits of ~~$78.8~~$24.5 million, noninterest-bearing demand deposits of ~~$37.8~~$20.0 million, other time deposits greater than $250,000 of $12.1 million, government time deposits of $9.7 million, other time deposits $100,000 to $250,000 of $7.5 million and time deposits less than $100,000 of ~~$11.0~~$3.4 million.

Core deposits, which we define as demand deposits, savings and money market deposits, and time deposits less than $100,000, totaled ~~$4.16~~$4.30 billion at ~~September 30, 2019~~March 31, 2020 and increased by ~~$140.7~~$45.4 million, or ~~3.5%,~~1.1, from December 31, ~~2018.~~2019. Core deposits as a percentage of total deposits was ~~82.5%~~83.8% at ~~September 30, 2019,~~March 31, 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 ~~$525.2~~$533.8 million at ~~September 30, 2019,~~March 31, 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 ~~$44.1~~$8.3 million and other comprehensive income of ~~$28.3~~$10.7 million, partially offset by the repurchase of ~~631,300~~206,802 shares of common stock under our repurchase program, at a cost of ~~$18.0~~$4.7 million and cash dividends paid of ~~$19.2~~$6.5 million in the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020. During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, we repurchased approximately ~~2.2%~~0.7% of our common stock outstanding as of December 31, ~~2018.~~2019.

Our total shareholders' equity to total assets ratio was ~~8.79%~~8.74% at ~~September 30, 2019,~~March 31, 2020, compared to ~~8.47%~~8.79% at December 31, ~~2018.~~2019. Our book value per share was ~~$18.47~~$18.99 and ~~$16.97~~$18.68 at ~~September 30, 2019~~March 31, 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 ~~September 30, 2019,~~March 31, 2020, on a stand-alone basis, CPF had an available cash balance of approximately ~~$11.6~~$7.7 million in order to meet its ongoing obligations.

As a Hawaii state-chartered bank, the bank may only pay dividends to the extent it has retained earnings as defined under Hawaii banking law ("Statutory Retained Earnings"), which differs from GAAP retained earnings. As of ~~September 30, 2019,~~March 31, 2020, the bank had Statutory Retained Earnings of ~~$61.5~~$65.8 million. On ~~October 22, 2019,~~April 21, 2020, the Company's Board of Directors declared a cash dividend of $0.23 per share on the Company's outstanding common stock, which was a 9.5% increase from the $0.21 per share a year-ago.

Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. Our ability to pay cash dividends to our shareholders is subject to restrictions under federal and Hawaii law, including restrictions imposed by the FRB and covenants set forth in various agreements we are a party to, including covenants set forth in our subordinated debentures.

In the year ended December 31, ~~2018,~~2019, the Company repurchased ~~1,155,157~~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. In the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, a total of ~~631,300~~206,802 shares of common stock, at a cost of ~~$18.0~~$4.7 million, were repurchased under the Company's stock repurchase plans. As of ~~September 30, 2019, $25.9~~March 31, 2020, $26.6 million remained available for repurchase under the Company's Repurchase Plan. The Company's Repurchase Plan ~~has no expiration date.~~is subject to a one year expiration. In March 2020, the Company temporarily suspended the Repurchase Plan due to uncertainty during the current COVID-19 pandemic. We cannot

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

Trust Preferred Securities

On December 17, 2018, the Company completed the redemption of $20.0 million in floating rate trust preferred securities of CPB Statutory Trust III ("Trust III") bearing an interest rate of three-month LIBOR plus 2.85% and maturing on December 17, 2033. The redemption price was 100% of the aggregate liquidation amount of the securities plus accumulated but unpaid distributions up to but not including the redemption date. The Company also redeemed $0.6 million of common securities issued by Trust III and held by the Company, as a result of the concurrent redemption of 100% of the principal assets of Trust III, or $20.6 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust III trust preferred securities. The redemption was pursuant to the optional prepayment provisions of the indenture. On January 9, 2019, Trust III was canceled with the state of Connecticut.

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

As of ~~September 30, 2019,~~March 31, 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 March 31, 2020, the Company has elected to exercise the option to delay for two years an estimate of the CECL methodology on regulatory capital.

The Company's and the bank's leverage capital, tier 1 risk-based capital, total risk-based capital, and CET1 risk-based capital ratios as of ~~September 30, 2019~~March 31, 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 March 31, 2020:
Leverage capital	$	567,947	9.5	%	$	239,808	4.0	%			N/A
Tier 1 risk-based capital	567,947		12.3		276,171		6.0				N/A
Total risk-based capital	618,504		13.4		368,228		8.0				N/A
CET1 risk-based capital	517,947		11.3		207,128		4.5				N/A

At December 31, 2019:
Leverage capital	$	568,529	9.5	%	$	238,630	4.0	%			N/A
Tier 1 risk-based 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 March 31, 2020:
Leverage capital	$	556,895	9.3	%	$	239,635	4.0	%	$	299,544	5.0	%
Tier 1 risk-based capital	556,895		12.1		275,928		6.0		367,904		8.0
Total risk-based capital	607,402		13.2		367,904		8.0		459,880		10.0
CET1 risk-based capital	556,895		12.1		206,946		4.5		298,922		6.5

At December 31, 2019:
Leverage capital	$	556,077	9.3	%	$	238,342	4.0	%	$	297,928	5.0	%
Tier 1 risk-based 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 September 30, 2019:

Leverage capital $ 561,478
9.5 % $ 235,781
4.0 %

N/A
Tier 1 risk-based capital 561,478
12.6
267,821
6.0

N/A
Total risk-based capital 611,076
13.7
357,094
8.0

N/A
CET1 risk-based capital 511,478
11.5
200,865
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 September 30, 2019:

Leverage capital $ 550,913
9.4 % $ 235,625
4.0 % $ 294,531
5.0 %
Tier 1 risk-based capital 550,913
12.4
267,577
6.0
356,770
8.0
Total risk-based capital 600,511
13.5
356,770
8.0
445,962
10.0
CET1 risk-based capital 550,913
12.4
200,683
4.5
289,875
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 ~~September 30, 2019, over a one-year horizon,~~March 31, 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	~~1.99~~3.08	%
-100 bp	~~(3.90~~(1.85)	)%

Liquidity and Borrowing Arrangements

Our objective in managing liquidity is to maintain a balance between sources and uses of funds in order to economically meet the cash requirements of customers for loans and deposit withdrawals and participate in lending and investment opportunities as they arise. We monitor our liquidity position in relation to changes in loan and deposit balances on a daily basis to ensure maximum utilization, maintenance of an adequate level of readily marketable assets and access to short-term funding sources.

Core deposits have historically provided us with a sizable source of relatively stable and low cost funds, but are subject to competitive pressure in our market. In addition to core deposit funding, we also have access to a variety of other short-term and long-term funding sources, which include proceeds from maturities of our investment securities, as well as secondary funding sources such as the FHLB, secured repurchase agreements and the Federal Reserve discount window, available to meet our liquidity needs. While we historically have had access to these other funding sources, access to these sources may not be guaranteed and can be restricted in the future as a result of market conditions or the Company's and bank's financial position.

The bank maintained a ~~$1.80~~$1.87 billion line of credit with the FHLB as of ~~September 30, 2019,~~March 31, 2020, compared to ~~$1.43~~$1.84 billion at December 31, ~~2018.~~2019. We had ~~$205.0~~$222.0 million in short-term borrowings under this arrangement at ~~September 30, 2019,~~March 31, 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 ~~$118.9~~$187.4 million at ~~September 30, 2019,~~March 31, 2020, compared to ~~$4.6~~$78.9 million at December 31, ~~2018.~~2019. Long-term borrowings under this arrangement totaled $50.0 million at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. FHLB advances and standby letters of credit available at ~~September 30, 2019~~March 31, 2020 were secured by certain real estate loans with a carrying value of ~~$2.42~~$2.51 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB. At ~~September 30, 2019, $1.43~~March 31, 2020, $1.41 billion was undrawn under this arrangement, compared to ~~$1.18~~$1.57 billion at December 31, ~~2018.~~2019.

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 ~~September 30, 2019~~March 31, 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 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 results will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

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

our business may include all or a combination of valuation impairments on our investments, loans, mortgage servicing

rights, deferred tax assets or counter-party risk derivatives.

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

We and our customers have been, and will continue to be adversely affected by the COVID-19 pandemic. The extent to which the COVID-19 pandemic continues to negatively impact our business, results of operations, and financial condition, ~~or results~~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 ~~operations.~~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 the three months ended ~~September 30, 2019,~~March 31, 2020, the Company repurchased ~~140,600~~206,802 shares of common stock, at an aggregate cost of ~~$4.0~~$4.7 million, under the Company's stock repurchase plans. As of ~~September 30, 2019,~~March 31, 2020, a total of ~~$25.9~~$26.6 million remained available for repurchase under the Company's Repurchase Plan. ~~There is no expiration date on~~In March 2020, the Company temporarily suspended the Repurchase Plan due to uncertainty during the current COVID-19 pandemic. We cannot provide any assurance as to when or if we will

recommence our Repurchase Plan.


	Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Shares Purchased as Part of Publicly Announced Programs	Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program
January 1-31, 2020	49,130	$	28.90	49,130	$	29,928,774
February 1-29, 2020	22,710	28.13		22,710	29,289,953
March 1-31, 2020	134,962	19.93		134,962	26,600,028
Total	206,802	$	22.96	206,802	26,600,028

Issuer Purchases of Equity Securities
Period Total
Number
of Shares
Purchased Average
Price Paid
per Share Total Shares
Purchased as
Part of Publicly
Announced
Programs Maximum Dollar
Value of
Shares That
May Yet Be
Purchased Under
the Program
July 1-31, 2019 11,100
$ 29.74
11,100
$ 29,612,363
August 1-31, 2019 67,000
28.34
67,000
27,713,654
September 1-30, 2019 62,500
28.58
62,500
25,927,436
Total 140,600
$ 28.56
140,600
25,927,436

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:	~~November~~May 5, ~~2019~~2020	/s/ Paul K. Yonamine
		Paul K. Yonamine
		Chairman and Chief Executive Officer

Date:	~~November~~May 5, ~~2019~~2020	/s/ David S. Morimoto
		David S. Morimoto
		Executive Vice President and Chief Financial Officer



	September 30, 2019
(dollars in thousands)	Amortized Cost		Fair Value
Available-for-sale:
Due in one year or less	$	32,455	$	32,658
Due after one year through five years	60,696		61,195
Due after five years through ten years	63,661		64,715
Due after ten years	39,008		39,753

Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	721,081		723,644
Commercial - U.S. Government agencies and sponsored entities	86,697		87,742
Residential - Non-government agencies	38,140		39,109
Commercial - Non-government agencies	134,724		138,059
Total available-for-sale securities	$	1,176,462	$	1,186,875



(dollars in thousands)	September 30, 2019		December 31, 2018
Commercial, financial and agricultural	$	576,343	$	581,177
Real estate:
Construction	96,996		67,269
Residential mortgage	1,554,752		1,424,384
Home equity	475,211		468,966
Commercial mortgage	1,135,408		1,041,685
Consumer	526,429		492,268
Leases	31		124
Gross loans and leases	4,365,170		4,075,873
Net deferred costs	2,692		2,493
Total loans and leases, net of deferred costs	$	4,367,862	$	4,078,366



			Real Estate
(dollars in thousands)	Comml, Fin & Ag		Constr			Resi Mortgage		Home Equity		Comml Mortgage			Consumer			Leases		Total
September 30, 2019
Allowance:
Individually evaluated for impairment	$	—	$	—		$	—	$	—	$	—		$	—		$	—	$	—
Collectively evaluated for impairment	7,781		1,693			13,546		4,287		12,209			8,651			—		48,167
Total ending balance	$	7,781	$	1,693		$	13,546	$	4,287	$	12,209		$	8,651		$	—	$	48,167

Loans and leases:
Individually evaluated for impairment	$	157	$	—		$	7,516	$	95	$	1,985		$	—		$	—	$	9,753
Collectively evaluated for impairment	576,186		96,996			1,547,236		475,116		1,133,423			526,429			31		4,355,417
Subtotal	576,343		96,996			1,554,752		475,211		1,135,408			526,429			31		4,365,170
Net deferred costs (income)	269		(335		)	3,983		354		(1,496		)	(83		)	—		2,692
Total loans and leases, net of deferred costs (income)	$	576,612	$	96,661		$	1,558,735	$	475,565	$	1,133,912		$	526,346		$	31	$	4,367,862



	Three Months Ended								Nine Months Ended
	September 30, 2019				September 30, 2018				September 30, 2019				September 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	$	164	$	2	$	399	$	12	$	188	$	7	$	498	$	17
Real estate:
Construction	—		—		2,382		30		1,323		62		2,476		84
Residential mortgage	7,536		63		12,857		123		8,763		776		13,208		419
Home equity	190		—		447		—		332		13		516		—
Commercial mortgage	2,021		22		3,483		36		2,162		68		3,653		110
Total	$	9,911	$	87	$	19,568	$	201	$	12,768	$	926	$	20,351	$	630



Year Ending December 31,
2019 (remainder)	$	3,669
2020	3,466
2021	1,494
2022	3,010
2023	10
2024	26
Thereafter	49
Total unfunded commitments	$	11,724



(dollars in thousands)	Three Months Ended September 30, 2019		Three Months Ended September 30, 2018		Nine Months Ended September 30, 2019		Nine Months Ended September 30, 2018
Proportional amortization method:
Amortization expense recognized in income tax expense	$	259	$	114	$	776	$	341
Tax credits recognized in income tax expense	307		152		922		457



(dollars in thousands)	Core Deposit Premium			Mortgage Servicing Rights			Total
Balance, January 1, 2018	$	2,006		$	15,843		$	17,849
Additions	—			1,204			1,204
Amortization	(2,006		)	(1,413		)	(3,419		)
Balance, September 30, 2018	$	—		$	15,634		$	15,634

Balance, January 1, 2019	$	—		$	15,596		$	15,596
Additions	—			1,189			1,189
Amortization	—			(1,727		)	(1,727		)
Balance, September 30, 2019	$	—		$	15,058		$	15,058



(dollars in thousands)	Banking Operations			Treasury			All Others			Total
Three Months Ended September 30, 2019
Net interest income	$	42,790		$	2,859		$	—		$	45,649
Inter-segment net interest income (expense)	4,788			(2,825		)	(1,963		)	—
Credit (provision) for loan and lease losses	(1,532		)	—			—			(1,532		)
Other operating income:
Mortgage banking income	1,360			—			404			1,764
Service charges on deposit accounts	2,125			—			—			2,125
Other service charges and fees	1,470			—			2,254			3,724
Income from fiduciary activities	1,126			—			—			1,126
Equity in earnings of unconsolidated subsidiaries	86			—			—			86
Fees on foreign exchange	20			150			—			170
Investments securities gains (losses)	—			36			—			36
Income from bank-owned life insurance	—			645			—			645
Loan placement fees	230			—			—			230
Net gain (loss) sale of foreclosed assets	—			—			17			17
Other	154			4			185			343
Other operating income	6,571			835			2,860			10,266
Other operating expense	(16,482		)	(352		)	(18,100		)	(34,934		)
Administrative and overhead expense allocation	(17,495		)	(204		)	17,699			—
Income before taxes	18,640			313			496			19,449
Income tax (expense) benefit	(4,702		)	(89		)	(104		)	(4,895		)
Net income (loss)	$	13,938		$	224		$	392		$	14,554



(dollars in thousands)	Three Months Ended September 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	$	6,295	2.05	%	33		$	22,057	1.97	%	109		$	(15,762	)	0.08	%	(76		)
Investment securities, excluding valuation allowance:
Taxable (1)	1,093,352		2.63		7,192		1,284,411		2.65		8,516		(191,059		)	(0.02	)	(1,324		)
Tax-exempt (1)	117,784		3.04		896		163,172		2.86		1,165		(45,388		)	0.18		(269		)
Total investment securities	1,211,136		2.67		8,088		1,447,583		2.67		9,681		(236,447		)	—		(1,593		)
Loans and leases, including loans held for sale (2)	4,293,455		4.25		45,861		3,941,511		4.09		40,531		351,944			0.16		5,330
Federal Home Loan Bank stock	16,646		4.46		186		7,773		3.11		60		8,873			1.35		126
Total interest earning assets	5,527,532		3.90		54,168		5,418,924		3.70		50,381		108,608			0.20		3,787
Noninterest-earning assets	379,675						290,901						88,774
Total assets	$	5,907,207					$	5,709,825					$	197,382

Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	1,002,875	0.08	%	207		$	933,405	0.08	%	181		$	69,470		—	%	26
Savings and money market deposits	1,582,795		0.39		1,549		1,524,121		0.15		593		58,674			0.24		956
Time deposits under $100,000	167,331		0.69		293		177,108		0.53		236		(9,777		)	0.16		57
Time deposits $100,000 and over	874,192		1.88		4,139		1,049,446		1.70		4,508		(175,254		)	0.18		(369		)
Total interest-bearing deposits	3,627,193		0.68		6,188		3,684,080		0.59		5,518		(56,887		)	0.09		670
Short-term borrowings	191,564		2.34		1,130		25,163		2.30		146		166,401			0.04		984
Long-term debt	101,547		3.96		1,013		92,785		4.90		1,147		8,762			(0.94	)	(134		)
Total interest-bearing liabilities	3,920,304		0.84		8,331		3,802,028		0.71		6,811		118,276			0.13		1,520
Noninterest-bearing deposits	1,360,221						1,378,981						(18,760		)
Other liabilities	102,599						44,079						58,520
Total liabilities	5,383,124						5,225,088						158,036
Shareholders’ equity	524,083						484,737						39,346
Non-controlling interest	—						—						—
Total equity	524,083						484,737						39,346
Total liabilities and equity	$	5,907,207					$	5,709,825					$	197,382

Net interest income					$	45,837					$	43,570						$	2,267

Interest rate spread			3.06	%					2.99	%						0.07	%

Net interest margin			3.30	%					3.20	%						0.10	%

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



(dollars in thousands)	Nine Months Ended September 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	$	8,540	2.30	%	147		$	23,713	1.75	%	310		$	(15,173	)	0.55	%	(163		)
Investment securities, excluding valuation allowance:
Taxable investment securities (1)	1,147,217		2.67		23,014		1,325,180		2.63		26,094		(177,963		)	0.04		(3,080		)
Tax-exempt investment securities (1)	137,750		2.93		3,023		164,174		2.86		3,527		(26,424		)	0.07		(504		)
Total investment securities	1,284,967		2.70		26,037		1,489,354		2.65		29,621		(204,387		)	0.05		(3,584		)
Loans and leases, including loans held for sale (2)	4,183,703		4.32		135,169		3,856,420		4.04		116,620		327,283			0.28		18,549
Federal Home Loan Bank stock	15,650		4.33		508		7,261		2.67		145		8,389			1.66		363
Total interest earning assets	5,492,860		3.94		161,861		5,376,748		3.64		146,696		116,112			0.30		15,165
Noninterest-earning assets	365,364						294,090						71,274
Total assets	$	5,858,224					$	5,670,838					$	187,386

Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	972,316	0.08	%	598		$	940,154	0.08	%	554		$	32,162		—	%	44
Savings and money market deposits	1,544,759		0.33		3,847		1,506,565		0.13		1,421		38,194			0.20		2,426
Time deposits under $100,000	172,204		0.69		884		178,363		0.48		645		(6,159		)	0.21		239
Time deposits $100,000 and over	921,003		1.96		13,507		1,042,353		1.48		11,558		(121,350		)	0.48		1,949
Total interest-bearing deposits	3,610,282		0.70		18,836		3,667,435		0.52		14,178		(57,153		)	0.18		4,658
Short-term borrowings	168,350		2.50		3,146		14,683		2.16		237		153,667			0.34		2,909
Long-term debt	101,547		4.09		3,104		92,785		4.64		3,221		8,762			(0.55	)	(117		)
Total interest-bearing liabilities	3,880,179		0.86		25,086		3,774,903		0.62		17,636		105,276			0.24		7,450
Noninterest-bearing deposits	1,370,972						1,367,574						3,398
Other liabilities	99,143						42,414						56,729
Total liabilities	5,350,294						5,184,891						165,403
Shareholders’ equity	507,930						485,942						21,988
Non-controlling interest	—						5						(5		)
Total equity	507,930						485,947						21,983
Total liabilities and equity	$	5,858,224					$	5,670,838					$	187,386

Net interest income					$	136,775					$	129,060						$	7,715

Interest rate spread			3.08	%					3.02	%						0.06	%

Net interest margin			3.32	%					3.20	%						0.12	%

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



(dollars in thousands)
Balance at December 31, 2018	$	2,737
Additions	922
Reductions:
Payments	(2,177		)
Return to accrual status	(27		)
Net charge-offs, valuation and other adjustments	(95		)
Total reductions	(2,299		)
Net increase	(1,377		)
Balance at September 30, 2019	$	1,360