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 SeptemberJune 30, 20192020
 
or

☐         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to              
 
Commission File Number: 001-31567
001-31567

CENTRAL PACIFIC FINANCIAL CORP.CORP.
(Exact name of registrant as specified in its charter) 
Hawaii99-0212597
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
 
220 South King Street,, Honolulu,, 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 classTrading Symbol(s)Name of each exchange on which registered
Common stock, No Par ValueCPFNew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  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, 2019July 17, 2020 was 28,376,89428,154,159 shares.

1


CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
Form 10-Q
 
Table of Contents
Page
Page
3
Item 1.Financial Statements (Unaudited)
4
5
6
7
98
109
4349
6477
6477
6578
6578
6578
6680
6781

2

PART I.   FINANCIAL INFORMATION
 
Forward-Looking Statements and Factors that Could Affect Future Results
 
This document may contain forward-looking statements concerning: projections of revenues, 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 wordsWords such as "believes," "plans," "anticipates," "expects," "intends," "forecasts," "hopes," "targeting," "continue," "remain," "will," "should," "estimates," "may" or wordsand 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 weaknessdeficiencies 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.

3

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands)September 30,
2019		 December 31,
2018		(dollars in thousands)June 30,
2020		December 31,
2019
Assets 
  
Assets  
Cash and due from banks$87,395
 $80,569
Cash and due from banks$102,132  $78,418  
Interest-bearing deposits in other banks7,803
 21,617
Interest-bearing deposits in other banks41,201  24,554  
Investment securities:   Investment securities:
Available-for-sale debt securities, at fair value1,186,875
 1,205,478
Available-for-sale debt securities, at fair value1,168,594  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 value1,058
 826
Equity securities, at fair value1,209  1,127  
Total investment securities1,187,933
 1,354,812
Total investment securities1,169,803  1,128,110  
   
Loans held for sale7,016
 6,647
Loans held for sale10,443  9,083  
   
Loans and leases4,367,862
 4,078,366
Allowance for loan and lease losses(48,167) (47,916)
Net loans and leases4,319,695
 4,030,450
LoansLoans5,003,438  4,449,540  
Allowance for credit lossesAllowance for credit losses(67,339) (47,971) 
Loans, net of allowance for credit lossesLoans, net of allowance for credit losses4,936,099  4,401,569  
   
Premises and equipment, net44,095
 45,285
Premises and equipment, net55,032  46,343  
Accrued interest receivable16,220
 17,000
Accrued interest receivable19,590  16,500  
Investment in unconsolidated subsidiaries17,001
 14,008
Investment in unconsolidated subsidiaries16,428  17,115  
Other real estate owned466
 414
Other real estate owned—  164  
Mortgage servicing rights15,058
 15,596
Mortgage servicing rights12,771  14,718  
Bank-owned life insurance158,939
 157,440
Bank-owned life insurance161,758  159,656  
Federal Home Loan Bank stock17,183
 16,645
Federal Home Loan Bank stock9,229  14,983  
Right-of-use lease asset52,588
 —
Right-of-use lease asset50,039  52,348  
Other assets45,324
 46,543
Other assets48,447  49,111  
Total assets$5,976,716
 $5,807,026
Total assets$6,632,972  $6,012,672  
   
Liabilities 
  
Liabilities  
Deposits: 
  
Deposits:  
Noninterest-bearing demand$1,399,200
 $1,436,967
Noninterest-bearing demand$1,851,012  $1,450,532  
Interest-bearing demand998,037
 954,011
Interest-bearing demand1,067,483  1,043,010  
Savings and money market1,593,738
 1,448,257
Savings and money market1,945,744  1,600,028  
Time1,046,684
 1,107,255
Time930,446  1,026,453  
Total deposits5,037,659
 4,946,490
Total deposits5,794,685  5,120,023  
   
Short-term borrowings205,000
 197,000
Short-term borrowings—  150,000  
Long-term debt101,547
 122,166
Long-term debt167,491  101,547  
Lease liability52,807
 —
Lease liability50,440  52,632  
Other liabilities54,476
 49,645
Other liabilities76,050  59,950  
Total liabilities5,451,489
 5,315,301
Total liabilities6,088,666  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, 2018452,278
 470,660
Contingent liabilities and other commitments (see Notes 8, 15 and 16)Contingent liabilities and other commitments (see Notes 8, 15 and 16)
EquityEquity  
Preferred stock, 0 par value, authorized 1,000,000 shares; issued and outstanding: NaN at June 30, 2020 and December 31, 2019Preferred stock, 0 par value, authorized 1,000,000 shares; issued and outstanding: NaN at June 30, 2020 and December 31, 2019—  —  
Common stock, 0 par value, authorized 185,000,000 shares; issued and outstanding: 28,154,159 at June 30, 2020 and 28,289,257 at December 31, 2019Common stock, 0 par value, authorized 185,000,000 shares; issued and outstanding: 28,154,159 at June 30, 2020 and 28,289,257 at December 31, 2019442,699  447,602  
Additional paid-in capital90,604
 88,876
Additional paid-in capital93,007  91,611  
Accumulated deficit(26,782) (51,718)Accumulated deficit(16,986) (19,102) 
Accumulated other comprehensive income (loss)9,127
 (16,093)
Accumulated other comprehensive incomeAccumulated other comprehensive income25,551  8,409  
Total shareholders' equity525,227
 491,725
Total shareholders' equity544,271  528,520  
Total liabilities and shareholders' equity$5,976,716
 $5,807,026
Non-controlling interestNon-controlling interest35  —  
Total equityTotal equity544,306  528,520  
Total liabilities and equityTotal liabilities and equity$6,632,972  $6,012,672  
See accompanying notes to consolidated financial statements.
4

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) 
Three Months Ended
September 30,		 Nine Months Ended
September 30,		Three Months Ended
June 30,		Six Months Ended
June 30,
(dollars in thousands, except per share data)2019 2018 2019 2018(dollars in thousands, except per share data)2020201920202019
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$45,915  $45,540  $92,119  $89,308  
Interest and dividends on investment securities:       Interest and dividends on investment securities:
Taxable interest7,178
 8,490
 22,968
 26,050
Taxable interest6,310  7,530  13,067  15,790  
Tax-exempt interest708
 920
 2,388
 2,786
Tax-exempt interest599  814  1,267  1,680  
Dividends14
 26
 46
 44
Dividends17  14  34  32  
Interest on deposits in other banks33
 109
 147
 310
Interest on deposits in other banks3  46  39  114  
Dividends on Federal Home Loan Bank stock186
 60
 508
 145
Dividends on Federal Home Loan Bank stock106  161  238  322  
Total interest income53,980
 50,136
 161,226
 145,955
Total interest income52,950  54,105  106,764  107,246  
Interest expense: 
  
  
  
Interest expense:    
Interest on deposits: 
  
  
  
Interest on deposits:    
Demand207
 181
 598
 554
Demand114  199  290  391  
Savings and money market1,549
 593
 3,847
 1,421
Savings and money market567  1,507  1,685  2,298  
Time4,432
 4,744
 14,391
 12,203
Time2,124  4,867  5,392  9,959  
Interest on short-term borrowings1,130
 146
 3,146
 237
Interest on short-term borrowings74  1,123  582  2,016  
Interest on long-term debt1,013
 1,147
 3,104
 3,221
Interest on long-term debt812  1,031  1,726  2,091  
Total interest expense8,331
 6,811
 25,086
 17,636
Total interest expense3,691  8,727  9,675  16,755  
Net interest income45,649
 43,325
 136,140
 128,319
Net interest income49,259  45,378  97,089  90,491  
Provision (credit) for loan and lease losses1,532
 (59) 4,219
 262
Net interest income after provision (credit) for loan and lease losses44,117
 43,384
 131,921
 128,057
Provision for credit lossesProvision for credit losses10,640  1,404  19,969  2,687  
Net interest income after provision for credit lossesNet interest income after provision for credit losses38,619  43,974  77,120  87,804  
Other operating income: 
  
  
  
Other operating income:    
Mortgage banking income1,764
 1,923
 4,789
 5,545
Mortgage banking income3,566  1,708  3,903  3,281  
Service charges on deposit accounts2,125
 2,189
 6,247
 6,169
Service charges on deposit accounts1,149  2,041  3,199  4,122  
Other service charges and fees3,724
 3,286
 10,479
 9,697
Other service charges and fees2,916  3,909  7,813  7,124  
Income from fiduciary activities1,126
 1,159
 3,220
 3,132
Income from fiduciary activities1,270  1,129  2,567  2,094  
Equity in earnings of unconsolidated subsidiaries86
 71
 165
 151
Equity in earnings of unconsolidated subsidiaries104  71  130  79  
Fees on foreign exchange170
 220
 539
 708
Investment securities gains36
 —
 36
 —
Income from bank-owned life insurance645
 1,055
 2,511
 1,874
Income from bank-owned life insurance1,424  914  1,405  1,866  
Loan placement fees230
 115
 486
 532
Net gain on sales of foreclosed assets17
 —
 17
 —
Net loss on sales of foreclosed assetsNet loss on sales of foreclosed assets(6) —  (6) —  
Other343
 802
 3,544
 1,596
Other269  322  567  3,201  
Total other operating income10,266
 10,820
 32,033
 29,404
Total other operating income10,692  10,094  19,578  21,767  
Other operating expense: 
  
  
  
Other operating expense:    
Salaries and employee benefits20,631
 19,011
 61,083
 56,299
Salaries and employee benefits20,622  20,563  40,969  40,452  
Net occupancy3,697
 3,488
 10,680
 10,114
Net occupancy3,645  3,525  7,317  6,983  
Equipment1,067
 1,048
 3,211
 3,160
Equipment1,043  1,138  2,140  2,144  
Amortization of core deposit premium—
 669
 —
 2,006
Communication expense1,008
 903
 2,645
 2,547
Communication expense774  903  1,611  1,637  
Legal and professional services1,933
 1,528
 5,231
 5,118
Legal and professional services2,238  1,728  4,266  3,298  
Computer software expense2,713
 2,672
 7,870
 7,244
Computer software expense3,035  2,560  5,978  5,157  
Advertising expense711
 612
 2,134
 1,841
Advertising expense923  712  2,015  1,423  
Foreclosed asset expense15
 212
 223
 537
Foreclosed asset expense—  49  67  208  
Other3,159
 3,882
 12,312
 12,174
Other4,147  4,929  8,304  9,153  
Total other operating expense34,934
 34,025
 105,389
 101,040
Total other operating expense36,427  36,107  72,667  70,455  
Income before income taxes19,449
 20,179
 58,565
 56,421
Income before income taxes12,884  17,961  24,031  39,116  
Income tax expense4,895
 4,986
 14,440
 12,727
Income tax expense2,967  4,427  5,788  9,545  
Net income$14,554
 $15,193
 $44,125
 $43,694
Net income$9,917  $13,534  $18,243  $29,571  
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$0.35  $0.47  $0.65  $1.03  
Diluted earnings per common share$0.51
 $0.52
 $1.53
 $1.47
Diluted earnings per common share$0.35  $0.47  $0.65  $1.03  
Cash dividends declared$0.23
 $0.21
 $0.67
 $0.61
Cash dividends declared$0.23  $0.23  $0.46  $0.44  
Weighted average common shares outstanding used in computation:       Weighted average common shares outstanding used in computation:
Basic shares28,424,898
 29,297,465
 28,575,369
 29,536,536
Basic shares28,040,802  28,546,564  28,083,602  28,651,852  
Diluted shares28,602,338
 29,479,812
 28,762,057
 29,743,238
Diluted shares28,095,230  28,729,510  28,190,132  28,847,786  
 See accompanying notes to consolidated financial statements.
5

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
June 30,		Six Months Ended
June 30,
(dollars in thousands) 2019 2018 2019 2018(dollars in thousands)2020201920202019
Net income $14,554
 $15,193
 $44,125
 $43,694
Net income$9,917  $13,534  $18,243  $29,571  
Other comprehensive income (loss), net of tax:        
Net change in unrealized gain (loss) on investment securities 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 securitiesNet change in unrealized gain on investment securities6,275  12,165  16,422  23,161  
Defined benefit plans 283
 217
 773
 623
Defined benefit plans204  248  720  490  
Total other comprehensive income (loss), net of tax 4,669
 (5,855) 28,320
 (24,089)
Total other comprehensive income, net of taxTotal other comprehensive income, net of tax6,479  12,413  17,142  23,651  
Comprehensive income $19,223
 $9,338
 $72,445
 $19,605
Comprehensive income$16,396  $25,947  $35,385  $53,222  
 
See accompanying notes to consolidated financial statements.
6

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

Common
Shares
Outstanding		Preferred
Stock		Common
Stock		Additional Paid-In CapitalAccum.
Deficit		Accum.
Other
Comp.
Income
(Loss)		Non-
Controlling
Interest		Total
 (dollars in thousands, except per share data)
Balance at December 31, 201928,289,257  $—  $447,602  $91,611  $(19,102) $8,409  $—  $528,520  
Impact of the adoption of new accounting standards (1)—  —  —  —  (3,156) —  —  (3,156) 
Adjusted balance at January 1, 202028,289,257  —  447,602  91,611  (22,258) 8,409  —  525,364  
Net income—  —  —  —  8,326  —  —  8,326  
Other comprehensive income—  —  —  —  —  10,663  —  10,663  
Cash dividends declared ($0.23 per share)—  —  —  —  (6,496) —  —  (6,496) 
Common stock repurchased and retired and other related costs(206,802) —  (4,749) —  —  —  —  (4,749) 
Share-based compensation32,898  —  —  673  —  —  —  673  
Non-controlling interest—  —  —  —  —  —  49  49  
Balance at March 31, 202028,115,353  $—  $442,853  $92,284  $(20,428) $19,072  $49  $533,830  
Net income—  —  —  —  9,917  —  —  9,917  
Other comprehensive income—  —  —  —  —  6,479  —  6,479  
Cash dividends declared ($0.23 per share)—  —  —  —  (6,475) —  —  (6,475) 
Common stock purchased by directors' deferred compensation plan (8,800 shares, net)—  —  (154) —  —  —  —  (154) 
Share-based compensation expense38,806  —  723  —  —  —  723  
Non-controlling interest—  —  —  —  —  —  (14) (14) 
Balance at June 30, 202028,154,159  $—  $442,699  $93,007  $(16,986) $25,551  $35  $544,306  
 Common
Shares
Outstanding		 Preferred
Stock		 Common
Stock		 Additional Paid-In Capital Accum.
Deficit		 Accum.
Other
Comp.
Income
(Loss)		 Non-
Controlling
Interest		 Total
 (dollars in thousands, except per share data)
Balance at December 31, 201828,967,715
 $—
 $470,660
 $88,876
 $(51,718) $(16,093) $—
 $491,725
Impact of the adoption of new accounting standards (1)—
 —
 —
 —
 —
 (3,100) —
 (3,100)
Adjusted balance at January 1, 201928,967,715
 —
 470,660
 88,876
 (51,718) (19,193) —
 488,625
Net income—
 —
 —
 —
 16,037
 —
 —
 16,037
Other comprehensive income—
 —
 —
 —
 —
 11,238
 —
 11,238
Cash dividends 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 expense32,326
 —
 —
 498
 —
 —
 —
 498
Balance at March 31, 201928,723,041
 $—
 $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 expense58,436
 —
   350
 —
 —
 —
 350
Balance at June 30, 201928,567,777
 $—
 $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 compensation14,164
 —
   880
 —
 —
 —
 880
Balance at September 30, 201928,441,341
 $—
 $452,278
 $90,604
 $(26,782) $9,127
 $—
 $525,227
                


Common
Shares
Outstanding		Preferred
Stock		Common
Stock		Additional Paid-In CapitalAccum.
Deficit		Accum.
Other
Comp.
Income
(Loss)		Non-
Controlling
Interest		Total
 (dollars in thousands, except per share data)
Balance at December 31, 201828,967,715  $—  $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, 201928,967,715  —  470,660  88,876  (51,718) (19,193) —  488,625  
Net income—  —  —  —  16,037  —  —  16,037  
Other comprehensive income—  —  —  —  —  11,238  —  11,238  
Cash dividends 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 compensation32,326  —  —  498  —  —  —  498  
Balance at March 31, 201928,723,041  $—  $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 compensation58,436  —  350  —  —  —  350  
Balance at June 30, 201928,567,777  $—  $456,293  $89,724  $(34,780) $4,458  $—  $515,695  
(1) Represents the impact of the adoption of Accounting Standards Update ("ASU") ASU 2016-13. See Note 2 to the consolidated financial statements for additional information.
(2) Represents the impact of the adoption of ASU 2017-12.

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, 201730,024,222
 $—
 $503,988
 $86,098
 $(89,036) $(1,039) $24
 $500,035
Impact of the adoption of new accounting standards (2)—
 —
 —
 —
 139
 (139) —
 —
Adjusted balance at January 1, 201830,024,222
 —
 503,988
 86,098
 (88,897) (1,178) 24
 500,035
Impact of the adoption of new accounting standards (3)—
 —
 —
 —
 1,836
 (1,836) —
 —
Net income—
 —
 —
 —
 14,277
 —
 —
 14,277
Other comprehensive loss—
 —
 —
 —
 —
 (14,715) —
 (14,715)
Cash dividends 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 compensation27,262
 —
 —
 399
 —
 —
 —
 399
Distribution from variable interest entity—
 —
 —
 —
 —
 —
 (24) (24)
Balance at March 31, 201829,707,122
 $—
 $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 compensation52,717
 —
   452
 —
 —
 —
 452
Balance at June 30, 201829,489,954
 $—
 $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 compensation15,487
 —
   990
 —
 —
 —
 990
Balance at September 30, 201829,270,398
 $—
 $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.
7

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended
June 30,
(dollars in thousands)20202019
Cash flows from operating activities:  
Net income$18,243  $29,571  
Adjustments to reconcile net income to net cash provided by operating activities: 
Provision for credit losses19,969  2,687  
Depreciation and amortization of premises and equipment3,010  3,085  
Non-cash lease expense117  151  
Cash flows from operating leases(3,189) (3,105) 
Loss on sale of other real estate, net of write-downs70  138  
Amortization of mortgage servicing rights3,217  1,072  
Net amortization and accretion of premium/discounts on investment securities4,327  4,644  
Share-based compensation expense1,396  848  
Net gain on sales of residential mortgage loans(5,273) (1,586) 
Proceeds from sales of loans held for sale167,643  93,490  
Originations of loans held for sale(163,730) (92,105) 
Equity in earnings of unconsolidated subsidiaries(130) (79) 
Distributions from unconsolidated subsidiaries121  101  
Net increase in cash surrender value of bank-owned life insurance(2,268) (854) 
Deferred income taxes(2,129) 8,501  
Net tax (expense) benefit from share-based compensation(134) 192  
Net change in other assets and liabilities15,798  (8,782) 
Net cash provided by operating activities57,058  37,969  
Cash flows from investing activities:  
Proceeds from maturities of and calls on investment securities available-for-sale123,720  121,881  
Purchases of investment securities available-for-sale(147,359) —  
Proceeds from sale of MasterCard stock—  2,555  
Net loan originations(524,869) (121,756) 
Purchases of loan portfolios(33,196) (49,327) 
Proceeds from sale of foreclosed loans/other real estate owned94  —  
Proceeds from bank-owned life insurance166  —  
Net purchases of premises, equipment and land(11,699) (1,400) 
Net return of capital from unconsolidated subsidiaries—  622  
Contributions to unconsolidated subsidiaries(2,194) —  
Net proceeds from redemption of (purchases of) FHLB stock5,754  (1,179) 
Net cash used in investing activities(589,583) (48,604) 
Cash flows from financing activities:  
Net increase in deposits674,662  30,359  
Proceeds from long-term debt65,944  —  
Repayments of long-term debt—  (20,619) 
Net (decrease) increase in short-term borrowings(150,000) 24,000  
Cash dividends paid on common stock(12,971) (12,633) 
Repurchases of common stock and other related costs(4,749) (13,951) 
Net cash provided by financing activities572,886  7,156  
Net increase (decrease) in cash and cash equivalents40,361  (3,479) 
Cash and cash equivalents at beginning of period102,972  102,186  
Cash and cash equivalents at end of period$143,333  $98,707  
Supplemental disclosure of cash flow information:  
Cash paid during the period for:  
Interest$11,069  $16,916  
Income taxes185  9,401  
Supplemental disclosure of non-cash information:
Net change in common stock held by directors’ deferred compensation plan154  416  
Net transfer of investment securities held-to-maturity to available-for-sale—  (149,042) 
Right-of-use lease assets obtained in exchange for lease liabilities—  55,887  
 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 losses4,219
 262
Depreciation and amortization of premises and equipment4,628
 4,700
Non-cash lease expense220
 —
Cash flows from operating leases(4,663) —
Loss on sale of other real estate, net of write-downs138
 431
Amortization of core deposit premium and mortgage servicing rights1,727
 3,419
Net amortization and accretion of premium/discounts on investment securities6,808
 8,465
Share-based compensation expense1,728
 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 sale152,684
 183,967
Originations of loans held for sale(150,217) (169,078)
Equity in earnings of unconsolidated subsidiaries(165) (151)
Distributions from unconsolidated subsidiaries175
 614
Net increase in cash surrender value of bank-owned life insurance(1,499) (792)
Deferred income taxes7,548
 12,542
Net tax benefits from share-based compensation209
 185
Net change in other assets and liabilities(12,309) (8,266)
Net cash provided by operating activities52,484
 78,820
Cash flows from investing activities: 
  
Proceeds from maturities of and calls on investment securities available-for-sale194,626
 114,508
Proceeds from sales of investment securities available-for-sale53,935
 —
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 stock2,555
 —
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 subsidiaries622
 —
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 deposits91,169
 47,326
Repayments of long-term debt(20,619) —
Net increase (decrease) in short-term borrowings8,000
 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 activities41,395
 77,524
Net (decrease) increase in cash and cash equivalents(6,988) 7,426
Cash and cash equivalents at beginning of period102,186
 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 taxes17,601
 23
Supplemental disclosure of non-cash information:   
Net change in common stock held by directors’ deferred compensation plan416
 504
Net reclassification of loans to foreclosed loans/other real estate owned190
 40
Net transfer of investment securities held-to-maturity to available-for-sale149,042
 —
Right-of-use lease assets obtained in exchange for lease liabilities55,887
 —

 See accompanying notes to consolidated financial statements.
8

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

Basis of Presentation
 
The accompanying unaudited consolidated financial statements of Central Pacific Financial Corp. and Subsidiaries (herein referred to as the "Company," "we," "us" or "our") have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.

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

Principles of Consolidation

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

In 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 million, $15.2$14.6 million and $1.6 million, respectively, at SeptemberJune 30, 20192020 and $0.2 million, $11.6$15.3 million and $2.2$1.6 million, respectively, at December 31, 2018.2019. Our policy for determining impairment of these investments includes an evaluation of whether a loss in value of an investment is other than temporary. Evidence of a loss in value includes absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. We perform impairment tests whenever indicators of impairment are present. If the value of an investment declines and it is considered other than temporary, the investment is written down to its respective fair value in the period in which this determination is made.

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

ReclassificationsRisks and Uncertainties

Certain prior year amountsCOVID-19 Pandemic

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

financial condition, and results of operations. Material adverse effects may include all or a combination of losses in operations, higher provisions for loan losses and valuation impairments on the Company's investments, loans, mortgage servicing rights, deferred tax assets, or counter-party risk derivatives.

Change in Operating Segments and Reclassifications

In the first quarter of 2020, the Company reassessed the alignment of its reportable segments and combined its 3 reportable segments (Banking Operations, Treasury and All Others segments) into a single operating segment. We believe this change better reflects how the Company's Executive Committee, or its chief operating decision maker ("CODM"), manages, allocates resources and assesses performance of the activities of the Company. The Company also believes that this change is better aligned with how the Company's CODM manages its business. Segment results for 2019 have been reclassified to conformreflect the realignment of the Company’s reportable segments and be comparable to the fiscal 2019 presentation. Such reclassifications had no effectsegment results for 2020. This change in reportable segments did not have an impact on the Company's previously reported historical consolidated financial statements.

Investment Securities

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

and included in accumulated other comprehensive income (loss) ("AOCI").

Equity securities with readily determinable fair values are carried at fair value, with changes in fair value included in net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.
The Company classifies its investment securities portfolio into the following major security types: mortgage-backed securities ("MBS"), other debt securities and equity securities. The Company’s MBS portfolio is comprised primarily of residential MBS issued by United States of America ("U.S.") government entities and agencies. These securities are either explicitly or implicitly guaranteed by an agency of the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The remainder of the MBS portfolio are commercial MBS issued by U.S government entities and agencies (which there is no minimum credit rating), non-agency residential MBS (which shall meet a minimum credit rating of AAA) and non-agency commercial MBS (which shall meet a minimum credit rating of BBB and meet minimum internal credit guidelines).

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

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

A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days delinquent. Interest accrued but not received for a security placed on non-accrual status is reversed against current period interest income. There were no investment securities on nonaccrual status as of June 30, 2020 and the Company did not reverse any accrued interest against interest income during the three and six months ended June 30, 2020.

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

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

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

rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the investment security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in AOCI.

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

As of June 30, 2020, the declines in market values of our AFS debt securities were primarily attributable to changes in interest rates and volatility in the credit and financial markets. Because we have no intent to sell securities in an unrealized loss position and it is not more likely than not that we will be required to sell such securities before recovery of its amortized cost basis, we do not believe a credit loss exists and an ACL was not recorded.

The Company has made a policy election to exclude accrued interest receivable from the amortized cost basis of debt securities and report accrued interest receivable together with accrued interest on loans in the consolidated balance sheets. Accrued interest receivable on AFS debt securities totaled $4.3 million as of June 30, 2020. Accrued interest receivable on AFS debt securities is excluded from the estimate of credit losses.

ACL for HTM Debt Securities

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

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

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

The Company did not have any HTM debt securities as of June 30, 2020.

Federal Home Loan Bank Stock

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

Loans

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

Interest income on loans is accrued at the contractual rate of interest on the unpaid principal balance. Accrued interest receivable on loans totaled $15.3 million at June 30, 2020 and is reported together with accrued interest on AFS debt securities on the consolidated balance sheets. Accrued interest receivable on loans is excluded from the estimate of credit losses.

11

Nonaccrual Loans

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

Troubled Debt Restructuring (“TDR”)

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

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

Expected credit losses are estimated on a collective (pool) basis when they share similar risk characteristics. If a TDR financial asset shares similar risk characteristics with other financial assets, it is evaluated with those other financial assets on a collective basis. If it does not share similar risk characteristics with other financial assets, it is evaluated individually. The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed TDRs are evaluated to determine the required ACL using the same method as all other loans held for investment, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the ACL is determined by discounting the expected future cash flows at the original interest rate of the loan. Based on the underlying risk characteristics, TDRs performing in accordance with their modified contractual terms may be collectively evaluated.

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

ACL for Loans

Under the current expected credit loss methodology, the ACL for loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Our policy is to charge off a loan in the period in which the loan is deemed to be uncollectible and all interest previously accrued but not collected is reversed against
12

current period interest income. We consider a loan to be uncollectible when it is probable that a loss has been incurred and the Company can make a reasonable estimate of the loss. In these instances, the likelihood of and/or timeframe for recovery of the amount due is uncertain, weak, or protracted. Subsequent receipts, if any, are credited first to the remaining principal, then to the ACL for loans as recoveries, and finally to unaccrued interest.

The ACL for loans represents management's estimate of all expected credit losses over the expected contractual life of our existing loan portfolio. Management estimates the ACL balance using relevant available information about the collectability of cash flows, from internal and external sources, including historical information relating to past events, current conditions, and reasonable and supportable forecasts of future economic conditions. When the Company is unable to forecast future economic events, management may revert to historical information.

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

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

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

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

The Company uses the Moody’s Analytics forecasting service for the economic forecast considered in its ACL methodology. The Moody’s Analytics forecast includes both National and Hawaii specific economic indicators. The Moody’s forecast is widely used in the industry and is reasonable and supportable. The Moody’s Analytics forecast is updated at least monthly and includes a variety of economic scenarios. Generally the Company will use the most recent consensus forecast from Moody’s as of the balance sheet date. During times of economic and market volatility or instability, the Company may include a qualitative factor for forecast imprecision that factors in other potential economic scenarios available by Moody’s Analytics or may apply overrides to its statistical models to enhance the reasonableness of its loss estimates.

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

The Company relies on a third-party platform which offers multiple methodologies to measure historical life-of-loan losses. The Company has also developed statistical models internally to incorporate future economic conditions and forecast expected credit losses based on various macro-economic indicators such as unemployment and income levels.

13

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


Loan SegmentHistorical Lifetime Loss MethodHistorical
Lookback
Period		Economic
Forecast
Length		Reversion Method
ConstructionProbability of Default/Loss Given Default ("PD/LGD")2008-PresentOne YearOne Year (straight-line basis)
Commercial real estateLoss-Rate Migration2008-Present
Multi-family mortgagePD/LGD2008-Present
Commercial, financial and agriculturalLoss-Rate Migration2008-Present
Home equity lines of creditLoss-Rate Migration2008-Present
Residential mortgageLoss-Rate Migration2008-Present
Consumer - other revolvingLoss-Rate Migration2008-Present
Consumer - non-revolvingLoss-Rate Migration2008-Present
Purchased Mainland portfolios (Dealer, Other consumer)Weighted-Average Remaining Maturity ("WARM")2008-Present

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

Construction loans

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

Commercial real estate loans

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

Multi-family mortgage loans

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

Commercial, financial and agricultural loans

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

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

Home equity lines of credit

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

14

Residential mortgage loans

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

Consumer loans - other revolving

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

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

Purchased consumer portfolios

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

Below is a description of the methodologies mentioned above:

PD/LGD

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

Migration

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

WARM

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

Other

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

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Determining the Contractual Term

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

Reserve for Off-Balance Sheet Credit Exposures

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

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

The estimate also applies the loss factors for each loan type used in the ACL for loans methodology, which is based on historical losses, economic conditions and reasonable and supportable forecasts. The reserve for off-balance sheet credit exposures is adjusted as a provision for off-balance sheet credit exposures in other operating expense.

Purchased Credit Deteriorated (“PCD”) Financial Assets

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

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

2. RECENT ACCOUNTING PRONOUNCEMENTS
 
Accounting Standards Adopted in 2019

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

lessor. As of 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-CreditInstruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,,"” which replaces the incurred loss methodology (Allowance for Loan and subsequent amendmentsLeases 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 allmethodology. The measurement of expected credit losses forunder the CECL methodology is applicable to financial assets heldmeasured at the reporting date basedamortized cost, including loan receivables and HTM debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on historical experience, current conditions, and reasonable and supportable forecasts.leases. In addition, this guidance modifies theASC 326 made changes to accounting treatment for other-than-temporary impairment for available-for-saleAFS debt securities. OrganizationsOne such change is to require credit losses to be presented as an allowance rather than a write-down on AFS debt securities if management intends to sell or believes that it is more likely than not they will continuebe required to use judgment to determine which loss estimation methods are appropriate for their circumstances. This guidance requires entities to record a cumulative effect adjustment tosell the consolidated balance sheet asdebt security before recovery of the beginning ofamortized cost basis.

The Company adopted ASU 2016-13 using the first reporting period in which the guidance is effective. However, an organization may elect to phase in the regulatory capital impact over a three-year transition period if adoption of the new standard results in a reduction of retained earnings. This update is effectivemodified retrospective method for fiscal years,all financial assets measured at amortized cost and interim periods within those fiscal years, beginning after December 15, 2019, with earlier adoption permitted. As such, the Company will implement CECLoff-balance sheet credit exposures. Results for the reporting periodperiods beginning after January 1, 2020.2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable generally accepted accounting principles (“GAAP”). The new guidance will require significant operational changes, particularly in existing processes, data collectionCompany recorded a net decrease to retained earnings (or a net increase to accumulated deficit) of $3.2 million as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13. The transition adjustment 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.

16

The Company has formed a steering committee that is responsible for oversight offollowing 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 is820. The Company adopted ASU 2018-13 effective for the Company's reporting period beginning January 1, 2020. Early adoption is permitted. Based on preliminary evaluation, the ASU will2018-13 did not have a material impact on disclosures in our consolidated financial statements.

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

17

Impact of Other Recently Issued Accounting Pronouncements on Future Filings

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

In 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 investmentThe 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
June 30, 2020    
Available-for-sale:    
Debt securities:    
States and political subdivisions$136,597  $4,882  $(11) $141,468  $—  
Corporate securities29,221  531  —  29,752  —  
U.S. Treasury obligations and direct obligations of U.S Government agencies36,802  25  (473) 36,354  —  
Mortgage-backed securities:    
Residential - U.S. Government-sponsored entities692,989  21,516  (28) 714,477  —  
Commercial - U.S. Government agencies and sponsored entities77,743  2,926  (4) 80,665  —  
Residential - Non-government agencies30,697  1,389  —  32,086  —  
Commercial - Non-government agencies131,679  2,290  (177) 133,792  —  
Total available-for-sale securities$1,135,728  $33,559  $(693) $1,168,594  $—  
(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 securities30,436
 277
 —
 30,713
U.S. Treasury obligations and direct obligations of U.S Government agencies43,213
 17
 (333) 42,897
Mortgage-backed securities: 
  
  
  
Residential - U.S. Government-sponsored entities721,081
 5,796
 (3,233) 723,644
Commercial - U.S. Government agencies and sponsored entities86,697
 1,431
 (386) 87,742
Residential - Non-government agencies38,140
 969
 —
 39,109
Commercial - Non-government agencies134,724
 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 entities65,072
 —
 (1,081) 63,991
Total held-to-maturity securities$148,508
 $19
 $(4,255) $144,272
        
Available-for-sale: 
  
  
  
Debt securities: 
  
  
  
States and political subdivisions$174,114
 $1,035
 $(1,475) $173,674
Corporate securities55,259
 —
 (410) 54,849
U.S. Treasury obligations and direct obligations of U.S Government agencies33,257
 —
 (683) 32,574
Mortgage-backed securities:       
Residential - U.S. Government-sponsored entities736,175
 369
 (19,492) 717,052
Commercial - U.S. Government agencies and sponsored entities53,014
 —
 (1,531) 51,483
Residential - Non-government agencies41,245
 337
 (464) 41,118
Commercial - Non-government agencies134,867
 1,013
 (1,152) 134,728
Total available-for-sale securities$1,227,931
 $2,754
 $(25,207) $1,205,478

(dollars in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
December 31, 2019    
Available-for-sale:    
Debt securities:    
States and political subdivisions$119,755  $2,303  $(40) $122,018  
Corporate securities30,277  252  —  30,529  
U.S. Treasury obligations and direct obligations of U.S Government agencies40,769  10  (398) 40,381  
Mortgage-backed securities: 
Residential - U.S. Government-sponsored entities673,918  6,003  (2,099) 677,822  
Commercial - U.S. Government agencies and sponsored entities80,773  1,198  (746) 81,225  
Residential - Non-government agencies36,377  830  (16) 37,191  
Commercial - Non-government agencies134,676  3,141  —  137,817  
Total available-for-sale securities$1,116,545  $13,737  $(3,299) $1,126,983  

18

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 securities826
 826


(dollars in thousands)Amortized CostFair Value
June 30, 2020
Equity securities$1,064  $1,209  
December 31, 2019
Equity securities935  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-maturityHTM investment securities with an amortized cost of $148.5 million and fair value of $144.3 million to its available-for-saleAFS investment securities portfolio.

The amortized cost and estimated fair value of our available-for-sale investmentAFS debt securities at SeptemberJune 30, 20192020 are shown below by contractual maturity are shown below. Actualmaturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

 June 30, 2020
(dollars in thousands)Amortized CostFair Value
Available-for-sale:�� 
Due in one year or less$44,455  $44,638  
Due after one year through five years43,905  44,632  
Due after five years through ten years69,693  72,675  
Due after ten years44,567  45,629  
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities692,989  714,477  
Commercial - U.S. Government agencies and sponsored entities77,743  80,665  
Residential - Non-government agencies30,697  32,086  
Commercial - Non-government agencies131,679  133,792  
Total available-for-sale securities$1,135,728  $1,168,594  
 
 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 years60,696
 61,195
Due after five years through ten years63,661
 64,715
Due after ten years39,008
 39,753
    
Mortgage-backed securities:   
Residential - U.S. Government-sponsored entities721,081
 723,644
Commercial - U.S. Government agencies and sponsored entities86,697
 87,742
Residential - Non-government agencies38,140
 39,109
Commercial - Non-government agencies134,724
 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 not0t sell any available-for-sale securities during the three and ninesix months ended SeptemberJune 30, 2018.2020 and June 30, 2019.

Investment securities of $662.2$597.4 million and $980.2$719.8 million at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively, were pledged to secure public funds on deposit and other short-term borrowings.

Provided below isAt June 30, 2020 and December 31, 2019, there were no holdings of investment securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders' equity.

19

There were a summarytotal of the 9825 and 336 investment81 AFS debt securities which were in an unrealized or unrecognizedloss position, without an ACL, at June 30, 2020 and December 31, 2019, respectively. The following tables summarize AFS debt securities which were in an unrealized loss position at SeptemberJune 30, 20192020 and December 31, 2018, respectively,2019, aggregated by major security type and length of time in a continuous unrealized or unrecognized loss position.
 
 Less Than 12 Months12 Months or LongerTotal
(dollars in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
June 30, 2020      
Debt securities:      
States and political subdivisions$3,631  $(11) $—  $—  $3,631  $(11) 
Corporate securities—  —  —  —  —  —  
U.S. Treasury obligations and direct obligations of U.S Government agencies10,867  (187) 18,458  (286) 29,325  (473) 
Mortgage-backed securities:      
Residential - U.S. Government-sponsored entities4,505  (28) —  —  4,505  (28) 
Residential - Non-government agencies—  —  —  —  —  —  
Commercial - U.S. Government agencies and sponsored entities1,781  (4) —  —  1,781  (4) 
Commercial - Non-government agencies26,729  (177) —  —  26,729  (177) 
Total temporarily impaired securities$47,513  $(407) $18,458  $(286) $65,971  $(693) 
 Less Than 12 Months 12 Months or Longer Total
(dollars in thousands)Fair
Value		 Unrealized
Losses		 Fair
Value		 Unrealized
Losses		 Fair
Value		 Unrealized
Losses
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 agencies16,815
 (122) 20,507
 (211) 37,322
 (333)
Mortgage-backed securities: 
  
  
  
  
  
Residential - U.S. Government-sponsored entities103,254
 (631) 247,482
 (2,602) 350,736
 (3,233)
Residential - Non-government agencies—
 —
 —
 —
 —
 —
Commercial - U.S. Government agencies and sponsored entities36,068
 (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 Months12 Months or LongerTotal
(dollars in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
December 31, 2019      
Debt securities:      
States and political subdivisions$1,754  $(9) $801  $(31) $2,555  $(40) 
Corporate securities—  —  —  —  —  —  
U.S. Treasury obligations and direct obligations of U.S Government agencies18,882  (143) 19,031  (255) 37,913  (398) 
Mortgage-backed securities:      
Residential - U.S. Government-sponsored entities54,335  (283) 214,295  (1,816) 268,630  (2,099) 
Residential - Non-government agencies8,206  (16) —  —  8,206  (16) 
Commercial - U.S. Government-sponsored entities32,067  (746) —  —  32,067  (746) 
Total temporarily impaired securities$115,244  $(1,197) $234,127  $(2,102) $349,371  $(3,299) 

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

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

20

Visa and MasterCard Class B Common Stock

As of SeptemberJune 30, 2019,2020, the Company owns 34,631 shares of Class B common stock of Visa, Inc. ("Visa"). These shares were received in 2008 as part of Visa's initial public offering ("IPO"). These shares are transferable only under limited circumstances until they can be converted into shares of the publicly traded Class A common stock. This conversion will not occur until the resolution of certain litigation, which is indemnified by Visa members. Since its IPO, Visa has funded a litigation reserve to settle these litigation claims. At its discretion, Visa may continue to increase the litigation reserve based upon a change in the conversion ratio of each member bank’s restricted Class B common stock to unrestricted Class A common stock. Due to the existing transfer restriction and the uncertainty of the outcome of the Visa litigation, the Company has determined that the Visa Class B common stock does not have a readily determinable fair value and chooses to carry the shares on the Company's consolidated balance sheets at zero cost basis.

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

4. LOANS AND LEASESCREDIT QUALITY
 
Loans, and leases, excluding loans held for sale, net of ACL under ASC 326 as of June 30, 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)June 30, 2020December 31, 2019
Commercial, financial and agricultural:
Small Business Administration Paycheck Protection Program$543,653  $—  
Other547,768  570,089  
Real estate:
Construction103,826  96,139  
Residential mortgage1,653,632  1,595,801  
Home equity510,188  490,239  
Commercial mortgage1,131,959  1,124,911  
Consumer527,100  569,516  
Gross loans and leases5,018,126  4,446,695  
Net deferred (fees) costs(14,688) 2,845  
Total loans, net of deferred fees and costs5,003,438  4,449,540  
Allowance for credit losses(67,339) (47,971) 
Total loans, net of allowance for credit losses$4,936,099  $4,401,569  
 
(dollars in thousands)September 30, 2019 December 31, 2018
Commercial, financial and agricultural$576,343
 $581,177
Real estate:

 

Construction96,996
 67,269
Residential mortgage1,554,752
 1,424,384
Home equity475,211
 468,966
Commercial mortgage1,135,408
 1,041,685
Consumer526,429
 492,268
Leases31
 124
Gross loans and leases4,365,170
 4,075,873
Net deferred costs2,692
 2,493
Total loans and leases, net of deferred costs$4,367,862
 $4,078,366
    
21

Section 1102 of the CARES Act includes an allocation of $349 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”). This program is known as the Paycheck Protection Program (“PPP”). An additional $310 billion was allocated to the PPP with the enactment of the Paycheck Protection Program and Healthcare Enhancement Act (“CARES 2.0”) on April 21, 2020. Subsequently, on June 5, 2020, the Paycheck Protection Flexibility Act of 2020 (“Flexibility Act”) was signed into law, amending the CARES Act. Loans under the PPP are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed interest rate of 1.00%. The Flexibility Act and new guidance issued by the U.S. Department of the Treasury and the SBA on June 17, 2020, provides a maturity of two years for PPP loans made before June 5, 2020, unless the borrower and lender mutually agree to extend the maturity of such loans to five years, and a maturity of five years for those PPP loans made on or after June 5, 2020. Through June 30, 2020, the Company did not mutually agree to extend any of the PPP loans to borrowers with two-year terms. Under the original PPP guidelines, payments of principal and interest are deferred for the first six months of the loan. The Flexibility Act extends the deferral period until the date the lender receives the applicable forgiven amount from the SBA. In addition, it clarifies that if a borrower fails to apply for forgiveness within 10 months after the end of the covered period, the deferral period for that loan will end on the date that is 10 months after the last day of the covered period. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. From April 3, 2020, the date the SBA began accepting submissions for the initial round of PPP loans through June 30, 2020, the Company received approval from the SBA on over 7,200 loans totaling over $550 million. Certain PPP loans paid-off shortly after funding resulting in a total balance as of June 30, 2020 of $544 million. Certain PPP loans approved by the SBA may be cancelled or withdrawn prior to closing and funding. Although the Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program, there could be risks and liability to the Company associated with participation in the program that cannot be determined at this time. As of June 30, 2020, the Company's PPP loan portfolio totaled $526.4 million, net of deferred fees and costs.

During the 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, weThe Company did not0t transfer any loans to the held-for-sale category.category during the six months ended June 30, 2020 and 2019.

WeThe Company did not0t sell any portfolio loans originally held for investment during the ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.

Through the third quarterThe 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 balancewere credit deteriorated since origination, at the time of purchase.

Impaired Loans
22

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

(dollars in thousands)Consumer - Unsecured
Three Months Ended June 30, 2020
Purchases:
Outstanding balance$11,359 
Purchase premium (discount)(503)
Purchase price$10,856 
Six Months Ended June 30, 2020
Purchases:
Outstanding balance$34,312 
Purchase premium (discount)(1,116)
Purchase price$33,196 
Three Months Ended June 30, 2019
Purchases:
Outstanding balance$31,041 
Purchase premium (discount)— 
Purchase price$31,041 
Six Months Ended June 30, 2019
Purchases:
Outstanding balance$49,327 
Purchase premium (discount)— 
Purchase price$49,327 
Note: Purchases of unsecured consumer loans were made under forward flow purchase agreements.

Collateral-Dependent Loans

In accordance with ASC 326, a loan is considered collateral-dependent when the allowance for loanborrower is experiencing financial difficulty and leaserepayment is expected to be provided substantially through the operation or sale of the collateral. The following table presents the amortized cost basis of collateral-dependent loans by class, which are individually evaluated to determine expected credit losses, (the "Allowance") and the recorded investment inrelated ACL allocated to these loans and leases based on the Company's impairment measurement method as of SeptemberJune 30, 2019 and December 31, 2018:2020:
   Real Estate      
(dollars in thousands)Comml, Fin & Ag Constr Resi Mortgage Home Equity Comml Mortgage Consumer Leases Total
September 30, 2019 
  
  
    
    
  
Allowance: 
  
  
    
    
  
Individually evaluated for impairment$—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
Collectively evaluated for impairment7,781
 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 impairment576,186
 96,996
 1,547,236
 475,116
 1,133,423
 526,429
 31
 4,355,417
Subtotal576,343
 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 impairment8,027
 1,202
 14,349
 3,788
 13,358
 7,192
 —
 47,916
Total ending balance$8,027
 $1,202
 $14,349
 $3,788
 $13,358
 7,192
 $—
 $47,916
                
Loans and leases: 
  
  
    
    
  
Individually evaluated for impairment$220
 $2,273
 $10,075
 $275
 $2,348
 $—
 $—
 $15,191
Collectively evaluated for impairment580,957
 64,996
 1,414,309
 468,691
 1,039,337
 492,268
 124
 4,060,682
Subtotal581,177
 67,269
 1,424,384
 468,966
 1,041,685
 492,268
 124
 4,075,873
Net deferred costs (income)483
 (342) 3,821
 —
 (1,407) (62) —
 2,493
Total loans and leases, net of deferred costs (income)$581,660
 $66,927
 $1,428,205
 $468,966
 $1,040,278
 $492,206
 $124
 $4,078,366


23


(dollars in thousands)Secured by
1-4 Family
Residential
Properties		Secured by
Nonfarm
Nonresidential
Properties		Secured by
Real Estate
and Business
Assets		TotalAllocated
ACL
June 30, 2020
Commercial, financial and agricultural$—  $—  $736  $736  $223  
Real estate:
Residential mortgage8,504  —  —  8,504  —  
Home equity538  —  —  538  —  
Commercial mortgage—  711  —  711  —  
Total$9,042  $711  $736  $10,489  $223  
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 mortgage8,239
 7,516
 —
 11,019
 10,075
 —
Home equity95
 95
 —
 275
 275
 —
Commercial mortgage1,985
 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 mortgage7,230  6,516  —  
Home equity92  92  —  
Commercial mortgage1,839  1,839  —  
Total9,407  8,582  —  
Impaired loans with an ACL recorded:   
Commercial, financial and agricultural467  467  218  
Consumer17  17  17  
Total484  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 ninesix months ended SeptemberJune 30, 2019, and 2018:as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:
 
 Three Months EndedSix Months Ended
 June 30, 2019June 30, 2019
(dollars in thousands)Average
Recorded
Investment		Interest
Income
Recognized		Average
Recorded
Investment		Interest
Income
Recognized
Commercial, financial and agricultural$185  $2  $199  $5  
Real estate:    
Construction1,434  32  1,890  62  
Residential mortgage8,583  607  9,289  713  
Home equity254  13  393  13  
Commercial mortgage2,138  23  2,222  46  
Total$12,594  $677  $13,993  $839  
 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 mortgage7,536
 63
 12,857
 123
 8,763
 776
 13,208
 419
Home equity190
 —
 447
 —
 332
 13
 516
 —
Commercial mortgage2,021
 22
 3,483
 36
 2,162
 68
 3,653
 110
Total$9,911
 $87
 $19,568
 $201
 $12,768
 $926
 $20,351
 $630

24

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

The Company had $0.3$0.9 million and $0.7$0.6 million of residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively.

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

Aging Analysis of AccruingNonaccrual and Non-AccruingPast Due Loans and Leases
 
For all loan types, the Company determines delinquency status by considering the number of days full payments required by the contractual terms of the loan are past due. The following tables present by class, the aging of the recorded investment in past due loans and leases as of SeptemberJune 30, 20192020 and December 31, 2018:2019. The following tables also present the amortized cost of loans on nonaccrual status for which there was no related ACL under ASC 326 as of June 30, 2020 and under previous GAAP as of December 31, 2019.
 
(dollars in thousands)Accruing
Loans
30 - 59 Days
Past Due		Accruing
Loans
60 - 89 Days
Past Due		Accruing
Loans
Greater 
Than
90 Days
Past Due		Nonaccrual
Loans		Total
Past Due
and
Nonaccrual		Loans and
Leases
Not
Past Due		TotalNonaccrual
Loans
With
No ACL
June 30, 2020       
Commercial, financial and agricultural - SBA PPP$—  $—  $—  $—  $—  $526,408  $526,408  $—  
Commercial, financial and agricultural - Other979  176  —  934  2,089  545,769  547,858  —  
Real estate:  
Construction—  —  —  —  —  103,518  103,518  —  
Residential mortgage—  1,375  726  3,215  5,316  1,652,242  1,657,558  3,215  
Home equity366  —  —  538  904  510,058  510,962  538  
Commercial mortgage—  —  —  —  —  1,130,169  1,130,169  —  
Consumer1,673  964  444  54  3,135  523,830  526,965  —  
Total$3,018  $2,515  $1,170  $4,741  $11,444  $4,991,994  $5,003,438  $3,753  
(dollars in thousands)Accruing
Loans
30 - 59 Days
Past Due		 Accruing
Loans
60 - 89 Days
Past Due		 Accruing
Loans
Greater Than
90 Days
Past Due		 Nonaccrual
Loans		 Total
Past Due
and
Nonaccrual		 Loans and
Leases
Not
Past Due		 Total
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 equity320
 250
 —
 95
 665
 474,900
 475,565
Commercial mortgage—
 —
 —
 —
 —
 1,133,912
 1,133,912
Consumer2,974
 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		TotalNonaccrual
Loans
With
No ACL
December 31, 2019       
Commercial, financial and agricultural$476  $865  $—  $467  $1,808  $568,496  $570,304  $—  
Real estate:  
Construction643  —  —  —  643  95,211  95,854  —  
Residential mortgage1,830  589  724  979  4,122  1,595,679  1,599,801  979  
Home equity759  207  —  92  1,058  489,676  490,734  92  
Commercial mortgage—  397  —  —  397  1,123,018  1,123,415  —  
Consumer3,223  943  286  17  4,469  564,963  569,432  —  
Total$6,931  $3,001  $1,010  $1,555  $12,497  $4,437,043  $4,449,540  $1,071  
(dollars in thousands)Accruing
Loans
30 - 59 Days
Past Due		 Accruing
Loans
60 - 89 Days
Past Due		 Accruing
Loans
Greater Than
90 Days
Past Due		 Nonaccrual
Loans		 Total
Past Due
and
Nonaccrual		 Loans and
Leases
Not
Past Due		 Total
December 31, 2018 
  
  
  
  
  
  
Commercial, financial and agricultural$1,348
 $162
 $—
 $—
 $1,510
 $580,150
 $581,660
Real estate:         
    
Construction—
 —
 —
 —
 —
 66,927
 66,927
Residential mortgage3,966
 157
 —
 2,048
 6,171
 1,422,034
 1,428,205
Home equity433
 104
 298
 275
 1,110
 467,856
 468,966
Commercial mortgage—
 —
 —
 —
 —
 1,040,278
 1,040,278
Consumer2,340
 872
 238
 —
 3,450
 488,756
 492,206
Leases—
 —
 —
 —
 —
 124
 124
Total$8,087
 $1,295
 $536
 $2,323
 $12,241
 $4,066,125
 $4,078,366
In accordance with the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" issued in April 2020, loans with deferrals granted because of COVID-19 are not considered past due and/or reported as nonaccrual during the deferral period.

25

Modifications

Troubled Debt Restructurings

Troubled debt restructurings ("TDRs") included in nonperforming assets at SeptemberJune 30, 20192020 consisted of 1 Hawaii residential mortgage loan with a principal balance of $0.3 million. There were $7.5 million of TDRs still accruing interest at June 30, 2020, NaN of which were more than 90 days delinquent. At December 31, 2019, there were $7.5 million of TDRs still accruing interest, NaN of which were more than 90 days delinquent.


The Company offers various types of concessions when modifying a loan. Concessions made to the original contractual terms of these loans consisted primarilythe loan typically consists of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. TheIn these cases, the principal balancesbalance on these TDRsthe TDR had matured and/or werewas in default at the time of restructure, and we havethere were no commitments to lend additional funds to anythe borrower during the three and six months ended June 30, 2020 and 2019.

As discussed in Note 1 to these financial statements, Section 4013 of these borrowers. ThereCARES Act and the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were $8.9 million of TDRs still accruing interest at September 30, 2019, none of which werenot more than 9030 days delinquent. Atpast due as of December 31, 2018, there2019 and at the time of modification program implementation, respectively, and meets other applicable criteria. The Company identified 9 consumer loans totaling $0.1 million that were $12.9modified during the quarter and did not meet the criteria under Section 4013 of CARES Act or the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)". As a result, these loans are included in the TDRs disclosed above. The remaining TDRs disclosed above were not related to COVID-19 modifications. The Company executed loan deferrals on outstanding balances of approximately $567.9 million of TDRs still accruing interest, none of whichresulting from the COVID-19 pandemic that were more than 90 days delinquent.not classified as a TDR at June 30, 2020.

SomeThe following table presents by class, information related to loans modified in a TDR may already be on nonaccrual status and partial charge-offs may have already been taken against the outstanding loan balance. Thus, these loans have already been identified as impaired and have already been evaluated under the Company's allowance for loan and lease losses (the "Allowance") methodology. Loans that were not on nonaccrual status when modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan. The loans modified in a TDR did not have a material effect on our provision for loan and lease losses (the "Provision") and the Allowance during the three and ninesix months ended SeptemberJune 30, 2019.2020:



(dollars in thousands)Number of
Contracts		Recorded
Investment
(as of Period End)		Increase in the
ACL
Three Months Ended June 30, 2020
Real estate: Commercial mortgage1  $285  $—  
Consumer9  145  —  
Total10  $430  $—  
Six Months Ended June 30, 2020
Real estate: Commercial mortgage1  $285  $—  
Consumer9  145  
Total10  $430  $—  
No
NaN loans were modified in a TDR during the three and ninesix months ended SeptemberJune 30, 2019 and 2018.2019.

NaN loans were modified as a TDR within the previous twelve months that subsequently defaulted during the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.

We had no commitments on TDRs during the three and nine months ended September 30, 2019 and 2018.2019.
 
Credit Quality Indicators
 
The Company categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases individually by classifying the loans and leases by credit risk. This analysis includes non-homogeneous loans, and leases, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:rating of loans. Loans not meeting the following criteria that are analyzed individually as part of the described process are considered to be pass-rated loans.
 
Special Mention. Loans and leases classified as special mention, while still adequately protected by the borrower's capital adequacy and payment capability, exhibit distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects
26

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.
27

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

Amortized Cost of Term Loans by Origination Year
20202019201820172016PriorAmortized Cost of Revolving LoansTotal
(dollars in thousands)
June 30, 2020
Commercial, financial and agricultural - SBA PPP:
Risk Rating
Pass$526,408  $—  $—  $—  $—  $—  $—  $526,408  
Commercial, financial and agricultural - Other:
Risk Rating
Pass73,563  70,052  64,647  53,927  46,574  99,703  82,204  490,670  
Special Mention2,740  8,796  5,490  15,034  550  9,632  1,520  43,762  
Substandard—  7,362  595  1,220  2,407  1,842  —  13,426  
Subtotal76,303  86,210  70,732  70,181  49,531  111,177  83,724  547,858  
Construction:
Risk Rating
Pass12,308  15,026  46,092  7,164  2,239  20,689  —  103,518  
Residential mortgage:
Risk Rating
Pass252,833  335,607  163,136  181,703  210,585  506,943  —  1,650,807  
Special Mention—  —  —  1,437  153  1,145  —  2,735  
Substandard—  —  545  895  888  1,688  —  4,016  
Subtotal252,833  335,607  163,681  184,035  211,626  509,776  —  1,657,558  
Home equity:
Risk Rating
Pass9,200  18,464  19,080  457  298  4,923  457,792  510,214  
Special Mention—  —  —  —  —  —  210  210  
Substandard—  —  —  —  206  332  —  538  
Subtotal9,200  18,464  19,080  457  504  5,255  458,002  510,962  
Commercial mortgage:
Risk Rating
Pass42,505  149,625  155,100  171,513  113,485  383,327  17,363  1,032,918  
Special Mention—  2,602  18,508  12,718  10,369  24,984  —  69,181  
Substandard—  4,593  —  —  4,513  18,964  —  28,070  
Subtotal42,505  156,820  173,608  184,231  128,367  427,275  17,363  1,130,169  
Consumer:
Risk Rating
Pass61,790  136,956  73,808  57,622  25,622  99,447  71,221  526,466  
Substandard11  27  14  48  4  256  —  360  
Loss—  —  —  79  45  15  —  139  
Subtotal61,801  136,983  73,822  57,749  25,671  99,718  71,221  526,965  
Total$981,358  $749,110  $547,015  $503,817  $417,938  $1,173,890  $630,310  $5,003,438  
28

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)PassSpecial
Mention		SubstandardLossSubtotalNet 
Deferred
Costs
(Income)		Total
December 31, 2019      
Commercial, financial and agricultural$523,342  $20,677  $26,070  $—  $570,089  $215  $570,304  
Real estate:  
Construction96,139  —  —  —  96,139  (285) 95,854  
Residential mortgage1,593,072  840  1,889  —  1,595,801  4,000  1,599,801  
Home equity490,147  —  92  —  490,239  495  490,734  
Commercial mortgage1,094,364  17,440  13,107  —  1,124,911  (1,496) 1,123,415  
Consumer569,212  —  193  111  569,516  (84) 569,432  
Total$4,366,276  $38,957  $41,351  $111  $4,446,695  $2,845  $4,449,540  
 
(dollars in thousands)Pass Special
Mention		 Substandard Loss Subtotal Net 
Deferred
Costs
(Income)		 Total
September 30, 2019 
  
  
    
  
  
Commercial, financial and agricultural$561,372
 $3,318
 $11,653
 $—
 $576,343
 $269
 $576,612
Real estate:         
    
Construction96,996
 —
 —
 —
 96,996
 (335) 96,661
Residential mortgage1,553,869
 —
 883
 —
 1,554,752
 3,983
 1,558,735
Home equity475,116
 —
 95
 —
 475,211
 354
 475,565
Commercial mortgage1,096,341
 25,757
 13,310
 —
 1,135,408
 (1,496) 1,133,912
Consumer526,193
 —
 149
 87
 526,429
 (83) 526,346
Leases31
 —
 —
 —
 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:         
    
Construction67,269
 —
 —
 —
 67,269
 (342) 66,927
Residential mortgage1,422,240
 —
 2,144
 —
 1,424,384
 3,821
 1,428,205
Home equity468,394
 —
 572
 —
 468,966
 —
 468,966
Commercial mortgage1,029,581
 10,412
 1,692
 —
 1,041,685
 (1,407) 1,040,278
Consumer492,030
 —
 80
 158
 492,268
 (62) 492,206
Leases124
 —
 —
 —
 124
 —
 124
Total$4,032,344
 $18,373
 $24,998
 $158
 $4,075,873
 $2,493
 $4,078,366


5. ALLOWANCE FOR LOANCREDIT LOSSES AND LEASE LOSSESRESERVE FOR OFF-BALANCE SHEET CREDIT EXPOSURES
 
The following table presents by class, the activity in the AllowanceACL for loans under ASC 326 during the periods indicated:three and six months ended June 30, 2020 and under previous GAAP during the three and six months ended June 30, 2019:
  Real Estate       Commercial, Financial and AgriculturalReal Estate 
(dollars in thousands)Commercial,
Financial &
Agricultural		 Construction Residential Mortgage Home Equity Commercial Mortgage Consumer Leases Total(dollars in thousands)SBA PPPOtherConstructionResidential MortgageHome EquityCommercial MortgageConsumerTotal
Three Months Ended September 30, 2019
Three Months Ended June 30, 2020Three Months Ended June 30, 2020
Beginning balance prior to ASC 326Beginning balance prior to ASC 326$—  $8,645  $3,057  $13,181  $2,309  $19,518  $12,935  $59,645  
Impact of adoption of ASC 326Impact of adoption of ASC 326—  —  —  —  —  —  —  —  
Beginning balance$8,109
 $1,313
 $13,367
 $4,313
 $11,668
 $9,497
 $—
 $48,267
Beginning balance—  8,645  3,057  13,181  2,309  19,518  12,935  59,645  
Provision (credit) for loan and lease losses107
 374
 75
 (45) 541
 480
 —
 1,532
Provision for credit lossesProvision for credit losses388  7,660  217  1,876  1,342  (3,371) 2,528  10,640  
8,216
 1,687
 13,442
 4,268
 12,209
 9,977
 —
 49,799
388  16,305  3,274  15,057  3,651  16,147  15,463  70,285  
Charge-offs797
 —
 —
 5
 —
 1,832
 —
 2,634
Charge-offs—  1,103  —  52  —  —  2,626  3,781  
Recoveries362
 6
 104
 24
 —
 506
 —
 1,002
Recoveries—  305  —  20  —  1  509  835  
Net charge-offs (recoveries)435
 (6) (104) (19) —
 1,326
 —
 1,632
Net charge-offs (recoveries)—  798  —  32  —  (1) 2,117  2,946  
Ending balance$7,781
 $1,693
 $13,546
 $4,287
 $12,209
 $8,651
 $—
 $48,167
Ending balance$388  $15,507  $3,274  $15,025  $3,651  $16,148  $13,346  $67,339  
               
Three Months Ended September 30, 2018
Three Months Ended June 30, 2019Three Months Ended June 30, 2019
Beginning balance$7,525
 $1,811
 $14,252
 $3,168
 $15,094
 $6,331
 $—
 $48,181
Beginning balance$—  $7,847  $1,299  $12,851  $4,278  $12,036  $8,956  $47,267  
Provision (credit) for loan and lease losses495
 (526) (168) 544
 (1,632) 1,228
 —
 (59)
Provision for credit lossesProvision for credit losses—  786  (578) 144  26  (393) 1,419  1,404  
8,020
 1,285
 14,084
 3,712
 13,462
 7,559
 —
 48,122
 —  8,633  721  12,995  4,304  11,643  10,375  48,671  
Charge-offs731
 —
 —
 —
 —
 1,762
 —
 2,493
Charge-offs—  839  —  —  —  —  1,459  2,298  
Recoveries578
 6
 51
 6
 8
 548
 —
 1,197
Recoveries—  315  592  372  9  25  581  1,894  
Net charge-offs (recoveries)153
 (6) (51) (6) (8) 1,214
 —
 1,296
Net charge-offs (recoveries)—  524  (592) (372) (9) (25) 878  404  
Ending balance$7,867
 $1,291
 $14,135
 $3,718
 $13,470
 $6,345
 $—
 $46,826
Ending balance$—  $8,109  $1,313  $13,367  $4,313  $11,668  $9,497  $48,267  
               

   Real Estate      
(dollars in thousands)Commercial,
Financial &
Agricultural		 Construction Residential Mortgage Home Equity Commercial Mortgage Consumer Leases Total
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 losses943
 (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-offs2,099
 —
 —
 5
 —
 5,542
 —
 7,646
Recoveries910
 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 losses1,227
 (1,749) (291) 383
 (3,383) 4,075
 —
 262
 8,821
 86
 14,037
 3,700
 13,418
 10,201
 —
 50,263
Charge-offs1,971
 —
 —
 —
 —
 5,424
 —
 7,395
Recoveries1,017
 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
                
29

 Commercial, Financial and AgriculturalReal Estate 
(dollars in thousands)SBA PPPOtherConstructionResidential MortgageHome EquityCommercial MortgageConsumerTotal
Six Months Ended June 30, 2020
Beginning balance prior to ASC 326$—  $8,136  $1,792  $13,327  $4,206  $11,113  $9,397  $47,971  
Impact of adoption of ASC 326—  (627) 479  608  (1,614) 2,624  2,096  3,566  
Balance after adoption of ASC 326—  7,509  2,271  13,935  2,592  13,737  11,493  51,537  
Provision for credit losses388  8,891  872  941  1,028  2,408  5,441  19,969  
388  16,400  3,143  14,876  3,620  16,145  16,934  71,506  
Charge-offs—  1,540  —  52  —  —  4,843  6,435  
Recoveries—  647  131  201  31  3  1,255  2,268  
Net charge-offs (recoveries)—  893  (131) (149) (31) (3) 3,588  4,167  
Ending balance$388  $15,507  $3,274  $15,025  $3,651  $16,148  $13,346  $67,339  
Six Months Ended June 30, 2019
Beginning balance$—  $8,027  $1,202  $14,349  $3,788  $13,358  $7,192  $47,916  
Provision for credit losses—  836  (487) (1,376) 507  (1,715) 4,922  2,687  
 —  8,863  715  12,973  4,295  11,643  12,114  50,603  
Charge-offs—  1,302  —  —  —  —  3,710  5,012  
Recoveries—  548  598  394  18  25  1,093  2,676  
Net charge-offs (recoveries)—  754  (598) (394) (18) (25) 2,617  2,336  
Ending balance$—  $8,109  $1,313  $13,367  $4,313  $11,668  $9,497  $48,267  

The following table presents the activity in the reserve for off-balance sheet credit exposures, included in other liabilities, under ASC 326 during the three and six months ended June 30, 2020 and under previous GAAP during the three and six months ended June 30, 2019.

Three Months Ended June 30, 2020
Beginning balance$3,810 
Provision for off-balance sheet credit exposures573 
Ending balance$4,383 
Three Months Ended June 30, 2019
Beginning balance$1,409 
Provision for off-balance sheet credit exposures488 
Ending balance$1,897 
Six Months Ended June 30, 2020
Beginning balance prior to ASC 326$1,272 
Impact of adoption of ASC 326740 
Balance after adoption of ASC 3262,012 
Provision for off-balance sheet credit exposures2,371 
Ending balance$4,383 
Six Months Ended June 30, 2019
Beginning balance$1,242 
Provision for off-balance sheet credit exposures655 
Ending balance$1,897 

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

30

Our Provisionprovision for credit losses on loans was a debit of $1.5$10.6 million and a debit of $4.2$20.0 million in the three and ninesix months ended SeptemberJune 30, 2019, respectively,2020 under ASC 326, compared to a credit of $0.1$1.4 million and a debit of $0.3$2.7 million in the three and ninesix months ended SeptemberJune 30, 2018, respectively.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)June 30, 2020December 31, 2019
Investments in low income housing tax credit partnerships$14,626  $15,322  
Investments in common securities of statutory trusts1,547  1,547  
Investments in affiliates201  192  
Other54  54  
Total$16,428  $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 trusts1,547
 2,169
Investments in affiliates172
 182
Other54
 54
Total$17,001
 $14,008

The Company invests in low-income housing tax credit ("LIHTC") partnerships. As of SeptemberJune 30, 20192020 and December 31, 2018,2019, the Company had $11.7$9.3 million and $8.3$11.5 million, respectively, in unfunded commitments related to the LIHTC partnerships. The expected payments for the unfunded commitments as of SeptemberJune 30, 20192020 for the remainder of fiscal year 2019,2020, the next five succeeding fiscal years and all years thereafter are as follows (dollars in thousands):

Year Ending December 31,
2020 (remainder)$4,694  
20211,494  
20222,995  
202310  
202426  
20256  
Thereafter43  
Total unfunded commitments$9,268  
Year Ending December 31, 
2019 (remainder)$3,669
20203,466
20211,494
20223,010
202310
202426
Thereafter49
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 ninesix months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018:2019:

(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 expense307
 152
 922
 457


(dollars in thousands)Three Months Ended
June 30, 2020		Three Months Ended
June 30, 2019		Six Months Ended
June 30, 2020		Six Months Ended
June 30, 2019
Proportional amortization method:
Amortization expense recognized in income tax expense$348  $259  $696  $517  
Tax credits recognized in income tax expense400  338  800  615  

31

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 
Additions742 
Amortization(1,072)
Balance, June 30, 2019$15,266 
Balance, January 1, 2020$14,718 
Additions1,270 
Amortization(3,217)
Balance, June 30, 2020$12,771 
(dollars in thousands)Core
Deposit
Premium		 Mortgage
Servicing
Rights		 Total
Balance, January 1, 2018$2,006
 $15,843
 $17,849
Additions—
 1,204
 1,204
Amortization(2,006) (1,413) (3,419)
Balance, September 30, 2018$—
 $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$1.1 million and $1.2$1.3 million for the three and ninesix months ended SeptemberJune 30, 2019, respectively,2020 compared to $0.4$0.5 million and $1.2$0.7 million for the three and ninesix months ended SeptemberJune 30, 2018, respectively.2019.

Amortization of mortgage servicing rights totaled $0.7$1.7 million and $1.7$3.2 million for the three and ninesix months ended SeptemberJune 30, 2019, respectively,2020 compared to $0.5$0.6 million and $1.4$1.1 million for the three and ninesix months ended SeptemberJune 30, 2018, respectively.2019.

The following table presentstables present the fair market value and key assumptions used in determining the fair market value of our mortgage servicing rights:
 
Six Months EndedSix Months Ended
(dollars in thousands)June 30, 2020June 30, 2019
Fair market value, beginning of period$15,820  $17,696  
Fair market value, end of period13,060  15,554  
 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 period15,965
 18,315
Weighted average discount rate9.5% 9.5%
Forecasted constant prepayment rate assumption (1)
14.6
 14.0

June 30, 2020December 31, 2019
Weighted average discount rate9.6 %9.5 %
Forecasted constant prepayment rate assumption (1)
21.7 %11.9 %

(1) Represents annualized loan prepayment rate assumption.

The gross carrying value and accumulated amortization related to our core deposit premium and mortgage servicing rights are presented below:
 
 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 rights67,202
 (52,144) 15,058
 66,013
 (50,417) 15,596
Total$111,844
 $(96,786) $15,058
 $110,655
 $(95,059) $15,596

 June 30, 2020December 31, 2019
(dollars in thousands)Gross
Carrying
Value		Accumulated
Amortization		Net
Carrying
Value		Gross
Carrying
Value		Accumulated
Amortization		Net
Carrying
Value
Mortgage servicing rights$68,865  $(56,094) $12,771  $67,595  $(52,877) $14,718  
 
32

Based on the mortgage servicing rights held as of SeptemberJune 30, 2019,2020, estimated amortization expense for the remainder of fiscal year 2019,2020, the next five succeeding fiscal years and all years thereafter are as follows (dollars in thousands):
 
Year Ending December 31, 
2019 (remainder)$669
20202,373
20211,918
20221,585
20231,319
20241,118
Thereafter6,076
Total$15,058

Year Ending December 31,
2020 (remainder)$2,583  
20214,359  
20223,538  
20232,291  
2024—  
2025—  
Thereafter—  
Total$12,771  
 
We perform an impairment assessment of our mortgage servicing rights whenever events or changes in circumstance indicate that the carrying value of the asset may not be recoverable.

8. DERIVATIVES
 
We utilize various designated and undesignated derivative financial instruments to reduce our exposure to movements in interest rates including interest rate lock commitments and forward sale commitments. We measure all derivatives at fair value on our consolidated balance sheet. In each reporting period, we record the derivative instruments in other assets or other liabilities depending on whether the derivatives are in an asset or liability position. For derivative instruments that are designated as cash flow hedging instruments, we record the effective portion of the changes in the fair value of the derivative in AOCI, net of tax, until earnings are affected by the variability of cash flows of the hedged transaction. We immediately recognize the portion of the gain or loss in the fair value of the derivative that represents hedge ineffectiveness in current period earnings. For derivative instruments that are not designated as hedging instruments, changes in the fair value of the derivative are included in current period earnings. At SeptemberJune 30, 20192020 and December 31, 2018,2019, we were not party to any derivatives designated as part of a fair value or cash flow hedge.

Interest Rate Lock and Forward Sale Commitments
 
We enter into interest rate lock commitments on certain mortgage loans that are intended to be sold. To manage interest rate risk on interest rate lock commitments, we also enter into forward loan sale commitments. The interest rate locks and forward loan sale commitments are accounted for as undesignated derivatives and are recorded at their respective fair values in other assets or other liabilities, with changes in fair value recorded in current period earnings. These instruments serve to reduce our exposure to movements in interest rates. At SeptemberJune 30, 2019,2020, we were a party to interest rate lock and forward sale commitments on $1.6$0.4 million and $8.4$10.9 million of mortgage loans, respectively.
 
The following table presents the location of all assets and liabilities associated with our derivative instruments within the consolidated balance sheets:
 
Derivatives Financial Instruments Not Designated as Hedging InstrumentsAsset DerivativesLiability Derivatives
Fair Value atFair Value at
(dollars in thousands)Balance Sheet LocationJune 30,
2020		December 31,
2019		June 30,
2020		December 31,
2019
Interest rate lock and forward sale commitmentsOther assets / other liabilities$9  $8  $79  $28  
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 in which we participate. The risk participation agreement entered into by us as a participant bank provides credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution. The fair value of the exposure related to the RPA was not material to the consolidated financial statements at June 30, 2020.
33


The following table presents the impact of derivative instruments and their location within the consolidated statements of income:
 
Derivatives Financial Instruments
Not Designated as Hedging Instruments		Location of Gain (Loss)
Recognized in
Earnings on Derivatives		Amount of Gain (Loss)
Recognized in
Earnings on Derivatives
(dollars in thousands)
Three Months Ended June 30, 2020
Interest rate lock and forward sale commitmentsMortgage banking income$(149)
Three Months Ended June 30, 2019
Interest rate lock and forward sale commitmentsMortgage banking income(18)
Six Months Ended June 30, 2020
Interest rate lock and forward sale commitmentsMortgage banking income(50)
Risk participation agreementOther service charges and fees1,288 
Six Months Ended June 30, 2019
Interest rate lock and forward sale commitmentsMortgage banking income21 
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$1.97 billion line of credit as of SeptemberJune 30, 2019,2020, compared to $1.43$1.84 billion at December 31, 2018.2019. At SeptemberJune 30, 2019, $1.432020, $1.67 billion was undrawn under this arrangement, compared to $1.18$1.57 billion at December 31, 2018. Short-term2019. There were 0 short-term borrowings under this arrangement totaled $205.0 million at SeptemberJune 30, 2019,2020, compared to $197.0$150.0 million at December 31, 2018.2019. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled $118.9$248.5 million at SeptemberJune 30, 2019,2020, compared to $4.6$78.9 million at December 31, 2018.2019. Long-term borrowings under this arrangement totaled $50.0 million at SeptemberJune 30, 20192020 and December 31, 2018.2019. FHLB advances and standby letters of credit available at SeptemberJune 30, 20192020 were secured by certain real estate loans with a carrying value of $2.42$2.66 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB.
 
At SeptemberJune 30, 20192020 and December 31, 2018,2019, our bank had additional unused borrowings available at the Federal Reserve discount window of $65.6$54.6 million and $73.9$65.3 million, respectively. As of SeptemberJune 30, 20192020 and December 31, 2018,2019, certain commercial and commercial real estate loans with a carrying value totaling $118.9$126.7 million and $123.3$126.1 million, respectively, were pledged as collateral on our line of credit with the Federal Reserve discount window. The Federal Reserve does not have the right to sell or repledge these loans.

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

In October 2003, we created 2 wholly-owned statutory trusts, CPB Capital Trust II ("Trust II") and CPB Statutory Trust III ("Trust III"). Trust II issued $20.0We completed the redemption of $20 million inof floating rate trust preferred securities bearing an interest rate of three-month LIBOR plus 2.85% and maturing on October 7, 2033. The principal assets ofissued by Trust II were $20.6in January 2019 and $20 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust II trust preferred securities. Trust II issued $0.6 million of common securities to the Company.

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

trust preferred securities. The redemption was pursuant to the optional prepayment provisions of the indenture. On January 22, 2019, Trust II was canceled with the state of Delaware.
Trust III issued $20.0 million in floating rate trust preferred securities bearing an interest rate of three-month LIBOR plus 2.85% and maturing on December 17, 2033. The principal assets of Trust III were $20.6 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust III trust preferred securities. Trust III issued $0.6 million of common securities to the Company.

On December 17, 2018, the Company completed the redemption of $20.0 million in floating rate trust preferred securities of Trust III. The redemption price was 100% of the aggregate liquidation amount of the securities plus accumulated but unpaid distributions up to but not including the redemption date. The Company also redeemed $0.6 million of common securities issued by Trust III and held by the Company, as a result of the concurrent redemption of 100% of the principal assets of Trust III, or $20.6 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust III trust preferred securities. The redemption was pursuant to the optional prepayment provisions of the indenture. On January 9, 2019, Trust III was canceled with the state of Connecticut.in December 2018.
 
In September 2004, we created a wholly-owned statutory trust, CPB Capital Trust IV ("Trust IV"). Trust IV issued $30.0 million in floating rate trust preferred securities bearing an interest rate of three-month LIBOR plus 2.45% and maturing on December 15, 2034. The principal assets of Trust IV are $30.9 million of the Company's junior subordinated debentures with an
34

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 SeptemberJune 30, 20192020 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 TrustAmount of Subordinated Debentures Interest Rate
Trust IV$30,928
 Three month LIBOR + 2.45%
Trust V20,619
 Three month LIBOR + 1.87%
Total$51,547
  
    
 December 31, 2018
Name of TrustAmount of Subordinated Debentures Interest Rate
Trust II$20,619
 Three month LIBOR + 2.85%
Trust IV30,928
 Three month LIBOR + 2.45%
Trust V20,619
 Three month LIBOR + 1.87%
Total$72,166
  
    

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

The floating trust preferred securities, the junior subordinated debentures that are the assets of Trusts IV and V and the common securities issued by Trusts IV and V are redeemable in whole or in part on any interest payment date on or after December 15, 2009 for Trust IV and V, or at any time in whole but not in part within 90 days following the occurrence of certain events. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from time to time to defer interest payments on the subordinated debentures, which would result in a deferral of

distribution payments on the related trust preferred securities, for up to 20 consecutive quarterly periods without default or penalty.

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

10. REVENUE FROM CONTRACTS WITH CUSTOMERS

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 ninesix months ended SeptemberJune 30, 20192020 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 fees3,260
 2,778
 9,021
 8,169
Income on fiduciary activities1,126
 1,159
 3,220
 3,132
Fees on foreign exchange21
 26
 75
 86
Loan placement fees230
 115
 486
 532
Net gain on sales of foreclosed assets17
 —
 17
 —
In-scope other operating income6,779
 6,267
 19,066
 18,088
Out-of-scope other operating income3,487
 4,553
 12,967
 11,316
Total other operating income$10,266
 $10,820
 $32,033
 $29,404

35

Three Months Ended
June 30,		Six Months Ended
June 30,
(dollars in thousands)2020201920202019
Other operating income:
In-scope of ASC 606
Mortgage banking income$189  $107  $418  $256  
Service charges on deposit accounts1,149  2,041  3,199  4,122  
Other service charges and fees2,589  3,221  5,585  5,815  
Income on fiduciary activities1,270  1,129  2,567  2,094  
Net gain on sales of foreclosed assets(6) —  (6) —  
In-scope other operating income5,191  6,498  11,763  12,287  
Out-of-scope other operating income5,501  3,596  7,815  9,480  
Total other operating income$10,692  $10,094  $19,578  $21,767  

11. SHARE-BASED COMPENSATION
 
Restricted Stock Units
 
The table below presents the activity of restricted stock units for the ninesix months ended SeptemberJune 30, 2019:2020:
 
SharesWeighted Average Grant Date Fair Value
Non-vested restricted stock units, beginning of period366,467  $28.89  
Changes during the period:  
Granted321,722  18.11  
Vested(105,553) 30.24  
Forfeited(15,631) 26.38  
Non-vested restricted stock units, end of period567,005  22.59  
 Shares Weighted Average Grant Date Fair Value
Non-vested restricted stock units, beginning of period362,725
 $26.98
Changes during the period: 
  
Granted181,431
 28.89
Vested(155,474) 24.40
Forfeited(15,205) 29.24
Non-vested restricted stock units, end of period373,477
 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.

36

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 cost699
 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 leases13.80 years
 13.80 years
Weighted-average discount rate - operating leases3.92% 3.92%

Three Months Ended
June 30,		Six Months Ended
June 30,
(dollars in thousands)2020201920202019
Lease cost:
Operating lease cost$1,653  $1,628  $3,306  $3,256  
Variable lease cost688  604  1,366  1,251  
Less: sublease income(3) (11) (15) (22) 
Total lease cost$2,338  $2,221  $4,657  $4,485  
Other information:
Operating cash flows from operating leases$(1,595) $(1,556) $(3,189) $(3,105) 
Weighted-average remaining lease term - operating leases13.23 years14.05 years13.23 years14.21 years
Weighted-average discount rate - operating leases3.93 %3.92 %3.93 %3.92 %

The following is a schedule of annual undiscounted cash flows for our operating leases and a reconciliation of those cash flows to the operating lease liabilities for the remainder of fiscal year 2019,2020, the next five succeeding fiscal years and all years thereafter (dollars in thousands):

Year Ending December 31,Undiscounted Cash Flows Lease Liability Expense Lease Liability Reduction
2019 (remainder)$1,550
 $512
 $1,038
20206,018
 1,939
 4,079
20215,708
 1,787
 3,921
20225,271
 1,645
 3,626
20234,973
 1,512
 3,461
20244,814
 1,383
 3,431
Thereafter40,920
 7,669
 33,251
Total$69,254
 $16,447
 $52,807

Year Ending December 31,Undiscounted Cash FlowsLease Liability ExpenseLease Liability Reduction
2020 (remainder)$3,027  $968  $2,059  
20215,907  1,808  4,099  
20225,472  1,659  3,813  
20235,175  1,519  3,656  
20244,947  1,385  3,562  
20254,634  1,247  3,387  
Thereafter36,285  6,421  29,864  
Total$65,447  $15,007  $50,440  

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

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

Three Months Ended
June 30,		Six Months Ended
June 30,
(dollars in thousands)2020201920202019
Total rental income recognized$534  $519  $1,067  $1,054  

37

Based on the Company's leases as lessor as of SeptemberJune 30, 2019,2020, estimated lease payments for the remainder of fiscal year 2019,2020, the next five succeeding fiscal years and all years thereafter are as follows (dollars in thousands):

Year Ending December 31, 
2019 (remainder)$503
20201,837
20211,868
20221,308
2023449
202497
Thereafter262
Total$6,324

Year Ending December 31,
2020 (remainder)$1,117  
20212,245  
20221,662  
2023578  
2024109  
202572  
Thereafter190  
Total$5,973  
13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
The following tables present the components of other comprehensive income for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, by component:
 
(dollars in thousands)Before TaxTax EffectNet of Tax
Three Months Ended June 30, 2020   
Net unrealized gains on investment securities:   
Net unrealized gains arising during the period$8,570  $2,295  $6,275  
Less: Reclassification adjustments from AOCI realized in net income—  —  —  
Net unrealized gains on investment securities8,570  2,295  6,275  
Defined benefit plans:   
Amortization of net actuarial loss269  70  199  
Amortization of net transition obligation4  1  3  
Amortization of prior service cost3  1  2  
Defined benefit plans, net276  72  204  
Other comprehensive income$8,846  $2,367  $6,479  
(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 securities5,991
 1,605
 4,386
      
Defined benefit plans: 
  
  
Amortization of net actuarial loss310
 31
 279
Amortization of net transition obligation5
 3
 2
Amortization of prior service cost4
 2
 2
Defined benefit plans, net319
 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 loss289
 78
 211
Amortization of net transition obligation5
 2
 3
Amortization of prior service cost4
 1
 3
Defined benefit plans, net298
 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 securities37,635
 10,088
 27,547

     
Defined benefit plans:   
  
Amortization of net actuarial loss837
 84
 753
Amortization of net transition obligation14
 4
 10
Amortization of prior service cost13
 3
 10
Defined benefit plans, net864
 91
 773

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

(dollars in thousands)Before TaxTax EffectNet of Tax
Three Months Ended June 30, 2019   
Net unrealized gains on investment securities:   
Net unrealized gains arising during the period$16,620  $4,455  $12,165  
Less: Reclassification adjustments from AOCI realized in net income—  —  —  
Net unrealized gains on investment securities16,620  4,455  12,165  
Defined benefit plans:   
Amortization of net actuarial loss264  22  242  
Amortization of net transition obligation4  1  3  
Amortization of prior service cost4  1  3  
Defined benefit plans, net272  24  248  
Other comprehensive income$16,892  $4,479  $12,413  

38

(dollars in thousands)Before Tax Tax Effect Net of Tax(dollars in thousands)Before TaxTax EffectNet 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)
Six Months Ended June 30, 2020Six Months Ended June 30, 2020   
Net unrealized gains on investment securities:Net unrealized gains on investment securities:   
Net unrealized gains arising during the periodNet unrealized gains arising during the period$22,428  $6,006  $16,422  
Less: Reclassification adjustments from AOCI realized in net income—
 —
 —
Less: Reclassification adjustments from AOCI realized in net income—  —  —  
Net unrealized losses on investment securities(33,809) (9,097) (24,712)
Net unrealized gains on investment securitiesNet unrealized gains on investment securities22,428  6,006  16,422  
     
Defined benefit plans: 
  
  
Defined benefit plans:  
Net actuarial gains arising during the periodNet actuarial gains arising during the period427  114  313  
Amortization of net actuarial loss865
 262
 603
Amortization of net actuarial loss537  142  395  
Amortization of net transition obligation14
 4
 10
Amortization of net transition obligation9  2  7  
Amortization of prior service cost13
 3
 10
Amortization of prior service cost7  2  5  
Defined benefit plans, net892
 269
 623
Defined benefit plans, net980  260  720  
     
Other comprehensive loss$(32,917) $(8,828) $(24,089)
Other comprehensive incomeOther comprehensive income$23,408  $6,266  $17,142  
     

(dollars in thousands)Before TaxTax EffectNet of Tax
Six Months Ended June 30, 2019   
Net unrealized gains on investment securities:   
Net unrealized gains arising during the period$31,644  $8,483  $23,161  
Less: Reclassification adjustments from AOCI realized in net income—  —  —  
Net unrealized gains on investment securities31,644  8,483  23,161  
Defined benefit plans:   
Amortization of net actuarial loss527  51  476  
Amortization of net transition obligation9  2  7  
Amortization of prior service cost9  2  7  
Defined benefit plans, net545  55  490  
Other comprehensive income$32,189  $8,538  $23,651  

The following tables present the changes in each component of AOCI, net of tax, for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
 
(dollars in thousands)Investment
Securities		 Defined
Benefit
Plans		 AOCI
Three Months Ended September 30, 2019 
  
  
Balance at beginning of period10,418
 (5,960) 4,458
      
Other comprehensive income before reclassifications4,412
 —
 4,412
Reclassification adjustments from AOCI(26) 283
 257
Total other comprehensive income4,386
 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 June 30, 2020   
Balance at beginning of period$24,972  $(5,900) $19,072  
Other comprehensive income before reclassifications6,275  —  6,275  
Reclassification adjustments from AOCI—  204  204  
Total other comprehensive income6,275  204  6,479  
Balance at end of period$31,247  $(5,696) $25,551  


(dollars in thousands)Investment
Securities		 Defined
Benefit
Plans		 AOCI
Three Months Ended 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 reclassifications27,573
 —
 27,573
Reclassification adjustments from AOCI(26) 773
 747
Total other comprehensive income27,547
 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 period4,934
 (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)
      

39


(dollars in thousands)Investment
Securities		Defined
Benefit
Plans		AOCI
Three Months Ended June 30, 2019   
Balance at beginning of period$(1,747) $(6,208) $(7,955) 
Other comprehensive loss before reclassifications12,165  —  12,165  
Reclassification adjustments from AOCI—  248  248  
Total other comprehensive income12,165  248  12,413  
Balance at end of period$10,418  $(5,960) $4,458  

(dollars in thousands)Investment
Securities		Defined
Benefit
Plans		AOCI
Six Months Ended June 30, 2020   
Balance at beginning of period$14,825  $(6,416) $8,409  
Other comprehensive income before reclassifications16,422  313  16,735  
Reclassification adjustments from AOCI—  407  407  
Total other comprehensive income16,422  720  17,142  
Balance at end of period$31,247  $(5,696) $25,551  

(dollars in thousands)Investment
Securities		Defined
Benefit
Plans		AOCI
Six Months Ended June 30, 2019   
Balance at beginning of period$(9,643) $(6,450) $(16,093) 
Impact of the adoption of new accounting standards(3,100) —  (3,100) 
Adjusted balance at beginning of period(12,743) (6,450) (19,193) 
Other comprehensive loss before reclassifications23,161  —  23,161  
Reclassification adjustments from AOCI—  490  490  
Total other comprehensive income (loss)23,161  490  23,651  
Balance at end of period$10,418  $(5,960) $4,458  
40

The following table presents the amounts reclassified out of each component of AOCI for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
 
 Amount Reclassified from AOCIAffected Line Item in the Statement Where Net Income is Presented
Details about AOCI ComponentsThree months ended June 30,
(dollars in thousands)20202019
Defined benefit retirement and supplemental executive retirement plan items:   
Amortization of net actuarial loss$(269) $(264) Salaries and employee benefits
Amortization of net transition obligation(4) (4) Salaries and employee benefits
Amortization of prior service cost(3) (4) Salaries and employee benefits
Total before tax(276) (272) 
Tax effect72  24  Income tax benefit (expense)
Net of tax$(204) $(248) 
Total reclassification adjustments from AOCI for the period, net of tax$(204) $(248) 
 Amount Reclassified from AOCI Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI ComponentsThree 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) $(289) Salaries and employee benefits
Amortization of net transition obligation(5) (5) Salaries and employee benefits
Amortization of prior service cost(4) (4) Salaries and employee benefits
Total before tax(319) (298) 
Tax effect36
 81
 Income tax benefit (expense)
Net of tax$(283) $(217) 
      
Total reclassification adjustments from AOCI for the period, net of tax$(257) $(217) 

 Amount Reclassified from AOCIAffected Line Item in the Statement Where Net Income is Presented
Details about AOCI ComponentsSix months ended June 30,
(dollars in thousands)20202019
Defined benefit retirement and supplemental executive retirement plan items:   
Amortization of net actuarial loss$(537) $(527) Salaries and employee benefits
Amortization of net transition obligation(9) (9) Salaries and employee benefits
Amortization of prior service cost(7) (9) Salaries and employee benefits
Settlement—  —  Salaries and employee benefits
Total before tax(553) (545) 
Tax effect146  55  Income tax benefit (expense)
Net of tax$(407) $(490) 
Total reclassification adjustments from AOCI for the period, net of tax$(407) $(490) 
 Amount Reclassified from AOCI Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI ComponentsNine 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) $(865) Salaries and employee benefits
Amortization of net transition obligation(14) (14) Salaries and employee benefits
Amortization of prior service cost(13) (13) Salaries and employee benefits
Total before tax(864) (892) 
Tax effect91
 269
 Income tax benefit (expense)
Net of tax$(773) $(623) 
      
Total reclassification adjustments from AOCI for the period$(747) $(623) Net of tax
      



41

14. EARNINGS PER SHARE
 
The following table presents the information used to compute basic and diluted earnings per common share for the periods indicated:
 
Three Months Ended
June 30,		Six Months Ended
June 30,
(dollars in thousands, except per share data)2020201920202019
Net income$9,917  $13,534  $18,243  $29,571  
Weighted average common shares outstanding - basic28,040,802  28,546,564  28,083,602  28,651,852  
Dilutive effect of employee stock options and awards54,428  182,946  106,530  195,934  
Weighted average common shares outstanding - diluted28,095,230  28,729,510  28,190,132  28,847,786  
Basic earnings per common share$0.35  $0.47  $0.65  $1.03  
Diluted earnings per common share$0.35  $0.47  $0.65  $1.03  
Anti-dilutive employee stock options and awards outstanding—  —  —  —  
 Three Months Ended
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 - basic28,424,898
 29,297,465
 28,575,369
 29,536,536
Dilutive effect of employee stock options and awards177,440
 182,347
 186,688
 206,702
Weighted average common shares outstanding - diluted28,602,338
 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 June 30, 2020, the weighted average discount rate used in the valuation of loans was 5.15%. In accordance with ASU 2016-01, the fair value of loans are measured based on the notion of exit price.
 
Loans Held for Sale
 
The fair value of loans classified as held for sale are generally based upon quoted prices for similar assets in active markets, acceptance of firm offer letters with agreed upon purchase prices, discounted cash flow models that take into account market observable assumptions, or independent appraisals of the underlying collateral securing the loans. We report the fair values of Hawaii and U.S. Mainland construction and commercial real estate loans, if any, net of applicable selling costs on our consolidated balance sheets.
 
42

Deposit Liabilities
 
The fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits and interest-bearing demand and savings accounts, are equal to the amount payable on demand. The fair value of time deposits is estimated using discounted cash flow analyses. As of June 30, 2020, the weighted average discount rate used in the valuation of time deposits was 0.47%. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
 
Long-Term Debt
 
The fair value of our long-term debt is estimated by discounting scheduled cash flows over the contractual borrowing period at the estimated market rate for similar borrowing arrangements. As of June 30, 2020, the weighted average discount rate used in the valuation of long-term debt was 1.93%.
 
Derivatives

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

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

Limitations
 
Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument. Because no market exists for a significant portion of our financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
 
43

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 banks7,803
 7,803
 7,803
 —
 —
Investment securities1,187,933
 1,187,933
 1,058
 1,175,373
 11,502
Loans held for sale7,016
 7,016
 —
 7,016
 —
Net loans and leases4,319,695
 4,328,177
 —
 9,752
 4,318,425
Accrued interest receivable16,220
 16,220
 16,220
 —
 —
          
Financial liabilities: 
  
  
  
  
Deposits: 
  
  
  
  
Noninterest-bearing demand1,399,200
 1,399,200
 1,399,200
 —
 —
Interest-bearing demand and savings and money market2,591,775
 2,591,775
 2,591,775
 —
 —
Time1,046,684
 1,043,147
 —
 —
 1,043,147
Short-term borrowings205,000
 205,000
 —
 205,000
 —
Long-term debt101,547
 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)
June 30, 2020     
Financial assets:     
Cash and due from banks$102,132  $102,132  $102,132  $—  $—  
Interest-bearing deposits in other banks41,201  41,201  41,201  —  —  
Investment securities1,169,803  1,169,803  1,209  1,156,923  11,671  
Loans held for sale10,443  10,443  —  10,443  —  
Net loans and leases4,936,099  4,795,025  —  —  4,795,025  
Accrued interest receivable19,590  19,590  19,590  —  —  
Financial liabilities:     
Deposits:     
Noninterest-bearing demand1,851,012  1,851,012  1,851,012  —  —  
Interest-bearing demand and savings and money market3,013,227  3,013,227  3,013,227  —  —  
Time930,446  932,077  —  —  932,077  
Short-term borrowings—  —  —  —  —  
Long-term debt167,491  156,386  —  —  156,386  
Accrued interest payable (included in other liabilities)2,894  2,894  2,894  —  —  
       Fair Value Measurement Using
(dollars in thousands)Notional
Amount		 Carrying
Amount		 Estimated
Fair Value		 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant
Unobservable
Inputs
(Level 3)
September 30, 2019   
  
  
  
  
Derivatives:           
Interest rate lock commitments$1,569
 $49
 $49
 $—
 $49
 $—
Forward sale commitments8,412
 (3) (3) —
 (3) —
            
Off-balance sheet financial instruments:     
      
Commitments to extend credit1,106,657
 1,295
 1,295
 —
 1,295
 —
Standby letters of credit and financial guarantees written11,275
 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 banks21,617
 21,617
 21,617
 —
 —
Investment securities1,354,812
 1,350,576
 826
 1,338,581
 11,169
Loans held for sale6,647
 6,647
 —
 6,647
 —
Net loans and leases4,030,450
 3,938,380
 —
 —
 3,938,380
Accrued interest receivable17,000
 17,000
 17,000
 —
 —
          
Financial liabilities: 
  
  
  
  
Deposits: 
  
  
  
  
Noninterest-bearing demand1,436,967
 1,436,967
 1,436,967
 —
 —
Interest-bearing demand and savings and money market2,402,268
 2,402,268
 2,402,268
 —
 —
Time1,107,255
 1,099,560
 —
 —
 1,099,560
Short-term borrowings197,000
 197,000
 —
 197,000
 —
Long-term debt122,166
 118,057
 —
 118,057
 —
Accrued interest payable (included in other liabilities)5,051
 5,051
 5,051
 —
 —

   Fair Value Measurement Using
(dollars in thousands)Notional
Amount		Carrying
Amount		Estimated
Fair Value		Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
June 30, 2020     
Derivatives:
Interest rate lock commitments$410  $9  $9  $—  $9  $—  
Forward sale commitments10,879  (79) (79) —  (79) —  
Off-balance sheet financial instruments: 
Commitments to extend credit1,186,385  1,362  1,362  —  1,362  —  
Standby letters of credit and financial guarantees written11,505  173  173  —  173  —  
Risk participation agreement28,800  49  49  —  —  49  

44

       Fair Value Measurement Using
(dollars in thousands)Notional
Amount		 Carrying
Amount		 Estimated
Fair Value		 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant
Unobservable
Inputs
(Level 3)
December 31, 2018           
Derivatives:           
Interest rate lock commitments$2,158
 $11
 $11
 $—
 $11
 $—
Forward sale commitments8,530
 (95) (95) —
 (95) —
            
Off-balance sheet financial instruments: 
  
  
  
  
  
Commitments to extend credit1,030,322
 1,205
 1,205
 —
 1,205
 —
Standby letters of credit and financial guarantees written13,377
 201
 201
 —
 201
 —
   Fair Value 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 banks24,554  24,554  24,554  —  —  
Investment securities1,128,110  1,128,110  1,127  1,115,728  11,255  
Loans held for sale9,083  9,083  —  9,083  —  
Net loans and leases4,401,569  4,392,477  —  —  4,392,477  
Accrued interest receivable16,500  16,500  16,500  —  —  
Financial liabilities:     
Deposits:     
Noninterest-bearing demand1,450,532  1,450,532  1,450,532  —  —  
Interest-bearing demand and savings and money market2,643,038  2,643,038  2,643,038  —  —  
Time1,026,453  1,023,362  —  —  1,023,362  
Short-term borrowings150,000  150,000  —  150,000  —  
Long-term debt101,547  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 commitments8,968  (28) (28) —  (28) —  
Off-balance sheet financial instruments:      
Commitments to extend credit1,089,135  1,230  1,230  —  1,230  —  
Standby letters of credit and financial guarantees written10,526  158  158  —  158  —  

Fair Value 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.
 
45

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 transfersThere was 1 transfer into or out of a level asLevel 3 of the end offair value hierarchy for long-term debt during the reporting period.three and six months ended June 30, 2020. 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 ninesix months ended SeptemberJune 30, 2019.2020.

The following tables present the fair value of assets and liabilities measured on a recurring basis as of SeptemberJune 30, 20192020 and December 31, 2018:2019:
 
  Fair Value at Reporting Date Using
(dollars in thousands)Fair ValueQuoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
June 30, 2020    
Available-for-sale securities:    
Debt securities:    
States and political subdivisions$141,468  $—  $129,797  $11,671  
Corporate securities29,752  —  29,752  —  
U.S. Treasury obligations and direct obligations of U.S Government agencies36,354  —  36,354  —  
Mortgage-backed securities:    
Residential - U.S. Government sponsored entities714,477  —  714,477  —  
Commercial - U.S. Government agencies and sponsored entities80,665  —  80,665  —  
Residential - Non-government agencies32,086  —  32,086  —  
Commercial - Non-government agencies133,792  —  133,792  —  
Total available-for-sale securities1,168,594  —  1,156,923  11,671  
Equity securities1,209  1,209  —  —  
Derivatives: Interest rate lock and forward sale commitments(70) —  (70) —  
Total$1,169,733  $1,209  $1,156,853  $11,671  
   Fair Value at Reporting Date Using
(dollars in thousands)Fair Value Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)		 Significant
Other
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)
September 30, 2019 
  
  
  
Available-for-sale securities: 
  
  
  
Debt securities: 
  
  
  
States and political subdivisions$124,711
 $—
 $113,209
 $11,502
Corporate securities30,713
 —
 30,713
 —
U.S. Treasury obligations and direct obligations of U.S Government agencies42,897
 —
 42,897
 —
Mortgage-backed securities: 
  
  
  
Residential - U.S. Government sponsored entities723,644
 —
 723,644
 —
Commercial - U.S. Government agencies and sponsored entities87,742
 —
 87,742
 —
Residential - Non-government agencies39,109
 —
 39,109
 —
Commercial - Non-government agencies138,059
 —
 138,059
 —
Total available-for-sale securities1,186,875
 —
 1,175,373
 11,502
        
Equity securities1,058
 1,058
 —
 —
        
Derivatives: Interest rate lock and forward sale commitments46
 —
 46
 —
Total$1,187,979
 $1,058
 $1,175,419
 $11,502


46

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

  Fair Value at Reporting Date Using
(dollars in thousands)Fair ValueQuoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
December 31, 2019    
Available-for-sale securities:    
Debt securities:    
States and political subdivisions$122,018  $—  $110,763  $11,255  
Corporate securities30,529  —  30,529  —  
U.S. Treasury obligations and direct obligations of U.S Government agencies40,381  —  40,381  —  
Mortgage-backed securities:    
Residential - U.S. Government sponsored entities677,822  —  677,822  —  
Commercial - U.S. Government agencies and sponsored entities81,225  —  81,225  —  
Residential - Non-government agencies37,191  —  37,191  —  
Commercial - Non-government agencies137,817  —  137,817  —  
Total available-for-sale securities1,126,983  —  1,115,728  11,255  
Equity securities1,127  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 ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
 
(dollars in thousands)Available-For-Sale
Debt Securities:
States and
Political
Subdivisions
Balance at December 31, 2018$11,169
Principal payments received(285)
Unrealized net gain included in other comprehensive income618
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(212)
Unrealized net gain included in other comprehensive income628 
Balance at June 30, 2020$11,671 
Balance at December 31, 2018$11,169 
Principal payments received(204)
Unrealized net gain included in other comprehensive income440 
Balance at June 30, 2019$11,405 
 
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$11.7 million and $11.1$11.4 million at SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019, respectively. The Company estimates the fair value of its mortgage revenue bonds by using a discounted cash flow model to calculate the present value of estimated future principal and interest payments.
 
The significant unobservable input used in the fair value measurement of the Company's mortgage revenue bonds is the weighted average discount rate. As of SeptemberJune 30, 2019,2020, the weighted average discount rate utilized was 3.94%2.82% compared to 5.28%4.27% at SeptemberJune 30, 20182019 and 5.06%4.08% at December 31, 2018,2019, which was derived by incorporating a credit spread over the FHLB Fixed-Rate Advance curve. Significant increases (decreases) in the weighted average discount rate could result in a significantly lower (higher) fair value measurement.

47


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 SeptemberJune 30, 20192020 and December 31, 2018:2019:
 
  Fair Value Measurements Using
(dollars in thousands)Fair ValueQuoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
June 30, 2020    
Other real estate (1)
$—  $—  $—  $—  
December 31, 2019    
Other real estate (1)
$164  $—  $164  $—  
   Fair Value Measurements Using
(dollars in thousands)Fair Value Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		 Significant
Other
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)
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 Operationscarried at fair value less costs to sell. Fair value is generally based upon independent market prices or Treasury segments described above and includes activities such as electronic banking, data processing and management of bank owned properties.
The accounting policiesappraised values of the segments are consistent with the Company's accounting policies that are described in Note 1 - Summary of Significant Accounting Policies to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC. The majority of the Company's net income is derived from net interest income. Accordingly, management focuses primarily on net interest income, rather than gross interest income and expense amounts, in evaluating segment profitability.collateral.
Intersegment net interest income (expense) was allocated to each segment based upon a funds transfer pricing process that assigns costs of funds to assets and earnings credits to liabilities based on market interest rates that reflect interest rate sensitivity and maturity characteristics. All administrative and overhead expenses are allocated to the segments at cost. Cash, investment securities, loans and leases and their related balances are allocated to the segment responsible for acquisition and maintenance of those assets. Segment assets also include all premises and equipment used directly in segment operations.


Segment profits and assets are provided in the following 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 income1,360
 —
 404
 1,764
Service charges on deposit accounts2,125
 —
 —
 2,125
Other service charges and fees1,470
 —
 2,254
 3,724
Income from fiduciary activities1,126
 —
 —
 1,126
Equity in earnings of unconsolidated subsidiaries86
 —
 —
 86
Fees on foreign exchange20
 150
 —
 170
Investments securities gains (losses)—
 36
 —
 36
Income from bank-owned life insurance—
 645
 —
 645
Loan placement fees230
 —
 —
 230
Net gain (loss) sale of foreclosed assets—
 —
 17
 17
Other154
 4
 185
 343
Other operating income6,571
 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 taxes18,640
 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 losses59
 —
 —
 59
Other operating income:       
Mortgage banking income1,173
 —
 750
 1,923
Service charges on deposit accounts2,189
 —
 —
 2,189
Other service charges and fees1,318
 8
 1,960
 3,286
Income from fiduciary activities1,159
 —
 —
 1,159
Equity in earnings of unconsolidated subsidiaries71
 —
 —
 71
Fees on foreign exchange22
 198
 


 220
Income from bank-owned life insurance—
 1,055
 —
 1,055
Loan placement fees115
 —
 —
 115
Other448
 58
 296
 802
Other operating income6,495
 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 taxes21,204
 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 income2,967
 —
 1,822
 4,789
Service charges on deposit accounts6,247
 —
 —
 6,247
Other service charges and fees4,130
 —
 6,349
 10,479
Income from fiduciary activities3,220
 —
 —
 3,220
Equity in earnings of unconsolidated subsidiaries165
 —
 —
 165
Fees on foreign exchange67
 472
 —
 539
Investments securities gains (losses)—
 36
 —
 36
Income from bank-owned life insurance—
 2,511
 —
 2,511
Loan placement fees486
 —
 —
 486
Net gain (loss) sale of foreclosed assets—
 —
 17
 17
Other453
 2,558
 533
 3,544
Other operating income17,735
 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 taxes60,413
 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 income3,089
 —
 2,456
 5,545
Service charges on deposit accounts6,169
 —
 —
 6,169
Other service charges and fees3,748
 22
 5,927
 9,697
Income from fiduciary activities3,132
 —
 —
 3,132
Equity in earnings of unconsolidated subsidiaries151
 —
 —
 151
Fees on foreign exchange75
 633
 


 708
Income from bank-owned life insurance—
 1,874
 —
 1,874
Loan placement fees532
 —
 —
 532
Other803
 60
 733
 1,596
Other operating income17,699
 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 taxes57,531
 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 assets25,867
 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 assets36,905
 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, believesbut do not believe the ultimate disposition of those mattersactions will not have a material adverse effectimpact on our results of operations or consolidated financial statements.

17. SUBSEQUENT EVENTS

In July 2020, the Board of Directors of the Company approved a plan to consolidate 4 branches on the island of Oahu later this year. NaN of the branches are in-store branches, which have been temporarily closed since March 2020 due to the COVID-19 pandemic and are expected to close during the third quarter of 2020. These in-store branches have small square footage that do not allow for adequate social distancing. The fourth branch is a full-service branch that is expected to close during the fourth quarter of 2020. Our upcoming digital rollout is well-aligned with our branch consolidation initiative, and we expect that much of the transactional activity that was processed by these branches can be migrated to our digital channels. We also have other neighboring branches in close proximity that are available for customer full-service needs. The Company anticipates annual expense savings of approximately $1.8 million related to the consolidation of the 4 branches. The Company expects to incur total pre-tax expenses related to the consolidation of approximately $0.3 million and $1.4 million during the third and fourth quarters of 2020, respectively.
48

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
Central Pacific Financial Corp. ("CPF") is a Hawaii corporation and a bank holding company. Our principal business is to serve as a holding company for our bank subsidiary, Central Pacific Bank. We refer to Central Pacific Bank herein as "our bank" or "the bank," and when we say "the Company," "we," "us" or "our," we mean the holding company on a consolidated basis with the bank and our other consolidated subsidiaries.
 
Central Pacific Bank is a full-service community bank with 35 branches, nine of which were temporarily closed to protect the health and 78well-being of the Company's employees and customers from the novel coronavirus pandemic ("COVID-19"), and 76 ATMs located throughout the state of Hawaii.Hawaii as of June 30, 2020. In July 2020, the Company re-opened two additional branches. The bank offers a broad range of products and services including accepting time, savings, money market, and demand deposits and originating loans, including commercial loans, construction loans, commercial 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, 20182019 filed with the U.S. Securities and Exchange Commission (the "SEC") on February 28, 2019.25, 2020, including the
“Risk Factors” set forth therein.
 
Critical Accounting Policies and Use of Estimates

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

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

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

On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of incurredCredit Losses on Financial Instruments,” which created material changes to the Company’s existing critical accounting policy that existed at December 31, 2019. Effective January 1, 2020 through June 30, 2020, the significant accounting policy which we believe to be the most critical in preparing our consolidated financial statements is the determination of the allowance for credit losses inherenton loans.

Allowance for Credit Losses on Loans

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

The Company's approach to developing the Allowance has three basic elements. These elements includeACL is comprised of specific reserves for individually impairedassigned to certain loans athat don’t share general allowance forrisk characteristics and general reserves on pools of loans other than those analyzed as individually impaired, and qualitative adjustments based on environmental and other factors which may be internal or externalthat do share general risk characteristics. Factors contributing to the Company.
Specific Reserve
Individually impaired loans in all loan categories are evaluated using onedetermination of three valuation methods as prescribed under Accounting Standards Codification ("ASC") 310-10, "Fair Value of Collateral, Observable Market Price, or Cash Flow". A loan is generally evaluated for impairment on an individual basis if it meets one or morespecific reserves include the creditworthiness of the following characteristics: risk-rated as substandard, doubtful borrower, and more specifically, changes in the expected future receipt of principal
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and interest payments and/or loss, loans on nonaccrual status, troubled debt restructures, or any loan deemed prudent by management to so analyze. Ifin the valuationvalue of pledged collateral. A reserve is recorded when the carrying amount of the impaired loan is less thanexceeds the recorded investment indiscounted estimated cash flows using the loan,loan’s initial effective interest rate or the deficiency will be charged off againstfair value of the Allowance or, alternatively, a specific reserve will be established and included in the overall Allowance balance. The Company did not record a specific reserve ascollateral for certain collateral dependent loans. For purposes of September 30, 2019 and December 31, 2018.

General Allowance

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

average historical loss rate is applied due to limited historical loss experience. The key inputs to run a migration analysis are the length and frequencylife 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 capturedportfolio. The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. Refer to Note 1 – Summary of Significant Accounting Policies in the historical loss data. In order to ensure that the qualitative adjustments are in compliance with current regulatory standards and U.S. GAAP, the Company is primarily basing adjustments on the nine standard factors outlined in the 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses. These factors include: lending policies, economic conditions, loan profile, lending staff, problem loan trends, loan review, collateral, credit concentrations and other internal and external factors.

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

Financial Summary
 
Net income for the three months ended SeptemberJune 30, 20192020 was $14.6$9.9 million, or $0.51$0.35 per diluted share, compared to $15.2net income of $13.5 million, or $0.52$0.47 per diluted share for the three months ended SeptemberJune 30, 2018.2019. Net income for the ninesix months ended SeptemberJune 30, 20192020 was $44.1$18.2 million, or $1.53$0.65 per diluted share, compared to $43.7net income of $29.6 million, or $1.47$1.03 per diluted share for the ninesix months ended SeptemberJune 30, 2018.2019. Earnings continue to be impacted by higher provision for credit loss expense due to deteriorating economic conditions brought on by the current COVID-19 pandemic.

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

On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” ("CECL") and, as a result, recorded increases of $3.6 million to the allowance for credit losses on loans and $0.7 million to the reserve for off-balance sheet credit exposures, included in other liabilities. The transition adjustments recorded on January 1, 2020 were offset to retained earnings of $3.2 million and net deferred tax assets of $1.1 million. During the three and six months ended June 30, 2020, the Company recorded total credit loss expense under ASC 326, which includes the provisions for credit losses and off-balance sheet credit exposures, of $11.2 million and $22.3 million, respectively, compared to $1.9 million and $3.3 million during the three and six months ended June 30, 2019, which impacted our operating results.
 
The following table presents annualized returns on average assets and average shareholders' equity, and basic and diluted earnings per share for the periods indicated. Returns on average assets and average shareholders' equity are annualized based on a 30/360 day convention.

Three Months Ended
June 30,		Six Months Ended
June 30,
 2020201920202019
Return on average assets0.61 %0.92 %0.58 %1.01 %
Return on average shareholders’ equity7.34  10.73  6.77  11.84  
Basic earnings per common share$0.35  $0.47  $0.65  $1.03  
Diluted earnings per common share0.35  0.47  0.65  1.03  
COVID-19 Pandemic

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

In response to the anticipated economic effects of COVID-19, the Board of Governors of the Federal Reserve System (the "FRB") has taken a number of actions that have significantly affected the financial markets in the United States, including actions intended to result in substantial decreases in market interest rates. On March 3, 2020, the 10-year Treasury yield fell below 1.00% for the first time, and the FRB reduced the target federal funds range by 50 basis points to 1.00% to 1.25%. On March 15, 2020, the FRB further reduced the target federal funds range by 100 basis points to 0% to 0.25% and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by COVID-19. On March 22,
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 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018
Return on average assets0.99% 1.06% 1.00% 1.03%
Return on average shareholders’ equity11.11
 12.54
 11.58
 11.99
Basic earnings per common share$0.51
 $0.52
 $1.54
 $1.48
Diluted earnings per common share0.51
 0.52
 1.53
 1.47
2020, the FRB announced that it would continue its quantitative easing program in amounts necessary to support the smooth functioning of markets for Treasury securities and agency MBS. We expect that these reductions in interest rates, among other actions of the FRB and the Federal government generally, especially if prolonged, could adversely affect our net interest income, margins and profitability.

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

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

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

•on March 16, 2020, a Supplementary Proclamation suspending certain laws hindering State and county responses to COVID-19;
•on March 21, 2020, a Second Supplementary Proclamation and Emergency Rules Relating to COVID-19 implementing a mandatory 14-day self-quarantine for all persons entering the State, effective March 26, 2020. All individuals, both residents and visitors, arriving or returning to the State of Hawaii are subject to a mandatory 14-day self-quarantine. The mandate -- the first such action in the nation -- applies to all arrivals at state airports from the continental U.S. and international destinations and extends to other private and commercial aircrafts;
•on March 23, 2020, a Third Supplementary Proclamation - a "Stay-at-Home" order beginning on March 25, 2020 through April 30, 2020 - to mandate and effectuate social distancing measures throughout the State;
•on March 31, 2020, a Fourth Supplementary Proclamation implementing a mandatory 14-day self-quarantine for all persons traveling between any of the islands in the State, effective April 1, 2020;
•on April 16, 2020, a Fifth Supplementary Proclamation implementing enhanced social distancing requirements and an eviction moratorium;
•on April 25, 2020, a Sixth Supplementary Proclamation, which extended the Stay-at-Home order, the 14-day mandatory quarantine for all travelers arriving in the state of Hawaii and the eviction moratorium through May 31, 2020 and amended and restated all prior proclamations and executive orders related to the COVID-19 emergency;
•on May 5, 2020, a Seventh Supplementary Proclamation, which authorizes the first group of businesses to re-open since the COVID-19 pandemic forced the temporary closure of non-essential businesses across the state and allows residents to leave their homes to patronize certain businesses and activities under the new “Safer-at-Home” order;
•on May 29, 2020, an Eighth Supplementary Proclamation, which extended the mandatory 14-day quarantine for all travelers arriving in the state of Hawaii and the eviction moratorium through June 30, 2020;
•on June 10, 2020, a Ninth Supplementary Proclamation, which lifts the mandatory 14-day quarantine requirement for inter-island travelers – effective June 16, 2020 – but extends the mandatory 14-day quarantine for all travelers arriving in the state of Hawaii through July 31, 2020. Under the current "Act with Care" phase, all persons within the State of Hawaii who are not subject to the 14-day quarantine for arriving passengers may engage in permitted activities outside their home or place of residence.

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

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

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

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

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

Our operations, like those of other financial institutions that operate in our market, are significantly influenced by economic conditions in Hawaii, including the strength of the real estate market and the tourism industry. The COVID-19 pandemic and the mandatory 14-day self quarantine has resulted in a significant decline in tourism to the state of Hawaii, with daily visitors to Hawaii down 99% during the month of May, compared to the same year-ago period. Hawaii's unemployment rate has gone from one of the best in the nation to one of the worst at approximately 13.9% during the month of June. As a result, many customers and businesses across the state have been significantly impacted by the COVID-19 pandemic which could lead to additional provisions for credit losses and lower interest and fee income, which if significant, could have a material impact to our results of operations and financial statements.

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

Financial position and results of operations

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

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The Company’s interest income could also be reduced due to COVID-19. Through guidance from regulatory agencies, the Company is prudently working with its borrowers impacted by COVID-19 to defer payments, interest, and fees. As of June 30, 2020, the Company executed loan payment forbearance or deferrals of principal and interest or principal only on the following outstanding loan balances:

LoanAccrued% of Total% of Total
CountBalanceInterestLoansLoans, excl. PPP
Commercial, financial and agricultural678  $116,382  $962  10.8 %21.2 %
Real estate:
Construction7  6,601  25  6.4 %6.4 %
Residential mortgage355  176,645  1,547  10.7 %10.7 %
Home equity—  —  —  — %— %
Commercial mortgage98  202,447  1,262  17.9 %17.9 %
Consumer3,829  65,785  876  12.5 %12.5 %
Total loans4,967  $567,860  $4,672  11.3 %12.7 %

The Company is continuing to grant or extend loan payment deferrals in the third quarter and therefore expects that the accrued interest receivable balance on the deferred loans will continue to increase. Interest and fees still accrue on amounts that are deemed collectible during the deferral period, however, should the Company later determine that collection of payments is not expected and eventual credit losses on these deferred payments emerge, accrued and unpaid interest income and fees will need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the probability and materiality of such an impact to net income.

The Company’s aggregate fee income could be reduced due to COVID-19. To support our customers during this difficult time, we waived non-CPB ATM fees and early withdrawal fees on our time deposits and granted temporary increases on debit card and mobile deposit transaction limits throughout Q2 2020. In addition, the Company has experienced a decline in transactional activity due to COVID-19. Beginning July 1, 2020, we reinstated the fees that were waived throughout Q2 2020, but the temporary increases on debit card and mobile deposit transaction limits remain in place.

Liquidity and capital

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

The Company’s liquidity will be impacted by loan principal and interest payment deferrals that are being granted for certain customers due to COVID-19. Cash flow from loan payments will be reduced due to the deferrals which are being granted for 3 to 6 months. Requests for loan payment deferrals rose in the second quarter of 2020. While some loan payment deferrals will end in the third quarter of 2020, we anticipate some borrowers will be requesting second deferrals. Additionally, liquidity could be adversely impacted if customers withdraw significant deposit balances due to COVID-19 concerns.

In the case of loans serviced by the Company for certain third parties, including those under the Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corp. ("FHLMC") programs, the Company is required to advance to the owners the payment of principal and interest on a scheduled basis for 4 months even when such payment was not collected from the borrower due to payment forbearance granted or payment delinquency. Such amounts advanced are recorded as a receivable by the Company and are expected to be collected from the borrower and/or government agencies (FNMA or FHLMC).

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

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

Asset valuation

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

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

Processes, controls and business continuity plan

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

The Company is implementing a gradual, phased-in return-to-office plan that includes a portion of the workforce continuing with flexible, remote work schedules. Due to the recent uptick in COVID-19 cases in Hawaii and nationwide, the return-to-office plan may be delayed as a precautionary measure. The Company may incur additional cost related to its continued deployment of the remote workforce plan. A remote workforce plan potentially could introduce operational or internal control challenges and risks, including resource constraints. The Company is closely monitoring operations to mitigate those risks, and currently does not anticipate significant challenges to its ability to maintain its systems and internal controls in light of the measures the Company has taken to prevent the spread of COVID-19. However, should there be significant changes to government orders, the health and well-being of our workforce, or to our critical systems and vendors, there could be an adverse impact on our operations.

Lending operations and accommodations to borrowers

To support its customers during this difficult time, the Company has moved quickly to put in place a number of COVID-19 relief programs for its consumer and business customers affected by the pandemic. For its customers, the Company is offering an employment disruption loan as well as consumer, commercial, commercial mortgage, and residential mortgage payment deferral programs. In addition, as previously mentioned, we waived non-CPB ATM fees and early withdrawal fees on our time deposits throughout Q2 2020 and increased spending cap limits on debit cards and mobile deposit limits to $10,000 daily. Beginning July 1, 2020, the previously waived fees have been reinstated but the increased spending cap limits will remain in place temporarily.

The bank is a Small Business Administration ("SBA") approved lender and is actively participating in assisting customers with loan applications for the SBA’s Paycheck Protection Program, or PPP, which is part of the CARES Act. PPP loans have a two or five-year term and earn interest at 1%. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan, which the Company is recognizing over the life of the loan. The Company saw tremendous interest in the PPP. From April 3, 2020, the date the SBA began accepting submissions for the initial round of PPP loans through June 30, 2020, the Company funded over 7,200 PPP loans totaling over $550 million and received gross processing fees of over $21 million. Certain PPP loans paid-off shortly after funding resulting in a total balance as of June 30, 2020 of $543.7 million. The Company has developed a PPP forgiveness portal and is beginning the process of assisting our customers with applying for forgiveness from the SBA. The Company plans to engage a third party to assist with this process. Although the Company
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believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program, there could be risks and liability by the Company that cannot be determined at this time.

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

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

The Company is providing 3-month principal and interest payment forbearances for our residential mortgage customers and 3-month principal and interest payment deferrals for our consumer customers. The Company is deferring either the full loan payment or the principal component of the loan payment for typically 3 to 6 months for its commercial real estate and commercial and industrial loan customers on a case-by-case basis depending on need. As of June 30, 2020, the Company had loan payment deferrals on outstanding balances of $567.9 million, or 11.3% of total loans (and 12.7% of total loans, excluding PPP loans). In accordance with the revised interagency guidance issued in April 2020 and Section 4013 of the CARES Act, banks are provided an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of February 29, 2020 and December 31, 2019, respectively. The Company identified nine consumer loans totaling $0.1 million that were modified during the quarter and did not meet the criteria under Section 4013 of the CARES Act or the interagency guidance. As a result, these loans are included in TDRs as of June 30, 2020. Collectibility of the accrued interest on deferred loans is uncertain and the Company may need to reverse the accrued interest which may negatively impact interest income in future periods. Additional loan modifications to capitalize interest and/or extend loan terms may also be necessary. The Company anticipates requests for new or extended loan deferrals will continue through the third quarter of 2020.

Credit

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

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

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

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

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

55

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

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

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

Material Trends

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

Hawaii's economy depends significantly on conditionsHawaii 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 growthfirst two months of Hawaii's economy2020. 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 duringin the eightfive months ended August 30, 2019, visitor spending was downMay 31, 2020, which includes an additional day associated with leap year, decreased 49.5% from the same prior year period. AccordingThe mandated 14-day self-quarantine for arriving visitors and residents began on March 26, 2020. During April and May, total visitors were down approximately 99% from the same year-ago period.

A few airlines have announced temporary suspension of flights to the Hawaii Tourism

Authority ("HTA"), 7.1 million visitors visitedinternational destinations. Many hotels throughout the state remain temporarily closed. Many shopping centers are still on reduced hours. However, some restaurants and bars are now open for indoor service, take-out, curbside pick-up and delivery.

The full or partial shutdown of tourism, restaurant, and retail industries has significantly impacted employment in the eight months ended August 30, 2019. This was an increase of 5.2% from the number of visitor arrivals in the eight months ended August 31, 2018.state. 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. TheHawai‘i State Department of Labor and& Industrial Relations reported("DLIR") announced 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 for June was 13.9% compared to the revised rate of 3.5%. DBEDT projects Hawaii's23.5% in May. The significant decrease may be due to PPP funds and other government stimulus programs. There is potential for an increase in the unemployment rate in future months. Statewide, 527,600 were employed and 85,200 unemployed in June for a total seasonally adjusted annuallabor force of 612,800. Nationally, the seasonally adjusted unemployment rate to be 3.0%was 11.1% in 2019 and 3.2%June, down from 13.3 percent in 2020.May.

Real estate lending is a primary focus for us, including residential mortgage and commercial mortgage loans. As a result, we are dependent on the strength of Hawaii's real estate market. HomeOahu 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 forstarted the year dropped. Duringstrong with healthy year-over-year increases in closed sales of single-family homes and condominiums during the nine months ended September 30, 2019, Oahu sales volume and median sales prices have slowed.first quarter, however as expected slowed during the second quarter due to the challenges presented by COVID-19. According to the latest data available from the Honolulu Board of Realtors, Oahu unit sales volume increased slightlydecreased by 0.8%4.8% for single-family homes but declined by 6.7%and 22.0% for condominiums for the ninesix months ended SeptemberJune 30, 2019,2020, compared to the same time period last year. For the ninesix months ended SeptemberJune 30, 2019,2020, the median sales price for single-family homes on Oahu was $785,000, representing a decrease of 0.5%1.3% increase from $789,000$775,000 in the same prior year period. The median sales price for condominiums on Oahu for the ninesix months ended SeptemberJune 30, 20192020 was $425,000,$427,750, representing a decreasean increase of 1.0%2.1% from $429,500$419,000 in the same prior year period.

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

In late 2008, the Federal Reserve lowered the target Federal Funds range to 0%-0.25%. In an attempt to help the overall economy, the Federal Reserve kept interest rates low through its targeted Federal Funds rate until the recession was safely over. In recent years, the Federal Reserve has begun raising the target Federal Funds range.

During 2018, the Federal Reserve increased the Federal Funds range four times, each by 25 basis points to 2.25%-2.50% as of December 31, 2018. The Federal Reserve left the Federal Funds range unchanged during the first half of 2019 but cut the Federal Funds range by 25 basis points 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 of the U.S. economy. Changes in monetary policy, including changes in interest rates, could influence, among other things, (i) the amount of interest we receive on loans and securities, (ii) the amount of interest we pay on deposits and borrowings, (iii) our ability to originate loans and obtain deposits and (iv) the fair value of our assets and liabilities.

RISE2020

Commencing in the second quarter of 2019, the Company launched RISE2020, a new multifaceted initiative intended to enhance customer experience, drive stronger long-term growth and profitability, improve shareholder returns and lower our efficiency ratio. RISE2020 includes initiatives in the following key areas of opportunity: Digital Banking, Revenue Enhancements, Branch Transformation and Operational Excellence. RISE2020 is intended to provide Central Pacific Bank with best-in class products and services in several strategic areas. 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
56

origination system inwere completed. Despite several challenges resulting from the fourth quarterimpact of 2019. The Company believes its efforts to meet its 2020 milestones in its branch modernization and digital bankingCOVID-19, the RISE2020 initiatives are progressing on schedule.


The Company plans to invest approximately $40 million in RISE2020 during the remainder of 2019continuing 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 to increase, the Company is forecasting enhanced revenue growth. Asmaking good progress. During the first quarter of 2020, the Company opened its concept branch, providing its customers a result, we expect our efficiency ratioglimpse into the future of Central Pacific Bank. The Company's revitalization of its building headquarters is in full steam with major parts of the construction underway and on track for an opening date of January 2021. Digital strategies continue to bepush forward. The development of the Company's new online and mobile banking platforms is in the 63-65% range in 2019final stages of pilot testing and 2020. Longer-term, the Company is targetingexcited for the public launch scheduled in late August 2020. Digital technology is even more critical to businesses during crises like the current pandemic and will remain a 15% return on average shareholders' equityhigh priority strategy for the Company's future. The rollout of newly upgraded ATMs continues. The Company continues to see a decline in branch transaction activity and a 57% efficiency ratio byits digital initiatives have been well-timed to meet the endchanging needs of 2022.its customers and the community.


Results of Operations
 
Net Interest Income
 
Net interest income, when annualized and expressed as a percentage of average interest earning assets, is referred to as "net interest margin." Interest income, which includes loan fees and resultant yield information, is expressed on a taxable equivalent basis using a federal statutory tax rate of 21% for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019. A comparison of net interest income on a taxable-equivalent basis ("net interest income") for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 is set forth below. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in volume and (ii) changes in rates. The change in volume is calculated as change in average balance, multiplied by prior period average yield/rate. The change in rate is calculated as change in average yield/rate, multiplied by current period volume. The change in interest income not solely due to change in volume or change in rate has been allocated proportionately to change in volume and change in average yield/rate.

57

 
(dollars in thousands)Three Months Ended June 30,
20202019Variance
Average
Balance		Average
Yield/
Rate		Interest
Income/
Expense		Average
Balance		Average
Yield/
Rate		Interest
Income/
Expense		Average
Balance		Average
Yield/
Rate		Interest
Income/
Expense
Assets     
Interest earning assets: 
Interest-bearing deposits in other banks$15,777  0.10 %3  $8,002  2.34 %46  $7,775  (2.24)%(43) 
Investment securities, excluding ACL:
Taxable (1)1,042,441  2.43  6,327  1,147,759  2.63  7,544  (105,318) (0.20) (1,217) 
Tax-exempt (1)100,485  3.02  758  142,660  2.89  1,030  (42,175) 0.13  (272) 
Total investment securities1,142,926  2.48  7,085  1,290,419  2.66  8,574  (147,493) (0.18) (1,489) 
Loans, including loans held for sale (2)4,902,905  3.76  45,915  4,171,558  4.37  45,540  731,347  (0.61) 375  
Federal Home Loan Bank stock11,753  3.62  106  15,998  4.02  161  (4,245) (0.40) (55) 
Total interest earning assets6,073,361  3.51  53,109  5,485,977  3.97  54,321  587,384  (0.46) (1,212) 
Noninterest-earning assets394,768    370,488    24,280   
Total assets$6,468,129    $5,856,465    $611,664   
Liabilities and Equity
Interest-bearing liabilities:         
Interest-bearing demand deposits$1,056,885  0.04 %114  $962,402  0.08 %199  $94,483  (0.04)%(85) 
Savings and money market deposits1,856,621  0.12  567  1,577,437  0.38  1,507  279,184  (0.26) (940) 
Time deposits under $100,000161,874  0.65  261  173,556  0.70  305  (11,682) (0.05) (44) 
Time deposits $100,000 and over807,276  0.93  1,863  907,330  2.02  4,562  (100,054) (1.09) (2,699) 
Total interest-bearing deposits3,882,656  0.29  2,805  3,620,725  0.73  6,573  261,931  (0.44) (3,768) 
Short-term borrowings63,104  0.48  74  175,347  2.57  1,123  (112,243) (2.09) (1,049) 
Long-term debt136,939  2.38  812  101,547  4.07  1,031  35,392  (1.69) (219) 
Total interest-bearing liabilities4,082,699  0.36  3,691  3,897,619  0.90  8,727  185,080  (0.54) (5,036) 
Noninterest-bearing deposits1,731,939   1,357,056   374,883  
Other liabilities112,687    97,041    15,646   
Total liabilities5,927,325    5,351,716    575,609   
Shareholders’ equity540,802    504,749    36,053   
Non-controlling interest2    —    2   
Total equity540,804    504,749    36,055   
Total liabilities and equity$6,468,129    $5,856,465    $611,664   
Net interest income  $49,418    $45,594    $3,824  
Interest rate spread3.15 %3.07 %0.08 %
Net interest margin 3.26 %  3.33 %  (0.07)% 
(1)  At amortized cost.
(2)  Includes nonaccrual loans.

58

(dollars in thousands)Three Months Ended September 30,(dollars in thousands)Six Months Ended June 30,
2019 2018 Variance20202019Variance
Average
Balance		 Average
Yield/
Rate		 Interest
Income/
Expense		 Average
Balance		 Average
Yield/
Rate		 Interest
Income/
Expense		 Average
Balance		 Average
Yield/
Rate		 Interest
Income/
Expense		Average
Balance		Average
Yield/
Rate		Interest
Income/
Expense		Average
Balance		Average
Yield/
Rate		Interest
Income/
Expense		Average
Balance		Average
Yield/
Rate		Interest
Income/
Expense
Assets   
      
  
    
  
Assets     
Interest earning assets:   
              Interest earning assets:   
Interest-bearing deposits in other banks$6,295
 2.05% 33
 $22,057
 1.97% 109
 $(15,762) 0.08 % (76)Interest-bearing deposits in other banks$13,430  0.59 %39  $9,682  2.38 %114  $3,748  (1.79)%(75) 
Investment securities, excluding valuation allowance:                 
Taxable (1)1,093,352
 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)
Investment securities, excluding ACL:Investment securities, excluding ACL:
Taxable investment securities (1)Taxable investment securities (1)1,035,068  2.53  13,101  1,174,596  2.69  15,822  (139,528) (0.16) (2,721) 
Tax-exempt investment securities (1)Tax-exempt investment securities (1)102,907  3.12  1,604  147,899  2.88  2,127  (44,992) 0.24  (523) 
Total investment securities1,211,136
 2.67
 8,088
 1,447,583
 2.67
 9,681
 (236,447) —
 (1,593)Total investment securities1,137,975  2.58  14,705  1,322,495  2.71  17,949  (184,520) (0.13) (3,244) 
Loans and leases, including loans held for sale (2)4,293,455
 4.25
 45,861
 3,941,511
 4.09
 40,531
 351,944
 0.16
 5,330
Loans, including loans held for sale (2)Loans, including loans held for sale (2)4,682,626  3.95  92,119  4,127,917  4.35  89,308  554,709  (0.40) 2,811  
Federal Home Loan Bank stock16,646
 4.46
 186
 7,773
 3.11
 60
 8,873
 1.35
 126
Federal Home Loan Bank stock13,171  3.61  238  15,143  4.26  322  (1,972) (0.65) (84) 
Total interest earning assets5,527,532
 3.90
 54,168
 5,418,924
 3.70
 50,381
 108,608
 0.20
 3,787
Total interest earning assets5,847,202  3.67  107,101  5,475,237  3.95  107,693  371,965  (0.28) (592) 
Noninterest-earning assets379,675
  
  
 290,901
  
  
 88,774
  
  Noninterest-earning assets390,390    358,089    32,301   
Total assets$5,907,207
  
  
 $5,709,825
  
  
 $197,382
  
  Total assets$6,237,592    $5,833,326    $404,266   
                 
Liabilities and Equity                 Liabilities and Equity      
Interest-bearing liabilities: 
  
  
  
  
  
  
  
  
Interest-bearing liabilities:         
Interest-bearing demand deposits$1,002,875
 0.08% 207
 $933,405
 0.08% 181
 $69,470
 — % 26
Interest-bearing demand deposits$1,035,340  0.06 %290  $956,783  0.08 %391  $78,557  (0.02)%(101) 
Savings and money market deposits1,582,795
 0.39
 1,549
 1,524,121
 0.15
 593
 58,674
 0.24
 956
Savings and money market deposits1,754,186  0.19  1,685  1,525,425  0.30  2,298  228,761  (0.11) (613) 
Time deposits under $100,000167,331
 0.69
 293
 177,108
 0.53
 236
 (9,777) 0.16
 57
Time deposits under $100,000163,074  0.67  546  174,683  0.68  592  (11,609) (0.01) (46) 
Time deposits $100,000 and over874,192
 1.88
 4,139
 1,049,446
 1.70
 4,508
 (175,254) 0.18
 (369)Time deposits $100,000 and over826,714  1.18  4,846  944,796  2.00  9,367  (118,082) (0.82) (4,521) 
Total interest-bearing deposits3,627,193
 0.68
 6,188
 3,684,080
 0.59
 5,518
 (56,887) 0.09
 670
Total interest-bearing deposits3,779,314  0.39  7,367  3,601,687  0.71  12,648  177,627  (0.32) (5,281) 
Short-term borrowings191,564
 2.34
 1,130
 25,163
 2.30
 146
 166,401
 0.04
 984
Short-term borrowings101,459  1.15  582  156,550  2.60  2,016  (55,091) (1.45) (1,434) 
Long-term debt101,547
 3.96
 1,013
 92,785
 4.90
 1,147
 8,762
 (0.94) (134)Long-term debt119,243  2.91  1,726  101,547  4.15  2,091  17,696  (1.24) (365) 
Total interest-bearing liabilities3,920,304
 0.84
 8,331
 3,802,028
 0.71
 6,811
 118,276
 0.13
 1,520
Total interest-bearing liabilities4,000,016  0.49  9,675  3,859,784  0.88  16,755  140,232  (0.39) (7,080) 
Noninterest-bearing deposits1,360,221
    
 1,378,981
    
 (18,760)    Noninterest-bearing deposits1,588,742   1,376,437    212,305  
Other liabilities102,599
  
  
 44,079
  
  
 58,520
  
  Other liabilities110,070    97,385    12,685   
Total liabilities5,383,124
  
  
 5,225,088
  
  
 158,036
  
  Total liabilities5,698,828    5,333,606    365,222   
Shareholders’ equity524,083
  
  
 484,737
  
  
 39,346
  
  Shareholders’ equity538,762    499,720    39,042   
Non-controlling interest—
  
  
 —
  
  
 —
  
  Non-controlling interest2    —    2   
Total equity524,083
  
  
 484,737
  
  
 39,346
  
  Total equity538,764    499,720    39,044   
Total liabilities and equity$5,907,207
  
  
 $5,709,825
  
  
 $197,382
  
  Total liabilities and equity$6,237,592    $5,833,326    $404,266   
                 
Net interest income 
  
 $45,837
  
  
 $43,570
  
  
 $2,267
Net interest income  $97,426    $90,938    $6,488  
                 
Interest rate spread  3.06%     2.99%     0.07 %  Interest rate spread3.18 %3.07 %0.11 %
                 
Net interest margin 
 3.30%  
  
 3.20%  
  
 0.10 %  
Net interest margin 3.34 %  3.33 %  0.01 % 
                 
(1) At amortized cost.                 (1) At amortized cost.
(2) Includes nonaccrual loans.                 (2) Includes nonaccrual loans.




(dollars in thousands)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 securities1,284,967
 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 stock15,650
 4.33
 508
 7,261
 2.67
 145
 8,389
 1.66
 363
Total interest earning assets5,492,860
 3.94
 161,861
 5,376,748
 3.64
 146,696
 116,112
 0.30
 15,165
Noninterest-earning assets365,364
  
  
 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 deposits1,544,759
 0.33
 3,847
 1,506,565
 0.13
 1,421
 38,194
 0.20
 2,426
Time deposits under $100,000172,204
 0.69
 884
 178,363
 0.48
 645
 (6,159) 0.21
 239
Time deposits $100,000 and over921,003
 1.96
 13,507
 1,042,353
 1.48
 11,558
 (121,350) 0.48
 1,949
Total interest-bearing deposits3,610,282
 0.70
 18,836
 3,667,435
 0.52
 14,178
 (57,153) 0.18
 4,658
Short-term borrowings168,350
 2.50
 3,146
 14,683
 2.16
 237
 153,667
 0.34
 2,909
Long-term debt101,547
 4.09
 3,104
 92,785
 4.64
 3,221
 8,762
 (0.55) (117)
Total interest-bearing liabilities3,880,179
 0.86
 25,086
 3,774,903
 0.62
 17,636
 105,276
 0.24
 7,450
Noninterest-bearing deposits1,370,972
    
 1,367,574
  
  
 3,398
    
Other liabilities99,143
  
  
 42,414
  
  
 56,729
  
  
Total liabilities5,350,294
  
  
 5,184,891
  
  
 165,403
  
  
Shareholders’ equity507,930
  
  
 485,942
  
  
 21,988
  
  
Non-controlling interest—
  
  
 5
  
  
 (5)  
  
Total equity507,930
  
  
 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$49.4 million for the three months ended SeptemberJune 30, 2019,2020, representing an increase of 5.2%8.4% from $43.6$45.6 million in the three months ended SeptemberJune 30, 2018.2019. Net interest income (expressed on a taxable-equivalent basis) was $136.8$97.4 million for the ninesix months ended SeptemberJune 30, 2019,2020, representing an increase of 6.0%7.1% from $129.1$90.9 million in the ninesix months ended SeptemberJune 30, 2018.2019. The increase in the three and ninesix months ended SeptemberJune 30, 20192020 was primarily due to loan growth, attributable to a significant increase in average loans originated under the Paycheck Protection Program ("PPP") and leases balancesorganic 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 depositsliabilities. Partially offsetting these increases were decreases in yields earned on interest-earning assets. Net interest income for the three months ended June 30, 2020 included $2.5 million in PPP net interest income and short-term borrowings,net loan fees, which are accreted into income over the term of the loans and accelerated when the loans are forgiven or paid-off.The
59

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

Interest Income

Taxable-equivalent interest income was $54.2$53.1 million for the three months ended SeptemberJune 30, 2019,2020, representing an increasea decrease of 7.5%2.2% from $50.4$54.3 million in the three months ended SeptemberJune 30, 2018.2019. The increase was primarily attributable to a $351.9 million increase61 bp decrease in the average yields earned on loans and leasesduring the three months ended June 30, 2020, compared to the three months ended SeptemberJune 30, 2018,2019, decreased interest income by approximately $5.5 million. In addition, run-off of the investment securities portfolio of $147.5 million, combined with the 18 bp decline in yields earned on investment securities during the three months ended June 30, 2020, compared to the three months ended June 30, 2019, decreased interest income by approximately $1.5 million. These decreases were partially offset by a $731.3 million increase in average loans compared to the three months ended June 30, 2019, accounting for an increase of approximately $3.6$5.8 million of the increase in interest income during the three months ended SeptemberJune 30, 2020. The significant increase in average loans was primarily attributable to the aforementioned PPP loans.

Taxable-equivalent interest income was $107.1 million for the six months ended June 30, 2020, representing a decrease of 0.5% from $107.7 million in the six months ended June 30, 2019. In addition,The 40 bp decrease in the average yields earned on the loans and leases portfolio during the threesix months ended SeptemberJune 30, 2019 increased by 16 bp,2020, compared to the threesix months ended SeptemberJune 30, 2018, accounting for2019, decreased interest income by approximately $1.7 million$9.8 million. In addition, run-off of the increaseinvestment securities portfolio of $184.5 million, combined with the 13 bp decline in yields earned on investment securities during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, decreased interest income.income by approximately $3.2 million. These increasesdecreases were partially offset by a $236.4 million decline in average investment securities, which decreased interest income by approximately $1.6 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$554.7 million increase in average loans and leases compared to the ninesix months ended SeptemberJune 30, 2018,2019, accounting for an increase of approximately $9.9$12.6 million of the increase in interest income during the ninesix months ended SeptemberJune 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 by 28 bp and 5 bp, respectively, compared to the nine months ended September 30, 2018, accounting for approximately $8.8 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 million.2020.

Interest Expense

Interest expense for the three months ended SeptemberJune 30, 20192020 was $8.3$3.7 million, representing an increasea decrease of 22.3%57.7% from $8.7 million in the three months ended SeptemberJune 30, 2018.2019. The increasedecrease was primarily attributable to an increasedeclines in averagerates paid on savings and money market deposits, time deposits $100,000 and over, short-term borrowings and long-term debt of $166.4 million, resulting in higher26 bp, 109 bp, 209 bp and 169 bp, respectively, which decreased interest expense ofby approximately $1.0 million.$1.2 million, $2.2 million, $0.3 million and $0.6 million, respectively. In addition, increases in average rates paid on time deposits $100,000 and over and savingsshort-term borrowings declined by $100.1 million and money market deposits of 18 bp and 24 bp, respectively, increased$112.2 million resulting in a decrease in interest expense byof approximately $0.4$0.5 million and $1.0$0.7 million, respectively. Time deposits $100,000 and over primarily consists of public funds which may be opportunistic sources of funding, but fluctuate more directly with changes in the Federal Funds rate. These increases were partially offset

Interest expense for the six months ended June 30, 2020 was $9.7 million, representing a decrease of 42.3% from $16.8 million in the six months ended June 30, 2019. The decrease was primarily attributable to declines in rates paid on savings and money market deposits, time deposits $100,000 and over, short-term borrowings and long-term debt of 11 bp, 82 bp, 145 bp and 124 bp, respectively, which decreased interest expense by a $175.3approximately $1.0 million, decline in$3.4 million, $0.7 million and $0.7 million, respectively. In addition, average time deposits $100,000 and over which decreased interest expenseand short-term borrowings declined by approximately $0.7$118.1 million and $55.1 million, respectively, resulting in 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$1.2 million and a 55 bp decrease in rates paid on long-term debt, which decreased interest expense by approximately $0.4 million.$0.7 million, respectively.

Net Interest Margin

Our net interest margin of 3.30%3.26% for the three months ended SeptemberJune 30, 2019 increased2020 decreased by 107 bp from 3.20%3.33% in the three months ended SeptemberJune 30, 2018. 2019.

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

Our net interest margin of 3.32%3.34% for the ninesix months ended SeptemberJune 30, 20192020 increased by 121 bp from 3.20%3.33% in the ninesix months ended SeptemberJune 30, 2018.2019.

60

The average rates paid on our interest-bearing liabilities, which declined by 39 bp in the six months ended June 30, 2020, compared to the same prior year period, outpaced the decline in average yields earned on our interest-earning assets, which increaseddeclined by 20 bp and 3028 bp in the three and ninesix months ended SeptemberJune 30, 2019, respectively,2020, compared to the same prior year periods, outpacedperiod.

Provision for Credit Losses

Our provision for credit losses on loans under ASC 326 was $10.6 million and $20.0 million during the increase in average rates paid on our interest-bearing liabilities, which increased by 13 bpthree and 24 bpsix months ended June 30, 2020, respectively, compared to an expense of $1.4 million and $2.7 million in the three and ninesix months ended SeptemberJune 30, 2019, respectively, compared to the same prior year periods.under previous GAAP.


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

We did not record a provision for credit losses on our time deposits $100,000 and over and savings and money market depositsinvestment securities under ASC 326 during the three and ninesix months ended SeptemberJune 30, 2019.2020.

Provision for Loan and Lease Losses
Our Provision expense was $1.5net charge-offs were $2.9 million during the three months ended SeptemberJune 30, 2019,2020, compared to a Provision reversalnet charge-offs of $0.1$0.4 million in the three months ended SeptemberJune 30, 2018.2019. Our Provision expense wasnet charge-offs were $4.2 million during the ninesix months ended SeptemberJune 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, 2019,2020, compared to net charge-offs of $1.3$2.3 million in the threesix months ended SeptemberJune 30, 2018. Our net charge-offs were $4.0 million during the nine months ended September 30, 2019, compared to net charge-offs of $3.4 million2019.

The disruptions in the nine months ended September 30, 2018.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.

61

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

 Three Months Ended
(dollars in thousands)June 30, 2020June 30, 2019$ Change% Change
Other operating income:
Mortgage banking income$3,566  $1,708  $1,858  108.8 %
Service charges on deposit accounts1,149  2,041  (892) -43.7 %
Other service charges and fees2,916  3,909  (993) -25.4 %
Income from fiduciary activities1,270  1,129  141  12.5 %
Equity in earnings of unconsolidated subsidiaries104  71  33  46.5 %
Investment securities gains—  —  —  N.M.*
Income from bank-owned life insurance1,424  914  510  55.8 %
Net loss on sales of foreclosed assets(6) —  (6) N.M.*
Other:  
Income recovered on nonaccrual loans previously charged-off37  85  (48) -56.5 %
Other recoveries26  26  —  — %
Commissions on sale of checks56  79  (23) -29.1 %
Gain on sale of MasterCard stock—  —  —  N.M.*
Other150  132  18  13.6 %
Total other operating income$10,692  $10,094  $598  5.9 %
* Not meaningful ("N.M.")
Note: Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period.
 Three Months Ended 
(dollars in thousands)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 accounts2,125
 2,189
 (64) -2.9 % 
Other service charges and fees3,724
 3,286
 438
 13.3 % 
Income from fiduciary activities1,126
 1,159
 (33) -2.8 % 
Equity in earnings of unconsolidated subsidiaries86
 71
 15
 21.1 % 
Fees on foreign exchange170
 220
 (50) -22.7 % 
Investment securities gains36
 —
 36
 N.M.
*
Income from bank-owned life insurance645
 1,055
 (410) -38.9 % 
Loan placement fees230
 115
 115
 100.0 % 
Net gain on sales of foreclosed assets17
 —
 17
 N.M.
*
Other: 
  
     
Income recovered on nonaccrual loans previously charged-off73
 395
 (322) -81.5 % 
Other recoveries42
 101
 (59) -58.4 % 
Commissions on sale of checks75
 79
 (4) -5.1 % 
Other153
 227
 (74) -32.6 % 
Total other operating income$10,266
 $10,820
 $(554) -5.1 % 
         
* Not meaningful ("N.M.")

For the three months ended SeptemberJune 30, 2019,2020, total other operating income of $10.3$10.7 million decreasedincreased by $0.6 million, or 5.1%5.9%, from $10.8$10.1 million in the year-ago quarter. The decreaseincrease from the year-ago quarter was primarily due to lower income from bank-owned life insurance of $0.4 million, lower income recovered on nonaccrual loans previously charged-off of $0.3 million and lowerhigher mortgage banking income of $0.2 million. The lower income from bank-owned life insurance was primarily attributable to fluctuations in the equity markets during the quarter. These decreases were partially offset by higher merchant$1.9 million and bank card fees of $0.3 million (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 accounts6,247
 6,169
 78
 1.3 % 
Other service charges and fees10,479
 9,697
 782
 8.1 % 
Income from fiduciary activities3,220
 3,132
 88
 2.8 % 
Equity in earnings of unconsolidated subsidiaries165
 151
 14
 9.3 % 
Fees on foreign exchange539
 708
 (169) -23.9 % 
Investment securities gains36
 —
 36
 N.M.
*
Income from bank-owned life insurance2,511
 1,874
 637
 34.0 % 
Loan placement fees486
 532
 (46) -8.6 % 
Net gain on sales of foreclosed assets17
 —
 17
 N.M.
 
Other: 
  
     
Income recovered on nonaccrual loans previously charged-off240
 621
 (381) -61.4 % 
Other recoveries94
 196
 (102) -52.0 % 
Commissions on sale of checks234
 249
 (15) -6.0 % 
Gain on sale of MasterCard stock2,555
 —
 2,555
 N.M.
*
Other421
 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$0.5 million in the current quarter. Strong residential mortgage demand enabled the Company to grow its residential mortgage portfolio and realize higher merchant and bank card feesgains on sales of $0.4residential mortgage loans of $3.6 million (included in other service charges and fees) andmortgage banking income), which was partially offset by higher commissions and fees on investment servicesamortization of $0.4mortgage servicing rights of $1.1 million (included in other service charges and fees).mortgage banking income), attributable to the decline in market interest rates. The higher income from bank-owned life insurance was primarily attributable to fluctuationscurrent quarter gains in the equity markets. These increases were partially offset by lower other service charges and fees of $1.0 million and lower service charges on deposit accounts of $0.9 million as certain service charges were suspended during the quarter to support our customers through the pandemic. In addition, there was less transactional activity due to the pandemic.

62

 Six Months Ended
(dollars in thousands)June 30, 2020June 30, 2019$ Change% Change
Other operating income:
Mortgage banking income$3,903  $3,281  $622  19.0 %
Service charges on deposit accounts3,199  4,122  (923) -22.4 %
Other service charges and fees7,813  7,124  689  9.7 %
Income from fiduciary activities2,567  2,094  473  22.6 %
Equity in earnings of unconsolidated subsidiaries130  79  51  64.6 %
Investment securities gains—  —  —  N.M.*
Income from bank-owned life insurance1,405  1,866  (461) -24.7 %
Net loss on sales of foreclosed assets(6) —  (6) N.M.*
Other:  
Income recovered on nonaccrual loans previously charged-off60  167  (107) -64.1 %
Other recoveries66  52  14  26.9 %
Commissions on sale of checks137  159  (22) -13.8 %
Gain on sale of MasterCard stock—  2,555  (2,555) -100.0 %
Other304  268  36  13.4 %
Total other operating income$19,578  $21,767  $(2,189) -10.1 %
* Not meaningful ("N.M.")

For the six months ended June 30, 2020, total other operating income of $19.6 million decreased by $2.2 million, or 10.1%, from $21.8 million in the six months ended June 30, 2019. The decrease from the year-ago period was primarily due to a $2.6 million gain on sale of MasterCard stock recognized in the year-ago period, combined with lower service charges on deposit accounts of $0.9 million and lower income from bank-owned life insurance of $0.5 million. As previously noted, certain service charges have been suspended to support our customers through the pandemic and there has been less transactional activity due to the pandemic resulting in lower service charges on deposit accounts. The lower income from bank-owned life insurance was primarily due to volatility in the equity markets. These decreases were partially offset by higher other service charges and fees of $0.7 million, higher mortgage banking income of $0.8$0.6 million and lowerhigher income recovered on nonaccrual loans previously charged-offfrom fiduciary activities of $0.4$0.5 million.

 The higher other charges and fees was primarily due to $1.3 million in income related to an interest rate swap recognized in the first quarter of 2020.
63


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

 Three Months Ended
(dollars in thousands)June 30, 2020June 30, 2019$ Change% Change
Other operating expense:
Salaries and employee benefits$20,622  $20,563  $59  0.3 %
Net occupancy3,645  3,525  120  3.4 %
Equipment1,043  1,138  (95) -8.3 %
Communication expense774  903  (129) -14.3 %
Legal and professional services2,238  1,728  510  29.5 %
Computer software expense3,035  2,560  475  18.6 %
Advertising expense923  712  211  29.6 %
Foreclosed asset expense—  49  (49) -100.0 %
Other:  
Charitable contributions10  175  (165) -94.3 %
FDIC insurance assessment475  362  113  31.2 %
Miscellaneous loan expenses399  317  82  25.9 %
ATM and debit card expenses584  620  (36) -5.8 %
Armored car expenses229  211  18  8.5 %
Entertainment and promotions165  1,023  (858) -83.9 %
Stationery and supplies220  279  (59) -21.1 %
Directors’ fees and expenses196  238  (42) -17.6 %
Directors' deferred compensation plan expense103  133  (30) -22.6 %
Provision for residential mortgage loan repurchase losses—  (403) 403  -100.0  
Provision for off-balance sheet credit exposures573  487  86  17.7 %
Other1,193  1,487  (294) -19.8 %
Total other operating expense$36,427  $36,107  $320  0.9 %
 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 occupancy3,697
 3,488
 209
 6.0 %
Equipment1,067
 1,048
 19
 1.8 %
Amortization of core deposit premium—
 669
 (669) -100.0 %
Communication expense1,008
 903
 105
 11.6 %
Legal and professional services1,933
 1,528
 405
 26.5 %
Computer software expense2,713
 2,672
 41
 1.5 %
Advertising expense711
 612
 99
 16.2 %
Foreclosed asset expense15
 212
 (197) -92.9 %
Other: 
  
    
Charitable contributions230
 166
 64
 38.6 %
FDIC insurance assessment5
 437
 (432) -98.9 %
Miscellaneous loan expenses274
 403
 (129) -32.0 %
ATM and debit card expenses660
 686
 (26) -3.8 %
Armored car expenses220
 185
 35
 18.9 %
Entertainment and promotions323
 185
 138
 74.6 %
Stationery and supplies240
 206
 34
 16.5 %
Directors’ fees and expenses242
 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 %
Other1,430
 1,091
 339
 31.1 %
Total other operating expense$34,934
 $34,025
 $909
 2.7 %
        

For the three months ended SeptemberJune 30, 2019,2020, total other operating expense was $34.9$36.4 million and increased by $0.9$0.3 million, or 2.7%0.9%, from $34.0$36.1 million in the year-ago quarter. The increase was primarily due to higher salaries and employee benefits of $1.6 million and higher legal and professional services of $0.4 million. The increase in salaries and employee benefits was partially attributable to the addition of positions in strategic areas and higher commissions, combined with annual merit increases effective in the second quarter of 2019. These increases were partially offset by lower amortization of core deposit premium of $0.7 million, as the intangible asset was fully amortized as of September 30, 2018, a credit to the reserve for unfunded loan commitments during the current quarter of $0.5 million and lower FDIC insurance expense of $0.4 million. 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 occupancy10,680
 10,114
 566
 5.6 %
Equipment3,211
 3,160
 51
 1.6 %
Amortization of core deposit premium—
 2,006
 (2,006) -100.0 %
Communication expense2,645
 2,547
 98
 3.8 %
Legal and professional services5,231
 5,118
 113
 2.2 %
Computer software expense7,870
 7,244
 626
 8.6 %
Advertising expense2,134
 1,841
 293
 15.9 %
Foreclosed asset expense223
 537
 (314) -58.5 %
Other: 
  
    
Charitable contributions559
 497
 62
 12.5 %
FDIC insurance assessment868
 1,305
 (437) -33.5 %
Miscellaneous loan expenses885
 1,026
 (141) -13.7 %
ATM and debit card expenses1,930
 2,032
 (102) -5.0 %
Armored car expenses629
 584
 45
 7.7 %
Entertainment and promotions1,576
 617
 959
 155.4 %
Stationery and supplies744
 643
 101
 15.7 %
Directors’ fees and expenses722
 777
 (55) -7.1 %
Provision for residential mortgage loan repurchase losses(403) 331
 (734) -221.8 %
Increase (decrease) to the reserve for unfunded commitments189
 36
 153
 425.0 %
Other4,613
 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$0.5 million and higher net occupancyadvertising expense of $0.6$0.2 million. The higher entertainment and promotions expense wasexpenses are primarily attributable to expenses related to a core deposit gathering campaign in the second quarter of 2019. These increasesour RISE2020 initiative and were partially offset by lower amortizationentertainment and promotions of core deposit premium of $2.0$0.9 million and a credit to the reserveprovision for residential mortgage loan repurchase losses of $0.4 million recorded in the year-ago quarter, compared to an increasenone in the current quarter. The lower entertainment and promotions expense was primarily attributable to higher expenses in the reserve of $0.3year-ago quarter related to a core deposit gathering campaign.


64

 Six Months Ended
(dollars in thousands)June 30, 2020June 30, 2019$ Change% Change
Other operating expense:
Salaries and employee benefits$40,969  $40,452  $517  1.3 %
Net occupancy7,317  6,983  334  4.8 %
Equipment2,140  2,144  (4) -0.2 %
Communication expense1,611  1,637  (26) -1.6 %
Legal and professional services4,266  3,298  968  29.4 %
Computer software expense5,978  5,157  821  15.9 %
Advertising expense2,015  1,423  592  41.6 %
Foreclosed asset expense67  208  (141) -67.8 %
Other:  
Charitable contributions197  329  (132) -40.1 %
FDIC insurance assessment475  863  (388) -45.0 %
Miscellaneous loan expenses699  611  88  14.4 %
ATM and debit card expenses1,218  1,270  (52) -4.1 %
Armored car expenses523  409  114  27.9 %
Entertainment and promotions445  1,253  (808) -64.5 %
Stationery and supplies468  504  (36) -7.1 %
Directors’ fees and expenses437  480  (43) -9.0 %
Directors’ deferred compensation plan expense(1,380) 568  (1,948) -343.0 %
Provision for residential mortgage loan repurchase losses—  (403) 403  -100.0  
Provision for off-balance sheet credit exposures2,371  654  1,717  262.5 %
Other2,851  2,615  236  9.0 %
Total other operating expense$72,667  $70,455  $2,212  3.1 %

For the six months ended June 30, 2020, total other operating expense was $72.7 million and increased by $2.2 million, or 3.1%, from $70.5 million in the year-ago period,six months ended June 30, 2019. The increase was primarily due to a higher provision for off-balance sheet credit exposures of $1.7 million under ASC 326, higher legal and professional services of $1.0 million, higher computer software expense of $0.8 million and higher advertising expense of $0.6 million, partially offset by a $1.9 million variance in the directors' deferred compensation plan expense and lower FDIC insuranceentertainment and promotions of $0.8 million. The lower directors' deferred compensation plan expense of $0.4 million.was primarily due to volatility in the equity markets.

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
June 30,		Six Months Ended
June 30,
(dollars in thousands)2020201920202019
Total other operating expense$36,427  $36,107  $72,667  $70,455  
Net interest income$49,259  $45,378  $97,089  $90,491  
Total other operating income10,692  10,094  19,578  21,767  
Total revenue before provision for credit losses$59,951  $55,472  $116,667  $112,258  
Efficiency ratio60.76 %65.09 %62.29 %62.76 %
65

 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 income10,266
 10,820
 32,033
 29,404
Total pre-provision revenue$55,915
 $54,145
 $168,173
 $157,723
        
Efficiency ratio62.48% 62.84% 62.67% 64.06%

Our efficiency ratio improved to 62.48%60.76% in the three months ended SeptemberJune 30, 20192020, compared to 62.84%65.09% 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, 2019current quarter was positively impacted by the aforementioned $2.6 million gainhigher net interest income during the quarter attributable to the PPP loans and lower rates paid on sale of MasterCard stock.average interest-bearing liabilities. Our efficiency ratio improved slightly to 62.29% in the six months ended June 30, 2020, compared to 62.76% in the six months ended June 30, 2019.

Income Taxes
 
The Company recorded income tax expense of $4.9$3.0 million and $14.4$5.8 million for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, compared to $5.0$4.4 million and $12.7$9.5 million in the same prior year periods,three and six months ended June 30, 2019, respectively. The effective tax rate for the three and ninesix months ended SeptemberJune 30, 20192020 was 25.2%23.03% and 24.7%24.09%, respectively, compared to 24.7%24.65% and 22.6% in the same prior year periods, respectively. The increases in income tax expense and the effective tax rate24.40% in the three and ninesix months ended SeptemberJune 30, 2019 was primarily due to higher pre-tax income in the current quarter, combined with an income tax benefit of $0.7 million related to the finalization of the impact of H.R.1, commonly referred to as the Tax Cuts and Jobs Act, recorded in the first quarter of 2018 and an income tax benefit of $0.6 million related to a tax accounting method change strategy recorded in the second quarter of 2018.2019.

The valuation allowance on our net deferred tax assets ("DTA") totaled $3.3$3.4 million at SeptemberJune 30, 20192020 and $3.5$3.4 million at December 31, 2018,2019, of which $3.2 million and $3.3$3.2 million, respectively, related to our DTA from net apportioned net operating loss ("NOL") carryforwards for California state income tax purposes as we do not expect to generate sufficient income in California to utilize the DTA. The remaining valuation allowance of $0.1$0.2 million and $0.2 million as of SeptemberJune 30, 20192020 and December 31, 20182019 relates to a Hawaii capital loss carryforward balance that we do not expect to be able to utilize. Net of the valuation allowance, the Company's net DTA totaled $14.0$18.7 million at SeptemberJune 30, 2019,2020, compared to a net DTA of $21.5$16.5 million as of December 31, 2018,2019, and is included in other assets on our consolidated balance sheets.
 
Financial Condition
 
Total assets at SeptemberJune 30, 20192020 of $5.98$6.63 billion increased by $169.7$620.3 million from $5.81$6.01 billion at December 31, 2018.2019.
 
Investment Securities
 
Investment securities of $1.19$1.17 billion at SeptemberJune 30, 2019 decreased2020 increased by $166.9$41.7 million, or 12.3%3.7%, from December 31, 2018.2019. The decreaseincrease reflects $201.4$147.4 million in principal runoff, offset bynet purchases, combined with a $33.4$22.4 million increase in the market valuation on the available-for-sale portfolio, and $1.0partially offset by $128.0 million in net purchases.principal runoff.

66


Loans
Loans and Leases

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

(dollars in thousands)June 30,
2020		December 31,
2019		$ Change% Change
Hawaii:    
Commercial, financial and agricultural:
SBA Paycheck Protection Program$483,827  $—  $483,827  — %
Other431,887  454,582  (22,695) (5.0) 
Real estate:
Construction103,518  95,854  7,664  8.0  
Residential mortgage1,657,558  1,599,801  57,757  3.6  
Home equity510,962  490,734  20,228  4.1  
Commercial mortgage912,422  909,798  2,624  0.3  
Consumer350,414  373,451  (23,037) (6.2) 
Leases—  —  —  —  
Total loans4,450,588  3,924,220  526,368  13.4  
Allowance for credit losses ("ACL")(59,765) (42,592) (17,173) 40.3  
Loans, net of ACL$4,390,823  $3,881,628  $509,195  13.1  
U.S. Mainland:    
Commercial, financial and agricultural:
SBA Paycheck Protection Program$42,581  $—  $42,581  — %
Other115,971  115,722  249  0.2  
Real estate:
Construction—  —  —  —  
Residential mortgage—  —  —  —  
Home equity—  —  —  —  
Commercial mortgage217,747  213,617  4,130  1.9  
Consumer176,551  195,981  (19,430) (9.9) 
Leases—  —  —  —  
Total loans552,850  525,320  27,530  5.2  
ACL(7,574) (5,379) (2,195) 40.8  
Loans, net of ACL$545,276  $519,941  $25,335  4.9  
Total:    
Commercial, financial and agricultural:
SBA Paycheck Protection Program$526,408  $—  $526,408  — %
Other547,858  570,304  (22,446) (3.9) 
Real estate:
Construction103,518  95,854  7,664  8.0  
Residential mortgage1,657,558  1,599,801  57,757  3.6  
Home equity510,962  490,734  20,228  4.1  
Commercial mortgage1,130,169  1,123,415  6,754  0.6  
Consumer526,965  569,432  (42,467) (7.5) 
Leases—  —  —  —  
Total loans5,003,438  4,449,540  553,898  12.4  
ACL(67,339) (47,971) (19,368) 40.4  
Loans, net of ACL$4,936,099  $4,401,569  $534,530  12.1  
(dollars in thousands) 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$5.00 billion at SeptemberJune 30, 20192020 increased by $289.5$553.9 million, or 7.1%12.4%, from December 31, 2018.2019. The increase reflects net increases in the following loan portfolios: Paycheck Protection Program loans of $526.4 million, residential mortgage of $130.5$57.8 million, home equity of $20.2 million, construction of $7.7 million and commercial mortgage of $93.6 million, consumer of $34.1 million, construction of $29.7 million, and home equity of $6.6
67

$6.8 million. These increases were partially offset by a net decreasedecreases in the consumer and other commercial financialportfolios of $42.5 million and agricultural portfolio of $5.0 million.$22.4 million, respectively.

The Hawaii loan portfolio increased by $229.7$526.4 million, or 6.3%13.4%, from December 31, 2018.2019. The increase reflects net increases in the following loan portfolios: Paycheck Protection Program loans of $483.8 million, residential mortgage of $130.5$57.8 million, home equity of $20.2 million, construction of $7.7 million and commercial mortgage of $48.9$2.6 million, constructionpartially offset by net decreases in the consumer and other commercial portfolios of

$32.0 million, consumer of $11.6 $23.0 million and home equity of $6.6 million.$22.7 million, respectively. 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$27.5 million, or 13.0%5.2% from December 31, 2018.2019. The net increase was primarily attributable to net increases in the Paycheck Protection Program and commercial mortgage loan portfolioportfolios of $44.7$42.6 million and $4.1 million, respectively, partially offset by a net decrease in the consumer loan portfolio of $22.5$19.4 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.

ThroughIn the thirdsecond quarter of 2019,2020, we purchased U.S. Mainland unsecured consumer loans with outstanding balances at the time of purchases totaling $80.0$10.9 million, for $78.8 million, orwhich reflected a net discount of $1.2 million.$0.5 million from the $11.4 million outstanding balance. At the time of purchase, the unsecured consumer loans had a weighted average remaining term of 115 months and a weighted average yield, net of servicing costs, of 3.18%.

In 2018,the first quarter of 2020, we purchased U.SU.S. Mainland unsecured consumer loans totaling $58.6$22.3 million, which reflected a net discount of $0.6 million from the $23.0 million outstanding balance. At the time of purchase, the unsecured consumer loans had a weighted average remaining term of 87 months and a weighted average yield, net of servicing costs, of 5.03%. The purchases during the first and second quarters of 2020 were made under two forward flow purchase agreements.

In 2019, we purchased an auto loan portfolio totaling $30.2 million, which included a $0.1$0.6 million premium over the $58.5$29.6 million outstanding balance atbalance. At the time of purchase.purchase, the auto loans had a weighted average remaining term of 56 months and a weighted average yield, net of servicing costs, of 6.15%. In 2019, we also purchased unsecured consumer loan portfolios totaling $109.9 million which included a $2.3 million discount to the $112.2 million outstanding balance. At the time of purchase, the unsecured consumer loan portfolios had a weighted average remaining term of 76 months and a weighted average yield, net of servicing costs, of 6.24%. The unsecured consumer loan purchases during 2019 were made under two forward flow purchase agreements.

68

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

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

(dollars in thousands)June 30,
2020		December 31,
2019		$ Change% Change
Nonperforming Assets ("NPAs") [1]  
Nonaccrual loans:  
Commercial, financial and agricultural$934  $467  $467  100.0 %
Real estate:
Residential mortgage3,215  979  2,236  228.4  
Home equity538  92  446  484.8  
Consumer54  17  37  217.6  
Total nonaccrual loans4,741  1,555  3,186  204.9  
Other real estate owned ("OREO"): 
Real estate:
Home equity—  164  (164) (100.0) 
Total OREO—  164  (164) (100.0) 
Total nonperforming assets4,741  1,719  3,022  175.8  
Accruing Loans Delinquent for 90 Days or More [1]
Real estate:
Residential mortgage726  724  2  0.3  
Consumer444  286  158  55.2  
Total accruing loans delinquent for 90 days or more1,170  1,010  160  15.8  
Restructured Loans Still Accruing Interest [1] 
Commercial, financial and agricultural172  135  37  27.4  
Real estate:
Residential mortgage5,290  5,502  (212) (3.9) 
Commercial mortgage1,888  1,839  49  2.7  
Consumer145  —  145  —  
Total restructured loans still accruing interest7,495  7,476  19  0.3  
Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest$13,406  $10,205  $3,201  31.4  
Ratio of nonaccrual loans to total loans0.09 %0.03 %0.06 %
Ratio of NPAs to total loans and OREO0.09 %0.04 %0.05 %
Ratio of NPAs and accruing loans delinquent for 90 days or more to total loans and OREO0.12 %0.06 %0.06 %
Ratio of NPAs, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO0.27 %0.23 %0.04 %
Ratio of classified assets and OREO to tier 1 capital and ACL7.28 %6.75 %0.53 %
[1] Section 4013 of the CARES Act and the revised Interagency Statement are being applied to loan modifications related to the COVID-19 pandemic as eligible and applicable. These loan modifications are not included in the delinquent, nonaccrual or restructured loan balances presented above.

69
(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 equity95
 275
 (180) (65.5)
Total nonaccrual loans894
 2,323
 (1,429) (61.5)
        
Other real estate owned ("OREO"):     
  
Real estate:       
Residential mortgage302
 414
 (112) (27.1)
Home equity164
 —
 164
 —
Total OREO466
 414
 52
 12.6
Total nonperforming assets1,360
 2,737
 (1,377) (50.3)
        
Accruing Loans Delinquent for 90 Days or More       
Real estate:       
Home equity—
 298
 (298) (100.0)
Consumer235
 238
 (3) (1.3)
Total accruing loans delinquent for 90 days or more235
 536
 (301) (56.2)
        
Restructured Loans Still Accruing Interest     
  
Commercial, financial and agricultural157
 220
 (63) (28.6)
Real estate:       
Construction—
 2,273
 (2,273) (100.0)
Residential mortgage6,717
 8,026
 (1,309) (16.3)
Commercial mortgage1,985
 2,348
 (363) (15.5)
Total restructured loans still accruing interest8,859
 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 leases0.02% 0.06%   (0.04)%
Ratio of nonperforming assets to total loans and leases and OREO0.03% 0.07%   (0.04)%
Ratio of nonperforming assets and accruing loans delinquent for 90 days or more to total loans and leases and OREO0.04% 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 OREO0.24% 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 
Additions3,827 
Reductions:
Payments(427)
Return to accrual status(123)
Sales of NPAs(94)
Net charge-offs, valuation and other adjustments(161)
Total reductions(805)
Net increase3,022 
Balance at June 30, 2020$4,741 
(dollars in thousands) 
Balance at December 31, 2018$2,737
Additions922
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$4.7 million at SeptemberJune 30, 2019,2020, compared to $2.7$1.7 million at December 31, 2018.2019. There were no nonperforming loans classified as held for sale at SeptemberJune 30, 20192020 and December 31, 2018.2019. The decreaseincrease in nonperforming assets from December 31, 20182019 was primarily attributable to $2.2additions to nonaccrual loans totaling $3.8 million, offset by $0.4 million in repayments of nonaccrual loans, and $0.1$0.2 million in net charge-offs, valuation and other adjustments, offset by four additions$0.1 million in loans returned to nonperforming assets totaling $0.9accrual status, and the sale of a foreclosed asset of $0.1 million.
 
Troubled debt restructurings ("TDRs") included in nonperforming assets at SeptemberJune 30, 20192020 consisted of one Hawaii residential mortgage loan with a combined principal balance of $0.3 million.

Concessions made to the original contractual terms of these loans consisted primarily of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. The principal balances on these TDRs had matured and/or were in default at the time of restructure and we have no commitments to lend additional funds to any of these borrowers. There were $8.9$7.5 million of TDRs still accruing interest at SeptemberJune 30, 2019,2020, none of which were more than 90 days delinquent. At December 31, 2018,2019, there were $12.9$7.5 million of TDRs still accruing interest, none of which were more than 90 days delinquent.

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

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


70

Allowance for Loan and LeaseCredit Losses
 
The following table sets forth certain information with respect to the AllowanceACL as of the dates and for the periods indicated:
 
Three Months Ended
September 30,		 Nine Months Ended
September 30,		Three Months Ended
June 30,		Six Months Ended
June 30,
(dollars in thousands)2019 2018 2019 2018(dollars in thousands)2020201920202019
Allowance for Loan and Lease Losses: 
  
  
  
Allowance for Credit Losses:Allowance for Credit Losses:    
Balance at beginning of period$48,267
 $48,181
 $47,916
 $50,001
Balance at beginning of period$59,645  $47,267  $47,971  $47,916  
Adoption of ASU 2016-13Adoption of ASU 2016-13—  —  3,566  —  
Adjusted balance at beginning of periodAdjusted balance at beginning of period59,645  47,267  51,537  47,916  
       
Provision (credit) for loan and lease losses1,532
 (59) 4,219
 262
Provision for credit lossesProvision for credit losses10,640  1,404  19,969  2,687  
       
Charge-offs:       Charge-offs:
Commercial, financial and agricultural797
 731
 2,099
 1,971
Commercial, financial and agricultural1,103  839  1,540  1,302  
Real estate:       Real estate:
Home equity5
 —
 5
 —
Residential mortgageResidential mortgage52  —  52  —  
Consumer1,832
 1,762
 5,542
 5,424
Consumer2,626  1,459  4,843  3,710  
Total charge-offs2,634
 2,493
 7,646
 7,395
Total charge-offs3,781  2,298  6,435  5,012  
       
Recoveries: 
  
  
  
Recoveries:    
Commercial, financial and agricultural362
 578
 910
 1,017
Commercial, financial and agricultural305  315  647  548  
Real estate:       Real estate:
Construction6
 6
 604
 1,205
Construction—  592  131  598  
Residential mortgage104
 51
 498
 98
Residential mortgage20  372  201  394  
Home equity24
 6
 42
 18
Home equity—  9  31  18  
Commercial mortgage—
 8
 25
 52
Commercial mortgage1  25  3  25  
Consumer506
 548
 1,599
 1,568
Consumer509  581  1,255  1,093  
Total recoveries1,002
 1,197
 3,678
 3,958
Total recoveries835  1,894  2,268  2,676  
       
Net charge-offs1,632
 1,296
 3,968
 3,437
Net charge-offs2,946  404  4,167  2,336  
       
Balance at end of period$48,167
 $46,826
 $48,167
 $46,826
Balance at end of period$67,339  $48,267  $67,339  $48,267  
       
Allowance as a percentage of total loans and leases1.10% 1.18% 1.10% 1.18%
       
Annualized ratio of net charge-offs to average loans and leases0.15% 0.13% 0.13% 0.12%
ACL as a percentage of total loansACL as a percentage of total loans1.35 %1.14 %1.35 %1.14 %
ACL as a percentage of total loans, excluding PPP loansACL as a percentage of total loans, excluding PPP loans1.50 %1.14 %1.50 %1.14 %
Annualized ratio of net charge-offs to average loansAnnualized ratio of net charge-offs to average loans0.24 %0.04 %0.18 %0.11 %
 
Our AllowanceACL at SeptemberJune 30, 20192020 totaled $48.2$67.3 million compared to $47.9$48.0 million at December 31, 2018. 2019.

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

During the three months ended SeptemberJune 30, 2019,2020, we recorded Provision expensea provision for credit losses on loans of $1.5$10.6 million primarilyand net charge-offs of $2.9 million. During the six months ended June 30, 2020, we recorded a provision for credit losses on loans of $20.0 million and net charge-offs of $4.2 million. The provisions reflect the incorporation of estimated life-of-loan losses under ASC 326 and economic forecasts that anticipate deterioration due to the increase in our loan portfolio and reflects net charge-offs of $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.

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Our AllowanceACL as a percentage of total loans and leases decreasedincreased from 1.17%1.08% at December 31, 20182019 to 1.10%1.35% at SeptemberJune 30, 2019. The decrease in2020. Excluding the PPP loan portfolio, which is guaranteed by the SBA, our AllowanceACL as a percentage of total loans and leaseswas 1.50%. The increase in our ACL as a percentage of total loans reflects the credit qualityadoption of the loan portfolio, real estate markets and general economic conditions both in Hawaii and the U.S. Mainland.ASU 2016-13. Our AllowanceACL as a percentage of nonperforming assets increaseddecreased from 1,751%2,791% at December 31, 20182019 to 3,542%1,420% at SeptemberJune 30, 2019.2020.
 
In accordance with GAAP, loans held for sale and other real estate assets are not included in our assessment of the Allowance.ACL.


Federal Home Loan Bank Stock
 
The bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB"). FHLB stock of $17.2$9.2 million at SeptemberJune 30, 2019 increased2020 decreased by $0.5$5.8 million, or 3.2%38.4%, from the FHLB stock balance at December 31, 2018.2019.  FHLB stock has an activity-based stock requirement, thus as borrowings increase,decline, so will our holdings of FHLB stock. There is a minimum requirement of $7.0 million in FHLB stock even if we have no borrowings outstanding.

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

(dollars in thousands)June 30,
2020		December 31,
2019		$ Change% Change
Noninterest-bearing demand deposits$1,851,012  $1,450,532  $400,480  27.6 %
Interest-bearing demand deposits1,067,483  1,043,010  24,473  2.3  
Savings and money market deposits1,945,744  1,600,028  345,716  21.6  
Time deposits less than $100,000159,739  165,755  (6,016) (3.6) 
Core deposits5,023,978  4,259,325  764,653  18.0  
Government time deposits509,927  533,088  (23,161) (4.3) 
Other time deposits $100,000 to $250,00096,633  107,550  (10,917) (10.2) 
Other time deposits greater than $250,000164,147  220,060  (55,913) (25.4) 
Total time deposits $100,000 and greater770,707  860,698  (89,991) (10.5) 
Total deposits$5,794,685  $5,120,023  $674,662  13.2  
(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 deposits998,037
 954,011
 44,026
 4.6
Savings and money market deposits1,593,738
 1,448,257
 145,481
 10.0
Time deposits less than $100,000165,687
 176,707
 (11,020) (6.2)
Core deposits4,156,662
 4,015,942
 140,720
 3.5
        
Government time deposits552,470
 631,293
 (78,823) (12.5)
Other time deposits $100,000 to $250,000103,959
 106,783
 (2,824) (2.6)
Other time deposits greater than $250,000224,568
 192,472
 32,096
 16.7
Total time deposits $100,000 and greater880,997
 930,548
 (49,551) (5.3)
        
Total deposits$5,037,659
 $4,946,490
 $91,169
 1.8

Total deposits of $5.04$5.79 billion at SeptemberJune 30, 20192020 increased by $91.2$674.7 million from total deposits of $4.95$5.12 billion at December 31, 2018.2019. Net increases in noninterest-bearing demand deposits of $400.5 million, savings and money market deposits of $145.5$345.7 million and interest-bearing demand deposits of $44.0 million and other time deposits greater than $250,000 of $32.1$24.5 million, were partially offset by net decreases in other time deposits greater than $250,000 of $55.9 million, government time deposits of $78.8$23.2 million, noninterest-bearing demandother time deposits $100,000 to $250,000 of $37.8$10.9 million and time deposits less than $100,000 of $11.0$6.0 million.
 
Core deposits, which we define as demand deposits, savings and money market deposits, and time deposits less than $100,000, totaled $4.16$5.02 billion at SeptemberJune 30, 20192020 and increased by $140.7$764.7 million, or 3.5%18.0%, from December 31, 2018.2019. The deposit of PPP funds into both new and existing deposit accounts largely contributed to the increase in core deposits. In addition, off-balance sheet investment funds from several large clients were brought back into deposit accounts. The addition of PPP funds may be temporary as the PPP monies are spent by the businesses in accordance with the program. Going forward the Company is focused on expanding banking relationships with the new businesses we assisted with PPP. Core deposits as a percentage of total deposits was 82.5%86.7% at SeptemberJune 30, 2019,2020, compared to 81.2%83.2% at December 31, 2018.2019.

Capital Resources
 
In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources and uses of capital in conjunction with an analysis of the size and quality of our assets, the anticipated performance of our business (including the
effects of the COVID-19 pandemic) and the level of risk and regulatory capital requirements. As part of this ongoing assessment, the Board of Directors reviews our capital position on an ongoing basis to ensure it is adequate, including, but not limited to, need for raising additional capital or returning capital to our shareholders, including the ability to declare cash dividends or repurchase our securities.
 
Common and Preferred Equity
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Shareholders' equity totaled $525.2$544.3 million at SeptemberJune 30, 2019,2020, compared to $491.7$528.5 million at December 31, 2018.2019. The change in total shareholders' equity was attributable to net income of $44.1$18.2 million and other comprehensive income of $28.3$17.1 million, partially offset by the repurchase of 631,300206,802 shares of common stock under our repurchase program, at a cost of $18.0$4.7 million and cash dividends paiddeclared of $19.2$13.0 million in the ninesix months ended SeptemberJune 30, 2019.2020. During the ninesix months ended SeptemberJune 30, 2019,2020, 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%8.21% at SeptemberJune 30, 2019,2020, compared to 8.47%8.79% at December 31, 2018.2019. The decline in our total shareholders' equity to total assets ratio was primarily due to the significant increase in the total assets denominator attributable to $526.4 million in PPP loans, net of deferred fees and costs. Our book value per share was $18.47$19.33 and $16.97$18.68 at SeptemberJune 30, 20192020 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 SeptemberJune 30, 2019,2020, on a stand-alone basis, CPF had an available cash balance of approximately $11.6$8.4 million in order to meet its ongoing obligations.

As a Hawaii state-chartered bank, the bank may only pay dividends to the extent it has retained earnings as defined under Hawaii banking law ("Statutory Retained Earnings"), which differs from GAAP retained earnings. As of SeptemberJune 30, 2019,2020, the bank had Statutory Retained Earnings of $61.5$68.4 million. On October 22, 2019,July 28, 2020, the Company's Board of Directors declared a cash dividend of $0.23 per share on the Company's outstanding common stock, which was a 9.5% increaseremained unchanged from the $0.21$0.23 per share a year-ago.
 
Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. Our ability to pay cash dividends to our shareholders is subject to restrictions under federal and Hawaii law, including restrictions imposed by the FRB and covenants set forth in various agreements we are a party to, including covenants set forth in our subordinated debentures.
 
In the year ended December 31, 2018,2019, the Company repurchased 1,155,157797,003 shares of common stock, at a cost of $32.8$22.8 million, under the Company's repurchase plan.

In June 2019,January 2020, the Company’s Board of Directors authorized the repurchase of up to $30 million of its common stock from time to time in the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase program (the "Repurchase Plan"). The Repurchase Plan replaces and supersedes in its entirety the share repurchase program previously approved by the Company's Board of Directors, which had $6.8$19.8 million in remaining repurchase authority. The Company's Repurchase Plan is subject to a one year expiration. In March 2020, the Company temporarily suspended the Repurchase Plan due to uncertainty during the current COVID-19 pandemic.

In the ninesix months ended SeptemberJune 30, 2019,2020, a total of 631,300206,802 shares of common stock, at a cost of $18.0$4.7 million, were repurchased under the Company's stock repurchase plans. As of SeptemberJune 30, 2019, $25.92020, $26.6 million remained available for repurchase under the Company's Repurchase Plan. The Company'sWe cannot provide any assurance when or to what extent we will resume repurchases under our Repurchase Plan has no expiration date.Plan.

Trust Preferred Securities

OnIn December 17, 2018 the Companyand January 2019 we completed the redemption of $20.0an aggregate of $40 million in floating rate trust preferred securities of CPB Statutory Trust III ("Trust III") bearing an interest rate of three-month LIBOR plus 2.85% and maturing on December 17, 2033. The redemption price was 100% of the aggregate liquidation amount of the securities plus accumulated but unpaid distributions up to but not including the redemption date. The Company also redeemed $0.6 million of common securities issued by Trust III and held by the Company, as a result of the concurrent redemption of 100% of the principal assets of Trust III, or $20.6 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust IIItwo trust preferred securities. The redemption was pursuant to the optional prepayment provisions of the indenture. On January 9, 2019, Trust III was canceled with the state of Connecticut.subsidiaries we previously had organized.

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

As of SeptemberJune 30, 2019,2020, we have two remaining statutory trusts, CPB Capital Trust IV ("Trust IV") and CPB Statutory Trust V ("Trust V"), which issued a total of $50.0 million in floating rate trust preferred securities. The trust preferred securities, the underlying floating rate junior subordinated debentures that are the assets of Trusts IV and V, and the common securities issued by Trusts IV and V are redeemable in whole or in part on any interest payment date on or after December 15, 2009 for Trust IV and V, or at any time in whole but not in part within 90 days following the occurrence of certain events. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from
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time to time to defer subordinated debenture interest payments, which would result in a deferral of dividend payments on the related trust preferred securities, for up to 20 consecutive quarterly periods without default or penalty.


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

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

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

As of June 30, 2020, the Company has elected to exercise the option to delay for two years an estimate of the CECL methodology on regulatory capital.
 
The Company's and the bank's leverage capital, tier 1 risk-based capital, total risk-based capital, and CET1 risk-based capital ratios as of SeptemberJune 30, 20192020 were above the levels required for a "well capitalized" regulatory designation.
 
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The following table sets forth the Company's and the bank's capital ratios, as well as the minimum capital adequacy requirements applicable to all financial institutions as of the dates indicated.
 
 ActualMinimum Required
for Capital Adequacy
Purposes		Minimum Required
to be
Well Capitalized
(dollars in thousands)AmountRatioAmountRatioAmountRatio
Company      
At June 30, 2020:      
Leverage capital$571,976  8.9 %$256,307  4.0 %N/A
Tier 1 risk-based capital571,976  12.5  274,997  6.0  N/A
Total risk-based capital622,393  13.6  366,662  8.0  N/A
CET1 risk-based capital521,976  11.4  206,247  4.5  N/A
At December 31, 2019:      
Leverage capital$568,529  9.5 %$238,630  4.0 %N/A
Tier 1 risk-based capital568,529  12.6  271,788  6.0  N/A
Total risk-based capital617,772  13.6  362,384  8.0  N/A
CET1 risk-based capital518,529  11.5  203,841  4.5  N/A
Central Pacific Bank      
At June 30, 2020:      
Leverage capital$559,461  8.7 %$256,118  4.0 %$320,147  5.0 %
Tier 1 risk-based capital559,461  12.2  274,739  6.0  366,319  8.0  
Total risk-based capital609,811  13.3  366,319  8.0  457,899  10.0  
CET1 risk-based capital559,461  12.2  206,055  4.5  297,634  6.5  
At December 31, 2019:      
Leverage capital$556,077  9.3 %$238,342  4.0 %$297,928  5.0 %
Tier 1 risk-based capital556,077  12.3  271,350  6.0  361,800  8.0  
Total risk-based capital605,320  13.4  361,800  8.0  452,250  10.0  
CET1 risk-based capital556,077  12.3  203,512  4.5  293,962  6.5  
  Actual Minimum Required
for Capital Adequacy
Purposes		 Minimum Required
to be
Well Capitalized
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
Company  
  
  
  
  
  
At 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.

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The following reflects our net interest income sensitivity analysis as of SeptemberJune 30, 2019, over a one-year horizon,2020. Net interest income is estimated assuming no balance sheet growth and given bothunder a flat interest rate scenario. The net interest income sensitivity is measured as the change in net interest income in alternate interest rate scenarios as a percentage of the flat rate scenario. The alternate rate scenarios typically assume rates move up or down 100 bps in an instantaneous, parallel fashion. However, due to historically low rates stemming from the COVID-19 pandemic, market rate changes in the down 100 bp upward and 100 bp downward parallel shift in interest rates.scenario were limited.
 
Rate ChangeEstimated Net Interest Income Sensitivity
+100 bp1.994.36 %
-100 bp(3.90(0.43))%

Liquidity and Borrowing Arrangements
 
Our objective in managing liquidity is to maintain a balance between sources and uses of funds in order to economically meet the cash requirements of customers for loans and deposit withdrawals and participate in lending and investment opportunities as they arise. We monitor our liquidity position in relation to changes in loan and deposit balances on a daily basis to ensure maximum utilization, maintenance of an adequate level of readily marketable assets and access to short-term funding sources.
 
Core deposits have historically provided us with a sizable source of relatively stable and low cost funds, but are subject to competitive pressure in our market. In addition to core deposit funding, we also have access to a variety of other short-term and long-term funding sources, which include proceeds from maturities of our investment securities, as well as secondary funding sources such as the FHLB, secured repurchase agreements and the Federal Reserve discount window, available to meet our liquidity needs. While we historically have had access to these other funding sources, access to these sources may not be guaranteed and can be restricted in the future as a result of market conditions or the Company's and bank's financial position.
 
The bank maintained a $1.80$1.97 billion line of credit with the FHLB as of SeptemberJune 30, 2019,2020, compared to $1.43$1.84 billion at December 31, 2018. We had $205.0 million in2019. There were no short-term borrowings under this arrangement at SeptemberJune 30, 2019,2020, compared to $197.0$150.0 million at December 31, 2018.2019. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled $118.9$248.5 million at SeptemberJune 30, 2019,2020, compared to $4.6$78.9 million at December 31, 2018.2019. Long-term borrowings under this arrangement totaled $50.0 million at SeptemberJune 30, 20192020 and December 31, 2018.2019. FHLB advances and standby letters of credit available at SeptemberJune 30, 20192020 were secured by certain real estate loans with a carrying value of $2.42$2.66 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB. At SeptemberJune 30, 2019, $1.432020, $1.67 billion was undrawn under this arrangement, compared to $1.18$1.57 billion at December 31, 2018.2019.
 
At SeptemberJune 30, 20192020 and December 31, 2018,2019, our bank had additional unused borrowings available at the Federal Reserve discount window of $65.6$54.6 million and $73.9$65.3 million, respectively. As of SeptemberJune 30, 20192020 and December 31, 2018,2019, certain commercial and commercial real estate loans with a carrying value totaling $118.9$126.7 million and $123.3$126.1 million, respectively, were pledged as collateral on our line of credit with the Federal Reserve discount window. The Federal Reserve does not have the right to sell or repledge these loans.

To bolster the effectiveness of the PPP, the Federal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provides loans to small businesses so that they can keep their workers on the payroll. The Paycheck Protection Program Liquidity Facility ("PPPLF") will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. At June 30, 2020, PPP loans pledged to the Federal Reserve Bank totaled $65.9 million and funds drawn from the Federal Reserve Bank as of June 30, 2020 totaled $65.9 million.
 
Our ability to maintain adequate levels of liquidity is dependent on our ability to continue to maintain our strong risk profile and capital base. Our liquidity may also be negatively impacted by weakness in the financial markets and industry-wide reductions in liquidity.
 
Contractual Obligations
 
Information regarding our contractual obligations is provided in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2018. During the first quarter of 2019, the Company signed an extension to its existing agreement with a computer software vendor.

This extension increases the Company's contractual obligations for the years 2022 through 2024 by approximately $6 million per year.2019. There have been no other material changes in our contractual obligations since December 31, 2018.2019.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

The primary analytical tool we use to measure and manage our interest rate risk is a simulation model that projects changes in net interest income ("NII") as market interest rates change. Our ALCO policy requires that simulated changes in NII should be within certain specified ranges, or steps must be taken to reduce interest rate risk. The results of the model indicate that the mix of rate-sensitive assets and liabilities at SeptemberJune 30, 20192020 would not result in a fluctuation of NII that would exceed the established policy limits.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

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

Item 1A. Risk Factors
 
There have been no material changes from the Risk Factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, as filed with the SEC on February 28, 2019,25, 2020, except as described below.

Our RISE2020 initiative may not be successful.

DuringThe COVID-19 pandemic has significantly impacted the second halfState of 2019Hawaii 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 conditionresults will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

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

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

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

We and our customers have been, and will continue to be adversely affected by the COVID-19 pandemic. The extent to which the COVID-19 pandemic continues to negatively impact our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds.
 
Issuer Purchases of Equity Securities
 
In June 2019,January 2020, the Company’s Board of Directors authorized the repurchase of up to $30 million of its common stock from time to time in the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase program (the "Repurchase Plan"). The Repurchase Plan replaces and supersedes in its entirety the share repurchase program previously approved by the Company's Board of Directors, which had $6.8$19.8 million in remaining repurchase authority. The current Repurchase Plan is subject to a one year expiration.
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In March 2020, the Company temporarily suspended the Repurchase Plan due to uncertainty during the current COVID-19 pandemic. As a result, the Company did not repurchase any shares of common stock under the Company's Repurchase Plan during the three months ended SeptemberJune 30, 2019, the Company repurchased 140,600 shares of common stock, at an aggregate cost of $4.0 million, under the Company's stock repurchase plans.2020. As of SeptemberJune 30, 2019,2020, a total of $25.9$26.6 million remained available for repurchase under the Company's Repurchase Plan. There is no expiration date on theWe cannot provide any assurance as to when or if we will recommence our Repurchase Plan.
 
Issuer Purchases of Equity Securities
PeriodTotal
Number
of Shares
Purchased		Average
Price Paid
per Share		Total Shares
Purchased as
Part of Publicly
Announced
Programs		Maximum Dollar
Value of
Shares That
May Yet Be
Purchased Under
the Program
April 1-30, 2020— $— — $26,600,028 
May 1-31, 2020— — — 26,600,028 
June 1-30, 2020— — — 26,600,028 
Total— $— — 26,600,028 
  Issuer Purchases of Equity Securities
Period Total
Number
of Shares
Purchased		 Average
Price Paid
per Share		 Total Shares
Purchased as
Part of Publicly
Announced
Programs		 Maximum Dollar
Value of
Shares That
May Yet Be
Purchased Under
the Program
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



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


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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 5, 2019July 29, 2020/s/ Paul K. Yonamine
Paul K. Yonamine
Chairman and Chief Executive Officer
Date:November 5, 2019July 29, 2020/s/ David S. Morimoto
David S. Morimoto
Executive Vice President and Chief Financial Officer


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