UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

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 ~~March 31,~~June 30, 2020

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

For the transition period from to

Commission File Number: 001-31567

CENTRAL PACIFIC FINANCIAL CORP.

(Exact name of registrant as specified in its charter)


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

220 South King Street, Honolulu, Hawaii 96813

(Address of principal executive offices) (Zip Code)

(808) 544-0500

(Registrant's telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, No Par Value

CPF

New York Stock Exchange

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

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

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


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

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

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

The number of shares outstanding of registrant's common stock, no par value, on ~~April 30,~~July 17, 2020 was ~~28,115,353~~28,154,159 shares.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

Form 10-Q

Table of Contents


			Page

Part I.	Financial Information	3

Item 1.	Financial Statements (Unaudited)

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

	Consolidated Statements of Income - Three months and six months ended ~~March 31,~~June 3 0 , 2020 and 2019	5

	Consolidated Statements of Comprehensive Income - Three months and six ended ~~March 31,~~June 30 , 2020 and 2019	6

	Consolidated Statements of Changes in Equity - Three months and six months ended ~~March 31,~~June 30 , 2020 and 2019	7

	Consolidated Statements of Cash Flows - ~~Three~~ Six months ended ~~March 31,~~June 30 , 2020 and 2019	8

	Notes to Consolidated Financial Statements (Unaudited)	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4549

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6777

Item 4.	Controls and Procedures	6777

Part II.	Other Information	6878

Item 1A.	Risk Factors	6878

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6878

Item 6.	Exhibits	7080

Signatures		7181

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. Words such as "believes," "plans," "anticipates," "expects," "intends," "forecasts," "hopes," "targeting," "continue," "remain," "will," "should," "estimates," "may" and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

While we believe that our forward-looking statements and the assumptions underlying them are reasonably based, such statements and assumptions are by their nature subject to risks and uncertainties, and thus could later prove to be inaccurate or incorrect. Accordingly, actual results could differ materially from those statements or projections for a variety of reasons, including, but not limited to: the adverse effects of the COVID-19 pandemic virus on local, national and international economies, including, but not limited to, the adverse impact on tourism and construction in the State of Hawaii, our borrowers, customers, third-party contractors, vendors and employees as well as the effects of government programs and initiatives in response to COVID-19; the increase in inventory or adverse conditions in the real estate market and deterioration in the construction industry; adverse changes in the financial performance and/or condition of our borrowers and, as a result, increased loan delinquency rates, deterioration in asset quality, and losses in our loan portfolio; our ability to successfully implement our RISE2020 initiative; the impact of local, national, and international economies and events (including natural disasters such as wildfires, volcanic eruptions, hurricanes, tsunamis, storms, earthquakes and 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 which affect our business operations and competitiveness; the costs and effects of legal and regulatory developments, including 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 (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 deficiencies in our internal controls over financial reporting or disclosure controls and procedures; technological changes and developments; changes in the competitive environment among financial holding companies and other financial service providers; the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board ("FASB") and other accounting standard setters and the cost and resources required to implement such changes; our ability to attract and retain key personnel; changes in our organization, compensation and benefit plans; and our success at managing the risks involved in the foregoing items.

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

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)


(dollars in thousands)	(dollars in thousands)	March 31, 2020		December 31, 2019		(dollars in thousands)	June 30, 2020		December 31, 2019
Assets	Assets					Assets
Cash and due from banks	Cash and due from banks	$	81,972	$	78,418	Cash and due from banks	$	102,132	$	78,418
Interest-bearing deposits in other banks	Interest-bearing deposits in other banks	11,021		24,554		Interest-bearing deposits in other banks	41,201		24,554
Investment securities:	Investment securities:					Investment securities:
Available-for-sale debt securities, at fair value	Available-for-sale debt securities, at fair value	1,184,023		1,126,983		Available-for-sale debt securities, at fair value	1,168,594		1,126,983

Equity securities, at fair value	Equity securities, at fair value	1,002		1,127		Equity securities, at fair value	1,209		1,127
Total investment securities	Total investment securities	1,185,025		1,128,110		Total investment securities	1,169,803		1,128,110

Loans held for sale	Loans held for sale	3,910		9,083		Loans held for sale	10,443		9,083

Loans	Loans	4,511,998		4,449,540		Loans	5,003,438		4,449,540
Allowance for credit losses	Allowance for credit losses	(59,645)		(47,971)		Allowance for credit losses	(67,339)		(47,971)
Loans, net of allowance for credit losses	Loans, net of allowance for credit losses	4,452,353		4,401,569		Loans, net of allowance for credit losses	4,936,099		4,401,569

Premises and equipment, net	Premises and equipment, net	50,447		46,343		Premises and equipment, net	55,032		46,343
Accrued interest receivable	Accrued interest receivable	16,851		16,500		Accrued interest receivable	19,590		16,500
Investment in unconsolidated subsidiaries	Investment in unconsolidated subsidiaries	16,721		17,115		Investment in unconsolidated subsidiaries	16,428		17,115
Other real estate owned	Other real estate owned	100		164		Other real estate owned	—		164
Mortgage servicing rights	Mortgage servicing rights	13,345		14,718		Mortgage servicing rights	12,771		14,718

Bank-owned life insurance	Bank-owned life insurance	159,637		159,656		Bank-owned life insurance	161,758		159,656
Federal Home Loan Bank stock	Federal Home Loan Bank stock	18,109		14,983		Federal Home Loan Bank stock	9,229		14,983
Right-of-use lease asset	Right-of-use lease asset	51,198		52,348		Right-of-use lease asset	50,039		52,348
Other assets	Other assets	47,859		49,111		Other assets	48,447		49,111
Total assets	Total assets	$	6,108,548	$	6,012,672	Total assets	$	6,632,972	$	6,012,672

Liabilities	Liabilities					Liabilities
Deposits:	Deposits:					Deposits:
Noninterest-bearing demand	Noninterest-bearing demand	$	1,430,540	$	1,450,532	Noninterest-bearing demand	$	1,851,012	$	1,450,532
Interest-bearing demand	Interest-bearing demand	1,018,508		1,043,010		Interest-bearing demand	1,067,483		1,043,010
Savings and money market	Savings and money market	1,693,280		1,600,028		Savings and money market	1,945,744		1,600,028
Time	Time	993,741		1,026,453		Time	930,446		1,026,453
Total deposits	Total deposits	5,136,069		5,120,023		Total deposits	5,794,685		5,120,023

Short-term borrowings	Short-term borrowings	222,000		150,000		Short-term borrowings	—		150,000
Long-term debt	Long-term debt	101,547		101,547		Long-term debt	167,491		101,547
Lease liability	Lease liability	51,541		52,632		Lease liability	50,440		52,632

Other liabilities	Other liabilities	63,561		59,950		Other liabilities	76,050		59,950
Total liabilities	Total liabilities	5,574,718		5,484,152		Total liabilities	6,088,666		5,484,152

Contingent liabilities and other commitments (see Notes 8, 15 and 16)	Contingent liabilities and other commitments (see Notes 8, 15 and 16)					Contingent liabilities and other commitments (see Notes 8, 15 and 16)

Equity	Equity					Equity
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding: none at March 31, 2020 and December 31, 2019		—		—
Common stock, no par value, authorized 185,000,000 shares; issued and outstanding: 28,115,353 at March 31, 2020 and 28,289,257 at December 31, 2019		442,853		447,602
Preferred stock, 0 par value, authorized 1,000,000 shares; issued and outstanding: NaN at June 30, 2020 and December 31, 2019						Preferred stock, 0 par value, authorized 1,000,000 shares; issued and outstanding: NaN at June 30, 2020 and December 31, 2019	—		—
Common stock, 0 par value, authorized 185,000,000 shares; issued and outstanding: 28,154,159 at June 30, 2020 and 28,289,257 at December 31, 2019						Common stock, 0 par value, authorized 185,000,000 shares; issued and outstanding: 28,154,159 at June 30, 2020 and 28,289,257 at December 31, 2019	442,699		447,602
Additional paid-in capital	Additional paid-in capital	92,284		91,611		Additional paid-in capital	93,007		91,611
Accumulated deficit	Accumulated deficit	(20,428)		(19,102)		Accumulated deficit	(16,986)		(19,102)
Accumulated other comprehensive income	Accumulated other comprehensive income	19,072		8,409		Accumulated other comprehensive income	25,551		8,409
Total shareholders' equity	Total shareholders' equity	533,781		528,520		Total shareholders' equity	544,271		528,520
Non-controlling interest	Non-controlling interest	49		—		Non-controlling interest	35		—
Total equity	Total equity	533,830		528,520		Total equity	544,306		528,520
Total liabilities and equity	Total liabilities and equity	$	6,108,548	$	6,012,672	Total liabilities and equity	$	6,632,972	$	6,012,672

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


		Three Months Ended March 31,							Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands, except per share data)	(dollars in thousands, except per share data)	2020		2019		(dollars in thousands, except per share data)	2020		2019		2020		2019
Interest income:	Interest income:					Interest income:
Interest and fees on loans and leases	Interest and fees on loans and leases	$	46,204	$	43,768	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:					Interest and dividends on investment securities:
Taxable interest	Taxable interest	6,757		8,260		Taxable interest	6,310		7,530		13,067		15,790
Tax-exempt interest	Tax-exempt interest	668		866		Tax-exempt interest	599		814		1,267		1,680
Dividends	Dividends	17		18		Dividends	17		14		34		32
Interest on deposits in other banks	Interest on deposits in other banks	36		68		Interest on deposits in other banks	3		46		39		114
Dividends on Federal Home Loan Bank stock	Dividends on Federal Home Loan Bank stock	132		161		Dividends on Federal Home Loan Bank stock	106		161		238		322
Total interest income	Total interest income	53,814		53,141		Total interest income	52,950		54,105		106,764		107,246
Interest expense:	Interest expense:					Interest expense:
Interest on deposits:	Interest on deposits:					Interest on deposits:
Demand	Demand	176		192		Demand	114		199		290		391
Savings and money market	Savings and money market	1,118		791		Savings and money market	567		1,507		1,685		2,298
Time	Time	3,268		5,092		Time	2,124		4,867		5,392		9,959
Interest on short-term borrowings	Interest on short-term borrowings	508		893		Interest on short-term borrowings	74		1,123		582		2,016
Interest on long-term debt	Interest on long-term debt	914		1,060		Interest on long-term debt	812		1,031		1,726		2,091
Total interest expense	Total interest expense	5,984		8,028		Total interest expense	3,691		8,727		9,675		16,755
Net interest income	Net interest income	47,830		45,113		Net interest income	49,259		45,378		97,089		90,491
Provision for credit losses	Provision for credit losses	9,329		1,283		Provision for credit losses	10,640		1,404		19,969		2,687
Net interest income after provision for credit losses	Net interest income after provision for credit losses	38,501		43,830		Net interest income after provision for credit losses	38,619		43,974		77,120		87,804
Other operating income:	Other operating income:					Other operating income:
Mortgage banking income	Mortgage banking income	337		1,573		Mortgage banking income	3,566		1,708		3,903		3,281
Service charges on deposit accounts	Service charges on deposit accounts	2,050		2,081		Service charges on deposit accounts	1,149		2,041		3,199		4,122
Other service charges and fees	Other service charges and fees	4,897		3,215		Other service charges and fees	2,916		3,909		7,813		7,124
Income from fiduciary activities	Income from fiduciary activities	1,297		965		Income from fiduciary activities	1,270		1,129		2,567		2,094
Equity in earnings of unconsolidated subsidiaries	Equity in earnings of unconsolidated subsidiaries	26		8		Equity in earnings of unconsolidated subsidiaries	104		71		130		79

Income (loss) from bank-owned life insurance		(19)		952
Income from bank-owned life insurance						Income from bank-owned life insurance	1,424		914		1,405		1,866

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

Other	Other	298		2,879		Other	269		322		567		3,201
Total other operating income	Total other operating income	8,886		11,673		Total other operating income	10,692		10,094		19,578		21,767
Other operating expense:	Other operating expense:					Other operating expense:
Salaries and employee benefits	Salaries and employee benefits	20,347		19,889		Salaries and employee benefits	20,622		20,563		40,969		40,452
Net occupancy	Net occupancy	3,672		3,458		Net occupancy	3,645		3,525		7,317		6,983
Equipment	Equipment	1,097		1,006		Equipment	1,043		1,138		2,140		2,144

Communication expense	Communication expense	837		734		Communication expense	774		903		1,611		1,637
Legal and professional services	Legal and professional services	2,028		1,570		Legal and professional services	2,238		1,728		4,266		3,298
Computer software expense	Computer software expense	2,943		2,597		Computer software expense	3,035		2,560		5,978		5,157
Advertising expense	Advertising expense	1,092		711		Advertising expense	923		712		2,015		1,423
Foreclosed asset expense	Foreclosed asset expense	67		159		Foreclosed asset expense	—		49		67		208

Other	Other	4,157		4,224		Other	4,147		4,929		8,304		9,153
Total other operating expense	Total other operating expense	36,240		34,348		Total other operating expense	36,427		36,107		72,667		70,455
Income before income taxes	Income before income taxes	11,147		21,155		Income before income taxes	12,884		17,961		24,031		39,116
Income tax expense	Income tax expense	2,821		5,118		Income tax expense	2,967		4,427		5,788		9,545
Net income	Net income	$	8,326	$	16,037	Net income	$	9,917	$	13,534	$	18,243	$	29,571
Per common share data:	Per common share data:					Per common share data:
Basic earnings per common share	Basic earnings per common share	$	0.30	$	0.56	Basic earnings per common share	$	0.35	$	0.47	$	0.65	$	1.03
Diluted earnings per common share	Diluted earnings per common share	$	0.29	$	0.55	Diluted earnings per common share	$	0.35	$	0.47	$	0.65	$	1.03
Cash dividends declared	Cash dividends declared	$	0.23	$	0.21	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:					Weighted average common shares outstanding used in computation:
Basic shares	Basic shares	28,126,400		28,758,310		Basic shares	28,040,802		28,546,564		28,083,602		28,651,852
Diluted shares	Diluted shares	28,277,753		28,979,855		Diluted shares	28,095,230		28,729,510		28,190,132		28,847,786

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


		Three Months Ended March 31,							Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	(dollars in thousands)	2020		2019		(dollars in thousands)	2020		2019		2020		2019
Net income	Net income	$	8,326	$	16,037	Net income	$	9,917	$	13,534	$	18,243	$	29,571
Other comprehensive income, net of tax:	Other comprehensive income, net of tax:					Other comprehensive income, net of tax:
Net change in unrealized gain on investment securities	Net change in unrealized gain on investment securities	10,147		10,996		Net change in unrealized gain on investment securities	6,275		12,165		16,422		23,161
Defined benefit plans	Defined benefit plans	516		242		Defined benefit plans	204		248		720		490
Total other comprehensive income, net of tax	Total other comprehensive income, net of tax	10,663		11,238		Total other comprehensive income, net of tax	6,479		12,413		17,142		23,651
Comprehensive income	Comprehensive income	$	18,989	$	27,275	Comprehensive income	$	16,396	$	25,947	$	35,385	$	53,222

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)


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

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

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


		Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-In Capital		Accum. Deficit		Accum. Other Comp. Income (Loss)		Non- Controlling Interest		Total			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)																													(dollars in thousands, except per share data)
Balance at December 31, 2018	Balance at December 31, 2018	28,967,715	$	—	$	470,660	$	88,876	$	(51,718)	$	(16,093)	$	—	$	491,725	Balance at December 31, 2018	28,967,715	$	—	$	470,660	$	88,876	$	(51,718)	$	(16,093)	$	—	$	491,725
Impact of the adoption of new accounting standards (2)	Impact of the adoption of new accounting standards (2)	—	—		—		—		—		(3,100)		—		(3,100)		Impact of the adoption of new accounting standards (2)	—	—		—		—		—		(3,100)		—		(3,100)
Adjusted balance at January 1, 2019	Adjusted balance at January 1, 2019	28,967,715	—		470,660		88,876		(51,718)		(19,193)		—		488,625		Adjusted balance at January 1, 2019	28,967,715	—		470,660		88,876		(51,718)		(19,193)		—		488,625

Net income	Net income	—	—		—		—		16,037		—		—		16,037		Net income	—	—		—		—		16,037		—		—		16,037
Other comprehensive income	Other comprehensive income	—	—		—		—		—		11,238		—		11,238		Other comprehensive income	—	—		—		—		—		11,238		—		11,238
Cash dividends declared ($0.21 per share)	Cash dividends declared ($0.21 per share)	—	—		—		—		(6,052)		—		—		(6,052)		Cash dividends declared ($0.21 per share)	—	—		—		—		(6,052)		—		—		(6,052)

Common stock repurchased and retired and other related costs	Common stock repurchased and retired and other related costs	(277,000)	—		(7,708)		—		—		—		—		(7,708)		Common stock repurchased and retired and other related costs	(277,000)	—		(7,708)		—		—		—		—		(7,708)
Share-based compensation	Share-based compensation	32,326	—		—		498		—		—		—		498		Share-based compensation	32,326	—		—		498		—		—		—		498

Balance at March 31, 2019	Balance at March 31, 2019	28,723,041	$	—	$	462,952	$	89,374	$	(41,733)	$	(7,955)	$	—	$	502,638	Balance at March 31, 2019	28,723,041	$	—	$	462,952	$	89,374	$	(41,733)	$	(7,955)	$	—	$	502,638
Net income																	Net income	—	—		—		—		13,534		—		—		13,534
Other comprehensive income																	Other comprehensive income	—	—		—		—		—		12,413		—		12,413
Cash dividends declared ($0.23 per share)																	Cash dividends declared ($0.23 per share)	—	—		—		—		(6,581)		—		—		(6,581)
Common stock purchased by directors' deferred compensation plan (14,600 shares, net)																	Common stock purchased by directors' deferred compensation plan (14,600 shares, net)	—	—		(416)		—		—		—		—		(416)
Common stock repurchased and retired and other related costs																	Common stock repurchased and retired and other related costs	(213,700)	—		(6,243)		—		—		—		—		(6,243)
Share-based compensation																	Share-based compensation	58,436	—				350		—		—		—		350

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

(1) Represents the impact of the adoption of Accounting Standards Update ("ASU") ASU 2016-13. See Note 2 to the consolidated financial statements for additional information.	(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.																															(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.	(2) Represents the impact of the adoption of ASU 2017-12.																															(2) Represents the impact of the adoption of ASU 2017-12.

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


		Three Months Ended March 31,							Six Months Ended June 30,
(dollars in thousands)	(dollars in thousands)	2020		2019		(dollars in thousands)	2020		2019
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	8,326	$	16,037	Net income	$	18,243	$	29,571
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	Provision for credit losses	9,329		1,283		Provision for credit losses	19,969		2,687
Depreciation and amortization of premises and equipment	Depreciation and amortization of premises and equipment	1,504		1,540		Depreciation and amortization of premises and equipment	3,010		3,085
Non-cash lease expense	Non-cash lease expense	59		79		Non-cash lease expense	117		151
Cash flows from operating leases	Cash flows from operating leases	(1,594)		(1,549)		Cash flows from operating leases	(3,189)		(3,105)

Loss on sale of other real estate, net of write-downs	Loss on sale of other real estate, net of write-downs	64		138		Loss on sale of other real estate, net of write-downs	70		138
Amortization of mortgage servicing rights	Amortization of mortgage servicing rights	1,547		471		Amortization of mortgage servicing rights	3,217		1,072
Net amortization and accretion of premium/discounts on investment securities	Net amortization and accretion of premium/discounts on investment securities	1,982		2,211		Net amortization and accretion of premium/discounts on investment securities	4,327		4,644
Share-based compensation expense	Share-based compensation expense	673		498		Share-based compensation expense	1,396		848

Net gain on sales of residential mortgage loans	Net gain on sales of residential mortgage loans	(727)		(611)		Net gain on sales of residential mortgage loans	(5,273)		(1,586)
Proceeds from sales of loans held for sale	Proceeds from sales of loans held for sale	31,498		31,877		Proceeds from sales of loans held for sale	167,643		93,490
Originations of loans held for sale	Originations of loans held for sale	(25,598)		(28,158)		Originations of loans held for sale	(163,730)		(92,105)
Equity in earnings of unconsolidated subsidiaries	Equity in earnings of unconsolidated subsidiaries	(26)		(8)		Equity in earnings of unconsolidated subsidiaries	(130)		(79)
Distributions from unconsolidated subsidiaries	Distributions from unconsolidated subsidiaries	73		82		Distributions from unconsolidated subsidiaries	121		101
Net decrease (increase) in cash surrender value of bank-owned life insurance		19		(952)
Net increase in cash surrender value of bank-owned life insurance						Net increase in cash surrender value of bank-owned life insurance	(2,268)		(854)
Deferred income taxes	Deferred income taxes	(406)		5,013		Deferred income taxes	(2,129)		8,501
Net tax benefits from share-based compensation		(48)		105
Net tax (expense) benefit from share-based compensation						Net tax (expense) benefit from share-based compensation	(134)		192
Net change in other assets and liabilities	Net change in other assets and liabilities	4,570		(2,173)		Net change in other assets and liabilities	15,798		(8,782)
Net cash provided by operating activities	Net cash provided by operating activities	31,245		25,883		Net cash provided by operating activities	57,058		37,969
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Proceeds from maturities of and calls on investment securities available-for-sale	Proceeds from maturities of and calls on investment securities available-for-sale	50,878		43,093		Proceeds from maturities of and calls on investment securities available-for-sale	123,720		121,881

Purchases of investment securities available-for-sale	Purchases of investment securities available-for-sale	(96,068)		—		Purchases of investment securities available-for-sale	(147,359)		—

Proceeds from sale of MasterCard stock	Proceeds from sale of MasterCard stock	—		2,555		Proceeds from sale of MasterCard stock	—		2,555
Net loan originations	Net loan originations	(41,339)		(6,851)		Net loan originations	(524,869)		(121,756)
Purchases of loan portfolios	Purchases of loan portfolios	(22,340)		(18,286)		Purchases of loan portfolios	(33,196)		(49,327)

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

Net purchases of premises, equipment and land	Net purchases of premises, equipment and land	(5,608)		(782)		Net purchases of premises, equipment and land	(11,699)		(1,400)
Net return of capital from unconsolidated subsidiaries	Net return of capital from unconsolidated subsidiaries	—		622		Net return of capital from unconsolidated subsidiaries	—		622
Contributions to unconsolidated subsidiaries	Contributions to unconsolidated subsidiaries	(422)		—		Contributions to unconsolidated subsidiaries	(2,194)		—
Net (purchases of) proceeds from redemption of FHLB stock		(3,126)		500
Net cash (used in) / provided by investing activities		(118,025)		20,851
Net proceeds from redemption of (purchases of) FHLB stock						Net proceeds from redemption of (purchases of) FHLB stock	5,754		(1,179)
Net cash used in investing activities						Net cash used in investing activities	(589,583)		(48,604)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Net increase in deposits	Net increase in deposits	16,046		1,638		Net increase in deposits	674,662		30,359

Proceeds from long-term debt						Proceeds from long-term debt	65,944		—
Repayments of long-term debt	Repayments of long-term debt	—		(20,619)		Repayments of long-term debt	—		(20,619)
Net increase (decrease) in short-term borrowings		72,000		(18,000)
Net (decrease) increase in short-term borrowings						Net (decrease) increase in short-term borrowings	(150,000)		24,000
Cash dividends paid on common stock	Cash dividends paid on common stock	(6,496)		(6,052)		Cash dividends paid on common stock	(12,971)		(12,633)
Repurchases of common stock and other related costs	Repurchases of common stock and other related costs	(4,749)		(7,708)		Repurchases of common stock and other related costs	(4,749)		(13,951)

Net cash provided by financing activities	Net cash provided by financing activities	76,801		(50,741)		Net cash provided by financing activities	572,886		7,156
Net decrease in cash and cash equivalents		(9,979)		(4,007)
Net increase (decrease) in cash and cash equivalents						Net increase (decrease) in cash and cash equivalents	40,361		(3,479)
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	102,972		102,186		Cash and cash equivalents at beginning of period	102,972		102,186
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	92,993	$	98,179	Cash and cash equivalents at end of period	$	143,333	$	98,707

Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:					Supplemental disclosure of cash flow information:
Cash paid during the period for:	Cash paid during the period for:					Cash paid during the period for:
Interest	Interest	$	6,140	$	8,402	Interest	$	11,069	$	16,916
Income taxes	Income taxes	170		—		Income taxes	185		9,401

Supplemental disclosure of non-cash information:	Supplemental disclosure of non-cash information:					Supplemental disclosure of non-cash information:

Net change in common stock held by directors’ deferred compensation plan						Net change in common stock held by directors’ deferred compensation plan	154		416

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

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

These interim condensed consolidated financial statements and notes should be read in conjunction with the Company's consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended December 31, 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 ~~$0.1~~$0.2 million, ~~$15.0~~$14.6 million and $1.6 million, respectively, at ~~March 31,~~June 30, 2020 and $0.2 million, $15.3 million and $1.6 million, respectively, at December 31, 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.

Risks and Uncertainties

COVID-19 Pandemic

In December 2019, a novel strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China, and has since spread to a number of other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has severely impacted the level of economic activity in the 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. 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 iscontinues to be sustained, it may further adversely impact the Company and the State of Hawaii and impair the ability of the Company's customers to fulfill their contractual obligations to the Company. This could cause the Company to experience a material adverse effect on its business operations, asset valuations, ~~financial condition, and~~

financial condition, and results of operations. Material adverse ~~impacts~~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 ~~three~~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 reflect the realignment of the Company’s reportable segments and be comparable to the segment results for 2020. This change in reportable segments did not have an impact on the Company's previously reported historical consolidated financial statements.

Investment Securities

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

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

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

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

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

A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days delinquent. Interest accrued but not received for a security placed on non-accrual status is reversed against current period interest income. There were no investment securities on nonaccrual status as of ~~March 31,~~June 30, 2020 and the Company did not reverse any accrued interest against interest income during the three and six months ended ~~March 31,~~June 30, 2020.

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

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

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

rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a

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

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

As of ~~March 31,~~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 ~~$4.5~~$4.3 million as of ~~March 31,~~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 ~~March 31,~~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 ~~$12.4~~$15.3 million at ~~March 31,~~June 30, 2020 and is reported together with accrued interest on AFS debt securities on the consolidated balance sheets. Accrued interest receivable on loans is excluded from the estimate of credit losses.

Nonaccrual Loans

The Company determines delinquency status by considering the number of days full payments required by the contractual terms of the loan are past due. Loans are generally placed on nonaccrual status when interest payments are 90 days past due, or earlier should management determine that the borrowers will be unable to meet contractual principal and/or interest obligations, unless the loans are well-secured and in the process of collection. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income should management determine that the ~~collectibility~~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 ~~individually~~ to determine the required ACL using the same method as all other loans held for investment, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the ACL is determined by discounting the expected future cash flows at the original interest rate of the loan. Based on the underlying risk characteristics, TDRs performing in accordance with their modified contractual terms ~~for a reasonable period of time~~ may be ~~included in the Company’s existing pools based on the underlying risk characteristics of the loan to measure the ACL.~~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. ~~This~~Section 4013 and the interagency guidance ~~is expected~~are being applied by the Company to ~~reduce~~loan modifications made related to the COVID-19 pandemic as eligible and appropriate. The application of the guidance reduced the number of TDRs that ~~will be reported in future periods, however, the amount is~~were reported. Future TDRs are indeterminable and will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

ACL for Loans

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

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

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

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

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

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

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

The Company uses the Moody’s Analytics forecasting service for the economic forecast ~~used~~considered in ~~the~~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 ~~provided~~available by ~~Moody’s. Had~~Moody’s Analytics or may apply overrides to its statistical models to enhance the ~~Company used a different forecast scenario, or utilized updated forecasts released after the balance sheet date, the provision for expected credit losses could be materially different.~~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~~life-of-loan losses. The Company has also developed statistical models internally to incorporate future economic conditions and forecast ~~future~~expected credit losses based on various macro-economic ~~indicators.~~indicators such as unemployment and income levels.

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

Loan Segment

Historical Lifetime
Loss Method

Historical
Lookback
Period

Economic
Forecast
Length

Reversion Method

Construction

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

2008-Present

One Year

One Year (straight-line basis)

Commercial real estate

Loss-Rate Migration

2008-Present

Multi-family mortgage

PD/LGD

2008-Present

Commercial, financial and agricultural

Loss-Rate Migration

2008-Present

Home equity lines of credit

Loss-Rate Migration

2008-Present

Residential mortgage

Loss-Rate Migration

2008-Present

Consumer - other revolving

Loss-Rate Migration

2008-Present

Consumer - non-revolving

Loss-Rate Migration

2008-Present

Purchased Mainland portfolios (Dealer, Other ~~consumer~~

~~Loss-Rate Migration~~

~~2008-Present~~

~~Purchased dealer loans~~consumer)

Weighted-Average Remaining Maturity ("WARM")

~~2008-Present~~

~~Purchased consumer unsecured loans~~

~~Loss-Rate Migration/WARM~~

2008-Present

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

Construction loans

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

Commercial real estate loans

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

Multi-family mortgage loans

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

Commercial, financial and agricultural loans

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

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

Home equity lines of credit

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

Residential mortgage loans

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

Consumer loans - other revolving

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

Consumer loans - non-revolving

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

Purchased consumer portfolios

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

Below is a description of the methodologies mentioned above:

PD/LGD

The PD/LGD calculation is based on a cohort methodology whereby loans in the same cohort are tracked over time to identify defaults and corresponding losses. PD/LGD analysis requires a portfolio segmented into pools, and we elected to then further ~~sub-segmented~~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 athe 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'.~~balance.

WARM

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

Other

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

Determining the Contractual Term

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

Reserve for Off-Balance Sheet Credit Exposures

The Company maintains a separate and distinct reserve for off-balance-sheet credit exposures which is included in other liabilities on the Company’s consolidated balance sheets. The Company estimates the amount of expected losses by calculating a commitment usage factor for letters of credit, non-revolving lines of credit, and revolving lines of credit over the remaining life during which the Company is exposed to credit risk via a contractual obligation to extend ~~credit, unless that obligation is unconditionally cancellable by the Company.~~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. ~~No credit loss estimate is reported for off-balance-sheet credit exposures that are unconditionally cancellable by the bank.~~

Purchased Credit Deteriorated (“PCD”) Financial Assets

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

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

2. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Adopted in 2020

On 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 incurred loss methodology (Allowance for Loan and Leases Losses or "ALLL") with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and HTM debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to accounting for AFS debt securities. One such change is to require credit losses to be presented as an allowance rather than a write-down on AFS debt securities if management intends to sell or believes that it is more likely than not they will be required to sell the debt security before recovery of the amortized cost basis.

The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for the reporting periods beginning after January 1, 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 Company recorded a net decrease to retained earnings (or a net increase to accumulated deficit) of $3.2 million as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13. The transition adjustment

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

The following table illustrates the impact of ASC 326:


	January 1, 2020
(dollars in thousands)	As Reported Under ASC 326		Pre-ASC 326 Adoption		Impact of ASC 326 Adoption
Assets:
Allowance for credit losses on loans:
Commercial, financial & industrial	$	(7,509)	$	(8,136)	$	627
Real estate:
Construction	(2,271)		(1,792)		(479)
Residential mortgage	(13,935)		(13,327)		(608)
Home equity	(2,592)		(4,206)		1,614
Commercial mortgage	(13,737)		(11,113)		(2,624)
Consumer	(11,493)		(9,397)		(2,096)

Subtotal	$	(51,537)	$	(47,971)	$	(3,566)

Net deferred tax assets (included in other assets)	$	17,692	$	16,541	$	1,151

Liabilities:
Reserve for off-balance sheet credit exposures (included in other liabilities)	$	(2,012)	$	(1,272)	$	(740)

Equity:
Accumulated deficit	$	22,257	$	19,102	$	3,155

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

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

Impact of Other Recently Issued Accounting Pronouncements on Future Filings

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

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

3. INVESTMENT SECURITIES

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


(dollars in thousands)	(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		ACL		(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		ACL
March 31, 2020
June 30, 2020												June 30, 2020
Available-for-sale:	Available-for-sale:											Available-for-sale:
Debt securities:	Debt securities:											Debt securities:
States and political subdivisions	States and political subdivisions	$	131,539	$	2,955	$	(284)	$	134,210	$	—	States and political subdivisions	$	136,597	$	4,882	$	(11)	$	141,468	$	—
Corporate securities	Corporate securities	30,116		111		—		30,227		—		Corporate securities	29,221		531		—		29,752		—
U.S. Treasury obligations and direct obligations of U.S Government agencies	U.S. Treasury obligations and direct obligations of U.S Government agencies	38,244		43		(781)		37,506		—		U.S. Treasury obligations and direct obligations of U.S Government agencies	36,802		25		(473)		36,354		—
Mortgage-backed securities:	Mortgage-backed securities:											Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	Residential - U.S. Government-sponsored entities	716,398		18,861		(209)		735,050		—		Residential - U.S. Government-sponsored entities	692,989		21,516		(28)		714,477		—
Commercial - U.S. Government agencies and sponsored entities	Commercial - U.S. Government agencies and sponsored entities	77,612		2,707		—		80,319		—		Commercial - U.S. Government agencies and sponsored entities	77,743		2,926		(4)		80,665		—
Residential - Non-government agencies	Residential - Non-government agencies	34,113		608		(49)		34,672		—		Residential - Non-government agencies	30,697		1,389		—		32,086		—
Commercial - Non-government agencies	Commercial - Non-government agencies	131,705		1,265		(931)		132,039		—		Commercial - Non-government agencies	131,679		2,290		(177)		133,792		—
Total available-for-sale securities	Total available-for-sale securities	$	1,159,727	$	26,550	$	(2,254)	$	1,184,023	$	—	Total available-for-sale securities	$	1,135,728	$	33,559	$	(693)	$	1,168,594	$	—

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


(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2019
Available-for-sale:
Debt securities:
States and political subdivisions	$	119,755	$	2,303	$	(40)	$	122,018
Corporate securities	30,277		252		—		30,529
U.S. Treasury obligations and direct obligations of U.S Government agencies	40,769		10		(398)		40,381
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	673,918		6,003		(2,099)		677,822
Commercial - U.S. Government agencies and sponsored entities	80,773		1,198		(746)		81,225
Residential - Non-government agencies	36,377		830		(16)		37,191
Commercial - Non-government agencies	134,676		3,141		—		137,817
Total available-for-sale securities	$	1,116,545	$	13,737	$	(3,299)	$	1,126,983

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

(dollars in thousands)

Amortized Cost

Fair Value

(dollars in thousands)

Amortized Cost

Fair Value

March 31, 2020

June 30, 2020

Equity securities

961

1,002

Equity securities

1,064

1,209

December 31, 2019

Equity securities

935

1,127

Equity securities

935

1,127

On January 1, 2019 in connection with the adoption of ASU 2017-12, the Company transferred all of its HTM investment securities with an amortized cost of $148.5 million and fair value of $144.3 million to its AFS investment securities portfolio.

The amortized cost and estimated fair value of our AFS debt securities at ~~March 31,~~June 30, 2020 are shown below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.


		March 31, 2020							June 30, 2020
(dollars in thousands)	(dollars in thousands)	Amortized Cost		Fair Value		(dollars in thousands)	Amortized Cost		Fair Value

Available-for-sale:	Available-for-sale:					Available-for-sale:	��
Due in one year or less	Due in one year or less	$	48,598	$	48,784	Due in one year or less	$	44,455	$	44,638
Due after one year through five years	Due after one year through five years	46,887		47,163		Due after one year through five years	43,905		44,632
Due after five years through ten years	Due after five years through ten years	63,133		64,548		Due after five years through ten years	69,693		72,675
Due after ten years	Due after ten years	41,281		41,448		Due after ten years	44,567		45,629

Mortgage-backed securities:	Mortgage-backed securities:					Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	Residential - U.S. Government-sponsored entities	716,398		735,050		Residential - U.S. Government-sponsored entities	692,989		714,477
Commercial - U.S. Government agencies and sponsored entities	Commercial - U.S. Government agencies and sponsored entities	77,612		80,319		Commercial - U.S. Government agencies and sponsored entities	77,743		80,665
Residential - Non-government agencies	Residential - Non-government agencies	34,113		34,672		Residential - Non-government agencies	30,697		32,086
Commercial - Non-government agencies	Commercial - Non-government agencies	131,705		132,039		Commercial - Non-government agencies	131,679		133,792

Total available-for-sale securities	Total available-for-sale securities	$	1,159,727	$	1,184,023	Total available-for-sale securities	$	1,135,728	$	1,168,594

We did ~~not~~0t sell any available-for-sale securities during the three and six months ended ~~March 31,~~June 30, 2020 and ~~March 31,~~June 30, 2019.

Investment securities of ~~$617.9~~$597.4 million and $719.8 million at ~~March 31,~~June 30, 2020 and December 31, 2019, respectively, were pledged to secure public funds on deposit and other short-term borrowings.

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

There were a total of 5025 and 81 AFS debt securities which were in an unrealized ~~or unrecognized~~ loss position, without an ACL, at ~~March 31,~~June 30, 2020 and December 31, 2019, respectively. The following tables summarize AFS debt securities which were in an unrealized loss position at ~~March 31,~~June 30, 2020 and December 31, 2019, aggregated by major security type and length of time in a continuous unrealized ~~or unrecognized~~ loss position.


		Less Than 12 Months						12 Months or Longer								Total					Less Than 12 Months						12 Months or Longer	Total
(dollars in thousands)	(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2020
June 30, 2020														June 30, 2020
Debt securities:	Debt securities:													Debt securities:
States and political subdivisions	States and political subdivisions	$	6,953	$	(278)	$	803	$	(6)	$	7,756	$	(284)	States and political subdivisions	$	3,631	$	(11)	$	—	$	—	$	3,631	$	(11)
Corporate securities	Corporate securities	—		—		—		—		—		—		Corporate securities	—		—		—		—		—		—
U.S. Treasury obligations and direct obligations of U.S Government agencies	U.S. Treasury obligations and direct obligations of U.S Government agencies	14,879		(325)		17,437		(456)		32,316		(781)		U.S. Treasury obligations and direct obligations of U.S Government agencies	10,867		(187)		18,458		(286)		29,325		(473)
Mortgage-backed securities:	Mortgage-backed securities:													Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	Residential - U.S. Government-sponsored entities	4,764		(28)		17,967		(181)		22,731		(209)		Residential - U.S. Government-sponsored entities	4,505		(28)		—		—		4,505		(28)
Residential - Non-government agencies	Residential - Non-government agencies	7,495		(49)		—		—		7,495		(49)		Residential - Non-government agencies	—		—		—		—		—		—
Commercial - U.S. Government agencies and sponsored entities	Commercial - U.S. Government agencies and sponsored entities	—		—		—		—		—		—		Commercial - U.S. Government agencies and sponsored entities	1,781		(4)		—		—		1,781		(4)
Commercial - Non-government agencies	Commercial - Non-government agencies	78,904		(931)		—		—		78,904		(931)		Commercial - Non-government agencies	26,729		(177)		—		—		26,729		(177)
Total temporarily impaired securities	Total temporarily impaired securities	$	112,995	$	(1,611)	$	36,207	$	(643)	$	149,202	$	(2,254)	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
December 31, 2019
Debt securities:
States and political subdivisions	$	1,754	$	(9)	$	801	$	(31)	$	2,555	$	(40)
Corporate securities	—		—		—		—		—		—
U.S. Treasury obligations and direct obligations of U.S Government agencies	18,882		(143)		19,031		(255)		37,913		(398)
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	54,335		(283)		214,295		(1,816)		268,630		(2,099)
Residential - Non-government agencies	8,206		(16)		—		—		8,206		(16)
Commercial - U.S. Government-sponsored entities	32,067		(746)		—		—		32,067		(746)

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

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

Visa and MasterCard Class B Common Stock

As of ~~March 31,~~June 30, 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 CREDIT QUALITY

Loans, excluding loans held for sale, net of ACL under ASC 326 as of ~~March 31,~~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:


(dollars in thousands)	(dollars in thousands)	March 31, 2020		December 31, 2019		(dollars in thousands)	June 30, 2020		December 31, 2019
Commercial, financial and agricultural		$	575,169	$	570,089
Commercial, financial and agricultural:						Commercial, financial and agricultural:
Small Business Administration Paycheck Protection Program						Small Business Administration Paycheck Protection Program	$	543,653	$	—
Other						Other	547,768		570,089
Real estate:	Real estate:					Real estate:
Construction	Construction	100,959		96,139		Construction	103,826		96,139
Residential mortgage	Residential mortgage	1,628,502		1,595,801		Residential mortgage	1,653,632		1,595,801
Home equity	Home equity	504,061		490,239		Home equity	510,188		490,239
Commercial mortgage	Commercial mortgage	1,140,611		1,124,911		Commercial mortgage	1,131,959		1,124,911

Consumer	Consumer	559,765		569,516		Consumer	527,100		569,516

Gross loans and leases	Gross loans and leases	4,509,067		4,446,695		Gross loans and leases	5,018,126		4,446,695
Net deferred costs		2,931		2,845
Loans		4,511,998		4,449,540
Net deferred (fees) costs						Net deferred (fees) costs	(14,688)		2,845
Total loans, net of deferred fees and costs						Total loans, net of deferred fees and costs	5,003,438		4,449,540
Allowance for credit losses	Allowance for credit losses	(59,645)		(47,971)		Allowance for credit losses	(67,339)		(47,971)
Loans, net of allowance for credit losses		$	4,452,353	$	4,401,569
Total loans, net of allowance for credit losses						Total loans, net of allowance for credit losses	$	4,936,099	$	4,401,569

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.

The Company did ~~not~~0t transfer any loans to the held-for-sale category during the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019.

The Company did ~~not~~0t sell any loans originally held for investment during the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019.

The Company has purchased loan portfolios, none of which were credit deteriorated since origination, at the time of purchase.

2122

The following table presents loans purchased by class for the periods presented:

(dollars in thousands)

Consumer - Unsecured

Three Months Ended ~~March 31,~~June 30, 2020

Purchases:

Outstanding balance

~~22,953~~11,359

Purchase premium (discount)

~~(613)~~(503)

Purchase price

~~22,340~~10,856

~~Three~~Six Months Ended ~~March 31, 2019~~June 30, 2020

Purchases:

Outstanding balance

~~18,286~~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

~~18,286~~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 borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table presents the amortized cost basis of collateral-dependent loans by class, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans as of ~~March 31,~~June 30, 2020:

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


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

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


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

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


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

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

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





Consumer	17		17		17
Total	484		484		235
Total impaired loans	$	9,891	$	9,066	$	235

The following table presents by class, the average recorded investment and interest income recognized on impaired loans for the three and six months ended ~~March 31,~~June 30, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:


		Three Months Ended							Three Months Ended						Six Months Ended
		March 31, 2019							June 30, 2019						June 30, 2019
(dollars in thousands)	(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial, financial and agricultural	Commercial, financial and agricultural	$	209	$	3	Commercial, financial and agricultural	$	185	$	2	$	199	$	5
Real estate:	Real estate:					Real estate:
Construction	Construction	2,233		30		Construction	1,434		32		1,890		62
Residential mortgage	Residential mortgage	9,818		106		Residential mortgage	8,583		607		9,289		713
Home equity	Home equity	497		—		Home equity	254		13		393		13
Commercial mortgage	Commercial mortgage	2,285		23		Commercial mortgage	2,138		23		2,222		46

Total	Total	$	15,042	$	162	Total	$	12,594	$	677	$	13,993	$	839

For the three and six months ended ~~March 31,~~June 30, 2019, the amount of interest income recognized on impaired loans within the period that the loans were impaired were primarily related to loans modified in a troubled debt restructuring ("TDR") that were on accrual status. For the three and six months ended ~~March 31,~~June 30, 2019, 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 ~~$0.7~~$0.9 million and $0.6 million of residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure at ~~March 31,~~June 30, 2020 and December 31, 2019, respectively.

The Company did not foreclose on any loans during the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019.

Nonaccrual and Past Due Loans

For all loan types, the Company determines delinquency status by considering the number of days full payments required by the contractual terms of the loan are past due. The following tables present by class, the aging of the recorded investment in past due loans and leases as of ~~March 31,~~June 30, 2020 and December 31, 2019. The following tables also present the amortized cost of loans on ~~onaccrual~~nonaccrual status for which there was no related ACL under ASC 326 as of ~~March 31,~~June 30, 2020 and under previous GAAP as of December 31, 2019.


(dollars in thousands)	(dollars in thousands)	Accruing Loans 30 - 59 Days Past Due		Accruing Loans 60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due and Nonaccrual		Loans and Leases Not Past Due		Total		Nonaccrual Loans With No ACL		(dollars in thousands)	Accruing Loans 30 - 59 Days Past Due		Accruing Loans 60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due and Nonaccrual		Loans and Leases Not Past Due		Total		Nonaccrual Loans With No ACL
March 31, 2020
Commercial, financial and agricultural		$	7,050	$	712	$	—	$	667	$	8,429	$	566,895	$	575,324	$	—
June 30, 2020																		June 30, 2020
Commercial, financial and agricultural - SBA PPP																		Commercial, financial and agricultural - SBA PPP	$	—	$	—	$	—	$	—	$	—	$	526,408	$	526,408	$	—
Commercial, financial and agricultural - Other																		Commercial, financial and agricultural - Other	979		176		—		934		2,089		545,769		547,858		—
Real estate:	Real estate:																	Real estate:
Construction	Construction	478		—		—		—		478		100,139		100,617		—		Construction	—		—		—		—		—		103,518		103,518		—
Residential mortgage	Residential mortgage	4,371		82		1,221		2,287		7,961		1,624,575		1,632,536		2,287		Residential mortgage	—		1,375		726		3,215		5,316		1,652,242		1,657,558		3,215
Home equity	Home equity	573		—		—		545		1,118		503,568		504,686		545		Home equity	366		—		—		538		904		510,058		510,962		538
Commercial mortgage	Commercial mortgage	287		—		—		—		287		1,138,850		1,139,137		—		Commercial mortgage	—		—		—		—		—		1,130,169		1,130,169		—

Consumer	Consumer	4,739		1,167		352		48		6,306		553,392		559,698		—		Consumer	1,673		964		444		54		3,135		523,830		526,965		—

Total	Total	$	17,498	$	1,961	$	1,573	$	3,547	$	24,579	$	4,487,419	$	4,511,998	$	2,832	Total	$	3,018	$	2,515	$	1,170	$	4,741	$	11,444	$	4,991,994	$	5,003,438	$	3,753


(dollars in thousands)	Accruing Loans 30 - 59 Days Past Due		Accruing Loans 60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due and Nonaccrual		Loans and Leases Not Past Due		Total		Nonaccrual Loans With No ACL
December 31, 2019
Commercial, financial and agricultural	$	476	$	865	$	—	$	467	$	1,808	$	568,496	$	570,304	$	—
Real estate:
Construction	643		—		—		—		643		95,211		95,854		—
Residential mortgage	1,830		589		724		979		4,122		1,595,679		1,599,801		979
Home equity	759		207		—		92		1,058		489,676		490,734		92
Commercial mortgage	—		397		—		—		397		1,123,018		1,123,415		—


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

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

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.

Troubled Debt Restructurings

Troubled debt restructurings ("TDRs") included in nonperforming assets at ~~March 31,~~June 30, 2020 consisted of 1 Hawaii residential mortgage loan with a principal balance of $0.3 million. There were ~~$7.3~~$7.5 million of TDRs still accruing interest at ~~March 31,~~June 30, 2020, ~~none~~NaN of which were more than 90 days delinquent. At December 31, 2019, there were $7.5 million of TDRs still accruing interest, ~~none~~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 the loan typically consists of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. In these cases, the principal balance on the TDR had matured and/or was in default at the time of restructure, and there ~~are~~were no commitments to lend additional funds to the ~~borrower.~~borrower during the three and six months ended June 30, 2020 and 2019.

As discussed in Note 1 to these financial statements, ~~the~~Section 4013 of CARES Act and the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, ~~2019.~~2019 and at the time of modification program implementation, respectively, and meets other applicable criteria. The Company identified 9 consumer loans totaling $0.1 million that were modified during the quarter and did not meet the criteria under Section 4013 of CARES Act or the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)". As a result, these loans are included in the TDRs disclosed above. The remaining TDRs disclosed above were not related to COVID-19 modifications. The Company executed loan deferrals on outstanding balances of approximately ~~$65~~$567.9 million resulting from the COVID-19 pandemic that were not classified as a TDR at ~~March 31,~~June 30, 2020.

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


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

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

Six Months Ended June 30, 2020

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

NaN loans were modified in a TDR during the three and six months ended ~~March 31, 2020 and~~June 30, 2019.

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

~~We had no commitments on TDRs during the three months ended March 31,~~June 30, 2020 and 2019.

Credit Quality Indicators

The Company categorizes loans 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 individually by classifying the loans by credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk rating of loans. Loans not meeting the following criteria that are analyzed individually as part of the described process are considered to be pass-rated loans.

Special Mention. Loans and leases classified as special mention, while still adequately protected by the borrower's capital adequacy and payment capability, exhibit distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects

of repayment. These exposures require management's close attention so as to avoid becoming undue or unwarranted credit exposures.

Substandard. Loans and leases classified as substandard are inadequately protected by the borrower's current financial condition and payment capability or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans and leases classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.

Loss. Loans and leases classified as loss are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Losses are taken in the period in which they surface as uncollectible.

2527

The following table presents the amortized cost basis of the Company's loans by class, credit quality indicator and origination year as of ~~March 31,~~June 30, 2020. Revolving loans converted to term as of and during the three and six months ended ~~March 31,~~June 30, 2020 were not material to the total loan portfolio.


		Amortized Cost of Term Loans by Origination Year																											Amortized Cost of Term Loans by Origination Year
		2020		2019		2018		2017		2016		Prior		Amortized Cost of Revolving Loans		Total			2020		2019		2018		2017		2016		Prior		Amortized Cost of Revolving Loans		Total
		(dollars in thousands)																															(dollars in thousands)
March 31, 2020
Commercial, financial and agricultural
June 30, 2020																		June 30, 2020
Commercial, financial and agricultural - SBA PPP:																		Commercial, financial and agricultural - SBA PPP:
Risk Rating																		Risk Rating
Pass																		Pass	$	526,408	$	—	$	—	$	—	$	—	$	—	$	—	$	526,408

Commercial, financial and agricultural - Other:																		Commercial, financial and agricultural - Other:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	$	40,976	$	77,593	$	64,288	$	59,642	$	50,144	$	125,599	$	97,073	$	515,315	Pass	73,563		70,052		64,647		53,927		46,574		99,703		82,204		490,670
Special Mention	Special Mention	2,865		9,777		5,627		15,376		1,006		9,153		3,280		47,084		Special Mention	2,740		8,796		5,490		15,034		550		9,632		1,520		43,762
Substandard	Substandard	—		7,497		526		1,229		2,097		1,576		—		12,925		Substandard	—		7,362		595		1,220		2,407		1,842		—		13,426

Subtotal	Subtotal	43,841		94,867		70,441		76,247		53,247		136,328		100,353		575,324		Subtotal	76,303		86,210		70,732		70,181		49,531		111,177		83,724		547,858
Construction
Construction:																		Construction:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	7,923		12,157		50,181		6,920		2,277		21,159		—		100,617		Pass	12,308		15,026		46,092		7,164		2,239		20,689		—		103,518

Residential mortgage
Residential mortgage:																		Residential mortgage:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	80,293		364,858		186,851		201,685		227,341		566,829		—		1,627,857		Pass	252,833		335,607		163,136		181,703		210,585		506,943		—		1,650,807
Special Mention	Special Mention	—		—		—		—		159		835		—		994		Special Mention	—		—		—		1,437		153		1,145		—		2,735
Substandard	Substandard	—		—		550		929		302		1,904		—		3,685		Substandard	—		—		545		895		888		1,688		—		4,016

Subtotal	Subtotal	80,293		364,858		187,401		202,614		227,802		569,568		—		1,632,536		Subtotal	252,833		335,607		163,681		184,035		211,626		509,776		—		1,657,558
Home equity
Risk Rating
Pass		4,927		21,426		22,858		493		249		3,951		450,237		504,141

Substandard		—		—		—		—		207		338		—		545

Subtotal		4,927		21,426		22,858		493		456		4,289		450,237		504,686
Commercial mortgage
Home equity:																		Home equity:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	36,503		153,355		170,779		172,937		118,087		396,221		17,463		1,065,345		Pass	9,200		18,464		19,080		457		298		4,923		457,792		510,214
Special Mention	Special Mention	—		—		2,392		12,597		13,220		32,666		—		60,875		Special Mention	—		—		—		—		—		—		210		210
Substandard	Substandard	—		7,434		—		—		—		5,483		—		12,917		Substandard	—		—		—		—		206		332		—		538

Subtotal	Subtotal	36,503		160,789		173,171		185,534		131,307		434,370		17,463		1,139,137		Subtotal	9,200		18,464		19,080		457		504		5,255		458,002		510,962
Consumer
Commercial mortgage:																		Commercial mortgage:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	47,522		206,573		111,490		68,480		31,287		17,520		76,277		559,149		Pass	42,505		149,625		155,100		171,513		113,485		383,327		17,363		1,032,918
Special Mention	Special Mention	—		—		—		—		—		—		150		150		Special Mention	—		2,602		18,508		12,718		10,369		24,984		—		69,181
Substandard	Substandard	—		11		26		11		—		237		—		285		Substandard	—		4,593		—		—		4,513		18,964		—		28,070

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

Substandard																		Substandard	11		27		14		48		4		256		—		360
Loss	Loss	—		—		—		—		—		114		—		114		Loss	—		—		—		79		45		15		—		139
Subtotal	Subtotal	47,522		206,584		111,516		68,491		31,287		17,871		76,427		559,698		Subtotal	61,801		136,983		73,822		57,749		25,671		99,718		71,221		526,965
Total	Total	$	221,009	$	860,681	$	615,568	$	540,299	$	446,376	$	1,183,585	$	644,480	$	4,511,998	Total	$	981,358	$	749,110	$	547,015	$	503,817	$	417,938	$	1,173,890	$	630,310	$	5,003,438

2628

The following table presents the Company's loans by class and credit quality indicator as of December 31, 2019:


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


Consumer	569,212		—		193		111		569,516		(84)		569,432

Total	$	4,366,276	$	38,957	$	41,351	$	111	$	4,446,695	$	2,845	$	4,449,540

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

The following table presents by class, the activity in the ACL for loans under ASC 326 during the three and six months ended ~~March 31,~~June 30, 2020 and under previous GAAP during the three and six months ended ~~March 31,~~June 30, 2019:


				Real Estate																			Commercial, Financial and Agricultural						Real Estate
(dollars in thousands)	(dollars in thousands)	Commercial, Financial & Agricultural		Construction		Residential Mortgage		Home Equity		Commercial Mortgage		Consumer		Total		(dollars in thousands)	SBA PPP		Other		Construction		Residential Mortgage		Home Equity		Commercial Mortgage			Consumer		Total
Three Months Ended March 31, 2020
Three Months Ended June 30, 2020																Three Months Ended June 30, 2020
Beginning balance prior to ASC 326	Beginning balance prior to ASC 326	$	8,136	$	1,792	$	13,327	$	4,206	$	11,113	$	9,397	$	47,971	Beginning balance prior to ASC 326	$	—	$	8,645	$	3,057	$	13,181	$	2,309	$	19,518		$	12,935	$	59,645
Impact of adoption of ASC 326	Impact of adoption of ASC 326	(627)		479		608		(1,614)		2,624		2,096		3,566		Impact of adoption of ASC 326	—		—		—		—		—		—			—		—
Balance after adoption of ASC 326		7,509		2,271		13,935		2,592		13,737		11,493		51,537
Beginning balance																Beginning balance	—		8,645		3,057		13,181		2,309		19,518			12,935		59,645
Provision for credit losses	Provision for credit losses	1,231		655		(935)		(314)		5,779		2,913		9,329		Provision for credit losses	388		7,660		217		1,876		1,342		(3,371)			2,528		10,640

																	388		16,305		3,274		15,057		3,651		16,147			15,463		70,285
Charge-offs	Charge-offs	437		—		—��		—		—		2,217		2,654		Charge-offs	—		1,103		—		52		—		—			2,626		3,781
Recoveries	Recoveries	342		131		181		31		2		746		1,433		Recoveries	—		305		—		20		—		1			509		835
Net charge-offs (recoveries)	Net charge-offs (recoveries)	95		(131)		(181)		(31)		(2)		1,471		1,221		Net charge-offs (recoveries)	—		798		—		32		—		(1)			2,117		2,946
Ending balance	Ending balance	$	8,645	$	3,057	$	13,181	$	2,309	$	19,518	$	12,935	$	59,645	Ending balance	$	388	$	15,507	$	3,274	$	15,025	$	3,651	$	16,148		$	13,346	$	67,339

Three Months Ended March 31, 2019
Three Months Ended June 30, 2019																Three Months Ended June 30, 2019
Beginning balance	Beginning balance	$	8,027	$	1,202	$	14,349	$	3,788	$	13,358	$	7,192	$	47,916	Beginning balance	$	—	$	7,847	$	1,299	$	12,851	$	4,278	$	12,036		$	8,956	$	47,267
Provision for credit losses	Provision for credit losses	50		91		(1,520)		481		(1,322)		3,503		1,283		Provision for credit losses	—		786		(578)		144		26		(393)			1,419		1,404
		8,077		1,293		12,829		4,269		12,036		10,695		49,199			—		8,633		721		12,995		4,304		11,643			10,375		48,671
Charge-offs	Charge-offs	463		—		—		—		—		2,251		2,714		Charge-offs	—		839		—		—		—		—			1,459		2,298
Recoveries	Recoveries	233		6		22		9		—		512		782		Recoveries	—		315		592		372		9		25			581		1,894
Net charge-offs (recoveries)	Net charge-offs (recoveries)	230		(6)		(22)		(9)		—		1,739		1,932		Net charge-offs (recoveries)	—		524		(592)		(372)		(9)		(25)			878		404
Ending balance	Ending balance	$	7,847	$	1,299	$	12,851	$	4,278	$	12,036	$	8,956	$	47,267	Ending balance	$	—	$	8,109	$	1,313	$	13,367	$	4,313	$	11,668		$	9,497	$	48,267

2729


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

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

The following table presents the activity in the reserve for off-balance sheet credit exposures, included in other liabilities, under ASC 326 during the three and six months ended ~~March 31,~~June 30, 2020 and under previous GAAP during the three and six months ended ~~March 31,~~June 30, 2019.


Three Months Ended ~~March 31,~~June 30, 2020


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

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


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

Six Months Ended June 30, 2020
Beginning balance prior to ASC 326	$	1,272
Impact of adoption of ASC 326	740
Balance after adoption of ASC 326	2,012
Provision for off-balance sheet credit exposures	~~1,798~~2,371
Ending ~~Balance~~balance	$	~~3,810~~4,383

~~Three~~Six Months Ended ~~March 31,~~June 30, 2019
Beginning balance	$	1,242


Provision for off-balance sheet credit exposures	~~167~~655
Ending balance	$	~~1,409~~1,897

In accordance with GAAP, other real estate assets are not included in our assessment of the ACL.

Our provision for credit losses on loans was ~~$9.3~~$10.6 million and $20.0 million in the three and six months ended ~~March 31,~~June 30, 2020 under ASC 326, compared to ~~$1.3~~$1.4 million and $2.7 million in the three and six months ended ~~March 31,~~June 30, 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)	(dollars in thousands)	March 31, 2020		December 31, 2019		(dollars in thousands)	June 30, 2020		December 31, 2019
Investments in low income housing tax credit partnerships	Investments in low income housing tax credit partnerships	$	14,974	$	15,322	Investments in low income housing tax credit partnerships	$	14,626	$	15,322
Investments in common securities of statutory trusts	Investments in common securities of statutory trusts	1,547		1,547		Investments in common securities of statutory trusts	1,547		1,547
Investments in affiliates	Investments in affiliates	146		192		Investments in affiliates	201		192
Other	Other	54		54		Other	54		54
Total	Total	$	16,721	$	17,115	Total	$	16,428	$	17,115

The Company invests in low-income housing tax credit ("LIHTC") partnerships. As of ~~March 31,~~June 30, 2020 and December 31, 2019, the Company had ~~$11.0~~$9.3 million and $11.5 million, respectively, in unfunded commitments related to the LIHTC partnerships. The expected payments for the unfunded commitments as of ~~March 31,~~June 30, 2020 for the remainder of fiscal year 2020, the next five succeeding fiscal years and all years thereafter are as follows (dollars in thousands):


Year Ending December 31,	Year Ending December 31,			Year Ending December 31,
2020 (remainder)	2020 (remainder)	$	6,452	2020 (remainder)	$	4,694
2021	2021	1,494		2021	1,494
2022	2022	3,010		2022	2,995
2023	2023	10		2023	10
2024	2024	26		2024	26
2025	2025	6		2025	6
Thereafter	Thereafter	42		Thereafter	43
Total unfunded commitments	Total unfunded commitments	$	11,040	Total unfunded commitments	$	9,268

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

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

The following table presents amortization and tax credits recognized associated with our investments in LIHTC partnerships for the three and six months ended ~~March 31,~~June 30, 2020 and ~~March 31,~~June 30, 2019:


(dollars in thousands)	(dollars in thousands)	Three Months Ended March 31, 2020		Three Months Ended March 31, 2019		(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:	Proportional amortization method:					Proportional amortization method:
Amortization expense recognized in income tax expense	Amortization expense recognized in income tax expense	$	348	$	258	Amortization expense recognized in income tax expense	$	348	$	259	$	696	$	517
Tax credits recognized in income tax expense	Tax credits recognized in income tax expense	400		277		Tax credits recognized in income tax expense	400		338		800		615

7. MORTGAGE SERVICING RIGHTS

The following table presents changes in mortgage servicing rights for the periods presented:

(dollars in thousands)

Mortgage
Servicing
Rights

Balance, January 1, 2019

15,596

Additions

~~222~~742

Amortization

~~(471)~~(1,072)

Balance, ~~March 31,~~June 30, 2019

~~15,347~~15,266

Balance, January 1, 2020

14,718

Additions

~~174~~1,270

Amortization

~~(1,547)~~(3,217)

Balance, ~~March 31,~~June 30, 2020

~~13,345~~12,771

Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans and totaled ~~$0.2~~$1.1 million and $1.3 million for the three and six months ended ~~March 31,~~June 30, 2020 compared to ~~$0.2~~$0.5 million and $0.7 million for the three and six months ended ~~March 31,~~June 30, 2019.

Amortization of mortgage servicing rights totaled ~~$1.5~~$1.7 million and $3.2 million for the three and six months ended ~~March 31,~~June 30, 2020 compared to ~~$0.5~~$0.6 million and $1.1 million for the three and six months ended ~~March 31,~~June 30, 2019.

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


		Three Months Ended			Three Months Ended				Six Months Ended		Six Months Ended
(dollars in thousands)	(dollars in thousands)	March 31, 2020			March 31, 2019			(dollars in thousands)	June 30, 2020		June 30, 2019
Fair market value, beginning of period	Fair market value, beginning of period	$	15,820		$	17,696		Fair market value, beginning of period	$	15,820	$	17,696
Fair market value, end of period	Fair market value, end of period	13,525			16,541			Fair market value, end of period	13,060		15,554
Weighted average discount rate		9.5		%	9.5		%
Forecasted constant prepayment rate assumption ⁽¹⁾		16.1		%	16.2		%


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

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

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


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

Mortgage servicing rights	Mortgage servicing rights	$	67,769	$	(54,424)	$	13,345	$	67,595	$	(52,877)	$	14,718	Mortgage servicing rights	$	68,865	$	(56,094)	$	12,771	$	67,595	$	(52,877)	$	14,718

Based on the mortgage servicing rights held as of ~~March 31,~~June 30, 2020, estimated amortization expense for the remainder of fiscal year 2020, the next five succeeding fiscal years and all years thereafter are as follows (dollars in thousands):


Year Ending December 31,	Year Ending December 31,			Year Ending December 31,
2020 (remainder)	2020 (remainder)	$	4,400	2020 (remainder)	$	2,583
2021	2021	4,764		2021	4,359
2022	2022	3,856		2022	3,538
2023	2023	325		2023	2,291
2024	2024	—		2024	—
2025	2025	—		2025	—
Thereafter	Thereafter	—		Thereafter	—
Total	Total	$	13,345	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 ~~March 31,~~June 30, 2020 and December 31, 2019, we were not party to any derivatives designated as part of a fair value or cash flow hedge.

Interest Rate Lock and Forward Sale Commitments

We enter into interest rate lock commitments on certain mortgage loans that are intended to be sold. To manage interest rate risk on interest rate lock commitments, we also enter into forward loan sale commitments. The interest rate locks and forward loan sale commitments are accounted for as undesignated derivatives and are recorded at their respective fair values in other assets or other liabilities, with changes in fair value recorded in current period earnings. These instruments serve to reduce our exposure to movements in interest rates. At ~~March 31,~~June 30, 2020, we were a party to interest rate lock and forward sale commitments on ~~$4.2~~$0.4 million and ~~$8.1~~$10.9 million of mortgage loans, respectively.

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

Derivatives Financial Instruments Not Designated as Hedging Instruments Asset Derivatives Liability Derivatives
Fair Value at Fair Value at
(dollars in thousands) Balance Sheet Location March 31,
2020 December 31,
2019 March 31,
2020 December 31,
2019
Interest rate lock and forward sale commitments Other assets / other liabilities $ 115 $ 8 $ 37 $ 28

Derivatives Financial Instruments Not Designated as Hedging Instruments

Asset Derivatives

Liability Derivatives

Fair Value at

(dollars in thousands)

Balance Sheet Location

June 30,
2020

December 31,
2019

June 30,
2020

December 31,
2019

Interest rate lock and forward sale commitments

Other assets / other liabilities

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 ~~were a participant in.~~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 ~~March 31,~~June 30, 2020.

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

Derivatives Financial Instruments
Not Designated as Hedging Instruments

Location of Gain (Loss)
Recognized in
Earnings on Derivatives

Amount of Gain (Loss)
Recognized in
Earnings on Derivatives

(dollars in thousands)

Three Months Ended ~~March 31,~~June 30, 2020

Interest rate lock and forward sale commitments

Mortgage banking income

99 (149)

Three Months Ended June 30, 2019

Interest rate lock and forward sale commitments

Mortgage banking income

(18)

Six Months Ended June 30, 2020

Interest rate lock and forward sale commitments

Mortgage banking income

(50)

Risk participation agreement

Other service charges and fees

1,288

~~Three~~Six Months Ended ~~March 31,~~June 30, 2019

Interest rate lock and forward sale commitments

Mortgage banking income

3921

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 ~~$1.87~~$1.97 billion line of credit as of ~~March 31,~~June 30, 2020, compared to $1.84 billion at December 31, 2019. At ~~March 31,~~June 30, 2020, ~~$1.41~~$1.67 billion was undrawn under this arrangement, compared to $1.57 billion at December 31, 2019. ~~Short-term~~There were 0 short-term borrowings under this arrangement ~~totaled $222.0 million~~ at ~~March 31,~~June 30, 2020, compared to $150.0 million at December 31, 2019. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled ~~$187.4~~$248.5 million at ~~March 31,~~June 30, 2020, compared to $78.9 million at December 31, 2019. Long-term borrowings under this arrangement totaled $50.0 million at ~~March 31,~~June 30, 2020 and December 31, 2019. FHLB advances and standby letters of credit available at ~~March 31,~~June 30, 2020 were secured by certain real estate loans with a carrying value of ~~$2.51~~$2.66 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB.

At ~~March 31,~~June 30, 2020 and December 31, 2019, our bank had additional unused borrowings available at the Federal Reserve discount window of ~~$60.3~~$54.6 million and $65.3 million, respectively. As of ~~March 31,~~June 30, 2020 and December 31, 2019, certain commercial and commercial real estate loans with a carrying value totaling ~~$125.2~~$126.7 million and $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 $20.0~~We completed the redemption of $20 million inof floating rate trust preferred securities ~~bearing an interest rate of three-month LIBOR plus 2.85% and maturing on October 7, 2033. The principal assets of~~issued by Trust II ~~were $20.6~~in January 2019 and $20 million of ~~the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust II trust preferred securities. Trust II issued $0.6 million of common securities to the Company.~~

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

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

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

In September 2004, we created a wholly-owned statutory trust, CPB Capital Trust IV ("Trust IV"). Trust IV issued $30.0 million in floating rate trust preferred securities bearing an interest rate of three-month LIBOR plus 2.45% and maturing on December 15, 2034. The principal assets of Trust IV are $30.9 million of the Company's junior subordinated debentures with an

identical interest rate and maturity as the Trust IV trust preferred securities. Trust IV issued $0.9 million of common securities to the Company.

In December 2004, we created a wholly-owned statutory trust, CPB Statutory Trust V ("Trust V"). Trust V issued $20.0 million in floating rate trust preferred securities bearing an interest rate of three-month LIBOR plus 1.87% and maturing on December 15, 2034. The principal assets of Trust V are $20.6 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust V trust preferred securities. Trust V issued $0.6 million of common securities to the Company.

At ~~March 31,~~June 30, 2020 and December 31, 2019, the Company had the following junior subordinated debentures outstanding, which is recorded in long-term debt on the Company's consolidated balance sheets:

(dollars in thousands)

~~March 31,~~June 30, 2020

Name of Trust

Subordinated Debentures

Interest Rate

Trust IV

30,928

Three month LIBOR + 2.45%

Trust V

20,619

Three month LIBOR + 1.87%

Total

51,547

December 31, 2019

Name of Trust

Subordinated Debentures

Interest Rate

Trust IV

30,928

Three month LIBOR + 2.45%

Trust V

20,619

Three month LIBOR + 1.87%

Total

51,547

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

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

10. REVENUE FROM CONTRACTS WITH CUSTOMERS

The following presents the Company's other operating income, segregated by revenue streams that are in-scope and out-of-scope of ASC 606, "Revenue from Contracts with Customers" for the three and six months ended ~~March 31,~~June 30, 2020 and ~~2019.~~2019:

Three Months Ended
March 31,
(dollars in thousands) 2020 2019
Other operating income:
In-scope of ASC 606
Mortgage banking income $ 229 $ 149
Service charges on deposit accounts 2,050 2,081
Other service charges and fees 2,996 2,594
Income on fiduciary activities 1,297 965
In-scope other operating income 6,572 5,789
Out-of-scope other operating income 2,314 5,884
Total other operating income $ 8,886 $ 11,673


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

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

11. SHARE-BASED COMPENSATION

Restricted Stock Units

The table below presents the activity of restricted stock units for the ~~three~~six months ended ~~March 31,~~June 30, 2020:


		Shares	Weighted Average Grant Date Fair Value			Shares	Weighted Average Grant Date Fair Value
Non-vested restricted stock units, beginning of period	Non-vested restricted stock units, beginning of period	366,467	$	28.89	Non-vested restricted stock units, beginning of period	366,467	$	28.89
Changes during the period:	Changes during the period:				Changes during the period:
Granted	Granted	78,697	28.10		Granted	321,722	18.11
Vested	Vested	(46,050)	30.43		Vested	(105,553)	30.24
Forfeited	Forfeited	(5,813)	29.55		Forfeited	(15,631)	26.38
Non-vested restricted stock units, end of period	Non-vested restricted stock units, end of period	393,301	28.54		Non-vested restricted stock units, end of period	567,005	22.59

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.

3336

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


		Three Months Ended March 31,										Three Months Ended June 30,									Six Months Ended June 30,
(dollars in thousands)	(dollars in thousands)	2020			2019			(dollars in thousands)	2020			2019			2020			2019
Lease cost:	Lease cost:							Lease cost:
Operating lease cost	Operating lease cost	$	1,653		$	1,628		Operating lease cost	$	1,653		$	1,628		$	3,306		$	3,256
Variable lease cost	Variable lease cost	678			647			Variable lease cost	688			604			1,366			1,251
Less: sublease income	Less: sublease income	(12)			(11)			Less: sublease income	(3)			(11)			(15)			(22)
Total lease cost	Total lease cost	$	2,319		2,264			Total lease cost	$	2,338		$	2,221		$	4,657		$	4,485

Other information:	Other information:							Other information:
Operating cash flows from operating leases	Operating cash flows from operating leases	$	(1,594)		$	(1,549)		Operating cash flows from operating leases	$	(1,595)		$	(1,556)		$	(3,189)		$	(3,105)
Weighted-average remaining lease term - operating leases	Weighted-average remaining lease term - operating leases	13.36 years			14.10 years			Weighted-average remaining lease term - operating leases	13.23 years			14.05 years			13.23 years			14.21 years
Weighted-average discount rate - operating leases	Weighted-average discount rate - operating leases	3.92		%	3.92		%	Weighted-average discount rate - operating leases	3.93		%	3.92		%	3.93		%	3.92		%

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


Year Ending December 31,	Year Ending December 31,	Undiscounted Cash Flows		Lease Liability Expense		Lease Liability Reduction		Year Ending December 31,	Undiscounted Cash Flows		Lease Liability Expense		Lease Liability Reduction
2020 (remainder)	2020 (remainder)	$	4,622	$	1,462	$	3,160	2020 (remainder)	$	3,027	$	968	$	2,059
2021	2021	5,907		1,808		4,099		2021	5,907		1,808		4,099
2022	2022	5,472		1,659		3,813		2022	5,472		1,659		3,813
2023	2023	5,175		1,519		3,656		2023	5,175		1,519		3,656
2024	2024	4,947		1,385		3,562		2024	4,947		1,385		3,562
2025	2025	4,634		1,247		3,387		2025	4,634		1,247		3,387
Thereafter	Thereafter	36,285		6,421		29,864		Thereafter	36,285		6,421		29,864
Total	Total	$	67,042	$	15,501	$	51,541	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 March 31,						Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	(dollars in thousands)	2020		2019	(dollars in thousands)	2020		2019		2020		2019
Total rental income recognized	Total rental income recognized	$	533	535	Total rental income recognized	$	534	$	519	$	1,067	$	1,054

3437

Based on the Company's leases as lessor as of ~~March 31,~~June 30, 2020, estimated lease payments for the remainder of fiscal year 2020, the next five succeeding fiscal years and all years thereafter are as follows (dollars in thousands):


Year Ending December 31,	Year Ending December 31,			Year Ending December 31,
2020 (remainder)	2020 (remainder)	$	1,710	2020 (remainder)	$	1,117
2021	2021	2,263		2021	2,245
2022	2022	1,657		2022	1,662
2023	2023	644		2023	578
2024	2024	155		2024	109
2025	2025	72		2025	72
Thereafter	Thereafter	190		Thereafter	190
Total	Total	$	6,691	Total	$	5,973

13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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


(dollars in thousands)	(dollars in thousands)	Before Tax		Tax Effect		Net of Tax		(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Three Months Ended March 31, 2020
Three Months Ended June 30, 2020								Three Months Ended June 30, 2020
Net unrealized gains on investment securities:	Net unrealized gains on investment securities:							Net unrealized gains on investment securities:
Net unrealized gains arising during the period	Net unrealized gains arising during the period	$	13,858	$	3,711	$	10,147	Net unrealized gains arising during the period	$	8,570	$	2,295	$	6,275
Less: Reclassification adjustments from AOCI realized in net income	Less: Reclassification adjustments from AOCI realized in net income	—		—		—		Less: Reclassification adjustments from AOCI realized in net income	—		—		—
Net unrealized gains on investment securities	Net unrealized gains on investment securities	13,858		3,711		10,147		Net unrealized gains on investment securities	8,570		2,295		6,275

Defined benefit plans:	Defined benefit plans:							Defined benefit plans:
Net actuarial gains arising during the period		427		114		313

Amortization of net actuarial loss	Amortization of net actuarial loss	268		72		196		Amortization of net actuarial loss	269		70		199
Amortization of net transition obligation	Amortization of net transition obligation	5		1		4		Amortization of net transition obligation	4		1		3
Amortization of prior service cost	Amortization of prior service cost	4		1		3		Amortization of prior service cost	3		1		2

Defined benefit plans, net	Defined benefit plans, net	704		188		516		Defined benefit plans, net	276		72		204

Other comprehensive income	Other comprehensive income	$	14,562	$	3,899	$	10,663	Other comprehensive income	$	8,846	$	2,367	$	6,479


(dollars in thousands)	(dollars in thousands)	Before Tax		Tax Effect		Net of Tax		(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Three Months Ended March 31, 2019
Three Months Ended June 30, 2019								Three Months Ended June 30, 2019
Net unrealized gains on investment securities:	Net unrealized gains on investment securities:							Net unrealized gains on investment securities:
Net unrealized gains arising during the period	Net unrealized gains arising during the period	$	15,024	$	4,028	$	10,996	Net unrealized gains arising during the period	$	16,620	$	4,455	$	12,165
Less: Reclassification adjustments from AOCI realized in net income	Less: Reclassification adjustments from AOCI realized in net income	—		—		—		Less: Reclassification adjustments from AOCI realized in net income	—		—		—
Net unrealized gains on investment securities	Net unrealized gains on investment securities	15,024		4,028		10,996		Net unrealized gains on investment securities	16,620		4,455		12,165

Defined benefit plans:	Defined benefit plans:							Defined benefit plans:

Amortization of net actuarial loss	Amortization of net actuarial loss	263		29		234		Amortization of net actuarial loss	264		22		242
Amortization of net transition obligation	Amortization of net transition obligation	5		1		4		Amortization of net transition obligation	4		1		3
Amortization of prior service cost	Amortization of prior service cost	5		1		4		Amortization of prior service cost	4		1		3

Defined benefit plans, net	Defined benefit plans, net	273		31		242		Defined benefit plans, net	272		24		248

Other comprehensive income	Other comprehensive income	$	15,297	$	4,059	$	11,238	Other comprehensive income	$	16,892	$	4,479	$	12,413

3538


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

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

Defined benefit plans, net	980		260		720

Other comprehensive income	$	23,408	$	6,266	$	17,142


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

Defined benefit plans:

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

Defined benefit plans, net	545		55		490

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

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


(dollars in thousands)	(dollars in thousands)	Investment Securities		Defined Benefit Plans		AOCI		(dollars in thousands)	Investment Securities		Defined Benefit Plans		AOCI
Three Months Ended March 31, 2020
Three Months Ended June 30, 2020								Three Months Ended June 30, 2020

Balance at beginning of period	Balance at beginning of period	14,825		(6,416)		8,409		Balance at beginning of period	$	24,972	$	(5,900)	$	19,072

Other comprehensive income before reclassifications	Other comprehensive income before reclassifications	10,147		313		10,460		Other comprehensive income before reclassifications	6,275		—		6,275
Reclassification adjustments from AOCI	Reclassification adjustments from AOCI	—		203		203		Reclassification adjustments from AOCI	—		204		204
Total other comprehensive income	Total other comprehensive income	10,147		516		10,663		Total other comprehensive income	6,275		204		6,479

Balance at end of period	Balance at end of period	$	24,972	$	(5,900)	$	19,072	Balance at end of period	$	31,247	$	(5,696)	$	25,551

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


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





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

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


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





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

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


(dollars in thousands)	Investment Securities		Defined Benefit Plans		AOCI
Six Months Ended June 30, 2019
Balance at beginning of period	$	(9,643)	$	(6,450)	$	(16,093)
Impact of the adoption of new accounting standards	(3,100)		—		(3,100)
Adjusted balance at beginning of period	(12,743)		(6,450)		(19,193)



Other comprehensive loss before reclassifications	23,161		—		23,161
Reclassification adjustments from AOCI	—		490		490
Total other comprehensive income (loss)	23,161		490		23,651

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

The following table presents the amounts reclassified out of each component of AOCI for the three and six months ended ~~March 31,~~June 30, 2020 and 2019:


		Amount Reclassified from AOCI							Affected Line Item in the Statement Where Net Income is Presented			Amount Reclassified from AOCI							Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI Components	Details about AOCI Components	Three months ended March 31,											Details about AOCI Components	Three months ended June 30,						Affected Line Item in the Statement Where Net Income is Presented
(dollars in thousands)	(dollars in thousands)	2020		2019			Affected Line Item in the Statement Where Net Income is Presented				2020			2019				Affected Line Item in the Statement Where Net Income is Presented

Defined benefit retirement and supplemental executive retirement plan items:	Defined benefit retirement and supplemental executive retirement plan items:								Defined benefit retirement and supplemental executive retirement plan items:
Amortization of net actuarial loss	Amortization of net actuarial loss	$	(268)	$	(263)	Salaries and employee benefits			Amortization of net actuarial loss	$	(269)			$	(264)		Salaries and employee benefits
Amortization of net transition obligation	Amortization of net transition obligation	(5)		(5)		Salaries and employee benefits	Amortization of net transition obligation	(4)				(4)				Salaries and employee benefits
Amortization of prior service cost	Amortization of prior service cost	(4)		(5)		Salaries and employee benefits	Amortization of prior service cost	(3)				(4)				Salaries and employee benefits

Total before tax	Total before tax	(277)		(273)			Total before tax	(276)				(272)
Tax effect	Tax effect	74		31		Income tax benefit (expense)	Tax effect	72				24				Income tax benefit (expense)
Net of tax	Net of tax	$	(203)	$	(242)		Net of tax	$	(204)			$	(248)

Total reclassification adjustments from AOCI for the period, net of tax	Total reclassification adjustments from AOCI for the period, net of tax	$	(203)	$	(242)		Total reclassification adjustments from AOCI for the period, net of tax	$	(204)			$	(248)


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





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

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

14. EARNINGS PER SHARE

The following table presents the information used to compute basic and diluted earnings per common share for the periods indicated:


		Three Months Ended March 31,							Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands, except per share data)	(dollars in thousands, except per share data)	2020		2019		(dollars in thousands, except per share data)	2020		2019		2020		2019
Net income	Net income	$	8,326	$	16,037	Net income	$	9,917	$	13,534	$	18,243	$	29,571

Weighted average common shares outstanding - basic	Weighted average common shares outstanding - basic	28,126,400		28,758,310		Weighted average common shares outstanding - basic	28,040,802		28,546,564		28,083,602		28,651,852
Dilutive effect of employee stock options and awards	Dilutive effect of employee stock options and awards	151,353		221,545		Dilutive effect of employee stock options and awards	54,428		182,946		106,530		195,934
Weighted average common shares outstanding - diluted	Weighted average common shares outstanding - diluted	28,277,753		28,979,855		Weighted average common shares outstanding - diluted	28,095,230		28,729,510		28,190,132		28,847,786

Basic earnings per common share	Basic earnings per common share	$	0.30	$	0.56	Basic earnings per common share	$	0.35	$	0.47	$	0.65	$	1.03
Diluted earnings per common share	Diluted earnings per common share	$	0.29	$	0.55	Diluted earnings per common share	$	0.35	$	0.47	$	0.65	$	1.03

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

15. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

Disclosures about Fair Value of Financial Instruments

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

Short-Term Financial Instruments

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

Investment Securities

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

Loans

Fair values of loans are estimated based on discounted cash flows of portfolios of loans with similar financial characteristics including the type of loan, interest terms and repayment history. Fair values are calculated by discounting scheduled cash flows through estimated maturities using estimated market discount rates. Estimated market discount rates are reflective of credit and interest rate risks inherent in the Company's various loan types and are derived from available market information, as well as specific borrower information. As of ~~March 31,~~June 30, 2020, the weighted average discount rate used in the valuation of loans was ~~4.63%~~5.15%. In accordance with ASU 2016-01, the fair value of loans are measured based on the notion of exit price.

Loans Held for Sale

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

Deposit Liabilities

The fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits and interest-bearing demand and savings accounts, are equal to the amount payable on demand. The fair value of time deposits is estimated using discounted cash flow analyses. As of ~~March 31,~~June 30, 2020, the weighted average discount rate used in the valuation of time deposits was ~~0.52%~~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.

3843

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															Fair Value Measurement Using
(dollars in thousands)	(dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2020
June 30, 2020												June 30, 2020
Financial assets:	Financial assets:											Financial assets:
Cash and due from banks	Cash and due from banks	$	81,972	$	81,972	$	81,972	$	—	$	—	Cash and due from banks	$	102,132	$	102,132	$	102,132	$	—	$	—
Interest-bearing deposits in other banks	Interest-bearing deposits in other banks	11,021		11,021		11,021		—		—		Interest-bearing deposits in other banks	41,201		41,201		41,201		—		—
Investment securities	Investment securities	1,185,025		1,185,025		1,002		1,172,451		11,572		Investment securities	1,169,803		1,169,803		1,209		1,156,923		11,671
Loans held for sale	Loans held for sale	3,910		3,910		—		3,910		—		Loans held for sale	10,443		10,443		—		10,443		—
Net loans and leases	Net loans and leases	4,452,353		4,204,383		—		—		4,204,383		Net loans and leases	4,936,099		4,795,025		—		—		4,795,025

Accrued interest receivable (included in other assets)		16,851		16,851		16,851		—		—
Accrued interest receivable												Accrued interest receivable	19,590		19,590		19,590		—		—

Financial liabilities:	Financial liabilities:											Financial liabilities:
Deposits:	Deposits:											Deposits:
Noninterest-bearing demand	Noninterest-bearing demand	1,430,540		1,430,540		1,430,540		—		—		Noninterest-bearing demand	1,851,012		1,851,012		1,851,012		—		—
Interest-bearing demand and savings and money market	Interest-bearing demand and savings and money market	2,711,788		2,711,788		2,711,788		—		—		Interest-bearing demand and savings and money market	3,013,227		3,013,227		3,013,227		—		—
Time	Time	993,741		996,284		—		—		996,284		Time	930,446		932,077		—		—		932,077
Short-term borrowings	Short-term borrowings	222,000		222,000		—		222,000		—		Short-term borrowings	—		—		—		—		—
Long-term debt	Long-term debt	101,547		91,032		—		91,032		—		Long-term debt	167,491		156,386		—		—		156,386
Accrued interest payable (included in other liabilities)	Accrued interest payable (included in other liabilities)	4,132		4,132		4,132		—		—		Accrued interest payable (included in other liabilities)	2,894		2,894		2,894		—		—


									Fair Value Measurement Using																	Fair Value Measurement Using
(dollars in thousands)	(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)		(dollars in thousands)	Notional Amount		Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2020
June 30, 2020															June 30, 2020
Derivatives:	Derivatives:														Derivatives:
Interest rate lock commitments	Interest rate lock commitments	$	4,237	$	115		$	115	$	—	$	115	$	—	Interest rate lock commitments	$	410	$	9	$	9	$	—	$	9	$	—
Forward sale commitments	Forward sale commitments	8,118		(37)		��	(37)		—		(37)		—		Forward sale commitments	10,879		(79)		(79)		—		(79)		—

Off-balance sheet financial instruments:	Off-balance sheet financial instruments:														Off-balance sheet financial instruments:
Commitments to extend credit	Commitments to extend credit	1,186,476		1,414			1,414		—		1,414		—		Commitments to extend credit	1,186,385		1,362		1,362		—		1,362		—
Standby letters of credit and financial guarantees written	Standby letters of credit and financial guarantees written	9,424		141			141		—		141		—		Standby letters of credit and financial guarantees written	11,505		173		173		—		173		—
Risk participation agreement	Risk participation agreement	28,800		32			32		—		—		32		Risk participation agreement	28,800		49		49		—		—		49

3944


						Fair Value Measurement Using															Fair Value Measurement Using
(dollars in thousands)	(dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2019	December 31, 2019											December 31, 2019
Financial assets:	Financial assets:											Financial assets:
Cash and due from banks	Cash and due from banks	$	78,418	$	78,418	$	78,418	$	—	$	—	Cash and due from banks	$	78,418	$	78,418	$	78,418	$	—	$	—
Interest-bearing deposits in other banks	Interest-bearing deposits in other banks	24,554		24,554		24,554		—		—		Interest-bearing deposits in other banks	24,554		24,554		24,554		—		—
Investment securities	Investment securities	1,128,110		1,128,110		1,127		1,115,728		11,255		Investment securities	1,128,110		1,128,110		1,127		1,115,728		11,255
Loans held for sale	Loans held for sale	9,083		9,083		—		9,083		—		Loans held for sale	9,083		9,083		—		9,083		—
Net loans and leases	Net loans and leases	4,401,569		4,392,477		—		—		4,392,477		Net loans and leases	4,401,569		4,392,477		—		—		4,392,477

Accrued interest receivable (included in other assets)		16,500		16,500		16,500		—		—
Accrued interest receivable												Accrued interest receivable	16,500		16,500		16,500		—		—

Financial liabilities:	Financial liabilities:											Financial liabilities:
Deposits:	Deposits:											Deposits:
Noninterest-bearing demand	Noninterest-bearing demand	1,450,532		1,450,532		1,450,532		—		—		Noninterest-bearing demand	1,450,532		1,450,532		1,450,532		—		—
Interest-bearing demand and savings and money market	Interest-bearing demand and savings and money market	2,643,038		2,643,038		2,643,038		—		—		Interest-bearing demand and savings and money market	2,643,038		2,643,038		2,643,038		—		—
Time	Time	1,026,453		1,023,362		—		—		1,023,362		Time	1,026,453		1,023,362		—		—		1,023,362
Short-term borrowings	Short-term borrowings	150,000		150,000		—		150,000		—		Short-term borrowings	150,000		150,000		—		150,000		—
Long-term debt	Long-term debt	101,547		97,827		—		97,827		—		Long-term debt	101,547		97,827		—		97,827		—
Accrued interest payable (included in other liabilities)	Accrued interest payable (included in other liabilities)	4,288		4,288		4,288		—		—		Accrued interest payable (included in other liabilities)	4,288		4,288		4,288		—		—


							Fair Value Measurement Using
(dollars in thousands)	Notional Amount		Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2019
Derivatives:
Interest rate lock commitments	$	625	$	8	$	8	$	—	$	8	$	—
Forward sale commitments	8,968		(28)		(28)		—		(28)		—

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

Fair Value Measurements

We group our financial assets and liabilities at fair value into three levels based on the markets in which the financial assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:

•Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities traded in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

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

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

4045

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.

There was 1 transfer into Level 3 of the fair value hierarchy for long-term debt during the three and six months ended June 30, 2020. There were 0 transfers of financial assets and liabilities ~~into or~~ out of Level 3 of the fair value hierarchy during the three and six months ended ~~March 31,~~June 30, 2020.

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


				Fair Value at Reporting Date Using													Fair Value at Reporting Date Using
(dollars in thousands)	(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2020
June 30, 2020										June 30, 2020
Available-for-sale securities:	Available-for-sale securities:									Available-for-sale securities:
Debt securities:	Debt securities:									Debt securities:
States and political subdivisions	States and political subdivisions	$	134,210	$	—	$	122,638	$	11,572	States and political subdivisions	$	141,468	$	—	$	129,797	$	11,671
Corporate securities	Corporate securities	30,227		—		30,227		—		Corporate securities	29,752		—		29,752		—
U.S. Treasury obligations and direct obligations of U.S Government agencies	U.S. Treasury obligations and direct obligations of U.S Government agencies	37,506		—		37,506		—		U.S. Treasury obligations and direct obligations of U.S Government agencies	36,354		—		36,354		—
Mortgage-backed securities:	Mortgage-backed securities:									Mortgage-backed securities:
Residential - U.S. Government sponsored entities	Residential - U.S. Government sponsored entities	735,050		—		735,050		—		Residential - U.S. Government sponsored entities	714,477		—		714,477		—
Commercial - U.S. Government agencies and sponsored entities	Commercial - U.S. Government agencies and sponsored entities	80,319		—		80,319		—		Commercial - U.S. Government agencies and sponsored entities	80,665		—		80,665		—
Residential - Non-government agencies	Residential - Non-government agencies	34,672		—		34,672		—		Residential - Non-government agencies	32,086		—		32,086		—
Commercial - Non-government agencies	Commercial - Non-government agencies	132,039		—		132,039		—		Commercial - Non-government agencies	133,792		—		133,792		—

Total available-for-sale securities	Total available-for-sale securities	1,184,023		—		1,172,451		11,572		Total available-for-sale securities	1,168,594		—		1,156,923		11,671

Equity securities	Equity securities	1,002		1,002		—		—		Equity securities	1,209		1,209		—		—

Derivatives: Interest rate lock and forward sale commitments	Derivatives: Interest rate lock and forward sale commitments	78		—		78		—		Derivatives: Interest rate lock and forward sale commitments	(70)		—		(70)		—
Total	Total	$	1,185,103	$	1,002	$	1,172,529	$	11,572	Total	$	1,169,733	$	1,209	$	1,156,853	$	11,671

4146


			Fair Value at Reporting Date Using
(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2019
Available-for-sale securities:
Debt securities:
States and political subdivisions	$	122,018	$	—	$	110,763	$	11,255
Corporate securities	30,529		—		30,529		—
U.S. Treasury obligations and direct obligations of U.S Government agencies	40,381		—		40,381		—
Mortgage-backed securities:
Residential - U.S. Government sponsored entities	677,822		—		677,822		—
Commercial - U.S. Government agencies and sponsored entities	81,225		—		81,225		—
Residential - Non-government agencies	37,191		—		37,191		—
Commercial - Non-government agencies	137,817		—		137,817		—

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

Equity securities	1,127		1,127		—		—

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

For the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 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, 2019	$	11,255
Principal payments received	~~(109)~~(212)
Unrealized net gain included in other comprehensive income	~~426~~628

Balance at ~~March 31,~~June 30, 2020	$	~~11,572~~11,671

Balance at December 31, 2018	$	11,169
Principal payments received	~~(105)~~(204)
Unrealized net ~~loss~~gain included in other comprehensive income	~~200~~440

Balance at ~~March 31,~~June 30, 2019	$	~~11,264~~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 ~~$11.6~~$11.7 million and ~~$11.3~~$11.4 million at ~~March 31,~~June 30, 2020 and ~~March 31,~~June 30, 2019, respectively. The Company estimates the fair value of its mortgage revenue bonds by using a discounted cash flow model to calculate the present value of estimated future principal and interest payments.

The significant unobservable input used in the fair value measurement of the Company's mortgage revenue bonds is the weighted average discount rate. As of ~~March 31,~~June 30, 2020, the weighted average discount rate utilized was ~~3.25%~~2.82% compared to ~~4.71%~~4.27% at ~~March 31,~~June 30, 2019 and 4.08% at December 31, 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.

4247

The following table presents the fair value of assets measured on a nonrecurring basis and the level of valuation assumptions used to determine the respective fair values as of ~~March 31,~~June 30, 2020 and December 31, 2019:


				Fair Value Measurements Using													Fair Value Measurements Using
(dollars in thousands)	(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2020
June 30, 2020										June 30, 2020

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

December 31, 2019	December 31, 2019									December 31, 2019

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

⁽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. LEGAL PROCEEDINGS

We are involved in legal actions, ~~arising in the ordinary course of business. Management, after consultation with our legal counsel, believes~~but do not believe the ultimate disposition of those ~~matters~~actions will ~~not~~ have a material adverse ~~effect~~impact on our results of operations or consolidated financial statements.

17. SUBSEQUENT EVENTS

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

~~In April 2020, various regulatory agencies, including~~ the Board of ~~Governors~~Directors of the ~~Federal Reserve System and~~Company approved a plan to consolidate 4 branches on the Federal Deposit Insurance Corporation, (“the agencies”) issued a revised interagency statement encouraging financial institutions to work with customers affected by COVID-19 and providing additional information regarding loan modifications. The revised interagency statement clarifies the interaction between the interagency statement issued on March 22, 2020 and the temporary relief provided by Section 4013island of Oahu later this year. NaN 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 pastbranches are in-store branches, which have been temporarily closed since March 2020 due ~~and nonaccrual regulatory reporting of loan modification programs and regulatory capital. In response~~ to the COVID-19 pandemic and are expected to close during the ~~Company~~third quarter of 2020. These in-store branches have small square footage that do not allow for adequate social distancing. The fourth branch is ~~providing 3-month principal~~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 ~~interest payment deferrals for its residential mortgage and consumer customers. The Company is also deferring either the full loan payment or the principal component~~we expect that much of the ~~loan payment~~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 3 to 6 months for its commercial real estate and commercial and industrial customers on a case-by-case basis depending on need. The Company executed loan deferrals on outstanding balances of approximately $65 million through March 31, 2020. As of April 30, 2020, the Company executed loan deferrals on outstanding balances of approximately $453 million, which includes the loans deferred during the first quarter of 2020, and is approximately 10% of the Company’s total loan portfolio. ~~In accordance with the revised interagency guidance issued in April 2020, these short-term deferrals are not presently considered TDRs and at this time interest has continued to accrue.~~ ~~Collectibility of the accrued interest on deferred loans is uncertain and the Company may need to reverse the accrued interest which may negatively impact interest income in future periods.~~

~~Additional loan modifications to capitalize interest and/or extend loan terms may also be necessary.~~ customer full-service needs. The Company anticipates ~~increased requests for loan deferrals in~~annual expense savings of approximately $1.8 million related to the ~~second quarter~~consolidation of ~~2020.~~

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.

4448

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

Overview

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

Central Pacific Bank is a full-service community bank with 35 branches, ~~,13~~nine of which ~~are~~were temporarily closed to protect the health and well-being of the Company's employees and customers from the novel coronavirus pandemic ("COVID-19"), and 7576 ATMs located throughout the state of Hawaii as of ~~March 31,~~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, 2019 filed with the U.S. Securities and Exchange Commission (the "SEC") on February 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.

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. This is further described in Note 1 to the consolidated financial statements in our 2019 Form 10-K.

On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which created material changes to the Company’s existing critical accounting policy that existed at December 31, 2019. Effective January 1, 2020 through ~~March 31,~~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 on loans.

Allowance for Credit Losses on Loans

Management considers the policies related to the allowance for credit losses ("ACL") on loans as the most critical to the financial statement presentation. The total ACL on loans includes activity related to allowances calculated in accordance with Accounting Standards Codification (“ASC”) 326, "Financial Instruments – Credit Losses". The ACL is established through the provision for credit losses charged to current earnings. The amount maintained in the ACL reflects management’s continuing evaluation of the estimated loan losses expected to be recognized over the life of the loans in our loan portfolio at the balance sheet date. The ACL is comprised of specific reserves assigned to certain loans that don’t share general risk characteristics and general reserves on pools of loans that do share general risk characteristics. Factors contributing to the determination of specific reserves include the creditworthiness of the borrower, and more specifically, changes in the expected future receipt of principal

and interest payments and/or in the value of pledged collateral. A reserve is recorded when the carrying amount of the loan

exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. For purposes of establishing the general reserve, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and calculate the net amount expected to be collected over the life of the loans to estimate the expected credit losses in the loan portfolio. The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. Refer to Note 1 – Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements in this report for further discussion of the risk factors considered by management in establishing the ACL.

Financial Summary

Net income for the three months ended ~~March 31,~~June 30, 2020 was ~~$8.3~~$9.9 million, or ~~$0.29~~$0.35 per diluted share, compared to net income of ~~$16.0~~$13.5 million, or ~~$0.55~~$0.47 per diluted share for the three months ended ~~March 31,~~June 30, 2019. Net income for the six months ended June 30, 2020 was $18.2 million, or $0.65 per diluted share, compared to net income of $29.6 million, or $1.03 per diluted share for the six months ended June 30, 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 ~~March 31,~~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 ~~$11.1~~$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 ~~first quarter~~ operating results.

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


		Three Months Ended March 31,										Three Months Ended June 30,									Six Months Ended June 30,
		2020			2019				2020			2019			2020			2019
Return on average assets	Return on average assets	0.55		%	1.10		%	Return on average assets	0.61		%	0.92		%	0.58		%	1.01		%
Return on average shareholders’ equity	Return on average shareholders’ equity	6.21			12.97			Return on average shareholders’ equity	7.34			10.73			6.77			11.84

Basic earnings per common share	Basic earnings per common share	$	0.30		$	0.56		Basic earnings per common share	$	0.35		$	0.47		$	0.65		$	1.03
Diluted earnings per common share	Diluted earnings per common share	0.29			0.55			Diluted earnings per common share	0.35			0.47			0.65			1.03

COVID-19 Pandemic

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

In response to the anticipated economic effects of COVID-19, the Board of Governors of the Federal Reserve System (the "FRB") has taken a number of actions that have significantly affected the financial markets in the United States, including actions intended to result in substantial decreases in market interest rates. On March 3, 2020, the 10-year Treasury yield fell below 1.00% for the first time, and the FRB reduced the target federal funds range by 50 basis points to 1.00% to 1.25%. On March 15, 2020, the FRB further reduced the target federal funds range by 100 basis points to 0% to 0.25% and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by COVID-19. On March 22,

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 ~~declared~~issued a Proclamation declaring a state of emergency ~~allowing Hawaii~~ to ~~use funds~~support ongoing State and county responses to act quickly in containing the spread of the coronavirus when an outbreak occurs in the islands. The measure allows for “funding flexibility” to buy supplies and equipment and gives the governor authority to suspend any laws that may impede emergency functions.

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

OnSince 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, ~~Governor Ige issued~~ a ~~second supplemental proclamation. Beginning~~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~~2020. All individuals, both residents and visitors, arriving or returning to the State of Hawaii ~~will be~~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.~~aircrafts;

•

Onon March 23, 2020, ~~Governor Ige issued~~ a ~~third supplemental proclamation~~Third Supplementary Proclamation - ~~stay-at-home~~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. ~~All~~Under the current "Act with Care" phase, all persons within the State of Hawaii who are ~~ordered~~not subject to ~~stay at~~the 14-day quarantine for arriving passengers may engage in permitted activities outside their home or ~~in their~~ place of ~~residence, such as hotels or condominiums. Individuals may leave only for essential activities or~~residence.

Due to ~~engage~~the recent uptick in ~~essential businesses~~COVID-19 cases in Hawaii and ~~operations. On April 25,~~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 ~~stay-at-home order through May 31, 2020.~~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 ~~April 27,~~July 24, 2020, the Centers for Disease Control and Prevention reported there were ~~607~~1,549 cases and 1626 COVID-19-related deaths in Hawaii. Of those cases, 10% have required hospitalization, and 1,449 (94%) were residents of Hawaii.

~~On March 24,~~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 ~~have been~~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, ~~have started~~were working remotely on a full-time or rotating basis. The Company believes the

actions it has taken to date, ~~will allow~~allows it to meet the needs of its customers and community while ensuring the safety of all ~~employees.~~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, meals and entertainment.~~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 ~~its~~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 ~~98% from~~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 ~~37%.~~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. ~~At this time, the Company is unable to project the probability and materiality of such credit losses and the impact its financial position and results of operation.~~

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

~~receivable on these deferred loans totaled $0.2 million as of March 31, 2020.~~ As of ~~April~~June 30, 2020, the Company executed loan payment forbearance or deferrals of principal and interest or principal only on the following outstanding ~~balances of approximately $453 million, which includes the loans deferred during the first quarter of 2020.~~ loan balances: 


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

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

The Company is continuing to grant or extend loan payment deferrals in the ~~second~~third quarter and therefore expects that the accrued interest receivable balance on the deferred loans will ~~significantly~~continue to increase. ~~While interest~~Interest and fees ~~will~~ still accrue on amounts that are deemed collectible during the deferral period, ~~under GAAP,~~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 ~~have~~ waived non-CPB ATM fees and early withdrawal fees on our time ~~deposits. At this time, these reductions in fees are~~deposits and granted temporary increases on debit card and mobile deposit transaction limits throughout Q2 2020. In addition, the Company ~~does not expect it~~has experienced a decline in transactional activity due to ~~have a material impact to net income.~~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. ~~Our~~We further believe our liquidity and capital positions ~~remain~~are strong. The Company currently ~~believes~~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.~~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. ~~The Company anticipates increased requests~~Requests for ~~loans~~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 ~~will also have~~has access to the Paycheck Protection Program Liquidity Facility

(“PPPLF”), which is an extension of credit to eligible financial institutions that originate Paycheck Protection Program (“PPP”) loans that takes the PPP loans as collateral at face value. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession caused large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

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

Asset valuation

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

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

Processes, controls and business continuity plan

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

The Company is implementing a gradual, phased-in return-to-office plan that includes a portion of the workforce continuing with flexible, remote work schedules. Due to the recent uptick in COVID-19 cases in Hawaii and nationwide, the return-to-office plan may be delayed as a precautionary measure. The Company may incur additional cost related to its continued deployment of the remote workforce ~~plan, but does not expect such costs to be material at this point in time.~~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 ~~have~~ 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 ~~was~~is part of the CARES Act. PPP loans have a ~~two-year~~two or five-year term and earn interest at 1%. The SBA ~~will pay~~pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan, which the Company ~~will recognize~~is recognizing over the life of the loan. The Company ~~has seen~~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 April 16, 2020, the date the SBA reached the limit of funds available to disburse under the initial round of the program, the Company received approval from the SBA on over 4,100 loans totaling approximately $475 million. From April 27, 2020, the date the SBA began accepting submissions for the second round of PPP loans through AprilJune 30, 2020, the Company ~~received approval from the SBA on~~funded over ~~1,500~~7,200 PPP loans totaling ~~approximately $66~~over $550 million and received gross processing fees of over $21 million. Certain PPP loans ~~approved by the SBA may be cancelled or withdrawn prior to closing and funding.~~paid-off shortly after funding resulting in a total balance as of June 30, 2020 of $543.7 million. The Company ~~began funding~~has developed a PPP ~~loans in April 2020.~~ forgiveness portal and is beginning the process of assisting our customers with applying for forgiveness from the SBA. The Company plans to engage a third party to assist with this process. Although the Company

believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program, there could be risks and liability by the Company that cannot be determined at this time.

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

The Company is staying in close contact with its customers and has increased its client outreach efforts. The Company’s commercial loan officers are ~~having calls with~~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 ~~its residential mortgage and~~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 ~~and other consumer~~ loan customers on a case-by-case basis depending on need. ~~The~~As of June 30, 2020, the Company ~~executed~~had loan payment deferrals on outstanding balances of ~~approximately $65~~$567.9 million, ~~through March 31, 2020.~~ Asor 11.3% of ~~April 30, 2020, the Company executed loan deferrals on outstanding balances~~total loans (and 12.7% of ~~approximately $453 million, which includes the~~total loans, ~~deferred during the first quarter of 2020, and is approximately 10% of the Company’s total loan portfolio.~~ 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 ~~short-term deferrals~~loans are ~~not presently considered~~included in TDRs ~~and at this time interest has continued to accrue.~~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 ~~increased~~ requests for new or extended loan deferrals will continue through the ~~second~~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 ~~expects that the~~has identified primary industries ~~that~~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. ~~Secondary~~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, ~~include~~to a lesser degree, real estate ~~management~~ and ~~other~~rental and leasing, transportation and warehousing, professional and administrative, and other industries. The Company also anticipates ~~adverse~~ impact onfrom its consumer loan portfolio, and is actively working with the borrowers in granting 90-day loan payment ~~deferrals to these borrowers.~~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. ~~Through this process,~~The review continued throughout the second quarter. The Company ~~identified borrowers that were likely to experience financial difficulty~~ proactively worked with many of its customers in providing loan payment deferrals as well as assisted in the application and ~~proactively downgraded~~approval of PPP loans.

The volume of loan payment deferrals granted peaked in May at approximately ~~$65~~$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 ~~pass~~a peak of 467 at May 31, 2020 to ~~special mention. As part~~350 at June 30, 2020.

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

Through our stepped-up assessment ~~for~~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 ~~downgrade,~~real estate and rental and leasing category which totaled approximately $59 million, or 1.2% of the ~~Company reviewed customer management~~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 ~~actions taken such as closing businesses~~seasoned investors, and ~~reducing expenses, monthly cash burn and access to cash liquidity and capital, and the overall ability~~are currently confident these borrowers will be able to weather through the ~~pandemic in the near term.~~ economic downturn.

The Company believes that ~~it is still too early to reach any firm conclusions~~the residential, home equity, and ~~that~~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 ~~downgrade assessments did not include~~pandemic. These loans comprise of approximately $3.4 billion or 76% of our total loan portfolio, net of PPP loans. Overall, the expected positive impact from Federal subsidy programs. The Company is proactively working with its customers, including those that have already applied and have been approved for a PPP loan. Furthermore, the Company has also provided assistance with short-term payment deferrals, as necessary.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 ~~include substantial~~continue to reflect adverse economic ~~deterioration.~~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 tourism started the year strong with solid growth in visitor arrivals and spending in the first two months of 2020. However, the COVID-19 outbreak has impacted Hawaii’s tourism significantly since late February. Total visitor arrivals in the ~~two~~five months ended ~~February 29,~~May 31, 2020, which includes an additional day associated with leap year, ~~increased 5.5% from the same prior year period. Total visitor expenditures in the two months ended February 29, 2020 increased by 4.8%~~decreased 49.5% from the same prior year period. The mandated 14-day self-quarantine for arriving visitors and residents began on March 26, 2020. ~~Total arrivals on that day were down to 1,580 from a historical daily average of 30,000 passengers during last March.~~ During ~~the first week of~~ April and May, total visitors were down approximately ~~98%~~99% from the same year-ago period.

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

~~Unemployment continues~~The full or partial shutdown of tourism, restaurant, and retail industries has significantly impacted employment in the state. The Hawai‘i State Department of Labor & Industrial Relations ("DLIR") announced that the seasonally adjusted unemployment rate for June was 13.9% compared to ~~soar. In~~ the ~~week ended April 18, 2020, 4.4 million Americans filed claims~~revised rate of 23.5% in May. The significant decrease may be due to PPP funds and other government stimulus programs. There is potential for ~~unemployment. This~~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 labor force of 612,800. Nationally, the seasonally adjusted unemployment rate was ~~the fifth consecutive week with over 3 million~~11.1% in claims for unemployment. During that time, 26.5 million Americans have filed jobless claims. Through March 31, 2020, Hawaii received more than 160,000 unemployment claims. The number of unemployment claimsJune, down from 13.3 percent in ~~Hawaii has grown to more than 250,000 through April 22, 2020.~~May.

Oahu home sales started the year strong with healthy year-over-year increases in closed sales of single-family homes and ~~condominiums.~~condominiums during the 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~~decreased by ~~11.6%~~4.8% for single-family homes and ~~were stable~~22.0% for condominiums for the ~~three~~six months ended ~~March 31,~~June 30, 2020, compared to the same time period last year. For the ~~three~~six months ended ~~March 31,~~June 30, 2020, the median sales price for single-family homes on Oahu was ~~$780,000, and remained unchanged~~$785,000, representing a 1.3% increase from $775,000 in the same prior year period. The median sales price for condominiums on

Oahu for the ~~three~~six months ended ~~March 31,~~June 30, 2020 was ~~$430,000,~~$427,750, representing an increase of ~~4.6%~~2.1% from ~~$411,250~~$419,000 in the same prior year period. While the numbers appear to be strong, many of the sales which closed in March were in escrow at least 30 days before the State's stay-at-home order. The impact of COVID-19 on the housing market remains to be seen.

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 2019, the outsourcing of the Company's residential mortgage loan servicing, the launch of its new website under the cpb.bank domain name and the implementation of its end-to-end commercial loan

origination system were completed. Despite several challenges resulting from the impact of COVID-19, the RISE2020 initiatives are continuing and the Company will continue the revitalization of its building headquarters. Digital strategies will continue to push forward. The Company may postpone other initiatives such as branch modernization for the remaining branch network.is making good progress. During the first quarter of 2020, the Company opened its concept branch, providing its customers a glimpse into the future of Central Pacific Bank. The ~~rollout~~Company's revitalization of ~~our new ATMs has begun.~~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 push forward. The development of the Company's new online and mobile banking platforms is ~~progressing, with a~~in the final stages of pilot oftesting and the ~~new platforms~~Company is excited for the public launch scheduled ~~for June~~in late August 2020. Digital technology is even more critical to ~~our business~~businesses during crises like the current pandemic and will remain a high priority strategy for ~~our~~the Company's future. The rollout of newly upgraded ATMs continues. The Company continues to see a decline in branch transaction activity and its digital initiatives have been well-timed to meet the changing needs of its customers and the community.

Results of Operations

Net Interest Income

Net interest income, when annualized and expressed as a percentage of average interest earning assets, is referred to as "net interest margin." Interest income, which includes loan fees and resultant yield information, is expressed on a taxable equivalent basis using a federal statutory tax rate of 21% for the three and six months ended ~~March 31,~~June 30, 2020 and 2019. A comparison of net interest income on a taxable-equivalent basis ("net interest income") for the three and six months ended ~~March 31,~~June 30, 2020 and 2019 is set forth below. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in volume and (ii) changes in rates. The change in volume is calculated as change in average balance, multiplied by prior period average yield/rate. The change in rate is calculated as change in average yield/rate, multiplied by current period volume. The change in interest income not solely due to change in volume or change in rate has been allocated proportionately to change in volume and change in average yield/rate.

5157


(dollars in thousands)	(dollars in thousands)	Three Months Ended March 31,																																																				(dollars in thousands)	Three Months Ended June 30,
				2020															2019															Variance															(dollars in thousands)			2020							2019	Variance
				Average Balance			Average Yield/ Rate			Interest Income/ Expense			Average Balance			Average Yield/ Rate			Interest Income/ Expense			Average Balance			Average Yield/ Rate			Interest Income/ Expense		(dollars in thousands)		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																											Assets
Interest earning assets:	Interest earning assets:																											Interest earning assets:
Interest-bearing deposits in other banks	Interest-bearing deposits in other banks	$	11,082		1.29	%		36			$	11,380		2.41	%		68			$	(298)		(1.12)	%		(32)		Interest-bearing deposits in other banks	$		15,777		0.10	%			3			$	8,002		2.34	%			46			$	7,775		(2.24)		%		(43)
Investment securities, excluding valuation allowance:
Investment securities, excluding ACL:																												Investment securities, excluding ACL:
Taxable (1)	Taxable (1)	1,027,695			2.64			6,774			1,201,732			2.76			8,278			(174,037)			(0.12)			(1,504)		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)	Tax-exempt (1)	105,330			3.21			845			153,196			2.86			1,096			(47,866)			0.35			(251)		Tax-exempt (1)	100,485			3.02			758			142,660				2.89			1,030			(42,175)				0.13			(272)
Total investment securities	Total investment securities	1,133,025			2.69			7,619			1,354,928			2.67			9,374			(221,903)			0.02			(1,755)		Total investment securities	1,142,926			2.48			7,085			1,290,419				2.66			8,574			(147,493)				(0.18)			(1,489)
Loans, including loans held for sale (2)	Loans, including loans held for sale (2)	4,462,347			4.16			46,204			4,083,791			4.33			43,768			378,556			(0.17)			2,436		Loans, including loans held for sale (2)	4,902,905			3.76			45,915			4,171,558				4.37			45,540			731,347				(0.61)			375
Federal Home Loan Bank stock	Federal Home Loan Bank stock	14,589			3.61			132			14,278			4.52			161			311			(0.91)			(29)		Federal Home Loan Bank stock	11,753			3.62			106			15,998				4.02			161			(4,245)				(0.40)			(55)
Total interest earning assets	Total interest earning assets	5,621,043			3.85			53,991			5,464,377			3.94			53,371			156,666			(0.09)			620		Total interest earning assets	6,073,361			3.51			53,109			5,485,977				3.97			54,321			587,384				(0.46)			(1,212)
Noninterest-earning assets	Noninterest-earning assets	386,194									345,554									40,640								Noninterest-earning assets	394,768									370,488										24,280
Total assets	Total assets	$	6,007,237								$	5,809,931								$	197,306							Total assets	$	6,468,129								$	5,856,465									$	611,664

Liabilities and Equity	Liabilities and Equity																											Liabilities and Equity
Interest-bearing liabilities:	Interest-bearing liabilities:																											Interest-bearing liabilities:
Interest-bearing demand deposits	Interest-bearing demand deposits	$	1,013,795		0.07	%		176			$	951,101		0.08	%		192			$	62,694		(0.01)	%		(16)		Interest-bearing demand deposits	$	1,056,885		0.04	%		114			$	962,402			0.08	%		199			$	94,483			(0.04)	%		(85)
Savings and money market deposits	Savings and money market deposits	1,651,751			0.27			1,118			1,472,835			0.22			791			178,916			0.05			327		Savings and money market deposits	1,856,621			0.12			567			1,577,437				0.38			1,507			279,184				(0.26)			(940)
Time deposits under $100,000	Time deposits under $100,000	164,274			0.70			284			175,823			0.66			287			(11,549)			0.04			(3)		Time deposits under $100,000	161,874			0.65			261			173,556				0.70			305			(11,682)				(0.05)			(44)
Time deposits $100,000 and over	Time deposits $100,000 and over	846,152			1.42			2,984			982,678			1.98			4,805			(136,526)			(0.56)			(1,821)		Time deposits $100,000 and over	807,276			0.93			1,863			907,330				2.02			4,562			(100,054)				(1.09)			(2,699)
Total interest-bearing deposits	Total interest-bearing deposits	3,675,972			0.50			4,562			3,582,437			0.69			6,075			93,535			(0.19)			(1,513)		Total interest-bearing deposits	3,882,656			0.29			2,805			3,620,725				0.73			6,573			261,931				(0.44)			(3,768)
Short-term borrowings	Short-term borrowings	139,813			1.46			508			137,544			2.63			893			2,269			(1.17)			(385)		Short-term borrowings	63,104			0.48			74			175,347				2.57			1,123			(112,243)				(2.09)			(1,049)
Long-term debt	Long-term debt	101,547			3.62			914			101,547			4.23			1,060			—			(0.61)			(146)		Long-term debt	136,939			2.38			812			101,547				4.07			1,031			35,392				(1.69)			(219)
Total interest-bearing liabilities	Total interest-bearing liabilities	3,917,332			0.61			5,984			3,821,528			0.85			8,028			95,804			(0.24)			(2,044)		Total interest-bearing liabilities	4,082,699			0.36			3,691			3,897,619				0.90			8,727			185,080				(0.54)			(5,036)
Noninterest-bearing deposits	Noninterest-bearing deposits	1,445,724									1,396,033									49,691								Noninterest-bearing deposits	1,731,939									1,357,056										374,883
Other liabilities	Other liabilities	107,458									97,735									9,723								Other liabilities	112,687									97,041										15,646
Total liabilities	Total liabilities	5,470,514									5,315,296									155,218								Total liabilities	5,927,325									5,351,716										575,609
Shareholders’ equity	Shareholders’ equity	536,721									494,635									42,086								Shareholders’ equity	540,802									504,749										36,053
Non-controlling interest	Non-controlling interest	2									—									2								Non-controlling interest	2									—										2
Total equity	Total equity	536,723									494,635									42,088								Total equity	540,804									504,749										36,055
Total liabilities and equity	Total liabilities and equity	$	6,007,237								$	5,809,931								$	197,306							Total liabilities and equity	$	6,468,129								$	5,856,465									$	611,664

Net interest income	Net interest income							$	48,007								$	45,343								$	2,664	Net interest income							$	49,418									$	45,594									$	3,824

Interest rate spread	Interest rate spread				3.24	%								3.09	%								0.15	%				Interest rate spread				3.15	%									3.07	%									0.08	%

Net interest margin	Net interest margin				3.43	%								3.34	%								0.09	%				Net interest margin				3.26	%									3.33	%									(0.07)	%

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


(dollars in thousands)	Six Months Ended June 30,
			2020															2019										Variance
			Average Balance			Average Yield/ Rate			Interest Income/ Expense			Average Balance			Average Yield/ Rate			Interest Income/ Expense			Average Balance			Average Yield/ Rate			Interest Income/ Expense
Assets
Interest earning assets:
Interest-bearing deposits in other banks	$	13,430		0.59	%		39			$	9,682		2.38	%		114			$	3,748		(1.79)	%		(75)
Investment securities, excluding ACL:
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)	102,907			3.12			1,604			147,899			2.88			2,127			(44,992)			0.24			(523)
Total investment securities	1,137,975			2.58			14,705			1,322,495			2.71			17,949			(184,520)			(0.13)			(3,244)
Loans, including loans held for sale (2)	4,682,626			3.95			92,119			4,127,917			4.35			89,308			554,709			(0.40)			2,811
Federal Home Loan Bank stock	13,171			3.61			238			15,143			4.26			322			(1,972)			(0.65)			(84)
Total interest earning assets	5,847,202			3.67			107,101			5,475,237			3.95			107,693			371,965			(0.28)			(592)
Noninterest-earning assets	390,390									358,089									32,301
Total assets	$	6,237,592								$	5,833,326								$	404,266

Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	1,035,340		0.06	%		290			$	956,783		0.08	%		391			$	78,557		(0.02)	%		(101)
Savings and money market deposits	1,754,186			0.19			1,685			1,525,425			0.30			2,298			228,761			(0.11)			(613)
Time deposits under $100,000	163,074			0.67			546			174,683			0.68			592			(11,609)			(0.01)			(46)
Time deposits $100,000 and over	826,714			1.18			4,846			944,796			2.00			9,367			(118,082)			(0.82)			(4,521)
Total interest-bearing deposits	3,779,314			0.39			7,367			3,601,687			0.71			12,648			177,627			(0.32)			(5,281)
Short-term borrowings	101,459			1.15			582			156,550			2.60			2,016			(55,091)			(1.45)			(1,434)
Long-term debt	119,243			2.91			1,726			101,547			4.15			2,091			17,696			(1.24)			(365)
Total interest-bearing liabilities	4,000,016			0.49			9,675			3,859,784			0.88			16,755			140,232			(0.39)			(7,080)
Noninterest-bearing deposits	1,588,742									1,376,437									212,305
Other liabilities	110,070									97,385									12,685
Total liabilities	5,698,828									5,333,606									365,222
Shareholders’ equity	538,762									499,720									39,042
Non-controlling interest	2									—									2
Total equity	538,764									499,720									39,044
Total liabilities and equity	$	6,237,592								$	5,833,326								$	404,266

Net interest income							$	97,426								$	90,938								$	6,488

Interest rate spread				3.18	%								3.07	%								0.11	%

Net interest margin				3.34	%								3.33	%								0.01	%

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

Net interest income (expressed on a taxable-equivalent basis) was ~~$48.0~~$49.4 million for the three months ended ~~March 31,~~June 30, 2020, representing an increase of ~~5.9%~~8.4% from ~~$45.3~~$45.6 million in the three months ended ~~March 31,~~June 30, 2019. Net interest income (expressed on a taxable-equivalent basis) was $97.4 million for the six months ended June 30, 2020, representing an increase of 7.1% from $90.9 million in the six months ended June 30, 2019. The increase in the three and six months ended ~~March 31,~~June 30, 2020 was primarily due to loan growth, attributable to loans originated under the Paycheck Protection Program ("PPP") and organic loan growth, funded by runoff of the investment securities portfolio and an increase in core deposits, combined with lower rates paid on interest-bearing liabilities. Partially offsetting these increases were decreases in yields earned on interest-earning assets. Net interest income for the three months ended June 30, 2020 included $2.5 million in PPP net interest income and net loan fees, which are accreted into income over the term of the loans and accelerated when the loans are forgiven or paid-off.The

decreases in yields earned on interest-earning assets and rates paid on interest-bearing liabilities were primarily attributable to the five rate cuts by the Federal Reserve from August 2019 through March 2020. During the three months ended June 30, 2020, the Company had an average PPP loan balance of $379.9 million, which earned approximately 2.61% in net interest income and net loan fees.

Interest Income

Taxable-equivalent interest income was ~~$54.0~~$53.1 million for the three months ended ~~March 31,~~June 30, 2020, representing ~~an increase~~a decrease of ~~1.2%~~2.2% from ~~$53.4~~$54.3 million in the three months ended ~~March 31,~~June 30, 2019. The increase was primarily attributable to a $378.6 million increase in average loans compared to the three months ended March 31, 2019, accounting for approximately $4.5 million of the increase in interest income during the three months ended March 31, 2020. This increase was partially offset by a61 bp decrease in the average yields earned on loans during the three months ended ~~March 31,~~June 30, 2020, ~~of 17 bp,~~ compared to the three months ended ~~March 31,~~June 30, 2019, ~~which~~ decreased interest income by approximately ~~$2.1~~$5.5 million. In addition, ~~average~~run-off of the investment securities ~~declined by $221.9~~portfolio of $147.5 million, ~~which~~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 $5.8 million in interest income during the three months ended June 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. The 40 bp decrease in the average yields earned on loans during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, decreased interest income by approximately $9.8 million. In addition, run-off of the investment securities portfolio of $184.5 million, combined with the 13 bp decline in yields earned on investment securities during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, decreased interest income by approximately $3.2 million. These decreases were partially offset by a $554.7 million increase in average loans compared to the six months ended June 30, 2019, accounting for an increase of approximately $12.6 million in interest income during the six months ended June 30, 2020.

Interest Expense

Interest expense for the three months ended ~~March 31,~~June 30, 2020 was ~~$6.0~~$3.7 million, representing a decrease of ~~25.5%~~57.7% from ~~$8.0~~$8.7 million in the three months ended ~~March 31,~~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 5626 bp, ~~117~~109 bp, 209 bp and 61169 bp, respectively, which decreased interest expense by approximately $1.2 million, ~~$0.4~~$2.2 million, $0.3 million and ~~$0.1~~$0.6 million, respectively. In addition, average time deposits $100,000 and over and short-term borrowings declined by ~~$136.5~~$100.1 million and $112.2 million resulting in a decrease in interest expense of approximately $0.5 million and $0.7 ~~million.~~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.

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 approximately $1.0 million, $3.4 million, $0.7 million and $0.7 million, respectively. In addition, average time deposits $100,000 and over and short-term borrowings declined by $118.1 million and $55.1 million, respectively, resulting in a decrease in interest expense of approximately $1.2 million and $0.7 million, respectively.

Net Interest Margin

Our net interest margin of ~~3.43%~~3.26% for the three months ended ~~March 31,~~June 30, 2020 ~~increased~~decreased by 97 bp from ~~3.34%~~3.33% in the three months ended ~~March 31,~~June 30, 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 3.34% for the six months ended June 30, 2020 increased by 1 bp from 3.33% in the six months ended June 30, 2019.

The average rates paid on our interest-bearing liabilities, which declined by 2439 bp in the ~~three~~six months ended ~~March 31,~~June 30, 2020, compared to the same prior year period, outpaced the decline in average yields earned on our interest-earning assets, which declined by 928 bp in the ~~three~~six months ended ~~March 31,~~June 30, 2020, compared to the same prior year period.

Provision for Credit Losses

Our provision for credit losses on loans under ASC 326 was ~~$9.3~~$10.6 million and $20.0 million during the three and six months ended ~~March 31,~~June 30, 2020, respectively, compared to an expense of ~~$1.3~~$1.4 million and $2.7 million in the three and six months ended ~~March 31,~~June 30, 2019, respectively, under previous GAAP.

In addition, we recorded a provision for off-balance sheet credit exposures of ~~$1.8~~$0.6 million and $2.4 million, included in other operating expense, during the three and six months ended ~~March 31,~~June 30, 2020, respectively, compared to a provision of ~~$0.2~~$0.5 million and $0.7 million in the three and six months ended ~~March 31,~~June 30, 2019, respectively, under previous GAAP. The increases in the provisions for credit losses and off-balance sheet credit exposures from the year-ago periods were primarily due to adverse economic conditions brought on by the COVID-19 pandemic.

We did not record a provision for credit losses on investment securities under ASC 326 during the three and six months ended ~~March 31, 2020 and 2019.~~June 30, 2020.

Our net charge-offs were ~~$1.2~~$2.9 million during the three months ended ~~March 31,~~June 30, 2020, compared to net charge-offs of ~~$1.9~~$0.4 million in the three months ended ~~March 31,~~June 30, 2019. Our net charge-offs were $4.2 million during the six months ended June 30, 2020, compared to net charge-offs of $2.3 million in the six months ended June 30, 2019.

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

5361

Other Operating Income

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


		Three Months Ended															Three Months Ended
(dollars in thousands)	(dollars in thousands)	March 31, 2020		March 31, 2019		$ Change		% Change		(dollars in thousands)	June 30, 2020		June 30, 2019		$ Change		% Change
Other operating income:	Other operating income:									Other operating income:
Mortgage banking income	Mortgage banking income	$	337	$	1,573	$	(1,236)	-78.6	%	Mortgage banking income	$	3,566	$	1,708	$	1,858	108.8	%
Service charges on deposit accounts	Service charges on deposit accounts	2,050		2,081		(31)		-1.5	%	Service charges on deposit accounts	1,149		2,041		(892)		-43.7	%
Other service charges and fees	Other service charges and fees	4,897		3,215		1,682		52.3	%	Other service charges and fees	2,916		3,909		(993)		-25.4	%
Income from fiduciary activities	Income from fiduciary activities	1,297		965		332		34.4	%	Income from fiduciary activities	1,270		1,129		141		12.5	%
Equity in earnings of unconsolidated subsidiaries	Equity in earnings of unconsolidated subsidiaries	26		8		18		225.0	%	Equity in earnings of unconsolidated subsidiaries	104		71		33		46.5	%

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

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

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

Other:	Other:									Other:
Income recovered on nonaccrual loans previously charged-off	Income recovered on nonaccrual loans previously charged-off	23		82		(59)		-72.0	%	Income recovered on nonaccrual loans previously charged-off	37		85		(48)		-56.5	%
Other recoveries	Other recoveries	40		26		14		53.8	%	Other recoveries	26		26		—		—	%
Commissions on sale of checks	Commissions on sale of checks	81		80		1		1.3	%	Commissions on sale of checks	56		79		(23)		-29.1	%
Gain on sale of MasterCard stock	Gain on sale of MasterCard stock	—		2,555		(2,555)		-100.0	%	Gain on sale of MasterCard stock	—		—		—		N.M.		*
Other	Other	154		136		18		13.2	%	Other	150		132		18		13.6	%
Total other operating income	Total other operating income	$	8,886	$	11,673	$	(2,787)	-23.9	%	Total other operating income	$	10,692	$	10,094	$	598	5.9	%

* Not meaningful ("N.M.")										* 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.	Note: Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period.																			Note: Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period.

For the three months ended ~~March 31,~~June 30, 2020, total other operating income of ~~$8.9~~$10.7 million ~~decreased~~increased by ~~$2.8~~$0.6 million, or ~~23.9%~~5.9%, from ~~$11.7~~$10.1 million in the year-ago quarter. The increase from the year-ago quarter was primarily due to higher mortgage banking income of $1.9 million and higher income from bank-owned life insurance of $0.5 million in the current quarter. Strong residential mortgage demand enabled the Company to grow its residential mortgage portfolio and realize higher gains on sales of residential mortgage loans of $3.6 million (included in mortgage banking income), which was partially offset by higher amortization of mortgage servicing rights of $1.1 million (included in mortgage banking income), attributable to the decline in market interest rates. The higher income from bank-owned life insurance was primarily attributable to current 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.


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

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

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

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

* Not meaningful ("N.M.")

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 ~~quarter~~period was primarily due to a $2.6 million gain on ~~the~~ sale of MasterCard ~~Class B common~~ stock ~~recorded~~recognized in the year-ago ~~quarter,~~period, combined with lower ~~mortgage banking income~~service charges on deposit accounts of ~~$1.2~~$0.9 million and lower income from bank-owned life insurance of ~~$1.0 million in~~$0.5 million. As previously noted, certain service charges have been suspended to support our customers through the ~~current quarter. The lower mortgage banking income was primarily attributable to higher amortization of mortgage servicing rights of $1.1 million, primarily attributable~~pandemic and there has been less transactional activity due to the ~~decline~~pandemic resulting in ~~market interest rates.~~lower service charges on deposit accounts. The lower income from bank-owned life insurance was primarily ~~attributable~~due to volatility in the equity markets during the quarter. This included a loss on corporate-owned life insurance, which had an offsetting decrease in the Company's employee deferred compensation expense due to the market movements during the quarter.markets. These decreases were partially offset by higher other service charges and fees of $0.7 million, higher mortgage banking income of $0.6 million and higher income from fiduciary activities of $0.5 million. The higher other charges and fees was primarily due to $1.3 million in income related to an interest rate swap ~~(included~~recognized in ~~other service charges and fees).~~

the first quarter of 2020.

5463

Other Operating Expense

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


		Three Months Ended															Three Months Ended
(dollars in thousands)	(dollars in thousands)	March 31, 2020		March 31, 2019		$ Change		% Change		(dollars in thousands)	June 30, 2020		June 30, 2019		$ Change		% Change
Other operating expense:	Other operating expense:									Other operating expense:
Salaries and employee benefits	Salaries and employee benefits	$	20,347	$	19,889	$	458	2.3	%	Salaries and employee benefits	$	20,622	$	20,563	$	59	0.3	%
Net occupancy	Net occupancy	3,672		3,458		214		6.2	%	Net occupancy	3,645		3,525		120		3.4	%
Equipment	Equipment	1,097		1,006		91		9.0	%	Equipment	1,043		1,138		(95)		-8.3	%

Communication expense	Communication expense	837		734		103		14.0	%	Communication expense	774		903		(129)		-14.3	%
Legal and professional services	Legal and professional services	2,028		1,570		458		29.2	%	Legal and professional services	2,238		1,728		510		29.5	%
Computer software expense	Computer software expense	2,943		2,597		346		13.3	%	Computer software expense	3,035		2,560		475		18.6	%
Advertising expense	Advertising expense	1,092		711		381		53.6	%	Advertising expense	923		712		211		29.6	%
Foreclosed asset expense	Foreclosed asset expense	67		159		(92)		-57.9	%	Foreclosed asset expense	—		49		(49)		-100.0	%

Other:	Other:									Other:
Charitable contributions	Charitable contributions	187		154		33		21.4	%	Charitable contributions	10		175		(165)		-94.3	%
FDIC insurance assessment	FDIC insurance assessment	—		501		(501)		-100.0	%	FDIC insurance assessment	475		362		113		31.2	%
Miscellaneous loan expenses	Miscellaneous loan expenses	300		294		6		2.0	%	Miscellaneous loan expenses	399		317		82		25.9	%
ATM and debit card expenses	ATM and debit card expenses	634		650		(16)		-2.5	%	ATM and debit card expenses	584		620		(36)		-5.8	%

Armored car expenses	Armored car expenses	294		198		96		48.5	%	Armored car expenses	229		211		18		8.5	%
Entertainment and promotions	Entertainment and promotions	280		230		50		21.7	%	Entertainment and promotions	165		1,023		(858)		-83.9	%
Stationery and supplies	Stationery and supplies	248		225		23		10.2	%	Stationery and supplies	220		279		(59)		-21.1	%
Directors’ fees and expenses	Directors’ fees and expenses	241		242		(1)		-0.4	%	Directors’ fees and expenses	196		238		(42)		-17.6	%
Directors' deferred compensation plan expense	Directors' deferred compensation plan expense	(1,483)		435		(1,918)		-440.9	%	Directors' deferred compensation plan expense	103		133		(30)		-22.6	%

Provision for residential mortgage loan repurchase losses										Provision for residential mortgage loan repurchase losses	—		(403)		403		-100.0
Provision for off-balance sheet credit exposures	Provision for off-balance sheet credit exposures	1,798		167		1,631		976.6	%	Provision for off-balance sheet credit exposures	573		487		86		17.7	%

Other	Other	1,658		1,128		530		47.0	%	Other	1,193		1,487		(294)		-19.8	%
Total other operating expense	Total other operating expense	$	36,240	$	34,348	$	1,892	5.5	%	Total other operating expense	$	36,427	$	36,107	$	320	0.9	%

For the three months ended ~~March 31,~~June 30, 2020, total other operating expense was ~~$36.2~~$36.4 million and increased by ~~$1.9~~$0.3 million, or ~~5.5%~~0.9%, from ~~$34.3~~$36.1 million in the year-ago quarter. The increase was primarily due to higher legal and professional services of $0.5 million, higher computer software expense of $0.5 million and higher advertising expense of $0.2 million. The higher expenses are primarily attributable to expenses related to our RISE2020 initiative and were partially offset by lower entertainment and promotions of $0.9 million and a provision for residential mortgage loan repurchase losses of $0.4 million recorded in the year-ago quarter, compared to none in the current quarter. The lower entertainment and promotions expense was primarily attributable to higher expenses in the year-ago quarter related to a core deposit gathering campaign.


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

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

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

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

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

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 six months ended June 30, 2019. The increase was primarily due to a higher provision for off-balance sheet credit exposures of ~~$1.6~~$1.7 million under ASC 326, ~~combined with higher salaries and employee benefits of $0.5 million and~~ higher legal and professional services of ~~$0.5~~$1.0 million, ~~primarily attributable to our RISE2020 initiative. These increases were~~higher computer software expense of $0.8 million and higher advertising expense of $0.6 million, partially offset by a ~~$1.5~~$1.9 million ~~credit related to~~variance in the ~~fair value of our~~ directors' deferred compensation ~~obligation recorded in the current quarter, compared to a $0.4 million~~plan expense ~~recorded in the year-ago quarter.~~and lower entertainment and promotions of $0.8 million. The ~~variance is~~lower directors' deferred compensation plan expense was primarily ~~attributable~~due to volatility in the equity markets. ~~In addition, FDIC insurance expense includes a $0.4 million assessment credit received in the current quarter.~~

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

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


		Three Months Ended March 31,										Three Months Ended June 30,									Six Months Ended June 30,
(dollars in thousands)	(dollars in thousands)	2020			2019			(dollars in thousands)	2020			2019			2020			2019
Total other operating expense	Total other operating expense	$	36,240		$	34,348		Total other operating expense	$	36,427		$	36,107		$	72,667		$	70,455

Net interest income	Net interest income	$	47,830		$	45,113		Net interest income	$	49,259		$	45,378		$	97,089		$	90,491
Total other operating income	Total other operating income	8,886			11,673			Total other operating income	10,692			10,094			19,578			21,767
Total revenue before provision for credit losses	Total revenue before provision for credit losses	$	56,716		$	56,786		Total revenue before provision for credit losses	$	59,951		$	55,472		$	116,667		$	112,258

Efficiency ratio	Efficiency ratio	63.90		%	60.49		%	Efficiency ratio	60.76		%	65.09		%	62.29		%	62.76		%

Our efficiency ratio ~~increased~~improved to ~~63.90%~~60.76% in the three months ended ~~March 31,~~June 30, 2020, compared to ~~60.49%~~65.09% in the year-ago quarter. The efficiency ratio in the ~~year-ago~~current quarter was positively impacted by the aforementioned ~~$2.6 million gain~~higher 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 ~~$2.8~~$3.0 million and $5.8 million for the three and six months ended ~~March 31,~~June 30, 2020, respectively, compared to ~~$5.1~~$4.4 million and $9.5 million in the ~~year-ago quarter.~~three and six months ended June 30, 2019, respectively. The effective tax rate for the three and six months ended ~~March 31,~~June 30, 2020 was ~~25.3%~~23.03% and 24.09%, respectively, compared to ~~24.2%~~24.65% and 24.40% in the ~~year-ago quarter.~~three and six months ended June 30, 2019.

The valuation allowance on our net deferred tax assets ("DTA") totaled $3.4 million at ~~March 31,~~June 30, 2020 and $3.4 million at December 31, 2019, of which $3.2 million and $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 $0.2 million and $0.2 million as of ~~March 31,~~June 30, 2020 and December 31, 2019 relates to a Hawaii capital loss carryforward balance that we do not expect to be able to utilize. Net of the valuation allowance, the Company's net DTA totaled ~~$16.9~~$18.7 million at ~~March 31,~~June 30, 2020, compared to a net DTA of $16.5 million as of December 31, 2019, and is included in other assets on our consolidated balance sheets.

Financial Condition

Total assets at ~~March 31,~~June 30, 2020 of ~~$6.11~~$6.63 billion increased by ~~$95.9~~$620.3 million from $6.01 billion at December 31, 2019.

Investment Securities

Investment securities of ~~$1.19~~$1.17 billion at ~~March 31,~~June 30, 2020 increased by ~~$56.9~~$41.7 million, or ~~5.0%~~3.7%, from December 31, 2019. The increase reflects ~~$96.1~~$147.4 million in net purchases, ~~and~~combined with a ~~$13.9~~$22.4 million increase in the market valuation on the available-for-sale portfolio, partially offset by ~~$52.9~~$128.0 million in principal runoff.

5666

Loans

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


(dollars in thousands)	(dollars in thousands)	March 31, 2020		December 31, 2019		$ Change		% Change		(dollars in thousands)	June 30, 2020		December 31, 2019		$ Change		% Change
Hawaii:	Hawaii:									Hawaii:
Commercial, financial and agricultural		$	454,817	$	454,582	$	235	0.1	%
Commercial, financial and agricultural:										Commercial, financial and agricultural:
SBA Paycheck Protection Program										SBA Paycheck Protection Program	$	483,827	$	—	$	483,827	—	%
Other										Other	431,887		454,582		(22,695)		(5.0)
Real estate:	Real estate:									Real estate:
Construction	Construction	100,617		95,854		4,763		5.0		Construction	103,518		95,854		7,664		8.0
Residential mortgage	Residential mortgage	1,632,536		1,599,801		32,735		2.0		Residential mortgage	1,657,558		1,599,801		57,757		3.6
Home equity	Home equity	504,686		490,734		13,952		2.8		Home equity	510,962		490,734		20,228		4.1
Commercial mortgage	Commercial mortgage	917,886		909,798		8,088		0.9		Commercial mortgage	912,422		909,798		2,624		0.3

Consumer	Consumer	367,960		373,451		(5,491)		(1.5)		Consumer	350,414		373,451		(23,037)		(6.2)

Leases										Leases	—		—		—		—
Total loans	Total loans	3,978,502		3,924,220		54,282		1.4		Total loans	4,450,588		3,924,220		526,368		13.4
Allowance for credit losses ("ACL")	Allowance for credit losses ("ACL")	(51,646)		(42,592)		(9,054)		21.3		Allowance for credit losses ("ACL")	(59,765)		(42,592)		(17,173)		40.3
Loans, net of ACL	Loans, net of ACL	$	3,926,856	$	3,881,628	$	45,228	1.2		Loans, net of ACL	$	4,390,823	$	3,881,628	$	509,195	13.1

U.S. Mainland:	U.S. Mainland:									U.S. Mainland:
Commercial, financial and agricultural		$	120,507	$	115,722	$	4,785	4.1
Commercial, financial and agricultural:										Commercial, financial and agricultural:
SBA Paycheck Protection Program										SBA Paycheck Protection Program	$	42,581	$	—	$	42,581	—	%
Other										Other	115,971		115,722		249		0.2
Real estate:	Real estate:									Real estate:
Construction	Construction	—		—		—		—		Construction	—		—		—		—
Residential mortgage	Residential mortgage	—		—		—		—		Residential mortgage	—		—		—		—
Home equity	Home equity	—		—		—		—		Home equity	—		—		—		—
Commercial mortgage	Commercial mortgage	221,251		213,617		7,634		3.6		Commercial mortgage	217,747		213,617		4,130		1.9

Consumer	Consumer	191,738		195,981		(4,243)		(2.2)		Consumer	176,551		195,981		(19,430)		(9.9)

Leases										Leases	—		—		—		—
Total loans	Total loans	533,496		525,320		8,176		1.6		Total loans	552,850		525,320		27,530		5.2
ACL	ACL	(7,999)		(5,379)		(2,620)		48.7		ACL	(7,574)		(5,379)		(2,195)		40.8
Loans, net of ACL	Loans, net of ACL	$	525,497	$	519,941	$	5,556	1.1		Loans, net of ACL	$	545,276	$	519,941	$	25,335	4.9

Total:	Total:									Total:
Commercial, financial and agricultural		$	575,324	$	570,304	$	5,020	0.9
Commercial, financial and agricultural:										Commercial, financial and agricultural:
SBA Paycheck Protection Program										SBA Paycheck Protection Program	$	526,408	$	—	$	526,408	—	%
Other										Other	547,858		570,304		(22,446)		(3.9)
Real estate:	Real estate:									Real estate:
Construction	Construction	100,617		95,854		4,763		5.0		Construction	103,518		95,854		7,664		8.0
Residential mortgage	Residential mortgage	1,632,536		1,599,801		32,735		2.0		Residential mortgage	1,657,558		1,599,801		57,757		3.6
Home equity	Home equity	504,686		490,734		13,952		2.8		Home equity	510,962		490,734		20,228		4.1
Commercial mortgage	Commercial mortgage	1,139,137		1,123,415		15,722		1.4		Commercial mortgage	1,130,169		1,123,415		6,754		0.6

Consumer	Consumer	559,698		569,432		(9,734)		(1.7)		Consumer	526,965		569,432		(42,467)		(7.5)

Leases										Leases	—		—		—		—
Total loans	Total loans	4,511,998		4,449,540		62,458		1.4		Total loans	5,003,438		4,449,540		553,898		12.4
ACL	ACL	(59,645)		(47,971)		(11,674)		24.3		ACL	(67,339)		(47,971)		(19,368)		40.4
Loans, net of ACL	Loans, net of ACL	$	4,452,353	$	4,401,569	$	50,784	1.2		Loans, net of ACL	$	4,936,099	$	4,401,569	$	534,530	12.1

Loans, net of deferred costs, of ~~$4.51~~$5.00 billion at ~~March 31,~~June 30, 2020 increased by ~~$62.5~~$553.9 million, or ~~1.4%~~12.4%, from December 31, 2019. The increase reflects net increases in the following loan portfolios: Paycheck Protection Program loans of $526.4 million, residential mortgage of ~~$32.7 million, commercial mortgage of $15.7~~$57.8 million, home equity of ~~$14.0~~$20.2 million, ~~commercial, financial and agricultural~~construction of ~~$5.0~~$7.7 million and ~~construction~~commercial mortgage of ~~$4.8~~

$6.8 million. These increases were partially offset by a net ~~decrease~~decreases in the consumer ~~portfolio~~and other commercial portfolios of ~~$9.7 million.~~$42.5 million and $22.4 million, respectively.

The Hawaii loan portfolio increased by ~~$54.3~~$526.4 million, or ~~1.4%~~13.4%, from December 31, 2019. The increase reflects net increases in the following loan portfolios: Paycheck Protection Program loans of $483.8 million, residential mortgage of ~~$32.7~~$57.8 million, home equity of ~~$14.0~~$20.2 million, construction of $7.7 million and commercial mortgage of ~~$8.1 million and construction of $4.8~~$2.6 million, partially offset by a net ~~decrease~~decreases in the consumer ~~portfolio~~and other commercial portfolios of ~~$5.5 million.~~$23.0 million and $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 ~~$8.2~~$27.5 million, or ~~1.6%~~5.2% from December 31, 2019. The net increase was primarily attributable to net increases in the Paycheck Protection Program and commercial mortgage loan ~~portfolio~~portfolios of ~~$7.6~~$42.6 million and ~~commercial, financial and agricultural loan portfolio of $4.8~~$4.1 million, respectively, partially offset by a net decrease in the consumer loan portfolio of ~~$4.2~~$19.4 million.

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

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

In 2019, we purchased an auto loan portfolio totaling $30.2 million, which included a $0.6 million premium over the $29.6 million outstanding balance. At the time of 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.

5868

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)	(dollars in thousands)	March 31, 2020			December 31, 2019			$ Change		% Change		(dollars in thousands)	June 30, 2020			December 31, 2019			$ Change		% Change
Nonperforming Assets
Nonperforming Assets ("NPAs") [1]												Nonperforming Assets ("NPAs") [1]
Nonaccrual loans:	Nonaccrual loans:											Nonaccrual loans:
Commercial, financial and agricultural	Commercial, financial and agricultural	$	667		$	467		$	200	42.8	%	Commercial, financial and agricultural	$	934		$	467		$	467	100.0	%
Real estate:	Real estate:											Real estate:

Residential mortgage	Residential mortgage	2,287			979			1,308		133.6		Residential mortgage	3,215			979			2,236		228.4
Home equity	Home equity	545			92			453		492.4		Home equity	538			92			446		484.8

Consumer	Consumer	48			17			31		182.4		Consumer	54			17			37		217.6

Total nonaccrual loans	Total nonaccrual loans	3,547			1,555			1,992		128.1		Total nonaccrual loans	4,741			1,555			3,186		204.9

Other real estate owned ("OREO"):	Other real estate owned ("OREO"):											Other real estate owned ("OREO"):

Real estate:	Real estate:											Real estate:

Home equity	Home equity	100			164			(64)		(39.0)		Home equity	—			164			(164)		(100.0)

Total OREO	Total OREO	100			164			(64)		(39.0)		Total OREO	—			164			(164)		(100.0)
Total nonperforming assets	Total nonperforming assets	3,647			1,719			1,928		112.2		Total nonperforming assets	4,741			1,719			3,022		175.8

Accruing Loans Delinquent for 90 Days or More
Accruing Loans Delinquent for 90 Days or More [1]												Accruing Loans Delinquent for 90 Days or More [1]

Real estate:	Real estate:											Real estate:

Residential mortgage	Residential mortgage	1,221			724			497		68.6		Residential mortgage	726			724			2		0.3

Consumer	Consumer	352			286			66		23.1		Consumer	444			286			158		55.2

Total accruing loans delinquent for 90 days or more	Total accruing loans delinquent for 90 days or more	1,573			1,010			563		55.7		Total accruing loans delinquent for 90 days or more	1,170			1,010			160		15.8

Restructured Loans Still Accruing Interest
Restructured Loans Still Accruing Interest [1]												Restructured Loans Still Accruing Interest [1]
Commercial, financial and agricultural	Commercial, financial and agricultural	113			135			(22)		(16.3)		Commercial, financial and agricultural	172			135			37		27.4
Real estate:	Real estate:											Real estate:

Residential mortgage	Residential mortgage	5,431			5,502			(71)		(1.3)		Residential mortgage	5,290			5,502			(212)		(3.9)

Commercial mortgage	Commercial mortgage	1,709			1,839			(130)		(7.1)		Commercial mortgage	1,888			1,839			49		2.7

Consumer												Consumer	145			—			145		—

Total restructured loans still accruing interest	Total restructured loans still accruing interest	7,253			7,476			(223)		(3.0)		Total restructured loans still accruing interest	7,495			7,476			19		0.3

Total nonperforming assets, accruing loans delinquent for 90 days or more and restructured loans still accruing interest		$	12,473		$	10,205		$	2,268	22.2
Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest												Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest	$	13,406		$	10,205		$	3,201	31.4

Ratio of nonaccrual loans to total loans	Ratio of nonaccrual loans to total loans	0.08		%	0.03		%			0.05	%	Ratio of nonaccrual loans to total loans	0.09		%	0.03		%			0.06	%
Ratio of nonperforming assets to total loans and OREO		0.08		%	0.04		%			0.04	%
Ratio of nonperforming assets and accruing loans delinquent for 90 days or more to total loans and OREO		0.12		%	0.06		%			0.06	%
Ratio of nonperforming assets, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO		0.28		%	0.23		%			0.05	%
Ratio of NPAs to total loans and OREO												Ratio of NPAs to total loans and OREO	0.09		%	0.04		%			0.05	%
Ratio of NPAs and accruing loans delinquent for 90 days or more to total loans and OREO												Ratio of NPAs and accruing loans delinquent for 90 days or more to total loans and OREO	0.12		%	0.06		%			0.06	%
Ratio of NPAs, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO												Ratio of NPAs, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO	0.27		%	0.23		%			0.04	%
Ratio of classified assets and OREO to tier 1 capital and ACL												Ratio of classified assets and OREO to tier 1 capital and ACL	7.28		%	6.75		%			0.53	%

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

5969

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


(dollars in thousands)
Balance at December 31, 2019	$	1,719
Additions	~~2,056~~3,827
Reductions:
Payments	~~(60)~~(427)
Return to accrual status	— (123)
Sales of NPAs	(94)
Net charge-offs, valuation and other adjustments	~~(68)~~(161)
Total reductions	~~(128)~~(805)
Net increase	~~1,928~~3,022
Balance at ~~March 31,~~June 30, 2020	$	~~3,647~~4,741

Nonperforming assets, which includes nonaccrual loans and other real estate owned, totaled ~~$3.6~~$4.7 million at ~~March 31,~~June 30, 2020, compared to $1.7 million at December 31, 2019. There were no nonperforming loans classified as held for sale at ~~March 31,~~June 30, 2020 and December 31, 2019. The increase in nonperforming assets from December 31, 2019 was primarily attributable to additions to nonaccrual loans totaling ~~$2.1~~$3.8 million, offset by ~~$0.1~~$0.4 million in repayments of nonaccrual loans, ~~and $0.1~~$0.2 million in net charge-offs, valuation and other ~~adjustments.~~adjustments, $0.1 million in loans returned to accrual status, and the sale of a foreclosed asset of $0.1 million.

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

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 offers various types~~Company's ratio of ~~concessions when modifying a loan. Concessions made~~classified assets and other real estate owned to tier 1 capital and the ~~original contractual terms of the loan typically consists of the deferral of interest and/or principal payments due~~ACL increased from 6.75% at December 31, 2019 to ~~deterioration in the borrowers' financial condition. In these cases, the principal balance on the TDR had matured and/or was in default~~7.28% at ~~the time of restructure, and there are no commitments to lend additional funds to the borrower.~~June 30, 2020.

6070

Allowance for Credit Losses

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


		Three Months Ended March 31,										Three Months Ended June 30,									Six Months Ended June 30,
(dollars in thousands)	(dollars in thousands)	2020			2019			(dollars in thousands)	2020			2019			2020			2019
Allowance for Credit Losses:	Allowance for Credit Losses:							Allowance for Credit Losses:
Balance at beginning of period	Balance at beginning of period	$	47,971		$	47,916		Balance at beginning of period	$	59,645		$	47,267		$	47,971		$	47,916
Adoption of ASU 2016-13	Adoption of ASU 2016-13	3,566			—			Adoption of ASU 2016-13	—			—			3,566			—
Adjusted balance at beginning of period	Adjusted balance at beginning of period	51,537			47,916			Adjusted balance at beginning of period	59,645			47,267			51,537			47,916

Provision for credit losses	Provision for credit losses	9,329			1,283			Provision for credit losses	10,640			1,404			19,969			2,687

Charge-offs:	Charge-offs:							Charge-offs:
Commercial, financial and agricultural	Commercial, financial and agricultural	437			463			Commercial, financial and agricultural	1,103			839			1,540			1,302
Real estate:								Real estate:

Residential mortgage								Residential mortgage	52			—			52			—

Consumer	Consumer	2,217			2,251			Consumer	2,626			1,459			4,843			3,710

Total charge-offs	Total charge-offs	2,654			2,714			Total charge-offs	3,781			2,298			6,435			5,012

Recoveries:	Recoveries:							Recoveries:
Commercial, financial and agricultural	Commercial, financial and agricultural	342			233			Commercial, financial and agricultural	305			315			647			548
Real estate:	Real estate:							Real estate:
Construction	Construction	131			6			Construction	—			592			131			598
Residential mortgage	Residential mortgage	181			22			Residential mortgage	20			372			201			394
Home equity	Home equity	31			9			Home equity	—			9			31			18
Commercial mortgage	Commercial mortgage	2			—			Commercial mortgage	1			25			3			25

Consumer	Consumer	746			512			Consumer	509			581			1,255			1,093

Total recoveries	Total recoveries	1,433			782			Total recoveries	835			1,894			2,268			2,676

Net charge-offs	Net charge-offs	1,221			1,932			Net charge-offs	2,946			404			4,167			2,336

Balance at end of period	Balance at end of period	$	59,645		$	47,267		Balance at end of period	$	67,339		$	48,267		$	67,339		$	48,267

ACL as a percentage of total loans	ACL as a percentage of total loans	1.32		%	1.15		%	ACL as a percentage of total loans	1.35		%	1.14		%	1.35		%	1.14		%

ACL as a percentage of total loans, excluding PPP loans								ACL as a percentage of total loans, excluding PPP loans	1.50		%	1.14		%	1.50		%	1.14		%
Annualized ratio of net charge-offs to average loans	Annualized ratio of net charge-offs to average loans	0.11		%	0.19		%	Annualized ratio of net charge-offs to average loans	0.24		%	0.04		%	0.18		%	0.11		%

Our ACL at ~~March 31,~~June 30, 2020 totaled ~~$59.6~~$67.3 million compared to $48.0 million at December 31, 2019.

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

During the three months ended ~~March 31,~~June 30, 2020, we recorded a provision for credit losses on loans of ~~$9.3~~$10.6 million and net charge-offs of ~~$1.2~~$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 ~~provision reflects~~provisions reflect the incorporation of ~~life of loan~~ estimated life-of-loan losses under ASC 326 and economic forecasts that anticipate deterioration due to the COVID-19 pandemic.

Our ACL as a percentage of total loans increased from 1.08% at December 31, 2019 to ~~1.32%~~1.35% at ~~March 31,~~June 30, 2020. Excluding the PPP loan portfolio, which is guaranteed by the SBA, our ACL as a percentage of total loans was 1.50%. The increase in our ACL as a percentage of total loans reflects the adoption of ASU 2016-13. Our ACL as a percentage of nonperforming assets decreased from 2,791% at December 31, 2019 to ~~1,635%~~1,420% at ~~March 31,~~June 30, 2020.

In accordance with GAAP, loans held for sale and other real estate assets are not included in our assessment of the 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 ~~$18.1~~$9.2 million at ~~March 31,~~June 30, 2020 ~~increased~~decreased by ~~$3.1~~$5.8 million, or ~~20.9%~~38.4%, from the FHLB stock balance at December 31, 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)	(dollars in thousands)	March 31, 2020		December 31, 2019		$ Change		% Change		(dollars in thousands)	June 30, 2020		December 31, 2019		$ Change		% Change
Noninterest-bearing demand deposits	Noninterest-bearing demand deposits	$	1,430,540	$	1,450,532	$	(19,992)	(1.4)	%	Noninterest-bearing demand deposits	$	1,851,012	$	1,450,532	$	400,480	27.6	%
Interest-bearing demand deposits	Interest-bearing demand deposits	1,018,508		1,043,010		(24,502)		(2.3)		Interest-bearing demand deposits	1,067,483		1,043,010		24,473		2.3
Savings and money market deposits	Savings and money market deposits	1,693,280		1,600,028		93,252		5.8		Savings and money market deposits	1,945,744		1,600,028		345,716		21.6
Time deposits less than $100,000	Time deposits less than $100,000	162,399		165,755		(3,356)		(2.0)		Time deposits less than $100,000	159,739		165,755		(6,016)		(3.6)
Core deposits	Core deposits	4,304,727		4,259,325		45,402		1.1		Core deposits	5,023,978		4,259,325		764,653		18.0

Government time deposits	Government time deposits	523,343		533,088		(9,745)		(1.8)		Government time deposits	509,927		533,088		(23,161)		(4.3)
Other time deposits $100,000 to $250,000	Other time deposits $100,000 to $250,000	100,047		107,550		(7,503)		(7.0)		Other time deposits $100,000 to $250,000	96,633		107,550		(10,917)		(10.2)
Other time deposits greater than $250,000	Other time deposits greater than $250,000	207,952		220,060		(12,108)		(5.5)		Other time deposits greater than $250,000	164,147		220,060		(55,913)		(25.4)
Total time deposits $100,000 and greater	Total time deposits $100,000 and greater	831,342		860,698		(29,356)		(3.4)		Total time deposits $100,000 and greater	770,707		860,698		(89,991)		(10.5)

Total deposits	Total deposits	$	5,136,069	$	5,120,023	$	16,046	0.3		Total deposits	$	5,794,685	$	5,120,023	$	674,662	13.2

Total deposits of ~~$5.14~~$5.79 billion at ~~March 31,~~June 30, 2020 increased by ~~$16.0~~$674.7 million from total deposits of $5.12 billion at December 31, 2019. Net increases in noninterest-bearing demand deposits of $400.5 million, savings and money market deposits of ~~$93.3~~$345.7 million and interest-bearing demand deposits of $24.5 million, were partially offset by net decreases in ~~interest-bearing demand deposits of $24.5 million, noninterest-bearing demand deposits of $20.0 million,~~ other time deposits greater than $250,000 of ~~$12.1~~$55.9 million, government time deposits of ~~$9.7~~$23.2 million, other time deposits $100,000 to $250,000 of ~~$7.5~~$10.9 million and time deposits less than $100,000 of ~~$3.4~~$6.0 million.

Core deposits, which we define as demand deposits, savings and money market deposits, and time deposits less than $100,000, totaled ~~$4.30~~$5.02 billion at ~~March 31,~~June 30, 2020 and increased by ~~$45.4~~$764.7 million, or ~~1.1,~~18.0%, from December 31, 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 ~~83.8%~~86.7% at ~~March 31,~~June 30, 2020, compared to 83.2% at December 31, 2019.

Capital Resources

In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources and uses of capital in conjunction with an analysis of the size and quality of our assets, the anticipated performance of our business (including the

effects of the COVID-19 pandemic) and the level of risk and regulatory capital requirements. As part of this ongoing assessment, the Board of Directors reviews our capital position on an ongoing basis to ensure it is adequate, including, but not limited to, need for raising additional capital or returning capital to our shareholders, including the ability to declare cash dividends or repurchase our securities.

Common and Preferred Equity

Shareholders' equity totaled ~~$533.8~~$544.3 million at ~~March 31,~~June 30, 2020, compared to $528.5 million at December 31, 2019. The change in total shareholders' equity was attributable to net income of ~~$8.3~~$18.2 million and other comprehensive income of ~~$10.7~~$17.1 million, partially offset by the repurchase of 206,802 shares of common stock under our repurchase program, at a cost of $4.7 million and cash dividends ~~paid~~declared of ~~$6.5~~$13.0 million in the ~~three~~six months ended ~~March 31,~~June 30, 2020. During the ~~three~~six months ended ~~March 31,~~June 30, 2020, we repurchased approximately 0.7% of our common stock outstanding as of December 31, 2019.

Our total shareholders' equity to total assets ratio was ~~8.74%~~8.21% at ~~March 31,~~June 30, 2020, compared to 8.79% at December 31, 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 ~~$18.99~~$19.33 and $18.68 at ~~March 31,~~June 30, 2020 and December 31, 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 ~~March 31,~~June 30, 2020, on a stand-alone basis, CPF had an available cash balance of approximately ~~$7.7~~$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 ~~March 31,~~June 30, 2020, the bank had Statutory Retained Earnings of ~~$65.8~~$68.4 million. On ~~April 21,~~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% increase~~remained unchanged from the ~~$0.21~~$0.23 per share a year-ago.

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

In the year ended December 31, 2019, the Company repurchased 797,003 shares of common stock, at a cost of $22.8 million, under the Company's repurchase plan.

In January 2020, the Company’s Board of Directors authorized the repurchase of up to $30 million of its common stock from time to time in the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase program (the "Repurchase Plan"). The Repurchase Plan replaces and supersedes in its entirety the share repurchase program previously approved by the Company's Board of Directors, which had $19.8 million in remaining repurchase authority. In the three months ended March 31, 2020, a total of 206,802 shares of common stock, at a cost of $4.7 million, were repurchased under the Company's stock repurchase plans. As of March 31, 2020, $26.6 million remained available for repurchase under the Company's Repurchase Plan. The Company's Repurchase Plan is subject to a one year expiration. In March 2020, the Company temporarily suspended the Repurchase Plan due to uncertainty during the current COVID-19 pandemic.

In the six months ended June 30, 2020, a total of 206,802 shares of common stock, at a cost of $4.7 million, were repurchased under the Company's stock repurchase plans. As of June 30, 2020, $26.6 million remained available for repurchase under the Company's Repurchase Plan. We cannot

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

Trust Preferred Securities

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

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.subsidiaries we previously had organized.

As of ~~March 31,~~June 30, 2020, we have two remaining statutory trusts, CPB Capital Trust IV ("Trust IV") and CPB Statutory Trust V ("Trust V"), which issued a total of $50.0 million in floating rate trust preferred securities. The trust preferred securities, the underlying floating rate junior subordinated debentures that are the assets of Trusts IV and V, and the common securities issued by Trusts IV and V are redeemable in whole or in part on any interest payment date on or after December 15, 2009 for Trust IV

and V, or at any time in whole but not in part within 90 days following the occurrence of certain events. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from

time to time to defer subordinated debenture interest payments, which would result in a deferral of dividend payments on the related trust preferred securities, for up to 20 consecutive quarterly periods without default or penalty.

Regulatory Capital Ratios

General capital adequacy regulations adopted by the FRB and FDIC require an institution to maintain minimum leverage capital, Tier 1 risk-based capital, total risk-based capital, and common equity Tier 1 ("CET1") capital ratios. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. For a further discussion of the effect of forthcoming changes in required regulatory capital ratios, see the discussion in the "Business — Supervision and Regulation" sections of our 2019 Form 10-K.

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

1.Revising the definition of eligible retained income in the capital rule;

2.Permitting banking organizations to neutralize the effects of purchasing assets through the Money Market Mutual Fund Liquidity Facility ("MMLF") on their risk-based and leverage capital ratios;

3.Providing banking organizations that implement the Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses, Topic 326, Measurement of Credit Losses on Financial Instruments, before the end of 2020 the option to delay for two years an estimate of the CECL methodology’s effect on regulatory capital, relative to the incurred loss methodology’s effect on capital, followed by a three-year transition period;

4.Allowing banking organizations to implement the final rule titled Standardized Approach for Calculating the Exposure Amount of Derivative Contracts (the "SA-CCR rule") for the first quarter of 2020, on a best efforts basis.

As of ~~March 31,~~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 ~~March 31,~~June 30, 2020 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.


		Actual						Minimum Required for Capital Adequacy Purposes							Minimum Required to be Well Capitalized							Actual						Minimum Required for Capital Adequacy Purposes	Minimum Required to be Well Capitalized
(dollars in thousands)	(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		(dollars in thousands)		Amount		Ratio		Amount		Ratio		Amount		Ratio
Company	Company													Company
At March 31, 2020:
At June 30, 2020:														At June 30, 2020:
Leverage capital	Leverage capital	$	567,947	9.5	%	$	239,808	4.0	%			N/A		Leverage capital		$	571,976	8.9	%	$	256,307	4.0	%			N/A
Tier 1 risk-based capital	Tier 1 risk-based capital	567,947		12.3		276,171		6.0				N/A		Tier 1 risk-based capital		571,976		12.5		274,997		6.0				N/A
Total risk-based capital	Total risk-based capital	618,504		13.4		368,228		8.0				N/A		Total risk-based capital		622,393		13.6		366,662		8.0				N/A
CET1 risk-based capital	CET1 risk-based capital	517,947		11.3		207,128		4.5				N/A		CET1 risk-based capital		521,976		11.4		206,247		4.5				N/A

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

Central Pacific Bank	Central Pacific Bank													Central Pacific Bank
At March 31, 2020:
At June 30, 2020:														At June 30, 2020:
Leverage capital	Leverage capital	$	556,895	9.3	%	$	239,635	4.0	%	$	299,544	5.0	%	Leverage capital		$	559,461	8.7	%	$	256,118	4.0	%	$	320,147	5.0	%
Tier 1 risk-based capital	Tier 1 risk-based capital	556,895		12.1		275,928		6.0		367,904		8.0		Tier 1 risk-based capital		559,461		12.2		274,739		6.0		366,319		8.0
Total risk-based capital	Total risk-based capital	607,402		13.2		367,904		8.0		459,880		10.0		Total risk-based capital		609,811		13.3		366,319		8.0		457,899		10.0
CET1 risk-based capital	CET1 risk-based capital	556,895		12.1		206,946		4.5		298,922		6.5		CET1 risk-based capital		559,461		12.2		206,055		4.5		297,634		6.5

At December 31, 2019:	At December 31, 2019:													At December 31, 2019:
Leverage capital	Leverage capital	$	556,077	9.3	%	$	238,342	4.0	%	$	297,928	5.0	%	Leverage capital		$	556,077	9.3	%	$	238,342	4.0	%	$	297,928	5.0	%
Tier 1 risk-based capital	Tier 1 risk-based capital	556,077		12.3		271,350		6.0		361,800		8.0		Tier 1 risk-based capital		556,077		12.3		271,350		6.0		361,800		8.0
Total risk-based capital	Total risk-based capital	605,320		13.4		361,800		8.0		452,250		10.0		Total risk-based capital		605,320		13.4		361,800		8.0		452,250		10.0
CET1 risk-based capital	CET1 risk-based capital	556,077		12.3		203,512		4.5		293,962		6.5		CET1 risk-based capital		556,077		12.3		203,512		4.5		293,962		6.5

Asset/Liability Management and Interest Rate Risk

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

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

ALCO utilizes a detailed and dynamic simulation model to measure and manage interest rate risk exposures. The simulation process is designed to measure the impact of future changes in interest rates on net interest income and market value of portfolio equity and to allow ALCO to model alternative balance sheet strategies.

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The following reflects our net interest income sensitivity analysis as of ~~March 31,~~June 30, 2020. Net interest income is estimated assuming no balance sheet growth under a flat interest rate scenario. The net interest income sensitivity is measured as the change in net interest income in alternate interest rate scenarios as a percentage of the flat rate scenario. The alternate rate scenarios typically assume rates move up or down 100 bps in an instantaneous, parallel fashion. However, due to historically low rates stemming from the COVID-19 pandemic, market rate changes in the down 100 bp scenario were limited.


Rate Change	Estimated Net Interest Income Sensitivity
+100 bp	~~3.08~~4.36	%
-100 bp	~~(1.85)~~(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 ~~$1.87~~$1.97 billion line of credit with the FHLB as of ~~March 31,~~June 30, 2020, compared to $1.84 billion at December 31, 2019. ~~We had $222.0 million in~~There were no short-term borrowings under this arrangement at ~~March 31,~~June 30, 2020, compared to $150.0 million at December 31, 2019. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled ~~$187.4~~$248.5 million at ~~March 31,~~June 30, 2020, compared to $78.9 million at December 31, 2019. Long-term borrowings under this arrangement totaled $50.0 million at ~~March 31,~~June 30, 2020 and December 31, 2019. FHLB advances and standby letters of credit available at ~~March 31,~~June 30, 2020 were secured by certain real estate loans with a carrying value of ~~$2.51~~$2.66 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB. At ~~March 31,~~June 30, 2020, ~~$1.41~~$1.67 billion was undrawn under this arrangement, compared to $1.57 billion at December 31, 2019.

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

Our ability to maintain adequate levels of liquidity is dependent on our ability to continue to maintain our strong risk profile and capital base. Our liquidity may also be negatively impacted by weakness in the financial markets and industry-wide reductions in liquidity.

Contractual Obligations

Information regarding our contractual obligations is provided in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes in our contractual obligations since December 31, 2019.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

The primary analytical tool we use to measure and manage our interest rate risk is a simulation model that projects changes in net interest income ("NII") as market interest rates change. Our ALCO policy requires that simulated changes in NII should be within certain specified ranges, or steps must be taken to reduce interest rate risk. The results of the model indicate that the mix of rate-sensitive assets and liabilities at ~~March 31,~~June 30, 2020 would not result in a fluctuation of NII that would exceed the established policy limits.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

On 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 incurred loss methodology (Allowance for Loan and Leases Losses or "ALLL") with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The Company designed new controls and modified existing controls as part of its adoption. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data. There were no other changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the 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, 2019, as filed with the SEC on February 25, 2020, except as described below.

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

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. Our operations, like those of other financial institutions that operate in our market, are significantly influenced by economic conditions in Hawaii, including the strength of the real estate market and the tourism industry. The COVID-19 pandemic has resulted in an extreme decline in tourism to the state of Hawaii. As a result, the demand for our products and services has been, and may continue to be, ~~impacted.~~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.~~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 the three months ended March 31, 2020, the Company repurchased 206,802 shares of common stock, at an aggregate cost of $4.7 million, under the Company's stock repurchase plans. As of March 31, 2020, a total of $26.6 million remained available for repurchase under the Company's Repurchase Plan. In March 2020, the Company temporarily suspended the Repurchase Plan due to uncertainty during the current COVID-19 pandemic. As a result, the Company did not repurchase any shares of common stock under the Company's Repurchase Plan during the three months ended June 30, 2020. As of June 30, 2020, a total of $26.6 million remained available for repurchase under the Company's Repurchase Plan. We cannot provide any assurance as to when or if we will

recommence our Repurchase Plan.

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


	Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Shares Purchased as Part of Publicly Announced Programs	Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program
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

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Item 6. Exhibits


Exhibit No.	Document

31.1		Rule 13a-14(a) Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 *

31.2		Rule 13a-14(a) Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 *

32.1		Section 1350 Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 **

32.2		Section 1350 Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 **

101.INS	XBRL Instance Document*

101.SCH	XBRL Taxonomy Extension Schema Document*

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB	XBRL Taxonomy Extension Label Linkbase Document*

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*

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


*	Filed herewith.

**	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:	~~May 5,~~July 29, 2020	/s/ Paul K. Yonamine
		Paul K. Yonamine
		Chairman and Chief Executive Officer

Date:	~~May 5,~~July 29, 2020	/s/ David S. Morimoto
		David S. Morimoto
		Executive Vice President and Chief Financial Officer

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