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 SeptemberJune 30, 20202021
 
or

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer☒☐Accelerated filer ☐☒
Non-accelerated filer ☐
Smaller reporting company 
☐
Emerging growth company☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. ☐

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

The number of shares outstanding of registrant's common stock, no par value, on October 19, 2020July 21, 2021 was 28,179,79828,218,860 shares.
1

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
Form 10-Q
 
Table of Contents
 Page
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Item 1.Financial Statements (Unaudited) 
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2

PART I.   FINANCIAL INFORMATION
 
Forward-Looking Statements and Factors that Could Affect Future Results
 
This document may contain forward-looking statements concerning: projections of revenues, expenses, income or loss, earnings or loss per share, capital expenditures, the payment or nonpayment of dividends, capital position, net interest margin or other financial items; statements of plans, objectives and expectations of Central Pacific Financial Corp. or its management or Board of Directors, including those relating to business plans, use of capital resources, products or services and regulatory developments and regulatory actions; statements of future economic performance including anticipated performance results in light of the COVID-19 pandemic and from our RISE2020 initiative;and other business initiatives; 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 impact of our participation in the Paycheck Protection Program ("PPP") and fulfillment of government guarantees on our PPP loans; 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;and other business initiatives; 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 regulations or 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
3

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.
34

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands)September 30,
2020		December 31,
2019
Assets  
Cash and due from banks$89,665 $78,418 
Interest-bearing deposits in other banks5,489 24,554 
Investment securities:
Available-for-sale debt securities, at fair value1,166,319 1,126,983 
Equity securities, at fair value1,204 1,127 
Total investment securities1,167,523 1,128,110 
Loans held for sale23,962 9,083 
Loans5,030,626 4,449,540 
Allowance for credit losses(80,542)(47,971)
Loans, net of allowance for credit losses4,950,084 4,401,569 
Premises and equipment, net61,095 46,343 
Accrued interest receivable21,478 16,500 
Investment in unconsolidated subsidiaries30,239 17,115 
Other real estate owned128 164 
Mortgage servicing rights12,429 14,718 
Bank-owned life insurance161,743 159,656 
Federal Home Loan Bank stock17,468 14,983 
Right-of-use lease asset44,896 52,348 
Other assets61,943 49,111 
Total assets$6,648,142 $6,012,672 
Liabilities  
Deposits:  
Noninterest-bearing demand$1,762,476 $1,450,532 
Interest-bearing demand1,114,123 1,043,010 
Savings and money market1,881,104 1,600,028 
Time921,226 1,026,453 
Total deposits5,678,929 5,120,023 
Short-term borrowings206,000 150,000 
Long-term debt101,547 101,547 
Lease liability45,355 52,632 
Other liabilities72,369 59,950 
Total liabilities6,104,200 5,484,152 
Contingent liabilities and other commitments (see Notes 8, 15 and 16)
Equity  
Preferred stock, 0 par value, authorized 1,000,000 shares; issued and outstanding: NaN at September 30, 2020 and December 31, 20190 0 
Common stock, 0 par value, authorized 185,000,000 shares; issued and outstanding: 28,179,798 at September 30, 2020 and 28,289,257 at December 31, 2019442,635 447,602 
Additional paid-in capital94,336 91,611 
Accumulated deficit(16,609)(19,102)
Accumulated other comprehensive income23,541 8,409 
Total shareholders' equity543,903 528,520 
Non-controlling interest39 0 
Total equity543,942 528,520 
Total liabilities and equity$6,648,142 $6,012,672 
(dollars in thousands)June 30,
2021		December 31,
2020
Assets  
Cash and due from banks$116,009 $97,546 
Interest-bearing deposits in other banks224,469 6,521 
Investment securities:
Available-for-sale debt securities, at fair value1,407,340 1,182,609 
Equity securities, at fair value1,578 1,351 
Total investment securities1,408,918 1,183,960 
Loans held for sale5,361 16,687 
Loans5,077,318 4,964,113 
Allowance for credit losses(77,781)(83,269)
Loans, net of allowance for credit losses4,999,537 4,880,844 
Premises and equipment, net76,740 65,278 
Accrued interest receivable19,014 20,224 
Investment in unconsolidated subsidiaries31,052 29,968 
Mortgage servicing rights10,500 11,865 
Bank-owned life insurance167,289 163,161 
Federal Home Loan Bank stock8,149 8,237 
Right-of-use lease asset41,890 45,857 
Other assets69,553 64,435 
Total assets$7,178,481 $6,594,583 
Liabilities  
Deposits:  
Noninterest-bearing demand$2,203,806 $1,790,269 
Interest-bearing demand1,341,280 1,174,888 
Savings and money market2,048,945 1,932,043 
Time803,128 898,918 
Total deposits6,397,159 5,796,118 
Short-term borrowings0 22,000 
Long-term debt105,495 105,385 
Lease liability43,112 47,191 
Other liabilities79,874 77,156 
Total liabilities6,625,640 6,047,850 
Contingent liabilities and other commitments (see Notes 8, 15 and 16)
Equity  
Preferred stock, 0 par value, authorized 1,000,000 shares;
issued and outstanding: NaN at June 30, 2021 and December 31, 2020
0 0 
Common stock, 0 par value, authorized 185,000,000 shares;
issued and outstanding: 28,218,860 at June 30, 2021 and 28,183,340 at December 31, 2020
440,854 442,635 
Additional paid-in capital96,182 94,842 
Retained earnings (Accumulated deficit)10,831 (10,920)
Accumulated other comprehensive income4,926 20,128 
Total shareholders' equity552,793 546,685 
Non-controlling interest48 48 
Total equity552,841 546,733 
Total liabilities and equity$7,178,481 $6,594,583 
See accompanying notes to consolidated financial statements.
45

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) 
Three Months Ended
September 30,		Nine Months Ended
September 30,		Three Months Ended
June 30,		Six Months Ended
June 30,
(dollars in thousands, except per share data)(dollars in thousands, except per share data)2020201920202019(dollars in thousands, except per share data)2021202020212020
Interest income:Interest income:    Interest income:    
Interest and fees on loansInterest and fees on loans$45,751 $45,861 $137,870 $135,169 Interest and fees on loans$49,024 $45,915 $95,098 $92,119 
Interest and dividends on investment securities:Interest and dividends on investment securities:Interest and dividends on investment securities:
Taxable interestTaxable interest5,233 7,178 18,300 22,968 Taxable interest4,447 6,310 9,553 13,067 
Tax-exempt interestTax-exempt interest621 708 1,888 2,388 Tax-exempt interest346 599 860 1,267 
DividendsDividends17 14 51 46 Dividends18 17 36 34 
Interest on deposits in other banksInterest on deposits in other banks3 33 42 147 Interest on deposits in other banks61 3 71 39 
Dividends on Federal Home Loan Bank stockDividends on Federal Home Loan Bank stock128 186 366 508 Dividends on Federal Home Loan Bank stock63 106 122 238 
Total interest incomeTotal interest income51,753 53,980 158,517 161,226 Total interest income53,959 52,950 105,740 106,764 
Interest expense:Interest expense:    Interest expense:    
Interest on deposits:Interest on deposits:    Interest on deposits:    
DemandDemand115 207 405 598 Demand93 114 179 290 
Savings and money marketSavings and money market417 1,549 2,102 3,847 Savings and money market282 567 556 1,685 
TimeTime1,284 4,432 6,676 14,391 Time498 2,124 1,086 5,392 
Interest on short-term borrowingsInterest on short-term borrowings71 1,130 653 3,146 Interest on short-term borrowings0 74 2 582 
Interest on long-term debtInterest on long-term debt746 1,013 2,472 3,104 Interest on long-term debt1,025 812 2,052 1,726 
Total interest expenseTotal interest expense2,633 8,331 12,308 25,086 Total interest expense1,898 3,691 3,875 9,675 
Net interest incomeNet interest income49,120 45,649 146,209 136,140 Net interest income52,061 49,259 101,865 97,089 
Provision for credit losses14,652 1,532 34,621 4,219 
(Credit) provision for credit losses(Credit) provision for credit losses(3,443)11,213 (4,264)22,340 
Net interest income after provision for credit lossesNet interest income after provision for credit losses34,468 44,117 111,588 131,921 Net interest income after provision for credit losses55,504 38,046 106,129 74,749 
Other operating income:Other operating income:    Other operating income:    
Mortgage banking incomeMortgage banking income4,345 1,994 8,248 5,275 Mortgage banking income1,533 3,566 4,503 3,903 
Service charges on deposit accountsService charges on deposit accounts1,475 2,125 4,674 6,247 Service charges on deposit accounts1,443 1,149 2,921 3,199 
Other service charges and feesOther service charges and fees3,345 3,894 11,158 11,018 Other service charges and fees4,619 2,916 8,409 7,813 
Income from fiduciary activitiesIncome from fiduciary activities1,149 1,126 3,716 3,220 Income from fiduciary activities1,269 1,270 2,500 2,567 
Equity in earnings of unconsolidated subsidiaries104 86 234 165 
Investment securities gains (losses)Investment securities gains (losses)(352)36 (352)36 Investment securities gains (losses)50 0 50 0 
Income from bank-owned life insuranceIncome from bank-owned life insurance1,179 645 2,584 2,511 Income from bank-owned life insurance1,210 1,424 2,007 1,405 
Net gain (loss) on sales of foreclosed assets0 17 (6)17 
OtherOther318 343 885 3,544 Other406 367 851 691 
Total other operating incomeTotal other operating income11,563 10,266 31,141 32,033 Total other operating income10,530 10,692 21,241 19,578 
Other operating expense:Other operating expense:    Other operating expense:    
Salaries and employee benefitsSalaries and employee benefits20,729 20,631 61,698 61,083 Salaries and employee benefits23,790 20,329 43,617 40,383 
Net occupancyNet occupancy3,834 3,697 11,151 10,680 Net occupancy4,055 3,645 7,819 7,317 
EquipmentEquipment1,234 1,067 3,374 3,211 Equipment1,048 1,043 2,048 2,140 
Communication expenseCommunication expense856 1,008 2,467 2,645 Communication expense756 774 1,525 1,611 
Legal and professional servicesLegal and professional services2,262 1,933 6,528 5,231 Legal and professional services2,572 2,238 4,949 4,266 
Computer software expenseComputer software expense3,114 2,713 9,092 7,870 Computer software expense3,398 3,035 7,181 5,978 
Advertising expenseAdvertising expense1,020 711 3,035 2,134 Advertising expense1,329 923 2,987 2,015 
Foreclosed asset expense6 15 73 223 
OtherOther3,917 3,159 12,221 12,312 Other4,485 3,867 9,153 6,586 
Total other operating expenseTotal other operating expense36,972 34,934 109,639 105,389 Total other operating expense41,433 35,854 79,279 70,296 
Income before income taxesIncome before income taxes9,059 19,449 33,090 58,565 Income before income taxes24,601 12,884 48,091 24,031 
Income tax expenseIncome tax expense2,200 4,895 7,988 14,440 Income tax expense5,887 2,967 11,339 5,788 
Net incomeNet income$6,859 $14,554 $25,102 $44,125 Net income$18,714 $9,917 $36,752 $18,243 
Per common share data:Per common share data:    Per common share data:    
Basic earnings per common shareBasic earnings per common share$0.24 $0.51 $0.89 $1.54 Basic earnings per common share$0.66 $0.35 $1.31 $0.65 
Diluted earnings per common shareDiluted earnings per common share$0.24 $0.51 $0.89 $1.53 Diluted earnings per common share$0.66 $0.35 $1.29 $0.65 
Cash dividends declaredCash dividends declared$0.23 $0.23 $0.69 $0.67 Cash dividends declared$0.24 $0.23 $0.47 $0.46 
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 sharesBasic shares28,060,020 28,424,898 28,075,684 28,575,369 Basic shares28,173,710 28,040,802 28,141,360 28,083,602 
Diluted sharesDiluted shares28,111,664 28,602,338 28,172,153 28,762,057 Diluted shares28,456,624 28,095,230 28,407,479 28,190,132 
 See accompanying notes to consolidated financial statements.
56

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended
September 30,		Nine Months Ended
September 30,
(dollars in thousands)2020201920202019
Net income$6,859 $14,554 $25,102 $44,125 
Other comprehensive income (loss), net of tax:
Net change in unrealized gain (loss) on investment securities(2,257)4,386 14,165 27,547 
Defined benefit plans247 283 967 773 
Total other comprehensive income (loss), net of tax(2,010)4,669 15,132 28,320 
Comprehensive income$4,849 $19,223 $40,234 $72,445 
Three Months Ended
June 30,		Six Months Ended
June 30,
(dollars in thousands)2021202020212020
Net income$18,714 $9,917 $36,752 $18,243 
Other comprehensive income, net of tax:
Net change in unrealized gain (loss) on investment securities1,727 6,275 (15,574)16,422 
Defined benefit plans188 204 372 720 
Total other comprehensive income (loss), net of tax1,915 6,479 (15,202)17,142 
Comprehensive income$20,629 $16,396 $21,550 $35,385 
 
See accompanying notes to consolidated financial statements.
67

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

Common
Shares
Outstanding		Preferred
Stock		Common
Stock		Additional Paid-In CapitalRetained Earnings (Accum.
Deficit)		Accum.
Other
Comp.
Income
(Loss)		Non-
Controlling
Interest		Total
 (dollars in thousands, except per share data)
Balance at December 31, 202028,183,340 $— $442,635 $94,842 $(10,920)$20,128 $48 $546,733 
Net income— — — — 18,038 — — 18,038 
Other comprehensive loss— — — — — (17,117)— (17,117)
Cash dividends declared ($0.23 per share)— — — — (6,490)— — (6,490)
Share-based compensation99,190 — 870 879 — — — 1,749 
Balance at March 31, 202128,282,530 $— $443,505 $95,721 $628 $3,011 $48 $542,913 
Net income— — — — 18,714 — — 18,714 
Other comprehensive income— — — — — 1,915 — 1,915 
Cash dividends declared ($0.24 per share)— — — — (6,787)— — (6,787)
Common stock purchased by directors' deferred compensation plan (6,900 shares, net)— — (191)— — — — (191)
Common stock repurchased and retired and other related costs(156,600)— (2,603)— (1,724)— — (4,327)
Share-based compensation92,930 — 143461 — — — 604 
Balance at June 30, 202128,218,860 $— $440,854 $96,182 $10,831 $4,926 $48 $552,841 
Common
Shares
Outstanding		Preferred
Stock		Common
Stock		Additional Paid-In CapitalAccum.
Deficit		Accum.
Other
Comp.
Income
(Loss)		Non-
Controlling
Interest		Total
 (dollars in thousands, except per share data)
Balance at December 31, 201928,289,257 $— $447,602 $91,611 $(19,102)$8,409 $0 $528,520 
Impact of the adoption of new accounting standards (1)— — — — (3,156)— — (3,156)
Adjusted balance at January 1, 202028,289,257 — 447,602 91,611 (22,258)8,409 0 525,364 
Net income— — — — 8,326 — — 8,326 
Other comprehensive income— — — — — 10,663 — 10,663 
Cash dividends declared ($0.23 per share)— — — — (6,496)— — (6,496)
Common stock repurchased and retired and other related costs(206,802)— (4,749)— — — — (4,749)
Share-based compensation32,898 — — 673 — — — 673 
Non-controlling interest— — — — — — 49 49 
Balance at March 31, 202028,115,353 $— $442,853 $92,284 $(20,428)$19,072 $49 $533,830 
Net income— — — — 9,917 — — 9,917 
Other comprehensive income— — — — — 6,479 — 6,479 
Cash dividends declared ($0.23 per share)— — — — (6,475)— — (6,475)
Common stock purchased by directors' deferred compensation plan (8,800 shares, net)— — (154)— — — — (154)
Share-based compensation expense38,806 — 723 — — — 723 
Non-controlling interest— — — — — — (14)(14)
Balance at June 30, 202028,154,159 $— $442,699 $93,007 $(16,986)$25,551 $35 $544,306 
Net income— — — — 6,859 — — 6,859 
Other comprehensive income— — — — — (2,010)— (2,010)
Cash dividends declared ($0.23 per share)— — — — (6,482)— — (6,482)
Common stock purchased by directors' deferred compensation plan (4,200 shares, net)— — (64)— — — — (64)
Share-based compensation25,639 — 1,329 — — — 1,329 
Non-controlling interest— — — — — — 4 4 
Balance at September 30, 202028,179,798 $— $442,635 $94,336 $(16,609)$23,541 $39 $543,942 

7

Common
Shares
Outstanding		Preferred
Stock		Common
Stock		Additional Paid-In CapitalAccum.
Deficit		Accum.
Other
Comp.
Income
(Loss)		Non-
Controlling
Interest		TotalCommon
Shares
Outstanding		Preferred
Stock		Common
Stock		Additional Paid-In CapitalAccum.
Deficit		Accum.
Other
Comp.
Income
(Loss)		Non-
Controlling
Interest		Total
(dollars in thousands, except per share data) (dollars in thousands, except per share data)
Balance at December 31, 201828,967,715 $— $470,660 $88,876 $(51,718)$(16,093)$0 $491,725 
Balance at December 31, 2019Balance at December 31, 201928,289,257 $— $447,602 $91,611 $(19,102)$8,409 $0 $528,520 
Impact of the adoption of new accounting standards (2)(1)Impact of the adoption of new accounting standards (2)(1)— — — — — (3,100)— (3,100)Impact of the adoption of new accounting standards (2)(1)— — — — (3,156)— — (3,156)
Adjusted balance at January 1, 201928,967,715 — 470,660 88,876 (51,718)(19,193)0 488,625 
Adjusted balance at January 1, 2020Adjusted balance at January 1, 202028,289,257 — 447,602 91,611 (22,258)8,409 0 525,364 
Net income— — — — 16,037 — — 16,037 
Other comprehensive income— — — — — 11,238 — 11,238 
Cash dividends declared ($0.21 per share)— — — — (6,052)— — (6,052)
Common stock repurchased and retired and other related costs(277,000)— (7,708)— — — — (7,708)
Share-based compensation32,326 — — 498 — — — 498 
Balance at March 31, 201928,723,041 $— $462,952 $89,374 $(41,733)$(7,955)$0 $502,638 
Net income— — — — 13,534 — — 13,534 
Other comprehensive income— — — — — 12,413 — 12,413 
Cash dividends declared ($0.23 per share)— — — — (6,581)— — (6,581)
Common stock purchased by directors' deferred compensation plan (14,600 shares, net)— — (416)— — — — (416)
Common stock repurchased and retired and other related costs(213,700)— (6,243)— — — — (6,243)
Share-based compensation58,436 — 350 — — 0 350 
Balance at June 30, 201928,567,777 $— $456,293 $89,724 $(34,780)$4,458 $0 $515,695 
Net incomeNet income— — — — 14,554 — — 14,554 Net income— — — — 8,326 — — 8,326 
Other comprehensive incomeOther comprehensive income— — — — — 4,669 — 4,669 Other comprehensive income— — — — — 10,663 — 10,663 
Cash dividends declared ($0.23 per share)Cash dividends declared ($0.23 per share)— — — — (6,556)— — (6,556)Cash dividends declared ($0.23 per share)— — — — (6,496)— — (6,496)
Common stock repurchased and retired and other related costsCommon stock repurchased and retired and other related costs(140,600)— (4,015)— — — — (4,015)Common stock repurchased and retired and other related costs(206,802)— (4,749)— — — — (4,749)
Share-based compensationShare-based compensation14,164 — 880 — — — 880 Share-based compensation32,898 — — 673 — — — 673 
Balance at September 30, 201928,441,341 $— $452,278 $90,604 $(26,782)$9,127 $0 $525,227 
Noncontrolling interestNoncontrolling interest— — — — — — 49 49 
Balance at March 31, 2020Balance at March 31, 202028,115,353 $— $442,853 $92,284 $(20,428)$19,072 $49 $533,830 
Net incomeNet income— — — — 9,917 — — 9,917 
Other comprehensive incomeOther 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)
Common stock repurchased and retired and other related costsCommon stock repurchased and retired and other related costs— — 0 — — — — 0 
Share-based compensationShare-based compensation38,806 — 723 — — 0 723 
Noncontrolling interestNoncontrolling interest— — — — — — (14)(14)
Balance at June 30, 2020Balance at June 30, 202028,154,159 $— $442,699 $93,007 $(16,986)$25,551 $35 $544,306 
(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.
(1) Represents the impact of the adoption of Accounting Standards Update ("ASU") ASU 2016-13.(1) Represents the impact of the adoption of Accounting Standards Update ("ASU") ASU 2016-13.
 See accompanying notes to consolidated financial statements.
8

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended
September 30,
(dollars in thousands)20202019
Cash flows from operating activities:  
Net income$25,102 $44,125 
Adjustments to reconcile net income to net cash provided by operating activities: 
Provision for credit losses34,621 4,219 
Depreciation and amortization of premises and equipment4,628 4,628 
Non-cash lease expense176 220 
Cash flows from operating leases(4,743)(4,663)
Loss on sale of other real estate, net of write-downs70 138 
Amortization of mortgage servicing rights4,558 1,727 
Net amortization and accretion of premium/discounts on investment securities7,127 6,808 
Share-based compensation expense2,725 1,728 
Net loss (gain) on sales of investment securities352 (36)
Net gain on sales of residential mortgage loans(9,971)(2,836)
Proceeds from sales of loans held for sale287,924 152,684 
Originations of loans held for sale(292,832)(150,217)
Equity in earnings of unconsolidated subsidiaries(234)(165)
Distributions from unconsolidated subsidiaries225 175 
Net increase in cash surrender value of bank-owned life insurance(2,253)(1,499)
Deferred income taxes(6,953)7,548 
Net tax (expense) benefit from share-based compensation(157)209 
Net change in other assets and liabilities(9,955)(12,309)
Net cash provided by operating activities40,410 52,484 
Cash flows from investing activities:  
Proceeds from maturities of and calls on investment securities available-for-sale237,632 194,626 
Proceeds from sales of investment securities available-for-sale86,508 53,935 
Purchases of investment securities available-for-sale(351,701)(54,975)
Proceeds from sale of MasterCard stock0 2,555 
Net loan originations(546,954)(214,834)
Purchases of loan portfolios(39,876)(78,820)
Proceeds from sale of foreclosed loans/other real estate owned94 0 
Proceeds from bank-owned life insurance166 0 
Net purchases of premises, equipment and land(19,380)(3,438)
Net return of capital from unconsolidated subsidiaries0 622 
Contributions to unconsolidated subsidiaries(2,936)0 
Net proceeds from redemption of (purchases of) FHLB stock(2,485)(538)
Net cash used in investing activities(638,932)(100,867)
Cash flows from financing activities:  
Net increase in deposits558,906 91,169 
Proceeds from long-term debt65,944 0 
Repayments of long-term debt(65,944)(20,619)
Net increase in short-term borrowings56,000 8,000 
Cash dividends paid on common stock(19,453)(19,189)
Repurchases of common stock and other related costs(4,749)(17,966)
Net cash provided by financing activities590,704 41,395 
Net decrease in cash and cash equivalents(7,818)(6,988)
Cash and cash equivalents at beginning of period102,972 102,186 
Cash and cash equivalents at end of period$95,154 $95,198 
Supplemental disclosure of cash flow information:  
Cash paid during the period for:  
Interest$14,988 $24,735 
Income taxes15,803 17,601 
Cash received during the period for:
Income taxes0 0 
Supplemental disclosure of non-cash information:
Net change in common stock held by directors’ deferred compensation plan218 416 
Net reclassification of loans to foreclosed loans/other real estate owned128 190 
Net transfer of loans to loans held for sale6,565 0 
Net transfer of investment securities held-to-maturity to available-for-sale0 (149,042)
Right-of-use lease assets obtained in exchange for lease liabilities0 55,887 
Six Months Ended
June 30,
(dollars in thousands)20212020
Cash flows from operating activities:  
Net income$36,752 $18,243 
Adjustments to reconcile net income to net cash provided by operating activities: 
(Credit) provision for credit losses(4,264)22,340 
Depreciation and amortization of premises and equipment3,293 3,010 
Non-cash lease (benefit) expense(34)117 
Cash flows from operating leases(3,325)(3,189)
Loss on disposal of fixed assets37 0 
Loss on sale of other real estate, net of write-downs0 70 
Amortization of mortgage servicing rights2,082 3,217 
Net amortization and accretion of premium/discounts on investment securities5,715 4,327 
Share-based compensation expense1,340 1,396 
Net gain on sales of investment securities(50)0 
Net gain on sales of residential mortgage loans(3,654)(5,273)
Proceeds from sales of loans held for sale89,016 167,643 
Originations of loans held for sale(74,036)(163,730)
Equity in earnings of unconsolidated subsidiaries(187)(130)
Distributions from unconsolidated subsidiaries288 121 
Net increase in cash surrender value of bank-owned life insurance(2,685)(2,268)
Deferred income taxes(8,612)(2,129)
Net tax benefit (expense) from share-based compensation252 (134)
Net change in other assets and liabilities17,212 13,427 
Net cash provided by operating activities59,140 57,058 
Cash flows from investing activities:  
Proceeds from maturities of and calls on investment securities available-for-sale169,385 123,720 
Proceeds from sales of investment securities available-for-sale174,971 0 
Purchases of investment securities available-for-sale(596,140)(147,359)
Net loan repayments (originations)3,765 (524,869)
Purchases of loan portfolios(118,194)(33,196)
Proceeds from sale of foreclosed loans/other real estate owned0 94 
Purchases of bank-owned life insurance(3,550)0 
Proceeds from bank-owned life insurance2,107 166 
Net purchases of premises, equipment and land(14,792)(11,699)
Contributions to unconsolidated subsidiaries(2,819)(2,194)
Net proceeds from redemption of FHLB stock88 5,754 
Net cash used in investing activities(385,179)(589,583)
Cash flows from financing activities:  
Net increase in deposits601,041 674,662 
Proceeds from long-term debt0 65,944 
Net decrease in short-term borrowings(22,000)(150,000)
Cash dividends paid on common stock(13,277)(12,971)
Repurchases of common stock and other related costs(4,327)(4,749)
Net proceeds from issuance of common stock and stock option exercises1,013 0 
Net cash provided by financing activities562,450 572,886 
Net increase in cash and cash equivalents236,411 40,361 
Cash and cash equivalents at beginning of period104,067 102,972 
Cash and cash equivalents at end of period$340,478 $143,333 
Supplemental disclosure of cash flow information:  
Cash paid during the period for:  
Interest$4,460 $11,069 
Income taxes14,358 185 
Supplemental disclosure of non-cash information:
Net change in common stock held by directors’ deferred compensation plan191 154 

 See accompanying notes to consolidated financial statements.
9

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, 2019.2020. 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.

Reclassifications

Certain amounts reported in prior years in the financial statements have been reclassified to conform to the current year’s presentation. These reclassifications did not impact net income, the consolidated balance sheets and the consolidated statements of cash flows.

Principles of Consolidation

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

In January 2020, we acquired a 50% ownership interest in a mortgage loan origination and brokerage company, Oahu HomeLoans, LLC. The bank concluded that the investment meets the consolidation requirements under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 810, "Consolidation." The bank concluded that the entity meets the definition of a variable interest entity and that we are the primary beneficiary of the variable interest entity. Accordingly, the investment has been consolidated into our financial statements.

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

Our investments in unconsolidated subsidiaries accounted for under the equity, proportional amortization and cost methods were $0.2 million, $28.4$27.3 million and $1.6$3.6 million, respectively, at SeptemberJune 30, 20202021 and $0.2$0.3 million, $15.3$28.1 million and $1.6 million, respectively, at December 31, 2019.2020. 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 across the globe. 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
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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 timeremains uncertain and will depend on future developments, including the scope and duration of the pandemic, the success of the continued COVID-19 vaccine rollout, and other actions taken by governmental authorities and other third parties in response to the pandemic. If the pandemic continues to be sustained, it may further adversely impact the Company and the State of Hawaii and impair the ability of the Company's customers to fulfill their contractual obligations to the Company. This could cause the Company to experience a material adverse effect on its business operations, asset valuations, financial condition, and results of operations.
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Material adverse effects may include all or a combination of losses in operations, loan defaults, higher provisions for credit losses and valuation impairments on the Company's investments, loans, mortgage servicing rights, deferred tax assets, or counter-party risk derivatives.

Change in Operating Segments and Reclassifications

In the first quarter of 2020, the Company reassessed the alignment of its reportable segments and combined its 3 reportable segments (Banking Operations, Treasury and All Others segments) into a single operating segment. We believe this change better reflects how the Company's Executive Committee, or its chief operating decision maker ("CODM"), manages, allocates resources and assesses performance of the activities of the Company. The Company also believes that this change is better aligned with how the Company's CODM manages its business. Segment results for 2019 have been reclassified to 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. Weand 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 SeptemberJune 30, 20202021 and the Company did not reverse any accrued interest against interest income during the three and ninesix months ended SeptemberJune 30, 2020.2021.

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
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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.
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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 SeptemberJune 30, 2020,2021, the declines in market values of our AFS debt securities were primarily attributable to changes in interest rates and volatility in the 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 $4.2 million as of SeptemberJune 30, 2020.2021. 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 SeptemberJune 30, 2020.2021.

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 typically 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 $17.3$14.8 million at SeptemberJune 30, 20202021 and is reported together with accrued interest on AFS debt securities on the consolidated balance sheets. Upon adoption of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” the Company made the accounting policy election to not measure an estimate of credit losses on accrued interest receivable as the Company writes off any uncollectible accrued interest receivable in a timely manner. The Company believes COVID-19 modified loans have distinct risk characteristics that cause
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them to be monitored and assessed for credit risk differently than their unmodified counterparts. Thus, in the third quarter of 2020, the Company elected to measure a reserve on the accrued interest receivable for loans on active payment forbearance or deferral. As a result, during the third quarter of 2020, the Company recorded a reservedeferral of $0.2 million, against accrued interest receivable with the offset recorded to provision for credit losses. Due to the significant decline in loans on active forbearance or deferral, the Company reversed the $0.2 million reserve during the second quarter of 2021 and no longer has a reserve on accrued interest receivable as of June 30, 2021.
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Nonaccrual Loans

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

Troubled Debt Restructuring (“TDR”)

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

TDRs that are performing and on accrual status as of the date of the modification remain on accrual status. TDRs that are nonperforming as of the date of modification generally remain as nonaccrual until the prospect of future payments in accordance with the modified loan agreement is reasonably assured, generally demonstrated when the borrower maintains compliance with the restructured terms for a predetermined period, normally at least six months. TDRs with temporary below-market concessions remain designated as a TDR regardless of the accrual or performance status until the loan is paid off.

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

In April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued a revised interagency statement encouraging financial institutions to work with customers affected by the COVID-19 pandemic and providing additional information regarding loan modifications. The revised interagency statement clarifies the interaction between the interagency statement issued on March 22, 2020 and the temporary relief provided by Section 4013 of the CARESCoronavirus Aid, Relief and Economic Security ("CARES") Act. Section 4013 allows financial institutions to suspend the requirements to classify certain loan modifications as TDRs. The revised statement also provides supervisory interpretations on past due and nonaccrual regulatory reporting of loan modification programs and regulatory capital. Section 4013 and the interagency guidance are being applied by the Company to loan modifications made related to the COVID-19 pandemic as eligible and appropriate. The application of the guidance reduced the number of TDRs that were reported. In December 2020, the Consolidated Appropriations Act, 2021 was signed into law. Section 541 of this legislation, “Extension of Temporary Relief From Troubled Debt Restructurings and Insurer Clarification,” extends Section 4013 of the CARES Act to the earlier of January 1, 2022 or 60 days after the termination of the national emergency declared relating to COVID-19.

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, the success of the continued COVID-19 vaccine rollout, and other actions taken by governmental authorities and other third parties in response to the pandemic.

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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 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 a one year when its forecast is no longer deemed reasonable and supportable.reversion period.

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

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

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

14

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

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

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

Construction loans

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

Commercial real estate loans

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

Multi-family mortgage loans

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

Commercial, financial and agricultural loans

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

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

Home equity lines of credit

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

15

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 (term) loans, including auto 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:

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

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

Loss-Rate Migration

MigrationLoss-rate 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. MigrationLoss-rate migration analysis requires the portfolio to be segmented into pools then further sub-segmented by risk characteristics such as risk rating, days past due, delinquency counters, TDR status and Nonaccrual status to measure loss rates accurately. The key inputs to run a loss-rate 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'.

WARMWeighted-Average Remaining Maturity ("WARM")

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

Other

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

16

Determining the Term

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

Reserve for Off-Balance Sheet Credit Exposures

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

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

The estimatereserve for off-balance-sheet credit exposures 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 adjustedrecorded as a provision for credit losses on off-balance sheet credit exposures in other operating expense.the provision for credit losses.

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.

17

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 
2021

In August 2018,December 2019, the FASB issued ASU 2018-13,2019-12, "Fair Value MeasurementIncome Taxes (Topic 820): Disclosure Framework—Changes740)." This ASU simplifies the accounting for income taxes by removing certain exceptions 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 measurementsgeneral principles in Topic 820.740. It also improves consistent application of GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company adopted ASU 2018-132019-12 effective January 1, 2020. ASU 2018-132021 and it did not have a material impact on disclosures in our consolidated financial statements.

In AprilOctober 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”)FASB 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. ASU 2020-10, "Codification Improvements." This interagency guidance is being applied by the Company to loan modifications made relatedASU issues improvements to the COVID-19 pandemic as eligible and appropriate. The application ofcodification by ensuring that all guidance that requires or provides an option for an entity to provide information in the guidance reduced the number of TDRs that were reported. Future TDRs are indeterminable and will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in responsenotes to the pandemic.financial statements is codified, reducing the likelihood that disclosure requirements would be missed. The Company adopted ASU 2020-10 effective January 1, 2021 and it did not have a material impact on our consolidated financial statements.

18

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. Entities can (1) elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can also
17

(2) elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. Finally, entities can (3) make a one-time election to sell and/or reclassify held-to-maturity (“HTM”) debt securities that reference an interest rate affected by reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is inwill elect (1) above for all contract modifications that meet the process of evaluatingstated criteria. As the provisions of this ASU, butCompany currently does not utilize hedge accounting, (2) above is currently not applicable. The Company currently does not have HTM debt securities and therefore, (3) above is currently not applicable.

In May 2021, the FASB issued ASU No. 2021-04, "Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options". ASU 2021-04 addresses issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. ASU 2021-04 is effective for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years, with early adoption permitted. We do not expect itadoption of the new guidance to have a materialsignificant impact on our consolidatedfinancial statements.

In July 2021, the FASB issued ASU No. 2021-05, "Leases (Topic 842), Lessors—Certain Leases with Variable Lease Payments". ASU 2021-05 updates guidance in Topic 842, to restore long-standing accounting practice for certain sales-type leases with variable payments. ASU 2021-05 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. We do not expect adoption of the new guidance to have a significant impact on our 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)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value		ACL
September 30, 2020    
Available-for-sale:    
Debt securities:    
States and political subdivisions$163,642 $5,239 $(292)$168,589 $0 
Corporate securities50,318 471 (231)50,558 0 
U.S. Treasury obligations and direct obligations of U.S Government agencies35,115 41 (212)34,944 0 
Mortgage-backed securities:    
Residential - U.S. Government-sponsored entities743,786 20,395 (855)763,326 0 
Commercial - U.S. Government agencies and sponsored entities71,335 2,451 0 73,786 0 
Residential - Non-government agencies27,525 1,185 (34)28,676 0 
Commercial - Non-government agencies44,814 1,641 (15)46,440 0 
Total available-for-sale securities$1,136,535 $31,423 $(1,639)$1,166,319 $0 

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

(dollars in thousands)(dollars in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value		(dollars in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value		ACL
December 31, 2019    
June 30, 2021June 30, 2021    
Available-for-sale:Available-for-sale:    Available-for-sale:    
Debt securities:Debt securities:    Debt securities:    
States and political subdivisionsStates and political subdivisions$119,755 $2,303 $(40)$122,018 States and political subdivisions$193,919 $3,833 $(988)$196,764 $0 
Corporate securitiesCorporate securities30,277 252 0 30,529 Corporate securities46,999 194 (515)46,678 0 
U.S. Treasury obligations and direct obligations of U.S Government agenciesU.S. Treasury obligations and direct obligations of U.S Government agencies40,769 10 (398)40,381 U.S. Treasury obligations and direct obligations of U.S Government agencies39,977 134 (377)39,734 0 
Mortgage-backed securities:Mortgage-backed securities: Mortgage-backed securities:    
Residential - U.S. Government-sponsored entitiesResidential - U.S. Government-sponsored entities673,918 6,003 (2,099)677,822 Residential - U.S. Government-sponsored entities984,750 8,613 (8,685)984,678 0 
Commercial - U.S. Government agencies and sponsored entitiesCommercial - U.S. Government agencies and sponsored entities80,773 1,198 (746)81,225 Commercial - U.S. Government agencies and sponsored entities79,970 2,094 (598)81,466 0 
Residential - Non-government agenciesResidential - Non-government agencies36,377 830 (16)37,191 Residential - Non-government agencies15,091 428 (73)15,446 0 
Commercial - Non-government agenciesCommercial - Non-government agencies134,676 3,141 0 137,817 Commercial - Non-government agencies41,318 1,256 0 42,574 0 
Total available-for-sale securitiesTotal available-for-sale securities$1,116,545 $13,737 $(3,299)$1,126,983 Total available-for-sale securities$1,402,024 $16,552 $(11,236)$1,407,340 $0 

1918

(dollars in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value		ACL
December 31, 2020    
Available-for-sale:    
Debt securities:    
States and political subdivisions$163,573 $5,370 $(177)$168,766 $0 
Corporate securities47,351 788 (131)48,008 0 
U.S. Treasury obligations and direct obligations of U.S Government agencies33,413 18 (286)33,145 0 
Mortgage-backed securities: 
Residential - U.S. Government-sponsored entities762,309 16,816 (299)778,826 0 
Commercial - U.S. Government agencies and sponsored entities85,405 2,564 (500)87,469 0 
Residential - Non-government agencies22,671 786 (34)23,423 0 
Commercial - Non-government agencies41,309 1,663 0 42,972 0 
Total available-for-sale securities$1,156,031 $28,005 $(1,427)$1,182,609 $0 

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

(dollars in thousands)Amortized CostFair Value
September 30, 2020
Equity securities$1,027 $1,204 
December 31, 2019
Equity securities935 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.
(dollars in thousands)Amortized CostFair Value
June 30, 2021
Equity securities$1,194 $1,578 
December 31, 2020
Equity securities1,068 1,351 

The amortized cost and estimated fair value of our AFS debt securities at SeptemberJune 30, 20202021 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.
 June 30, 2021
(dollars in thousands)Amortized CostFair Value
Available-for-sale:  
Due in one year or less$23,390 $23,497 
Due after one year through five years27,513 28,430 
Due after five years through ten years90,757 91,326 
Due after ten years139,235 139,923 
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities984,750 984,678 
Commercial - U.S. Government agencies and sponsored entities79,970 81,466 
Residential - Non-government agencies15,091 15,446 
Commercial - Non-government agencies41,318 42,574 
Total available-for-sale securities$1,402,024 $1,407,340 
 September 30, 2020
(dollars in thousands)Amortized CostFair Value
Available-for-sale:  
Due in one year or less$27,260 $27,378 
Due after one year through five years40,800 42,098 
Due after five years through ten years89,879 92,226 
Due after ten years91,136 92,389 
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities743,786 763,326 
Commercial - U.S. Government agencies and sponsored entities71,335 73,786 
Residential - Non-government agencies27,525 28,676 
Commercial - Non-government agencies44,814 46,440 
Total available-for-sale securities$1,136,535 $1,166,319 

For theFor three and ninesix months ended SeptemberJune 30, 2020,2021, proceeds from the sale of available-for-sale investment securities were $86.5 million and resulted in a gross realized loss of $0.4 million. For the three and nine months ended September 30, 2019, proceeds from the sale of available-for-sale investment securities were $53.9$175.0 million and resulted in a gross realized gain of $36$50 thousand. We did 0t sell any available-for-sale securities during the three and six months ended June 30, 2020.

Investment securities with fair value of $517.5$518.6 million and $719.8$483.6 million at SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively, were pledged to secure public funds on deposit and other short-term borrowings.

At SeptemberJune 30, 20202021 and December 31, 2019,2020, 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.

2019


There were a total of 48 100and 8137 AFS debt securities which were in an unrealized loss position, without an ACL, at SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively. TheThe following tables summarize AFS debt securities which were in an unrealized loss position at SeptemberJune 30, 20202021 and December 31, 2019,2020, aggregated by major security type and length of time in a continuous unrealized loss position.
 Less Than 12 Months12 Months or LongerTotal
(dollars in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
September 30, 2020      
Debt securities:      
States and political subdivisions$39,297 $(292)$0 $0 $39,297 $(292)
Corporate securities26,173 (231)0 0 26,173 (231)
U.S. Treasury obligations and direct obligations of U.S Government agencies4,805 (30)22,141 (182)26,946 (212)
Mortgage-backed securities:      
Residential - U.S. Government-sponsored entities122,914 (855)0 0 122,914 (855)
Residential - Non-government agencies994 (34)0 0 994 (34)
Commercial - Non-government agencies3,495 (15)0 0 3,495 (15)
Total temporarily impaired securities$197,678 $(1,457)$22,141 $(182)$219,819 $(1,639)
 Less Than 12 Months12 Months or LongerTotal
(dollars in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
June 30, 2021      
Debt securities:      
States and political subdivisions$48,529 $(988)$0 $0 $48,529 $(988)
Corporate securities31,376 (515)0 0 31,376 (515)
U.S. Treasury obligations and direct obligations of U.S Government agencies16,694 (236)12,858 (141)29,552 (377)
Mortgage-backed securities:      
Residential - U.S. Government-sponsored entities666,130 (8,685)0 0 666,130 (8,685)
Residential - Non-government agencies521 (41)419 (32)940 (73)
Commercial - U.S. Government agencies and sponsored entities23,336 (598)0 0 23,336 (598)
Total temporarily impaired securities$786,586 $(11,063)$13,277 $(173)$799,863 $(11,236)

Less Than 12 Months12 Months or LongerTotal Less Than 12 Months12 Months or LongerTotal
(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
December 31, 2019      
December 31, 2020December 31, 2020      
Debt securities:Debt securities:      Debt securities:      
States and political subdivisionsStates and political subdivisions$1,754 $(9)$801 $(31)$2,555 $(40)States and political subdivisions$21,313 $(177)$0 $0 $21,313 $(177)
Corporate securitiesCorporate securities4,869 (131)0 0 4,869 (131)
U.S. Treasury obligations and direct obligations of U.S Government agenciesU.S. Treasury obligations and direct obligations of U.S Government agencies18,882 (143)19,031 (255)37,913 (398)U.S. Treasury obligations and direct obligations of U.S Government agencies5,980 (24)20,925 (262)26,905 (286)
Mortgage-backed securities:Mortgage-backed securities:      Mortgage-backed securities:      
Residential - U.S. Government-sponsored entitiesResidential - U.S. Government-sponsored entities54,335 (283)214,295 (1,816)268,630 (2,099)Residential - U.S. Government-sponsored entities76,402 (299)0 0 76,402 (299)
Residential - Non-government agenciesResidential - Non-government agencies8,206 (16)0 0 8,206 (16)Residential - Non-government agencies989 (34)0 0 989 (34)
Commercial - U.S. Government-sponsored entitiesCommercial - U.S. Government-sponsored entities32,067 (746)0 0 32,067 (746)Commercial - U.S. Government-sponsored entities16,977 (500)0 0 16,977 (500)
Total temporarily impaired securitiesTotal temporarily impaired securities$115,244 $(1,197)$234,127 $(2,102)$349,371 $(3,299)Total temporarily impaired securities$126,530 $(1,165)$20,925 $(262)$147,455 $(1,427)

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 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.

21

Visa and MasterCard Class B Common Stock

As of SeptemberJune 30, 2020,2021, 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
20

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 common stock.

4. LOANS AND CREDIT QUALITY
 
Loans, excluding loans held for sale, net of ACL under ASC 326 as of SeptemberJune 30, 20202021 and loans, excluding loans held for sale, net of ACL under previous GAAP as of December 31, 20192020 consisted of the following:
(dollars in thousands)(dollars in thousands)September 30, 2020December 31, 2019(dollars in thousands)June 30, 2021December 31, 2020
Commercial, financial and agricultural:Commercial, financial and agricultural:Commercial, financial and agricultural:
Small Business Administration Paycheck Protection ProgramSmall Business Administration Paycheck Protection Program$545,277 $0 Small Business Administration Paycheck Protection Program$450,471 $425,993 
OtherOther526,363 570,089 Other486,331 545,136 
Real estate:Real estate:Real estate:
ConstructionConstruction118,519 96,139 Construction133,808 125,625 
Residential mortgageResidential mortgage1,676,457 1,595,801 Residential mortgage1,709,885 1,687,251 
Home equityHome equity533,139 490,239 Home equity582,143 550,216 
Commercial mortgageCommercial mortgage1,143,209 1,124,911 Commercial mortgage1,188,244 1,158,203 
ConsumerConsumer500,416 569,516 Consumer541,491 479,580 
Gross loansGross loans5,043,380 4,446,695 Gross loans5,092,373 4,972,004 
Net deferred (fees) costs(12,754)2,845 
Net deferred feesNet deferred fees(15,055)(7,891)
Total loans, net of deferred fees and costsTotal loans, net of deferred fees and costs5,030,626 4,449,540 Total loans, net of deferred fees and costs5,077,318 4,964,113 
Allowance for credit lossesAllowance for credit losses(80,542)(47,971)Allowance for credit losses(77,781)(83,269)
Total loans, net of allowance for credit lossesTotal loans, net of allowance for credit losses$4,950,084 $4,401,569 Total loans, net of allowance for credit losses$4,999,537 $4,880,844 

The bank is a Small Business Administration ("SBA") approved lender and actively participated in assisting customers with loan applications for the SBA’s Paycheck Protection Program, or PPP, which was part of the CARES Act. PPP loans have a two or five-yearfive-year term and earn interest at 1%. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan, which the Company is recognizing over the life of the loan. The Company saw tremendous interest in the PPP. TFrom April 3, 2020, the date thehe SBA began accepting submissions for the initial round of PPP loans throughon April 3, 2020. In April 2020, the Paycheck Protection Program and Health Care Enhancement Act added an additional round of funding for the PPP. In June 2020, the Paycheck Protection Program Flexibility Act of 2020 was enacted, which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Through the end of the programsecond round in August 2020, the Company funded over 7,200 PPP loans totaling over $558 million and received gross processing fees of over $21$21.2 million. Certain

In December 2020, the Consolidated Appropriations Act, 2021 was passed which among other things, included a third round of funding and a new simplified forgiveness procedure for PPP loans paid-off shortly after funding resultingof $150,000 or less. During the six months ended June 30, 2021, the Company funded over 4,600 loans totaling over $320.9 million in a total outstanding balance of $545.3 million and net deferredthe third round, earning additional gross processing fees of $16.7 million as of September 30, 2020. over $18.4 million.

The Company hasdeveloped a PPP forgiveness portal and with assistance from a third party vendor has begun the process of assisting ourassisted its customers with applying for forgiveness from the SBA. The Company has engaged a third party to assist with this process. We have received forgiveness payments and repayments from borrowers totaling over $416.3 million as of June 30, 2021. A total outstanding balance of $450.5 million and net deferred fees of $15.9 million remain as of June 30, 2021.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 liabilities by the Company that cannot be determined at this time.

The Company transferred 3 loans totaling $6.6 million to the held-for-sale category during the nine months ended September 30, 2020, which were sold in October 2020 at a loss of less than $0.1 million. The Company did 0t transfer any loans to the held-for-sale category during the ninesix months ended SeptemberJune 30, 2019.
22

2021 and 2020.

The Company did 0t sell any loans originally held for investment during the ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.

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

21

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

(dollars in thousands)Consumer - Unsecured
Three Months Ended September 30, 2020
Purchases:
Outstanding balance$6,960 
Purchase premium (discount)(280)
Purchase price$6,680 
Nine Months Ended September 30, 2020
Purchases:
Outstanding balance$41,272 
Purchase premium (discount)(1,396)
Purchase price$39,876 
Three Months Ended September 30, 2019
Purchases:
Outstanding balance$30,669 
Purchase premium (discount)(1,176)
Purchase price$29,493 
Nine Months Ended September 30, 2019
Purchases:
Outstanding balance$79,996 
Purchase premium (discount)(1,176)
Purchase price$78,820 
Note: Purchases of unsecured consumer loans were made under forward flow purchase agreements.
(dollars in thousands)U.S. Mainland Consumer - UnsecuredU.S. Mainland Consumer - AutomobileTotal
Three Months Ended June 30, 2021
Purchases:
Outstanding balance$45,482 $36,381 $81,863 
Purchase (discount) premium(2,632)3,063 431 
Purchase price$42,850 $39,444 $82,294 
Six Months Ended June 30, 2021
Purchases:
Outstanding balance$68,016 $49,371 $117,387 
Purchase (discount) premium(2,763)3,729 966 
Purchase price$65,253 $53,100 $118,353 
Three Months Ended June 30, 2020
Purchases:
Outstanding balance$11,359 $0 $11,359 
Purchase discount(503)0 (503)
Purchase price$10,856 $0 $10,856 
Six Months Ended June 30, 2020
Purchases:
Outstanding balance$34,312 $0 $34,312 
Purchase discount(1,116)0 (1,116)
Purchase price$33,196 $0 $33,196 

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 SeptemberJune 30, 2021 and December 31, 2020:

(dollars in thousands)Secured by
1-4 Family
Residential
Properties		Secured by
Nonfarm
Nonresidential
Properties		Secured by
Real Estate
and Business
 Assets		TotalAllocated
ACL
June 30, 2021
Commercial, financial and agricultural$0 $0 $558 $558 $68 
Real estate:
Residential mortgage9,784 0 0 9,784 0 
Home equity434 0 0 434 0 
Commercial mortgage0 543 0 543 0 
Total$10,218 $543 $558 $11,319 $68 

2322

(dollars in thousands)Secured by
1-4 Family
Residential
Properties		Secured by
Nonfarm
Nonresidential
Properties		Secured by
Real Estate
and Business
Assets		TotalAllocated
ACL
September 30, 2020
Commercial, financial and agricultural$0 $0 $1,371 $1,371 $213 
Real estate:
Residential mortgage9,210 0 0 9,210 0 
Home equity533 0 0 533 0 
Commercial mortgage0 7,558 0 7,558 307 
Total$9,743 $7,558 $1,371 $18,672 $520 

(dollars in thousands)Secured by
1-4 Family
Residential
Properties		Secured by
Nonfarm
Nonresidential
Properties		Secured by
Real Estate
and Business
 Assets		TotalAllocated
ACL
December 31, 2020
Commercial, financial and agricultural$0 $0 $676 $676 $209 
Real estate:
Residential mortgage9,833 0 0 9,833 0 
Home equity524 0 0 524 0 
Commercial mortgage0 626 0 626 0 
Total$10,357 $626 $676 $11,659 $209 

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		ALLL
Allocated
Impaired loans:   
Commercial, financial and agricultural$246 $135 $— 
Real estate:
Residential mortgage7,230 6,516 — 
Home equity92 92 — 
Commercial mortgage1,839 1,839 — 
Total9,407 8,582 — 
Impaired loans with an ACL recorded:   
Commercial, financial and agricultural467 467 218 
Consumer17 17 17 
Total484 484 235 
Total impaired loans$9,891 $9,066 $235 
The following table presents by class, the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:

 Three Months EndedNine Months Ended
 September 30, 2019September 30, 2019
(dollars in thousands)Average
Recorded
Investment		Interest
Income
Recognized		Average
Recorded
Investment		Interest
Income
Recognized
Commercial, financial and agricultural$164 $2 $188 $7 
Real estate:    
Construction0 0 1,323 62 
Residential mortgage7,536 63 8,763 776 
Home equity190 0 332 13 
Commercial mortgage2,021 22 2,162 68 
Total$9,911 $87 $12,768 $926 

24

For the three and nine months ended September 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 nine months ended September 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$1.0 million and $0.6$1.6 million of residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure at SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively.

The Company did 0t foreclose on any loans during the nine months ended September 30, 2020. The Company foreclosed on 1 loan totaling $0.2 million during the ninethree and six months ended SeptemberJune 30, 2019.2021. The Company did 0t foreclose on any loans during the three and six months ended June 30, 2020.

The Company sold 1 foreclosed property totaling $0.1 million during the nine months ended September 30, 2020 at a loss of less than $0.1 million. The Company did 0t sell any foreclosed properties during the ninesix months ended SeptemberJune 30, 2019.2021. During the three and six months ended June 30, 2020, the Company received proceeds of $0.1 million on the sale of one foreclosed property at a loss of $6 thousand.

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 as of SeptemberJune 30, 20202021 and December 31, 2019.2020. The following tables also present the amortized cost of loans on nonaccrual status for which there was no related ACL under ASC 326 as of SeptemberJune 30, 20202021 and under previous GAAP as of December 31, 2019.2020.

(dollars in thousands)Accruing
Loans
30 - 59 Days
Past Due		Accruing
Loans
60 - 89 Days
Past Due		Accruing
Loans
Greater 
Than
90 Days
Past Due		Nonaccrual
Loans		Total
Past Due
and
Nonaccrual		Loans and
Leases
Not
Past Due		TotalNonaccrual
Loans
With
No ACL
September 30, 2020       
Commercial, financial and agricultural - SBA PPP$0 $0 $0 $0 $0 $528,581 $528,581 $0 
Commercial, financial and agricultural - Other5,246 85 0 1,536 6,867 521,203 528,070 668 
Real estate:  
Construction0 0 0 0 0 118,247 118,247 0 
Residential mortgage12 556 588 4,032 5,188 1,674,872 1,680,060 4,032 
Home equity255 0 0 533 788 533,268 534,056 533 
Commercial mortgage1,778 0 0 6,889 8,667 1,132,598 1,141,265 4,296 
Consumer1,774 691 321 69 2,855 497,492 500,347 0 
Total$9,065 $1,332 $909 $13,059 $24,365 $5,006,261 $5,030,626 $9,529 

(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		TotalNonaccrual
Loans
With
No ALLL		(dollars in thousands)Accruing
Loans
30 - 59 Days
Past Due		Accruing
Loans
60 - 89 Days
Past Due		Accruing
Loans
Greater 
Than
90 Days
Past Due		Nonaccrual
Loans		Total
Past Due
and
Nonaccrual		Loans and
Leases
Not
Past Due		TotalNonaccrual
Loans
With
No ACL
December 31, 2019       
Commercial, financial and agricultural$476 $865 $0 $467 $1,808 $568,496 $570,304 $0 
June 30, 2021June 30, 2021       
Commercial, financial and agricultural:Commercial, financial and agricultural:
SBA PPPSBA PPP$0 $0 $0 $0 $0 $434,610 $434,610 $0 
OtherOther517 67 29 699 1,312 484,913 486,225 220 
Real estate:Real estate:  Real estate:  
ConstructionConstruction643 0 0 0 643 95,211 95,854 0 Construction0 0 0 0 0 133,457 133,457 0 
Residential mortgageResidential mortgage1,830 589 724 979 4,122 1,595,679 1,599,801 979 Residential mortgage0 1,003 1,438 5,280 7,721 1,704,080 1,711,801 5,284 
Home equityHome equity759 207 0 92 1,058 489,676 490,734 92 Home equity331 73 0 434 838 582,592 583,430 434 
Commercial mortgageCommercial mortgage0 397 0 0 397 1,123,018 1,123,415 0 Commercial mortgage0 0 0 0 0 1,186,430 1,186,430 0 
ConsumerConsumer3,223 943 286 17 4,469 564,963 569,432 0 Consumer1,345 501 100 332 2,278 539,087 541,365 0 
TotalTotal$6,931 $3,001 $1,010 $1,555 $12,497 $4,437,043 $4,449,540 $1,071 Total$2,193 $1,644 $1,567 $6,745 $12,149 $5,065,169 $5,077,318 $5,938 

2523

(dollars in thousands)Accruing
Loans
30 - 59 Days
Past Due		Accruing
Loans
60 - 89 Days
Past Due		Accruing
Loans
Greater 
Than
90 Days
Past Due		Nonaccrual
Loans		Total
Past Due
and
Nonaccrual		Loans and
Leases
Not
Past Due		TotalNonaccrual
Loans
With
No ACL
December 31, 2020       
Commercial, financial and agricultural:
SBA PPP$0 $0 $0 $0 $0 $416,375 $416,375 $0 
Other613 350 0 1,461 2,424 542,667 545,091 0 
Real estate:  
Construction0 0 0 0 0 125,407 125,407 0 
Residential mortgage2,832 689 567 4,115 8,203 1,682,009 1,690,212 4,115 
Home equity273 3 0 524 800 550,466 551,266 524 
Commercial mortgage0 0 0 0 0 1,156,328 1,156,328 0 
Consumer2,725 906 240 92 3,963 475,471 479,434 0 
Total$6,443 $1,948 $807 $6,192 $15,390 $4,948,723 $4,964,113 $4,639 

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 if deemed collectible during the deferral period.

Troubled Debt Restructurings

Troubled debt restructurings ("TDRs") included in nonperforming assets at SeptemberJune 30, 20202021 consisted of 23 Hawaii residential mortgage loans with a principal balance of $0.3$0.4 million. There were $7.4$6.3 million of TDRs still accruing interest at SeptemberJune 30, 2020, NaN2021, of which 2 loans totaling $0.2 million were more than 90 days delinquent. At December 31, 2019,2020, there were $7.5$7.8 million of TDRs still accruing interest, NaN of which were1 loan totaling $0.7 million was 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 were no commitments to lend additional funds to the borrower during the three and ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.

As discussed in Note 1 to these financial statements, Section 4013 of CARES Act and the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" provided banks an optional TDR election for certain loan modifications related to COVID-19 as long as the borrowers were not more than 30 days past due as of December 31, 2019 or at the time of modification program implementation, respectively, and meets other applicable criteria. The Company has identified 11 consumerdid not identify any loans totaling $0.2 million, including 3 consumer loans totaling $0.1 million in the third quarterfirst half of 2020,2021 that were modified 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 Company had active loan deferrals with outstanding balances of approximately $290.7$3.5 million and $120.2 million resulting from the COVID-19 pandemic thatas of June 30, 2021 and December 31, 2020, respectively, of which $2.8 million and $119.3 million were not classified as a TDR at SeptemberJune 30, 2020. The following table sets forth loans2021 and December 31, 2020, respectively, under Section 4013 of CARES Act or the "Interagency Statement on active payment forbearance or deferral as of September 30, 2020:Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)".

(dollars in thousands)Loan CountBalanceAccrued Interest ReceivableTotal Loans% of Total LoansTotal Loans, excl. PPP% of Total Loans, excl. PPP
Commercial, financial and agricultural363 $64,298 $844 $1,056,651 6.1 %$528,070 12.2 %
Real estate:
Construction0 0 0 118,247 0 %118,247 0 %
Residential mortgage216 103,130 1,803 1,680,060 6.1 %1,680,060 6.1 %
Home equity0 0 0 534,056 0 %534,056 0 %
Commercial mortgage25 69,420 469 1,141,265 6.1 %1,141,265 6.1 %
Consumer3,209 53,993 1,323 500,347 10.8 %500,347 10.8 %
Total loans3,813 $290,841 $4,439 $5,030,626 5.8 %$4,502,045 6.5 %

0
2624

NaN loans were modified during the three months ended June 30, 2021. The Company modified one loan totaling $0.6 million during the three months ended March 31,2021. The loan was paid off during the three months ended June 30, 2021.

The following table presents by class, information related to loans modified in a TDR during the three and ninesix months ended SeptemberJune 30, 2020:


(dollars in thousands)Number of
Contracts		Recorded
Investment
(as of Period End)		Increase in the
ACL
Three Months Ended September 30, 2020
Consumer3 80 — 
Total3 $80 $— 
Nine Months Ended September 30, 2020
Real estate: Commercial mortgage1 $281 $— 
Consumer11 214 — 
Total12 $495 $— 

NaN loans were modified in a TDR during the three and nine months ended September 30, 2019.
(dollars in thousands)Number of
Contracts		Recorded
Investment
(as of Period End)		Increase in the
ACL
Three Months Ended June 30, 2020
Real estate: Commercial mortgage1 $285 $0 
Consumer9 145 0 
Total10 $430 $0 
Six Months Ended June 30, 2020
Real estate: Commercial mortgage1 $285 $0 
Consumer9 145 0 
Total10 $430 $0 

NaN loans were modified as a TDR within the previous twelve months that subsequently defaulted during the three and ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.

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 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 classified as substandard are inadequately protected by the borrower's current financial condition and payment capability or of the collateral pledged, if any. Loans 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 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 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.

27

The following table presents the amortized cost basis of the Company's loans by class, credit quality indicator and origination year as of SeptemberJune 30, 2021 and December 31, 2020. Revolving loans converted to term as of and during the three and ninesix months ended SeptemberJune 30, 2021 and 2020 were not material to the total loan portfolio.
25

Amortized Cost of Term Loans by Origination YearAmortized Cost of Term Loans by Origination Year
(dollars in thousands)(dollars in thousands)20202019201820172016PriorAmortized Cost of Revolving LoansTotal(dollars in thousands)20212020201920182017PriorAmortized Cost of Revolving LoansTotal
September 30, 2020
June 30, 2021June 30, 2021
Commercial, financial and agricultural - SBA PPP:Commercial, financial and agricultural - SBA PPP:Commercial, financial and agricultural - SBA PPP:
Risk RatingRisk RatingRisk Rating
PassPass$528,581 $0 $0 $0 $0 $0 $0 $528,581 Pass$274,947 $159,663 $0 $0 $0 $0 $0 $434,610 
SubtotalSubtotal528,581 0 0 0 0 0 0 528,581 Subtotal274,947 159,663 0 0 0 0 0 434,610 
Commercial, financial and agricultural - Other:Commercial, financial and agricultural - Other:Commercial, financial and agricultural - Other:
Risk RatingRisk RatingRisk Rating
PassPass68,156 63,398 60,700 43,948 41,585 91,001 78,224 447,012 Pass42,540 65,657 51,256 59,386 44,416 110,922 65,432 439,609 
Special MentionSpecial Mention4,958 11,714 8,784 31,839 2,123 13,757 420 73,595 Special Mention946 6,466 11,638 3,344 11,442 7,744 0 41,580 
SubstandardSubstandard200 1,528 1,111 1,105 2,206 1,313 0 7,463 Substandard200 89 739 974 347 2,687 0 5,036 
SubtotalSubtotal73,314 76,640 70,595 76,892 45,914 106,071 78,644 528,070 Subtotal43,686 72,212 63,633 63,704 56,205 121,353 65,432 486,225 
Construction:Construction:Construction:
Risk RatingRisk RatingRisk Rating
PassPass19,436 20,931 41,893 11,201 2,202 19,238 2,401 117,302 Pass6,806 26,915 33,143 34,288 6,262 20,765 4,349 132,528 
Special MentionSpecial Mention0 0 945 0 0 0 0 945 Special Mention0 0 0 929 0 0 0 929 
SubtotalSubtotal19,436 20,931 42,838 11,201 2,202 19,238 2,401 118,247 Subtotal6,806 26,915 33,143 35,217 6,262 20,765 4,349 133,457 
Residential mortgage:Residential mortgage:Residential mortgage:
Risk RatingRisk RatingRisk Rating
PassPass416,073 302,683 141,156 159,808 197,665 456,398 0 1,673,783 Pass300,519 521,905 215,065 97,573 114,308 454,665 0 1,704,035 
Special MentionSpecial Mention0 0 0 1,437 147 0 0 1,584 Special Mention0 985 0 0 0 0 0 985 
SubstandardSubstandard0 0 540 1,328 884 1,941 0 4,693 Substandard0 0 698 1,110 753 4,220 0 6,781 
Loss0 0 0 0 0 0 0 0 
SubtotalSubtotal416,073 302,683 141,696 162,573 198,696 458,339 0 1,680,060 Subtotal300,519 522,890 215,763 98,683 115,061 458,885 0 1,711,801 
Home equity:Home equity:Home equity:
Risk RatingRisk RatingRisk Rating
PassPass13,407 16,993 16,713 778 390 4,794 480,238 533,313 Pass11,579 15,258 12,325 13,048 502 27,637 502,011 582,360 
Special MentionSpecial Mention0 0 0 0 0 0 210 210 Special Mention0 250 0 0 0 0 386 636 
SubstandardSubstandard0 0 0 0 204 329 0 533 Substandard0 0 0 0 0 434 0 434 
SubtotalSubtotal13,407 16,993 16,713 778 594 5,123 480,448 534,056 Subtotal11,579 15,508 12,325 13,048 502 28,071 502,397 583,430 
Commercial mortgage:Commercial mortgage:Commercial mortgage:
Risk RatingRisk RatingRisk Rating
PassPass93,195 149,180 137,886 163,112 108,333 365,488 16,926 1,034,120 Pass46,626 143,824 149,049 136,564 161,017 448,019 15,071 1,100,170 
Special MentionSpecial Mention0 2,602 24,134 7,685 13,623 24,137 0 72,181 Special Mention0 0 7,627 20,552 4,007 24,586 0 56,772 
SubstandardSubstandard0 2,593 11,500 1,998 4,296 14,577 0 34,964 Substandard0 0 1,771 11,500 1,809 14,408 0 29,488 
SubtotalSubtotal93,195 154,375 173,520 172,795 126,252 404,202 16,926 1,141,265 Subtotal46,626 143,824 158,447 168,616 166,833 487,013 15,071 1,186,430 
Consumer:Consumer:Consumer:
Risk RatingRisk RatingRisk Rating
PassPass72,249 133,485 77,840 52,150 21,327 71,599 71,057 499,707 Pass112,023 121,960 122,660 59,031 31,465 19,816 73,976 540,931 
Special Mention0 0 0 0 0 0 250 250 
SubstandardSubstandard27 11 40 9 1 168 0 256 Substandard0 75 123 72 19 142 0 431 
LossLoss15 0 0 49 0 70 0 134 Loss0 0 0 0 0 3 0 3 
SubtotalSubtotal72,291 133,496 77,880 52,208 21,328 71,837 71,307 500,347 Subtotal112,023 122,035 122,783 59,103 31,484 19,961 73,976 541,365 
TotalTotal$1,216,297 $705,118 $523,242 $476,447 $394,986 $1,064,810 $649,726 $5,030,626 Total$796,186 $1,063,047 $606,094 $438,371 $376,347 $1,136,048 $661,225 $5,077,318 
26

Amortized Cost of Term Loans by Origination Year
(dollars in thousands)20202019201820172016PriorAmortized Cost of Revolving LoansTotal
December 31, 2020
Commercial, financial and agricultural - SBA PPP:
Risk Rating
Pass$416,375 $0 $0 $0 $0 $0 $0 $416,375 
Subtotal416,375 0 0 0 0 0 0 416,375 
Commercial, financial and agricultural - Other:
Risk Rating
Pass$86,456 $55,660 $61,314 $47,672 $39,337 $98,136 $82,465 $471,040 
Special Mention9,690 16,120 6,293 26,109 1,556 6,989 420 67,177 
Substandard200 839 1,043 1,045 2,570 1,177 0 6,874 
Subtotal96,346 72,619 68,650 74,826 43,463 106,302 82,885 545,091 
Construction:
Risk Rating
Pass22,491 29,518 36,790 9,365 2,163 19,138 3,099 122,564 
Special Mention0 0 2,843 0 0 0 0 2,843 
Subtotal22,491 29,518 39,633 9,365 2,163 19,138 3,099 125,407 
Residential mortgage:
Risk Rating
Pass556,479 276,645 127,490 136,307 180,782 406,020 0 1,683,723 
Special Mention997 0 0 597 142 0 0 1,736 
Substandard0 0 537 785 1,381 2,050 0 4,753 
Subtotal557,476 276,645 128,027 137,689 182,305 408,070 0 1,690,212 
Home equity:
Risk Rating
Pass17,582 15,851 15,567 679 1,023 4,592 494,741 550,035 
Special Mention0 0 0 0 0 0 707 707 
Substandard0 0 0 0 200 324 0 524 
Subtotal17,582 15,851 15,567 679 1,223 4,916 495,448 551,266 
Commercial mortgage:
Risk Rating
Pass130,448 144,244 123,519 166,618 104,381 363,837 16,200 1,049,247 
Special Mention0 2,021 31,647 2,919 13,546 19,653 0 69,786 
Substandard0 1,791 19,000 1,934 0 14,570 0 37,295 
Subtotal130,448 148,056 174,166 171,471 117,927 398,060 16,200 1,156,328 
Consumer:
Risk Rating
Pass112,955 147,940 78,486 44,571 17,445 4,032 73,423 478,852 
Special Mention0 0 0 0 0 0 250 250 
Substandard0 138 102 22 0 22 0 284 
Loss0 16 0 26 2 4 0 48 
Subtotal112,955 148,094 78,588 44,619 17,447 4,058 73,673 479,434 
Total$1,353,673 $690,783 $504,631 $438,649 $364,528 $940,544 $671,305 $4,964,113 

2827

The following tables present the Company's loans by class and credit quality indicator as of SeptemberJune 30, 20202021 and December 31, 2019:2020:
(dollars in thousands)PassSpecial MentionSubstandardLossSubtotalNet 
Deferred
Costs
(Income)		Total
June 30, 2021      
Commercial, financial and agricultural: SBA PPP$450,471 $0 $0 $0 $450,471 $(15,861)$434,610 
Commercial, financial and agricultural: Other439,715 41,580 5,036 0 486,331 (106)486,225 
Real estate:  
Construction132,879 929 0 0 133,808 (351)133,457 
Residential mortgage1,702,119 985 6,781 0 1,709,885 1,916 1,711,801 
Home equity581,073 636 434 0 582,143 1,287 583,430 
Commercial mortgage1,101,984 56,772 29,488 0 1,188,244 (1,814)1,186,430 
Consumer541,057 0 431 3 541,491 (126)541,365 
Total$4,949,298 $100,902 $42,170 $3 $5,092,373 $(15,055)$5,077,318 

(dollars in thousands)PassSpecial MentionSubstandardLossSubtotalNet 
Deferred
Costs
(Income)		Total
September 30, 2020      
Commercial, financial and agricultural: SBA PPP$545,277 $0 $0 $0 $545,277 $(16,696)$528,581 
Commercial, financial and agricultural: Other445,305 73,595 7,463 0 526,363 1,707 528,070 
Real estate:  
Construction117,574 945 0 0 118,519 (272)118,247 
Residential mortgage1,670,180 1,584 4,693 0 1,676,457 3,603 1,680,060 
Home equity532,396 210 533 0 533,139 917 534,056 
Commercial mortgage1,036,064 72,181 34,964 0 1,143,209 (1,944)1,141,265 
Consumer499,776 250 256 134 500,416 (69)500,347 
Total$4,846,572 $148,765 $47,909 $134 $5,043,380 $(12,754)$5,030,626 

(dollars in thousands)(dollars in thousands)PassSpecial MentionSubstandardLossSubtotalNet 
Deferred
Costs
(Income)		Total(dollars in thousands)PassSpecial MentionSubstandardLossSubtotalNet 
Deferred
Costs
(Income)		Total
December 31, 2019      
December 31, 2020December 31, 2020      
Commercial, financial and agricultural: SBA PPPCommercial, financial and agricultural: SBA PPP$425,993 $0 $0 $0 $425,993 $(9,618)$416,375 
Commercial, financial and agricultural: OtherCommercial, financial and agricultural: Other$523,342 $20,677 $26,070 $0 $570,089 $215 $570,304 Commercial, financial and agricultural: Other471,085 67,177 6,874 0 545,136 (45)545,091 
Real estate:Real estate:  Real estate:  
ConstructionConstruction96,139 0 0 0 96,139 (285)95,854 Construction122,782 2,843 0 0 125,625 (218)125,407 
Residential mortgageResidential mortgage1,593,072 840 1,889 0 1,595,801 4,000 1,599,801 Residential mortgage1,680,762 1,736 4,753 0 1,687,251 2,961 1,690,212 
Home equityHome equity490,147 0 92 0 490,239 495 490,734 Home equity548,985 707 524 0 550,216 1,050 551,266 
Commercial mortgageCommercial mortgage1,094,364 17,440 13,107 0 1,124,911 (1,496)1,123,415 Commercial mortgage1,051,122 69,786 37,295 0 1,158,203 (1,875)1,156,328 
ConsumerConsumer569,212 0 193 111 569,516 (84)569,432 Consumer478,998 250 284 48 479,580 (146)479,434 
TotalTotal$4,366,276 $38,957 $41,351 $111 $4,446,695 $2,845 $4,449,540 Total$4,779,727 $142,499 $49,730 $48 $4,972,004 $(7,891)$4,964,113 

2928

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 ninesix months ended SeptemberJune 30, 20202021 and under previous GAAP during the three and nine months ended SeptemberJune 30, 2019:2020:
Commercial, Financial and AgriculturalReal Estate  Commercial, Financial and AgriculturalReal Estate 
(dollars in thousands)(dollars in thousands)SBA PPPOtherConstructionResidential MortgageHome EquityCommercial MortgageConsumerTotal(dollars in thousands)SBA PPPOtherConstructionResidential MortgageHome EquityCommercial MortgageConsumerTotal
Three Months Ended September 30, 2020
Three Months Ended June 30, 2021Three Months Ended June 30, 2021
Beginning balanceBeginning balance$489 $15,464 $5,047 $15,357 $5,251 $22,734 $17,211 $81,553 
Beginning balance388 15,507 3,274 15,025 3,651 16,148 13,346 67,339 
Provision for credit losses on loans [1]2 2,620 759 3,537 2,517 3,304 1,726 14,465 
(Credit) provision for credit losses on loans(Credit) provision for credit losses on loans(133)(1,925)(354)1,368 1,058 (3,265)288 (2,963)
390 18,127 4,033 18,562 6,168 19,452 15,072 81,804 356 13,539 4,693 16,725 6,309 19,469 17,499 78,590 
Charge-offsCharge-offs0 810 0 11 0 75 1,492 2,388 Charge-offs0 401 0 0 0 0 1,523 1,924 
RecoveriesRecoveries0 321 0 13 0 12 780 1,126 Recoveries0 276 0 186 0 65 588 1,115 
Net charge-offs (recoveries)Net charge-offs (recoveries)0 489 0 (2)0 63 712 1,262 Net charge-offs (recoveries)0 125 0 (186)0 (65)935 809 
Ending balanceEnding balance$390 $17,638 $4,033 $18,564 $6,168 $19,389 $14,360 $80,542 Ending balance$356 $13,414 $4,693 $16,911 $6,309 $19,534 $16,564 $77,781 
Three Months Ended September 30, 2019
Three Months Ended June 30, 2020Three Months Ended June 30, 2020
Beginning balanceBeginning balance$0 $8,109 $1,313 $13,367 $4,313 $11,668 $9,497 $48,267 Beginning balance$0 $8,645 $3,057 $13,181 $2,309 $19,518 $12,935 $59,645 
Provision for credit losses on loans0 107 374 75 (45)541 480 1,532 
(Credit) provision for credit losses on loans(Credit) provision for credit losses on loans388 7,660 217 1,876 1,342 (3,371)2,528 10,640 
0 8,216 1,687 13,442 4,268 12,209 9,977 49,799  388 16,305 3,274 15,057 3,651 16,147 15,463 70,285 
Charge-offsCharge-offs0 797 0 0 5 — 1,832 2,634 Charge-offs0 1,103 0 52 0 0 2,626 3,781 
RecoveriesRecoveries0 362 6 104 24 0 506 1,002 Recoveries0 305 0 20 0 1 509 835 
Net charge-offs (recoveries)Net charge-offs (recoveries)0 435 (6)(104)(19)0 1,326 1,632 Net charge-offs (recoveries)0 798 0 32 0 (1)2,117 2,946 
Ending balanceEnding balance$0 $7,781 $1,693 $13,546 $4,287 $12,209 $8,651 $48,167 Ending balance$388 $15,507 $3,274 $15,025 $3,651 $16,148 $13,346 $67,339 

Commercial, Financial and AgriculturalReal Estate  Commercial, Financial and AgriculturalReal Estate 
(dollars in thousands)(dollars in thousands)SBA PPPOtherConstructionResidential MortgageHome EquityCommercial MortgageConsumerTotal(dollars in thousands)SBA PPPOtherConstructionResidential MortgageHome EquityCommercial MortgageConsumerTotal
Nine Months Ended September 30, 2020
Beginning balance prior to ASC 326$0 $8,136 $1,792 $13,327 $4,206 $11,113 $9,397 $47,971 
Impact of adoption of ASC 3260 (627)479 608 (1,614)2,624 2,096 3,566 
Balance after adoption of ASC 3260 7,509 2,271 13,935 2,592 13,737 11,493 51,537 
Provision for credit losses on loans [1]390 11,511 1,631 4,478 3,545 5,712 7,167 34,434 
Six Months Ended June 30, 2021Six Months Ended June 30, 2021
Beginning balanceBeginning balance$304 $18,717 $4,277 $16,484 $5,449 $22,163 $15,875 $83,269 
(Credit) provision for credit losses on loans [1](Credit) provision for credit losses on loans [1]52 (4,658)416 135 851 (2,702)1,969 (3,937)
390 19,020 3,902 18,413 6,137 19,449 18,660 85,971 356 14,059 4,693 16,619 6,300 19,461 17,844 79,332 
Charge-offsCharge-offs0 2,350 0 63 0 75 6,335 8,823 Charge-offs0 1,010 0 0 0 0 2,621 3,631 
RecoveriesRecoveries0 968 131 214 31 15 2,035 3,394 Recoveries0 365 0 292 9 73 1,341 2,080 
Net charge-offs (recoveries)Net charge-offs (recoveries)0 1,382 (131)(151)(31)60 4,300 5,429 Net charge-offs (recoveries)0 645 0 (292)(9)(73)1,280 1,551 
Ending balanceEnding balance$390 $17,638 $4,033 $18,564 $6,168 $19,389 $14,360 $80,542 Ending balance$356 $13,414 $4,693 $16,911 $6,309 $19,534 $16,564 $77,781 
Nine Months Ended September 30, 2019
Beginning balance$0 $8,027 $1,202 $14,349 $3,788 $13,358 $7,192 $47,916 
Provision for credit losses on loans0 943 (113)(1,301)462 (1,174)5,402 4,219 
Six Months Ended June 30, 2020Six Months Ended June 30, 2020
Beginning balance prior to ASC 326Beginning balance prior to ASC 326$0 $8,136 $1,792 $13,327 $4,206 $11,113 $9,397 $47,971 
Impact of adoption of ASC 326Impact of adoption of ASC 3260 (627)479 608 (1,614)2,624 2,096 3,566 
Balance after adoption of ASC 326Balance after adoption of ASC 3260 7,509 2,271 13,935 2,592 13,737 11,493 51,537 
(Credit) provision for credit losses on loans(Credit) provision for credit losses on loans388 8,891 872 941 1,028 2,408 5,441 19,969 
0 8,970 1,089 13,048 4,250 12,184 12,594 52,135  388 16,400 3,143 14,876 3,620 16,145 16,934 71,506 
Charge-offsCharge-offs0 2,099 0 0 5 0 5,542 7,646 Charge-offs0 1,540 0 52 0 0 4,843 6,435 
RecoveriesRecoveries0 910 604 498 42 25 1,599 3,678 Recoveries0 647 131 201 31 3 1,255 2,268 
Net charge-offs (recoveries)Net charge-offs (recoveries)0 1,189 (604)(498)(37)(25)3,943 3,968 Net charge-offs (recoveries)0 893 (131)(149)(31)(3)3,588 4,167 
Ending balanceEnding balance$0 $7,781 $1,693 $13,546 $4,287 $12,209 $8,651 $48,167 Ending balance$388 $15,507 $3,274 $15,025 $3,651 $16,148 $13,346 $67,339 
[1] The Company recorded a reserve on accrued interest receivable for loans on active payment forbearance or deferral, which were granted to borrowers impacted by the COVID-19 pandemic. This reserve was recorded as a contra-asset against accrued interest receivable with the offset to provision for credit losses. The provision for credit losses presented in this table excludes the provision for credit losses on accrued interest receivable of $0.2 million.[1] The Company recorded a reserve on accrued interest receivable for loans on active payment forbearance or deferral, which were granted to borrowers impacted by the COVID-19 pandemic. This reserve was recorded as a contra-asset against accrued interest receivable with the offset to provision for credit losses. The provision for credit losses presented in this table excludes the provision for credit losses on accrued interest receivable of $0.2 million.[1] The Company recorded a reserve on accrued interest receivable for loans on active payment forbearance or deferral, which were granted to borrowers impacted by the COVID-19 pandemic. This reserve was recorded as a contra-asset against accrued interest receivable with the offset to provision for credit losses. The provision for credit losses presented in this table excludes the provision for credit losses on accrued interest receivable of $0.2 million.
3029


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 ninesix months ended SeptemberJune 30, 20202021 and under previous GAAP during the three and nine months ended SeptemberJune 30, 2019.2020.

(dollars in thousands)
Three Months Ended SeptemberJune 30, 20202021
Beginning balance$4,3835,037 
Provision for off-balance sheet credit exposures221 (293)
Ending balance$4,6044,744 
Three Months Ended SeptemberJune 30, 20192020
Beginning balance prior to ASC 326$1,8973,810 
Impact of adoption of ASC 3260 
Balance after adoption of ASC 3263,810 
Provision for off-balance sheet credit exposures(466)573 
Ending balance$1,4314,383 
NineSix Months Ended SeptemberJune 30, 2021
Beginning balance$4,884 
Provision for off-balance sheet credit exposures(140)
Ending balance$4,744 
Six Months Ended June 30, 2020
Beginning balance prior to ASC 326$1,272 
Impact of adoption of ASC 326740 
Balance after adoption of ASC 3262,012 
Provision for off-balance sheet credit exposures2,5922,371 
Ending balance$4,604 
Nine Months Ended September 30, 2019
Beginning balance$1,242 
Provision for off-balance sheet credit exposures189 
Ending balance$1,4314,383 

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

OurIn the three months ended June 30, 2021, our provision for credit losses was a credit of $3.4 million, which consisted of a credit to the provision for credit losses on loans was $14.5of $3.0 million, a credit to the provision for credit losses on off-balance sheet credit exposures of $0.2 million, and $34.4 million ina credit to the three and nine months ended September 30, 2020 under ASC 326, compared to $1.5 million and $4.2 million in the three and nine months ended September 30, 2019 under previous GAAP.provision for credit losses on accrued interest receivable of $0.2 million.

In the six months ended June 30, 2021, our provision for credit losses was a credit of $4.3 million, which consisted of a credit to the provision for credit losses on loans of $3.9 million, a credit to the provision for credit losses on off-balance sheet credit exposures of $0.1 million, and a credit to the provision for credit losses on accrued interest receivable of $0.3 million.

In the three months ended June 30, 2020, our provision for credit loss was a debit of $11.2 million, which consisted of a debit to the provision for credit losses on loans of $10.6 million and a debit to the provision for credit losses on off-balance sheet credit exposures of $0.6 million.

In the six months ended June 30, 2020, our provision for credit loss was a debit of $22.3 million, which consisted of a debit to the provision for credit losses on loans of $20.0 million and a debit to the provision for credit losses on off-balance sheet credit exposures of $2.4 million.

30

6. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

The components of the Company's investments in unconsolidated subsidiaries were as follows:
(dollars in thousands)(dollars in thousands)September 30, 2020December 31, 2019(dollars in thousands)June 30, 2021December 31, 2020
Investments in low income housing tax credit partnershipsInvestments in low income housing tax credit partnerships$28,437 $15,322 Investments in low income housing tax credit partnerships$27,276 $28,090 
Investments in common securities of statutory trustsInvestments in common securities of statutory trusts1,547 1,547 Investments in common securities of statutory trusts1,547 1,547 
Investments in affiliatesInvestments in affiliates201 192 Investments in affiliates176 277 
OtherOther54 54 Other2,053 54 
TotalTotal$30,239 $17,115 Total$31,052 $29,968 

The Company invests in low-income housing tax credit ("LIHTC") and other partnerships. As of SeptemberJune 30, 20202021 and December 31, 2019,2020, the Company had $22.7 $14.4 million and $11.5and $17.2 million, respectively, in unfunded commitments related to the LIHTC partnerships of $1.9 million and NaN, respectively, related to other partnerships. The expected payments for the unfunded commitments as of SeptemberJune 30, 20202021 for the remainder of fiscal year 2020,2021, the next five succeeding fiscal years and all years thereafter are as follows:

31

(dollars in thousands)
Year Ending December 31,
2020 (remainder)$12,853 
20211,494 
20228,253 
202310 
202426 
20256 
Thereafter43 
Total unfunded commitments$22,685 

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.
(dollars in thousands)
Year Ending December 31,LIHTC partnershipsOther partnershipsTotal
2021 (remainder)$8,299 $1,920 $10,219 
20225,980 0 5,980 
202310 0 10 
202426 0 26 
20256 0 6 
20266 0 6 
Thereafter37 0 37 
Total unfunded commitments$14,364 $1,920 $16,284 

The following table presents amortization and tax credits recognized associated with our investments in LIHTC partnerships for the three and ninesix months ended SeptemberJune 30, 20202021 and SeptemberJune 30, 2019:2020:

(dollars in thousands)(dollars in thousands)Three Months Ended
September 30, 2020		Three Months Ended
September 30, 2019		Nine Months Ended
September 30, 2020		Nine Months Ended
September 30, 2019		(dollars in thousands)Three Months Ended
June 30, 2021		Three Months Ended
June 30, 2020		Six Months Ended
June 30, 2021		Six Months Ended
June 30, 2020
Proportional amortization method:Proportional amortization method:Proportional amortization method:
Amortization expense recognized in income tax expenseAmortization expense recognized in income tax expense$348 $259 $1,044 $776 Amortization expense recognized in income tax expense$407 $348 $814 $696 
Tax credits recognized in income tax expenseTax credits recognized in income tax expense399 307 1,199 922 Tax credits recognized in income tax expense474 400 948 800 

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, 20192021$15,59611,865 
Additions1,189717 
Amortization(1,727)(2,082)
Balance, SeptemberJune 30, 20192021$15,05810,500 
Balance, January 1, 2020$14,718 
Additions2,2691,270 
Amortization(4,558)(3,217)
Balance, SeptemberJune 30, 2020$12,42912,771 

31

Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans and totaled $1.0$0.3 millionand $0.7 millionfor the three and six months ended June 30, 2021, respectively, compared to $1.1 million and $2.3$1.3 million for the three and ninesix months ended SeptemberJune 30, 2020, compared to $0.4 million and $1.2 million for the three and nine months ended September 30, 2019.respectively.

32

Amortization of mortgage servicing rights totaled $1.3$0.9 million and $4.6$2.1 millionfor the three and six months ended June 30, 2021, respectively, compared to $1.7 million and $3.2 million for the three and ninesix months ended SeptemberJune 30, 2020, compared to $0.7 million and $1.7 million for the three and nine months ended September 30, 2019.respectively.

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

Six Months EndedSix Months Ended
(dollars in thousands)June 30, 2021June 30, 2020
Fair market value, beginning of period$12,003 $15,820 
Fair market value, end of period10,755 13,060 
Weighted average discount rate9.6 %9.6 %
Weighted average prepayment speed assumption18.0 %21.7 %
Nine Months EndedNine Months Ended
(dollars in thousands)September 30, 2020September 30, 2019
Fair market value, beginning of period$15,820 $17,696 
Fair market value, end of period12,694 15,965 

September 30, 2020December 31, 2019
Weighted average discount rate9.6 %9.5 %
Forecasted constant prepayment rate assumption (1)
24.3 %11.9 %

(1) Represents annualized loan prepayment rate assumption.

The gross carrying value and accumulated amortization related to our mortgage servicing rights are presented below:
 June 30, 2021December 31, 2020
(dollars in thousands)Gross
Carrying
Value		Accumulated
Amortization		Net
Carrying
Value		Gross
Carrying
Value		Accumulated
Amortization		Net
Carrying
Value
Mortgage servicing rights$71,626 $(61,126)$10,500 $70,909 $(59,044)$11,865 

 September 30, 2020December 31, 2019
(dollars in thousands)Gross
Carrying
Value		Accumulated
Amortization		Net
Carrying
Value		Gross
Carrying
Value		Accumulated
Amortization		Net
Carrying
Value
Mortgage servicing rights$69,864 $(57,435)$12,429 $67,595 $(52,877)$14,718 
Based on the mortgage servicing rights held as of SeptemberJune 30, 2020,2021, estimated amortization expense for the remainder of fiscal year 2020,2021, the next five succeeding fiscal years and all years thereafter are as follows:

(dollars in thousands)(dollars in thousands)(dollars in thousands)
Year Ending December 31,Year Ending December 31,Year Ending December 31,
2020 (remainder)$957 
20213,375 
2021 (remainder)2021 (remainder)$1,432 
202220222,682 20222,446 
202320232,181 20231,974 
202420241,801 20241,596 
202520251,433 20251,316 
202620261,092 
ThereafterThereafter0 Thereafter644 
TotalTotal$12,429 Total$10,500 

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
33

are included in current period earnings. At SeptemberJune 30, 20202021 and December 31, 2019,2020, we were not party to any derivatives designated as part of a fair value or cash flow hedge.  

32

Interest Rate Lock and Forward Sale Commitments

We enter into interest rate lock commitments on certain mortgage loans that are intended to be sold. To manage interest rate risk on interest rate lock commitments, we also enter into forward loan sale commitments. The interest rate locks and forward loan sale commitments are accounted for as undesignated derivatives and are recorded at their respective fair values in other assets or other liabilities, with changes in fair value recorded in current period earnings. These instruments serve to reduce our exposure to movements in interest rates. At SeptemberJune 30, 2020,2021, we were a party to interest rate lock and forward sale commitments on $2.9$0.8 million and $19.3$4.9 million of mortgage loans, respectively.

Risk Participation Agreements

In the first and fourth quarters of 2020, the Company entered into credit risk participation agreements ("RPA") with financial institution counterparties for interest rate swaps related to loans in which we participate. The risk participation agreements entered into by us and a participant bank provide credit protection to the financial institution counterparties should the borrowers fail to perform on their interest rate derivative contracts with the financial institutions.

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

Derivatives Financial Instruments Not Designated as Hedging InstrumentsAsset DerivativesLiability Derivatives
Fair Value atFair Value at
(dollars in thousands)Balance Sheet LocationSeptember 30,
2020		December 31,
2019		September 30,
2020		December 31,
2019
Interest rate lock and forward sale commitmentsOther assets / other liabilities$111 $8 $127 $28 

Risk Participation Agreement

In the first quarter of 2020, the Company entered into a credit risk participation agreement ("RPA") with a financial institution counterparty for an interest rate swap related to a loan in which we participate. The risk participation agreement entered into by us as a participant bank provides credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution.
Derivatives Financial Instruments Not Designated as Hedging InstrumentsAsset DerivativesLiability Derivatives
Fair Value atFair Value at
(dollars in thousands)Balance Sheet LocationJune 30,
2021		December 31,
2020		June 30,
2021		December 31,
2020
Interest rate lock, forward sale commitments and risk participation agreementsOther assets / other liabilities$14 $18 $36 $163 

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 SeptemberJune 30, 20202021  
Interest rate lock and forward sale commitmentsMortgage banking income$109 (84)
Risk participation agreementagreementsOther service charges and fees(54)(4)
Three Months Ended September 30, 2019
Interest rate lock and forward sale commitmentsMortgage banking income110 
Loans held for saleOther income(1)
Nine Months Ended SeptemberJune 30, 2020 
Interest rate lock and forward sale commitmentsMortgage banking income59 (149)
Risk participation agreementagreementsOther service charges and fees1,2340 
  
NineSix Months Ended SeptemberJune 30, 20192021 
Interest rate lock and forward sale commitmentsMortgage banking income13196 
Loans held for saleRisk participation agreementsOther service charges and fees27 
Six Months Ended June 30, 2020
Interest rate lock and forward sale commitmentsMortgage banking income(1)(50)
Risk participation agreementsOther service charges and fees1,288 

34

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 $1.79$1.81 billionline of credit as of SeptemberJune 30, 2020,2021, compared to $1.84$1.81 billion at December 31, 2019.2020. At SeptemberJune 30, 2020, $1.262021, $1.58 billionwas undrawn under this arrangement, compared to $1.57$1.52 billion at December 31, 2019. Short-term2020. There were no short-term borrowings under this arrangement totaled $206.0 million at SeptemberJune 30, 2020,2021, compared to $150.0$22.0 million at December 31, 2019.2020. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled $267.0$230.8 million at SeptemberJune 30, 2020,2021, compared to $78.9$268.0 million at
33

December 31, 2019. Long-term2020. There were no long-term borrowings under this arrangement totaled $50.0 million at SeptemberJune 30, 20202021 and December 31, 2019.2020. FHLB advances and standby letters of credit available at SeptemberJune 30, 20202021 were secured by certain real estate loans with a carrying value of $2.71$2.67 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB.

At SeptemberJune 30, 20202021 and December 31, 2019,2020, our bank had additional unused borrowings available at the Federal Reserve discount window of $59.2$64.4 million and $65.3$64.5 million, respectively. As of SeptemberJune 30, 20202021 and December 31, 2019,2020, certain commercial and commercial real estate loans with a carrying value totaling $125.0$130.6 million and $126.1$136.9 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 SeptemberJune 30, 2021 and December 31, 2020, there were no funds drawn from the Federal Reserve Bank under the PPPLF and no PPP loans were pledged to the Federal Reserve Bank. The PPPLF expires on July 30, 2021.

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"). We completed the redemption of $20 million of floating rate trust preferred securities issued by Trust II in January 2019 and $20 million of floating rate trust preferred securities issued by Trust III 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.

35

At SeptemberJune 30, 20202021 and December 31, 2019,2020, 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)SeptemberJune 30, 20202021
Name of TrustSubordinated DebenturesInterest Rate
Trust IV$30,928 Three month LIBOR + 2.45%
Trust V20,619 Three month LIBOR + 1.87%
Total$51,547 
December 31, 20192020
Name of TrustSubordinated DebenturesInterest Rate
Trust IV$30,928 Three month LIBOR + 2.45%
Trust V20,619 Three month LIBOR + 1.87%
Total$51,547 

The floating trust preferred securities, the junior subordinated debentures that are the assets of Trusts IV and V and the common securities issued by Trusts IV and V are redeemable in whole or in part on any interest payment date on or after December 15, 2009 for Trust IV and V, or at any time in whole but not in part within 90 days following the occurrence of certain events. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from time to time to defer interest payments on the subordinated debentures, which would result in a deferral of
34

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.

Subordinated Notes

As of June 30, 2021 and December 31, 2020, the Company had the following subordinated notes outstanding:

(Dollars in thousands)June 30, 2021
NameAmount of Subordinated NotesInterest Rate
October 2020 Private Placement$55,000 4.75% for the first five years. Resets quarterly thereafter to the then current three-month SOFR plus 456 basis points.
(Dollars in thousands)December 31, 2020
Name of TrustAmount of Subordinated DebenturesInterest Rate
October 2020 Private Placement$55,000 4.75% for the first five years. Resets quarterly thereafter to the then current three-month SOFR plus 456 basis points.
On October 20, 2020, the Company completed a $55.0 million private placement of ten-year fixed-to-floating rate subordinated notes, which will be used to support regulatory capital ratios and for general corporate purposes. The Company exchanged the privately placed notes for registered notes with the same terms and in the same aggregate principal amount at the end of the fourth quarter of 2020. The Notes bear a fixed interest rate of 4.75% for the first five years and will reset quarterly thereafter for the remaining five years to the then current three-month Secured Overnight Financing Rate ("SOFR"), as published by the Federal Reserve Bank of New York, plus 456 basis points.
The subordinated notes may be included in Tier 2 capital, with certain limitations applicable, under current regulatory guidelines and interpretations. The subordinated notes had a carrying value of $53.9 million, net of unamortized debt issuance costs of $1.1 million, at June 30, 2021.

10. REVENUE FROM CONTRACTS WITH CUSTOMERS

The following presents the Company's other operating income, segregated by revenue streams that are in-scope and out-of-scope of ASC 606, "Revenue from Contracts with Customers" for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019:2020:

Three Months Ended
September 30,		Nine Months Ended
September 30,		Three Months Ended
June 30,		Six Months Ended
June 30,
(dollars in thousands)(dollars in thousands)2020201920202019(dollars in thousands)2021202020212020
Other operating income:Other operating income:Other operating income:
In-scope of ASC 606In-scope of ASC 606In-scope of ASC 606
Mortgage banking incomeMortgage banking income$235 $230 $653 $486 Mortgage banking income$522 $189 $1,360 $418 
Service charges on deposit accountsService charges on deposit accounts1,475 2,125 4,674 6,247 Service charges on deposit accounts1,443 1,149 2,921 3,199 
Other service charges and feesOther service charges and fees2,932 3,281 8,517 9,096 Other service charges and fees3,925 2,589 7,103 5,585 
Income on fiduciary activitiesIncome on fiduciary activities1,149 1,126 3,716 3,220 Income on fiduciary activities1,269 1,270 2,500 2,567 
Net gain (loss) on sales of foreclosed assets0 17 (6)17 
Net loss on sales of foreclosed assetsNet loss on sales of foreclosed assets0 (6)0 (6)
In-scope other operating incomeIn-scope other operating income5,791 6,779 17,554 19,066 In-scope other operating income7,159 5,191 13,884 11,763 
Out-of-scope other operating incomeOut-of-scope other operating income5,772 3,487 13,587 12,967 Out-of-scope other operating income3,371 5,501 7,357 7,815 
Total other operating incomeTotal other operating income$11,563 $10,266 $31,141 $32,033 Total other operating income$10,530 $10,692 $21,241 $19,578 

3635

11. SHARE-BASED COMPENSATION
 
Restricted Stock Units
 
The table below presents the activity of restricted stock units for the ninesix months ended SeptemberJune 30, 2020:2021:
SharesWeighted Average Grant Date Fair ValueSharesWeighted Average Grant Date Fair Value
Non-vested restricted stock units, beginning of periodNon-vested restricted stock units, beginning of period366,467 $28.89 Non-vested restricted stock units, beginning of period532,374 $22.49 
Changes during the period:Changes during the period:  Changes during the period:  
GrantedGranted321,722 18.11 Granted210,566 21.67 
VestedVested(123,179)29.47 Vested(121,922)25.40 
ForfeitedForfeited(22,628)24.80 Forfeited(9,443)17.03 
Non-vested restricted stock units, end of periodNon-vested restricted stock units, end of period542,382 22.53 Non-vested restricted stock units, end of period611,575 21.71 

12. LEASES

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

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

Three Months Ended
September 30,		Nine Months Ended
September 30,		Three Months Ended
June 30,		Six Months Ended
June 30,
(dollars in thousands)(dollars in thousands)2020201920202019(dollars in thousands)2021202020212020
Lease cost:Lease cost:Lease cost:
Operating lease costOperating lease cost$1,613 $1,627 $4,919 $4,883 Operating lease cost$1,720 $1,653 $3,291 $3,306 
Variable lease costVariable lease cost732 699 2,098 1,950 Variable lease cost470 688 1,190 1,366 
Less: sublease incomeLess: sublease income0 (11)(15)(33)Less: sublease income0 (3)0 (15)
Total lease costTotal lease cost$2,345 $2,315 $7,002 $6,800 Total lease cost$2,190 $2,338 $4,481 $4,657 
Other information:Other information:Other information:
Operating cash flows from operating leasesOperating cash flows from operating leases$(1,554)$(1,558)$(4,743)$(4,663)Operating cash flows from operating leases$(1,726)$(1,595)$(3,325)$(3,189)
Weighted-average remaining lease term - operating leasesWeighted-average remaining lease term - operating leases12.47 years13.80 years12.47 years13.80 yearsWeighted-average remaining lease term - operating leases11.80 years13.23 years11.80 years13.23 years
Weighted-average discount rate - operating leasesWeighted-average discount rate - operating leases3.91 %3.92 %3.91 %3.92 %Weighted-average discount rate - operating leases3.91 %3.93 %3.91 %3.93 %

3736

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 2020,2021, the next five succeeding fiscal years and all years thereafter:

(dollars in thousands)(dollars in thousands)(dollars in thousands)
Year Ending December 31,Year Ending December 31,Undiscounted Cash FlowsLease Liability ExpenseLease Liability ReductionYear Ending December 31,Undiscounted Cash FlowsLease Liability ExpenseLease Liability Reduction
2020 (remainder)$1,451 $437 $1,014 
20215,839 1,638 4,201 
2021 (remainder)2021 (remainder)$3,208 $818 $2,390 
202220225,433 1,487 3,946 20225,925 1,497 4,428 
202320234,860 1,348 3,512 20235,183 1,343 3,840 
202420244,539 1,222 3,317 20244,508 1,214 3,294 
202520254,227 1,096 3,131 20254,195 1,088 3,107 
202620264,133 968 3,165 
ThereafterThereafter31,700 5,466 26,234 Thereafter27,350 4,462 22,888 
TotalTotal$58,049 $12,694 $45,355 Total$54,502 $11,390 $43,112 

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

Three Months Ended
September 30,		Nine Months Ended
September 30,		Three Months Ended
June 30,		Six Months Ended
June 30,
(dollars in thousands)(dollars in thousands)2020201920202019(dollars in thousands)2021202020212020
Total rental income recognizedTotal rental income recognized$492 $522 $1,559 $1,576 Total rental income recognized$521 $534 $1,041 $1,067 

Based on the Company's leases as lessor as of SeptemberJune 30, 2020,2021, estimated lease payments for the remainder of fiscal year 2020,2021, the next five succeeding fiscal years and all years thereafter are as follows:

(dollars in thousands)(dollars in thousands)(dollars in thousands)
Year Ending December 31,Year Ending December 31,Year Ending December 31,
2020 (remainder)$530 
20212,133 
2021 (remainder)2021 (remainder)$1,062 
202220221,790 20221,756 
20232023480 2023777 
2024202484 2024253 
2025202572 2025137 
2026202673 
ThereafterThereafter190 Thereafter117 
TotalTotal$5,279 Total$4,175 
3837

13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the components of other comprehensive income for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, by component:
(dollars in thousands)(dollars in thousands)Before TaxTax EffectNet of Tax(dollars in thousands)Before TaxTax EffectNet of Tax
Three Months Ended September 30, 2020   
Net unrealized losses on investment securities:   
Net unrealized losses arising during the period$(3,434)$(919)$(2,515)
Three Months Ended June 30, 2021Three Months Ended June 30, 2021   
Net unrealized gains on investment securities:Net unrealized gains on investment securities:   
Net unrealized gains arising during the periodNet unrealized gains arising during the period$2,407 $643 $1,764 
Less: Reclassification adjustments from AOCI realized in net incomeLess: Reclassification adjustments from AOCI realized in net income352 94 258 Less: Reclassification adjustments from AOCI realized in net income(50)(13)(37)
Net unrealized losses on investment securities(3,082)(825)(2,257)
Net unrealized gains on investment securitiesNet unrealized gains on investment securities2,357 630 1,727 
Defined benefit plans:Defined benefit plans:   Defined benefit plans:   
Amortization of net actuarial lossAmortization of net actuarial loss330 89 241 Amortization of net actuarial loss272 87 185 
Amortization of net transition obligationAmortization of net transition obligation5 1 4 Amortization of net transition obligation4 1 3 
Amortization of prior service cost3 1 2 
Defined benefit plans, netDefined benefit plans, net338 91 247 Defined benefit plans, net276 88 188 
Other comprehensive loss$(2,744)$(734)$(2,010)
Other comprehensive incomeOther comprehensive income$2,633 $718 $1,915 

(dollars in thousands)(dollars in thousands)Before TaxTax EffectNet of Tax(dollars in thousands)Before TaxTax EffectNet of Tax
Three Months Ended September 30, 2019   
Three Months Ended June 30, 2020Three 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 periodNet unrealized gains arising during the period$6,027 $1,615 $4,412 Net unrealized gains arising during the period$8,570 $2,295 $6,275 
Less: Reclassification adjustments from AOCI realized in net incomeLess: Reclassification adjustments from AOCI realized in net income(36)(10)(26)Less: Reclassification adjustments from AOCI realized in net income0 0 0 
Net unrealized gains on investment securitiesNet unrealized gains on investment securities5,991 1,605 4,386 Net unrealized gains on investment securities8,570 2,295 6,275 
Defined benefit plans:Defined benefit plans:   Defined benefit plans:   
Amortization of net actuarial lossAmortization of net actuarial loss310 31 279 Amortization of net actuarial loss269 70 199 
Amortization of net transition obligationAmortization of net transition obligation5 3 2 Amortization of net transition obligation4 1 3 
Amortization of prior service costAmortization of prior service cost4 2 2 Amortization of prior service cost3 1 2 
Defined benefit plans, netDefined benefit plans, net319 36 283 Defined benefit plans, net276 72 204 
Other comprehensive incomeOther comprehensive income$6,310 $1,641 $4,669 Other comprehensive income$8,846 $2,367 $6,479 
(dollars in thousands)Before TaxTax EffectNet of Tax
Six Months Ended June 30, 2021   
Net unrealized losses on investment securities:   
Net unrealized losses arising during the period$(21,212)$(5,675)$(15,537)
Less: Reclassification adjustments from AOCI realized in net income(50)(13)(37)
Net unrealized losses on investment securities(21,262)(5,688)(15,574)
Defined benefit plans:  
Amortization of net actuarial loss518 153 365 
Amortization of net transition obligation9 2 7 
Defined benefit plans, net527 155 372 
Other comprehensive loss$(20,735)$(5,533)$(15,202)

3938

(dollars in thousands)Before TaxTax EffectNet of Tax
Nine Months Ended September 30, 2020   
Net unrealized gains on investment securities:   
Net unrealized gains arising during the period$18,994 $5,087 $13,907 
Less: Reclassification adjustments from AOCI realized in net income352 94 258 
Net unrealized gains on investment securities19,346 5,181 14,165 
Defined benefit plans:  
Net actuarial gains arising during the period427 114 313 
Amortization of net actuarial loss867 230 637 
Amortization of net transition obligation14 4 10 
Amortization of prior service cost10 3 7 
Defined benefit plans, net1,318 351 967 
Other comprehensive income$20,664 $5,532 $15,132 

(dollars in thousands)(dollars in thousands)Before TaxTax EffectNet of Tax(dollars in thousands)Before TaxTax EffectNet of Tax
Nine Months Ended September 30, 2019   
Six Months Ended June 30, 2020Six Months Ended June 30, 2020   
Net unrealized gains on investment securities:Net unrealized gains on investment securities:   Net unrealized gains on investment securities:   
Net unrealized gains arising during the periodNet unrealized gains arising during the period$37,671 $10,098 $27,573 Net unrealized gains arising during the period$22,428 $6,006 $16,422 
Less: Reclassification adjustments from AOCI realized in net incomeLess: Reclassification adjustments from AOCI realized in net income(36)(10)(26)Less: Reclassification adjustments from AOCI realized in net income0 0 0 
Net unrealized gains on investment securitiesNet unrealized gains on investment securities37,635 10,088 27,547 Net unrealized gains on investment securities22,428 6,006 16,422 
Defined benefit plans:Defined benefit plans:   Defined benefit plans:   
Net actuarial gains arising during the periodNet actuarial gains arising during the period427 114 313 
Amortization of net actuarial lossAmortization of net actuarial loss837 84 753 Amortization of net actuarial loss537 142 395 
Amortization of net transition obligationAmortization of net transition obligation14 4 10 Amortization of net transition obligation9 2 7 
Amortization of prior service costAmortization of prior service cost13 3 10 Amortization of prior service cost7 2 5 
Defined benefit plans, netDefined benefit plans, net864 91 773 Defined benefit plans, net980 260 720 
Other comprehensive incomeOther comprehensive income$38,499 $10,179 $28,320 Other comprehensive income$23,408 $6,266 $17,142 

The following tables present the changes in each component of AOCI, net of tax, for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019:2020:
(dollars in thousands)Investment
Securities		Defined
Benefit
Plans		AOCI
Three Months Ended June 30, 2021   
Balance at beginning of period$9,350 $(6,339)$3,011 
Other comprehensive income before reclassifications1,764 0 1,764 
Reclassification adjustments from AOCI(37)188 151 
Total other comprehensive income1,727 188 1,915 
Balance at end of period$11,077 $(6,151)$4,926 

(dollars in thousands)(dollars in thousands)Investment
Securities		Defined
Benefit
Plans		AOCI(dollars in thousands)Investment
Securities		Defined
Benefit
Plans		AOCI
Three Months Ended September 30, 2020   
Three Months Ended June 30, 2020Three Months Ended June 30, 2020   
Balance at beginning of periodBalance at beginning of period$31,247 $(5,696)$25,551 Balance at beginning of period$24,972 $(5,900)$19,072 
Other comprehensive income (loss) before reclassifications(2,515)0 (2,515)
Other comprehensive income before reclassificationsOther comprehensive income before reclassifications6,275 0 6,275 
Reclassification adjustments from AOCIReclassification adjustments from AOCI258 247 505 Reclassification adjustments from AOCI0 204 204 
Total other comprehensive income (loss)(2,257)247 (2,010)
Total other comprehensive incomeTotal other comprehensive income6,275 204 6,479 
Balance at end of periodBalance at end of period$28,990 $(5,449)$23,541 Balance at end of period$31,247 $(5,696)$25,551 

4039

(dollars in thousands)(dollars in thousands)Investment
Securities		Defined
Benefit
Plans		AOCI(dollars in thousands)Investment
Securities		Defined
Benefit
Plans		AOCI
Three Months Ended September 30, 2019   
Six Months Ended June 30, 2021Six Months Ended June 30, 2021   
Balance at beginning of periodBalance at beginning of period$10,418 $(5,960)$4,458 Balance at beginning of period$26,651 $(6,523)$20,128 
Other comprehensive loss before reclassifications4,412 0 4,412 
Other comprehensive income before reclassificationsOther comprehensive income before reclassifications(15,537)0 (15,537)
Reclassification adjustments from AOCIReclassification adjustments from AOCI(26)283 257 Reclassification adjustments from AOCI(37)372 335 
Total other comprehensive income4,386 283 4,669 
Total other comprehensive income (loss)Total other comprehensive income (loss)(15,574)372 (15,202)
Balance at end of periodBalance at end of period$14,804 $(5,677)$9,127 Balance at end of period$11,077 $(6,151)$4,926 

(dollars in thousands)(dollars in thousands)Investment
Securities		Defined
Benefit
Plans		AOCI(dollars in thousands)Investment
Securities		Defined
Benefit
Plans		AOCI
Nine Months Ended September 30, 2020   
Six Months Ended June 30, 2020Six Months Ended June 30, 2020   
Balance at beginning of periodBalance at beginning of period$14,825 $(6,416)$8,409 Balance at beginning of period$14,825 $(6,416)$8,409 
Other comprehensive income before reclassifications13,907 313 14,220 
Other comprehensive loss before reclassificationsOther comprehensive loss before reclassifications16,422 313 16,735 
Reclassification adjustments from AOCIReclassification adjustments from AOCI258 654 912 Reclassification adjustments from AOCI0 407 407 
Total other comprehensive income14,165 967 15,132 
Total other comprehensive income (loss)Total other comprehensive income (loss)16,422 720 17,142 
Balance at end of periodBalance at end of period$28,990 $(5,449)$23,541 Balance at end of period$31,247 $(5,696)$25,551 

(dollars in thousands)Investment
Securities		Defined
Benefit
Plans		AOCI
Nine Months Ended September 30, 2019   
Balance at beginning of period$(9,643)$(6,450)$(16,093)
Impact of the adoption of new accounting standards(3,100)0 (3,100)
Adjusted balance at beginning of period(12,743)(6,450)(19,193)
Other comprehensive loss before reclassifications27,573 0 27,573 
Reclassification adjustments from AOCI(26)773 747 
Total other comprehensive income (loss)27,547 773 28,320 
Balance at end of period$14,804 $(5,677)$9,127 
4140

The following table presents the amounts reclassified out of each component of AOCI for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019:2020:
 Amount Reclassified from AOCIAffected Line Item in the Statement Where Net Income is Presented
Details about AOCI ComponentsThree months ended June 30,
(dollars in thousands)20212020
Defined benefit retirement and supplemental executive retirement plan items:   
Amortization of net actuarial loss$(272)$(269)Other operating expense - other
Amortization of net transition obligation(4)(4)Other operating expense - other
Amortization of prior service cost0 (3)Other operating expense - other
Total before tax(276)(276)
Tax effect88 72 Income tax benefit (expense)
Net of tax$(188)$(204)
Total reclassification adjustments from AOCI for the period, net of tax$(151)$(204)

 Amount Reclassified from AOCIAffected Line Item in the Statement Where Net Income is Presented
Details about AOCI ComponentsThree months ended September 30,
(dollars in thousands)20202019
Sale of investment securities available-for-sale:
Realized gains (losses) on securities available-for-sale$(352)$36 Investment securities gains (losses)
Tax effect94 (10)Income tax benefit (expense)
Net of tax$(258)$26 
Defined benefit retirement and supplemental executive retirement plan items:   
Amortization of net actuarial loss$(330)$(310)Salaries and employee benefits
Amortization of net transition obligation(5)(5)Salaries and employee benefits
Amortization of prior service cost(3)(4)Salaries and employee benefits
Total before tax(338)(319)
Tax effect91 36 Income tax benefit (expense)
Net of tax$(247)$(283)
Total reclassification adjustments from AOCI for the period, net of tax$(505)$(257)

Amount Reclassified from AOCIAffected Line Item in the Statement Where Net Income is Presented Amount Reclassified from AOCIAffected Line Item in the Statement Where Net Income is Presented
Details about AOCI ComponentsDetails about AOCI ComponentsNine months ended September 30,Details about AOCI ComponentsSix months ended June 30,
(dollars in thousands)(dollars in thousands)20202019(dollars in thousands)20212020
Sale of investment securities available-for-sale:
Realized gains (losses) on securities available-for-sale$(352)$36 Investment securities gains (losses)
Tax effect94 (10)Income tax benefit (expense)
Net of tax$(258)$26 
Defined benefit retirement and supplemental executive retirement plan items:Defined benefit retirement and supplemental executive retirement plan items:   Defined benefit retirement and supplemental executive retirement plan items:   
Amortization of net actuarial lossAmortization of net actuarial loss$(867)$(837)Salaries and employee benefitsAmortization of net actuarial loss$(518)$(537)Other operating expense - other
Amortization of net transition obligationAmortization of net transition obligation(14)(14)Salaries and employee benefitsAmortization of net transition obligation(9)(9)Other operating expense - other
Amortization of prior service costAmortization of prior service cost(10)(13)Salaries and employee benefitsAmortization of prior service cost0 (7)Other operating expense - other
Total before taxTotal before tax(891)(864)Total before tax(527)(553)
Tax effectTax effect237 91 Income tax benefit (expense)Tax effect155 146 Income tax benefit (expense)
Net of taxNet of tax$(654)$(773)Net of tax$(372)$(407)
Total reclassification adjustments from AOCI for the period, net of taxTotal reclassification adjustments from AOCI for the period, net of tax$(912)$(747)Total reclassification adjustments from AOCI for the period, net of tax$(335)$(407)


42

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
September 30,		Nine Months Ended
September 30,		Three Months Ended
June 30,		Six Months Ended
June 30,
(dollars in thousands, except per share data)(dollars in thousands, except per share data)2020201920202019(dollars in thousands, except per share data)2021202020212020
Net incomeNet income$6,859 $14,554 $25,102 $44,125 Net income$18,714 $9,917 $36,752 $18,243 
Weighted average common shares outstanding - basicWeighted average common shares outstanding - basic28,060,020 28,424,898 28,075,684 28,575,369 Weighted average common shares outstanding - basic28,173,710 28,040,802 28,141,360 28,083,602 
Dilutive effect of employee stock options and awardsDilutive effect of employee stock options and awards51,644 177,440 96,469 186,688 Dilutive effect of employee stock options and awards282,914 54,428 266,119 106,530 
Weighted average common shares outstanding - dilutedWeighted average common shares outstanding - diluted28,111,664 28,602,338 28,172,153 28,762,057 Weighted average common shares outstanding - diluted28,456,624 28,095,230 28,407,479 28,190,132 
Basic earnings per common shareBasic earnings per common share$0.24 $0.51 $0.89 $1.54 Basic earnings per common share$0.66 $0.35 $1.31 $0.65 
Diluted earnings per common shareDiluted earnings per common share$0.24 $0.51 $0.89 $1.53 Diluted earnings per common share$0.66 $0.35 $1.29 $0.65 
Anti-dilutive employee stock options and awards outstanding0 0 0 0 

41

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 SeptemberJune 30, 2020,2021, the weighted average discount rate used in the valuation of loans was 4.78%4.53%. 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.

43

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 SeptemberJune 30, 2020,2021, the weighted average discount rate used in the valuation of time deposits was 0.41%0.31%. 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 SeptemberJune 30, 2020,2021, the weighted average discount rate used in the valuation of long-term debt was 2.83%5.82%.

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.
42


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.

44

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

   Fair Value Measurement Using
(dollars in thousands)Carrying
Amount		Estimated
Fair Value		Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
June 30, 2021     
Financial assets:     
Cash and due from banks$116,009 $116,009 $116,009 $0 $0 
Interest-bearing deposits in other banks224,469 224,469 224,469 0 0 
Investment securities1,408,918 1,408,918 1,578 1,398,430 8,910 
Loans held for sale5,361 5,361 0 5,361 0 
Net loans4,999,537 4,882,130 0 0 4,882,130 
Accrued interest receivable19,014 19,014 19,014 0 0 
Financial liabilities:     
Deposits:     
Noninterest-bearing demand2,203,806 2,203,806 2,203,806 0 0 
Interest-bearing demand and savings and money market3,390,225 3,390,225 3,390,225 0 0 
Time803,128 802,904 0 0 802,904 
Long-term debt105,495 90,309 0 0 90,309 
Accrued interest payable (included in other liabilities)1,142 1,142 1,142 0 0 
   Fair Value Measurement Using
(dollars in thousands)Carrying
Amount		Estimated
Fair Value		Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
September 30, 2020     
Financial assets:     
Cash and due from banks$89,665 $89,665 $89,665 $0 $0 
Interest-bearing deposits in other banks5,489 5,489 5,489 0 0 
Investment securities1,167,523 1,167,523 1,204 1,153,791 12,528 
Loans held for sale23,962 23,962 0 23,962 0 
Net loans4,950,084 4,844,662 0 0 4,844,662 
Accrued interest receivable21,478 21,478 21,478 0 0 
Financial liabilities:     
Deposits:     
Noninterest-bearing demand1,762,476 1,762,476 1,762,476 0 0 
Interest-bearing demand and savings and money market2,995,227 2,995,227 2,995,227 0 0 
Time921,226 922,223 0 0 922,223 
Short-term borrowings206,000 206,000 0 206,000 0 
Long-term debt101,547 90,690 0 0 90,690 
Accrued interest payable (included in other liabilities)1,608 1,608 1,608 0 0 

   Fair Value Measurement Using
(dollars in thousands)Notional
Amount		Carrying
Amount		Estimated
Fair Value		Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
September 30, 2020     
Derivatives:
Interest rate lock commitments$2,927 $111 $111 $0 $111 $0 
Forward sale commitments19,341 (73)(73)0 (73)0 
Risk participation agreement28,800 (54)(54)0 0 (54)
Off-balance sheet financial instruments: 
Commitments to extend credit1,195,510 1,368 1,368 0 1,368 0 
Standby letters of credit and financial guarantees written10,842 163 163 0 163 0 

   Fair Value Measurement Using
(dollars in thousands)Notional
Amount		Carrying
Amount		Estimated
Fair Value		Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
June 30, 2021     
Derivatives:
Interest rate lock commitments$779 $14 $14 $0 $14 $0 
Forward sale commitments4,945 (14)(14)0 (14)0 
Risk participation agreement37,647 (22)(22)0 0 (22)
Off-balance sheet financial instruments: 
Commitments to extend credit1,308,203 0 1,620 0 1,620 0 
Standby letters of credit and financial guarantees written11,456 0 172 0 172 0 
4543

  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, 2020December 31, 2020     
Financial assets:Financial assets:     Financial assets:     
Cash and due from banksCash and due from banks$78,418 $78,418 $78,418 $0 $0 Cash and due from banks$97,546 $97,546 $97,546 $0 $0 
Interest-bearing deposits in other banksInterest-bearing deposits in other banks24,554 24,554 24,554 0 0 Interest-bearing deposits in other banks6,521 6,521 6,521 0 0 
Investment securitiesInvestment securities1,128,110 1,128,110 1,127 1,115,728 11,255 Investment securities1,183,960 1,183,960 1,351 1,170,283 12,326 
Loans held for saleLoans held for sale9,083 9,083 0 9,083 0 Loans held for sale16,687 16,687 0 16,687 0 
Net loansNet loans4,401,569 4,392,477 0 0 4,392,477 Net loans4,880,844 4,795,776 0 0 4,795,776 
Accrued interest receivableAccrued interest receivable16,500 16,500 16,500 0 0 Accrued interest receivable20,224 20,224 20,224 0 0 
Financial liabilities:Financial liabilities:     Financial liabilities:     
Deposits:Deposits:     Deposits:     
Noninterest-bearing demandNoninterest-bearing demand1,450,532 1,450,532 1,450,532 0 0 Noninterest-bearing demand1,790,269 1,790,269 1,790,269 0 0 
Interest-bearing demand and savings and money marketInterest-bearing demand and savings and money market2,643,038 2,643,038 2,643,038 0 0 Interest-bearing demand and savings and money market3,106,931 3,106,931 3,106,931 0 0 
TimeTime1,026,453 1,023,362 0 0 1,023,362 Time898,918 899,562 0 0 899,562 
Short-term borrowingsShort-term borrowings150,000 150,000 0 150,000 0 Short-term borrowings22,000 22,000 0 22,000 0 
Long-term debtLong-term debt101,547 97,827 0 97,827 0 Long-term debt105,385 92,488 0 0 92,488 
Accrued interest payable (included in other liabilities)Accrued interest payable (included in other liabilities)4,288 4,288 4,288 0 0 Accrued interest payable (included in other liabilities)1,727 1,727 1,727 0 0 

  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)
December 31, 2019
December 31, 2020December 31, 2020
Derivatives:Derivatives:Derivatives:
Interest rate lock commitmentsInterest rate lock commitments$625 $8 $8 $0 $8 $0 Interest rate lock commitments$714 $18 $18 $0 $18 $0 
Forward sale commitmentsForward sale commitments8,968 (28)(28)0 (28)0 Forward sale commitments16,603 (115)(115)0 (115)0 
Risk participation agreementsRisk participation agreements37,762 (48)(48)0 0 (48)
Off-balance sheet financial instruments:Off-balance sheet financial instruments:      Off-balance sheet financial instruments:      
Commitments to extend creditCommitments to extend credit1,089,135 1,230 1,230 0 1,230 0 Commitments to extend credit1,176,065 0 1,313 0 1,313 0 
Standby letters of credit and financial guarantees writtenStandby letters of credit and financial guarantees written10,526 158 158 0 158 0 Standby letters of credit and financial guarantees written10,544 0 158 0 158 0 

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.

46
44


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 nine months ended September 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 ninesix months ended SeptemberJune 30, 2020.2021.

45

The following tables present the fair value of assets and liabilities measured on a recurring basis as of SeptemberJune 30, 20202021 and December 31, 2019:2020:
  Fair Value at Reporting Date Using
(dollars in thousands)Fair ValueQuoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
June 30, 2021    
Available-for-sale securities:    
Debt securities:    
States and political subdivisions$196,764 $0 $188,794 $7,970 
Corporate securities46,678 0 46,678 0 
U.S. Treasury obligations and direct obligations of U.S Government agencies39,734 0 39,734 0 
Mortgage-backed securities:    
Residential - U.S. Government sponsored entities984,678 0 984,678 0 
Commercial - U.S. Government agencies and sponsored entities81,466 0 81,466 0 
Residential - Non-government agencies15,446 0 14,506 940 
Commercial - Non-government agencies42,574 0 42,574 0 
Total available-for-sale securities1,407,340 0 1,398,430 8,910 
Equity securities1,578 1,578 0 0 
Derivatives: Interest rate lock, forward sale commitments and risk participation agreements(22)0 0 (22)
Total$1,408,896 $1,578 $1,398,430 $8,888 

 Fair Value at Reporting Date Using  Fair Value at Reporting Date Using
(dollars in thousands)(dollars in thousands)Fair ValueQuoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)		(dollars in thousands)Fair ValueQuoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
September 30, 2020    
December 31, 2020December 31, 2020    
Available-for-sale securities:Available-for-sale securities:    Available-for-sale securities:    
Debt securities:Debt securities:    Debt securities:    
States and political subdivisionsStates and political subdivisions$168,589 $0 $157,055 $11,534 States and political subdivisions$168,766 $0 $157,429 $11,337 
Corporate securitiesCorporate securities50,558 0 50,558 0 Corporate securities48,008 0 48,008 0 
U.S. Treasury obligations and direct obligations of U.S Government agenciesU.S. Treasury obligations and direct obligations of U.S Government agencies34,944 0 34,944 0 U.S. Treasury obligations and direct obligations of U.S Government agencies33,145 0 33,145 0 
Mortgage-backed securities:Mortgage-backed securities:    Mortgage-backed securities:    
Residential - U.S. Government sponsored entitiesResidential - U.S. Government sponsored entities763,326 0 763,326 0 Residential - U.S. Government sponsored entities778,826 0 778,826 0 
Commercial - U.S. Government agencies and sponsored entitiesCommercial - U.S. Government agencies and sponsored entities73,786 0 73,786 0 Commercial - U.S. Government agencies and sponsored entities87,469 0 87,469 0 
Residential - Non-government agenciesResidential - Non-government agencies28,676 0 27,682 994 Residential - Non-government agencies23,423 0 22,434 989 
Commercial - Non-government agenciesCommercial - Non-government agencies46,440 0 46,440 0 Commercial - Non-government agencies42,972 0 42,972 0 
Total available-for-sale securitiesTotal available-for-sale securities1,166,319 0 1,153,791 12,528 Total available-for-sale securities1,182,609 0 1,170,283 12,326 
Equity securitiesEquity securities1,204 1,204 0 0 Equity securities1,351 1,351 0 0 
Derivatives: Interest rate lock and forward sale commitments(16)0 38 (54)
Derivatives: Interest rate lock, forward sale commitments and risk participation agreementsDerivatives: Interest rate lock, forward sale commitments and risk participation agreements(145)0 (97)(48)
TotalTotal$1,167,507 $1,204 $1,153,829 $12,474 Total$1,183,815 $1,351 $1,170,186 $12,278 

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  Fair Value at Reporting Date Using
(dollars in thousands)Fair ValueQuoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
December 31, 2019    
Available-for-sale securities:    
Debt securities:    
States and political subdivisions$122,018 $0 $110,763 $11,255 
Corporate securities30,529 0 30,529 0 
U.S. Treasury obligations and direct obligations of U.S Government agencies40,381 0 40,381 0 
Mortgage-backed securities:    
Residential - U.S. Government sponsored entities677,822 0 677,822 0 
Commercial - U.S. Government agencies and sponsored entities81,225 0 81,225 0 
Residential - Non-government agencies37,191 0 37,191 0 
Commercial - Non-government agencies137,817 0 137,817 0 
Total available-for-sale securities1,126,983 0 1,115,728 11,255 
Equity securities1,127 1,127 0 0 
Derivatives: Interest rate lock and forward sale commitments(20)0 (20)0 
Total$1,128,090 $1,127 $1,115,708 $11,255 

For the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

Available-For-Sale Debt Securities:Available-For-Sale Debt Securities:
(dollars in thousands)(dollars in thousands)States and Political SubdivisionsResidential - Non-Government AgenciesTotal(dollars in thousands)States and Political SubdivisionsResidential - Non-Government AgenciesTotal
Balance at December 31, 2020Balance at December 31, 2020$11,337 $989 $12,326 
Principal payments receivedPrincipal payments received(2,734)(11)(2,745)
Unrealized net loss included in other comprehensive incomeUnrealized net loss included in other comprehensive income(633)(38)(671)
Balance at June 30, 2021Balance at June 30, 2021$7,970 $940 $8,910 
 
Balance at December 31, 2019Balance at December 31, 2019$11,255 $0 $11,255 Balance at December 31, 2019$11,255 $0 $11,255 
Principal payments receivedPrincipal payments received(319)0 (319)Principal payments received(212)0 (212)
Unrealized net gain included in other comprehensive incomeUnrealized net gain included in other comprehensive income598 0 598 Unrealized net gain included in other comprehensive income628 0 628 
Purchases0 994 994 
Balance at September 30, 2020$11,534 $994 $12,528 
 
Balance at December 31, 2018$11,169 $0 $11,169 
Principal payments received(285)0 (285)
Unrealized net gain included in other comprehensive income618 0 618 
Purchases0 0 0 
Balance at September 30, 2019$11,502 $0 $11,502 
Balance at June 30, 2020Balance at June 30, 2020$11,671 $0 $11,671 

Within the states and political subdivisions available-for-sale debt securities category, the Company holds 42 mortgage revenue bonds issued by the City & County of Honolulu with an aggregate fair value of $11.5$8.0 million and $11.5$11.7 million at SeptemberJune 30, 20202021 and SeptemberJune 30, 2019,2020, respectively. Within the residential non-government agency available-for-sale debt securitiesother MBS non-agency category, the Company purchasedholds 2 mortgage backed bonds issued by Habitat for Humanity with a fair value of $1.0 million.$0.9 million at June 30, 2021. The Company estimates the aggregate fair value of $12.5$8.9 million 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 City & County of Honolulu mortgage revenue bonds and Habitat for Humanity mortgage backed bonds is the weighted average discount rate. As of SeptemberJune 30, 2020,2021, the weighted average
48

discount rate utilized was 2.79%was 3.19% compared to 3.94%2.82% at SeptemberJune 30, 20192020 and 4.08%2.83% at December 31, 2019,2020, which was derived by incorporating a credit spread over the FHLB Fixed-Rate Advance curve. Significant increases (decreases) in the weighted average discount rate could result in a significantly lower (higher) fair value measurement.

The following table presents the fair value of assets measured on a nonrecurring basis and the level of valuation assumptions used to determine the respective fair values as of SeptemberJune 30, 20202021 and December 31, 2019:2020:
 Fair Value Measurements Using  Fair Value Measurements Using
(dollars in thousands)(dollars in thousands)Fair ValueQuoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)		(dollars in thousands)Fair ValueQuoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
September 30, 2020    
June 30, 2021June 30, 2021    
Other real estate (1)
Other real estate (1)
$128 $0 $128 $0 
Other real estate (1)
$0 $0 $0 $0 
December 31, 2019    
December 31, 2020December 31, 2020    
Other real estate (1)
Other real estate (1)
$164 $0 $164 $0 
Other real estate (1)
$0 $0 $0 $0 

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

17. SUBSEQUENT EVENTS

On October 20, 2020, the Company completed its private placement with registration rights of $55.0 million in ten-year fixed-to-floating rate subordinated notes due 2030 (the “Notes”). The Notes bear a fixed interest rate of 4.75% for the first five years and will reset quarterly thereafter for the remaining five years to the then current three-month Secured Overnight Financing Rate, as published by the Federal Reserve Bank of New York, plus 456 basis points basis points. The Company is entitled to redeem the Notes, in whole or in part, on any interest payment date on or after November 1, 2025, or at any time, in whole but not in part, upon certain other specified events prior to the Notes’ maturity on November 1, 2030.

The Notes have been structured to qualify initially as Tier 2 capital for the Company for regulatory capital purposes. The Company intends to use the net proceeds from the offering for general corporate purposes and capital flexibility.
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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 3231 branches and 7570 ATMs located throughout the state of Hawaii as of SeptemberJune 30, 2020. During the third quarter of 2020, the Company consolidated three in-store branches with other existing nearby branches. These in-store branches had a small square footage which did not allow for adequate social distancing and have been closed since March 2020 due to the novel coronavirus pandemic ("COVID-19"). A traditional branch is expected to be consolidated during the fourth quarter of 2020. Four of the Company's 32 branches remain temporarily closed to protect the health and well-being of the Company's employees and customers from COVID-19.2021.

The bank offers a broad range of products and services including accepting time, savings,demand, money market, savings and demandtime 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, 20192020 filed with the U.S. Securities and Exchange Commission (the "SEC") on February 25, 2020,23, 2021, 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 - Summary of Significant Accounting Policies in the accompanying notes 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 September 30, 2020, theThe 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 on loans charged to current earnings. The amount maintained in the ACL reflects management’s continuing
50

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’tdo not 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
48

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 SeptemberJune 30, 20202021 was $6.9$18.7 million, or $0.24$0.66 per diluted share, compared to net income of $14.6$9.9 million, or $0.51$0.35 per diluted share for the three months ended SeptemberJune 30, 2019.2020. Net income for the ninesix months ended SeptemberJune 30, 20202021 was $25.1$36.8 million, or $0.89$1.29 per diluted share, compared to net income of $44.1$18.2 million, or $1.53$0.65 per diluted share for the ninesix months ended SeptemberJune 30, 2019. Earnings continue2020.

During the three and six months ended June 30, 2021, the Company recorded credits to be impacted by a higherthe provision for credit loss expense that is driven by models that utilize Hawaii-specific economic projections from a third party forecast.losses of $3.4 million and $4.3 million, respectively, compared to debits to the provision of $11.2 million and $22.3 million during the three and six months ended June 30, 2020, respectively.

Excluding the provision for credit losses and income tax expense, the Company's pre-tax, pre-provision income for the three and ninesix months ended SeptemberJune 30, 20202021 was $23.7$21.2 million and $67.7$43.8 million, respectively, compared to $21.0$24.1 million and $62.8$46.4 million for the three and ninesix months ended September 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 nine months ended SeptemberJune 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 $14.9 million and $37.2 million, respectively, compared to $1.1 million and $4.4 million during the three and nine months ended September 30, 2019, which impacted our operating results.respectively.

The following table presents annualized returns on average assets and average shareholders' equity, and basic and diluted earnings per share for the periods indicated. Returns on average assets and average shareholders' equity are annualized based on a 30/360 day convention.
Three Months Ended
June 30,		Six Months Ended
June 30,
 2021202020212020
Return on average assets1.06 %0.61 %1.07 %0.58 %
Return on average shareholders’ equity13.56 7.34 13.31 6.77 
Basic earnings per common share$0.66 $0.35 $1.31 $0.65 
Diluted earnings per common share0.66 0.35 1.29 0.65 

Three Months Ended
September 30,		Nine Months Ended
September 30,
 2020201920202019
Return on average assets0.42 %0.99 %0.53 %1.00 %
Return on average shareholders’ equity4.99 11.11 6.17 11.58 
Basic earnings per common share$0.24 $0.51 $0.89 $1.54 
Diluted earnings per common share0.24 0.51 0.89 1.53 

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 and permanent closures of many businesses and the institution of social distancing, mask mandates and sheltering in place requirementsgathering and travel restrictions in many states and communities. While many of these restrictions have since loosened,Continuation continuation and further spread of COVID-19, including COVID-19 variants, 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
51

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 the September 2020June 2021 meeting, the FRB elected to hold the target federal funds rate at 0% to 0.25% and officials expects ratesexpect it will be appropriate to remain near zero through 2023.maintain this target range until labor market conditions have reached levels consistent with their assessments of maximum employment and inflation has risen to 2.00% and is on track to moderately
exceed 2.00% for some time.

49

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.

In December 2020, Congress passed another $900 billion aid package, or the Consolidated Appropriations Act, 2021, which extends certain relief provisions under the CARES Act.

In March 2021, Congress passed another $1.9 trillion aid package, or the American Rescue Plan Act of 2021, which builds upon many of the measures in the CARES Act from March 2020 and in the Consolidated Appropriations Act, 2021, from December 2020.

Hawaii's economy continues to be impacted by COVID-19, but is most recently improving. On March 4, 2020, Hawaii Governor David Ige issued a Proclamation declaring a state of emergency to support ongoing State and county responses to COVID-19.

Since then, Governor Ige issued fourteentwenty-one supplemental emergency proclamations. The fourteenth supplemental emergency proclamation signed on October 13, 2020:proclamations which includes travel restrictions and other measures.

•extends the COVID-19 emergency period in Hawaiʻi through November 30, 2020.
•extends the 14-day mandatory quarantine requirement for out-of-state travelers to Hawaii, as well as inter-island travelers arriving to Kauai, Hawaii Island or Maui County (Maui, Molokai, Lanai), through November 30, 2020, with the exceptionAlthough most of the pre-travel test option. The inter-island travel quarantine does not include inter-island travelers arrivingimposed restrictions have been loosened, some are slated to Oahu. The period of self-quarantine begins immediately upon arrival, and lasts 14 days or the durationmaintain until 70% of the person’s stay onHawaii population is fully vaccinated. As a result of these restrictions and vaccinations administered, the island, whichever is shorter.
•mandates that all persons must wear masks in compliance with the county orders, rules and directives approved by the governor.
•cxtends the prohibition on evictions for non-paymentspread of rent until November 30, 2020.

Beginning October 15, 2020, Hawaii re-opened to U.S mainland tourists. A pre-travel testing option allows travelers an alternative to the mandatory 14-day quarantine. All travelers arriving in Hawaii from out-of-state will be required to get a valid COVID-19 Nucleic Acid Amplification Test ("NAAT") from trusted testing and travel partners 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 went from one of the lowest per capita in the country during the first half of 2020 to the one of the highest during the third quarter of 2020 resulting in new shutdowns and a delay in the reopening of the state. Infection rates have since improved.has been relatively contained. As of October 20, 2020,June 30, 2021 the Centers for Disease Control and Prevention reported there were 14,10836,387 cases (7-day moving average of 6743 new infections) and 189497 COVID-19-related deaths in Hawaii. Over 58% of Hawaii's population has been fully vaccinated as of June 30, 2021.

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

The Company continues to prudently manage through the pandemic and has put in place preventative measures including face masks, plexiglass shields, social distancing, enhanced cleaning and remote work for the majority of non-branch employees. During the second and third quarters of 2020, the Company re-opened six of its branches that were temporarily closed. The
52

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 were temporarily closed since March 2020 due to the COVID-19 pandemic, and were officially closed during the third quarter of 2020. These in-store branches had a small square footage which did 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 incurred $0.3 million in pre-tax expenses related to the consolidation of the three in-store branches during the third quarter of 2020 and expects to incur additional $1.4 million in pre-tax expenses related to the consolidation of the fourth branch during the fourth quarter of 2020.

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-day10-day self quarantine has resulted in a significant decline in tourism to the state of Hawaii, with daily visitors to Hawaii down 97.6% during the month of August and 69.0% year-to-date, compared to the same year-ago periods. Hawaii's unemployment rate has gone from one of the best in the nation over the past several years to one of the worst at approximately 15.1% during the month of September.Hawaii. As a result, manymany customers and businesses across the state have been significantly impacted by the COVID-19 pandemic whichpandemic. However the state is making progress towards economic recovery. Beginning October 15, 2020, passengers arriving from out-of-state and traveling inter-county could leadbypass the mandatory 14-day self-quarantine with a valid negative COVID-19 Nucleic Acid Amplification Test ("NAAT") test result from a Trusted Testing and Travel Partner through the state’s Safe Travels program. On December 10, 2020, the mandatory quarantine was reduced from 14 to additional provisions10 days in accordance with the U.S. Centers for credit lossesDisease Control and lower interest and fee income, which if significant, could havePrevention’s ("CDC") guidelines. On June 15, 2021, travelers who were fully vaccinated in the state of Hawaii may bypass the quarantine without a material impact to our results of operations and financial statements.pretravel test. On July 8, 2021, travelers who were fully vaccinated in the U.S. may bypass the quarantine without a pretravel test.

COVID-19 may also materially disrupt bankingVisitor arrivals have recently been exceeding 30,000 per day in July 2021, or approximately 90% of pre-pandemic levels. While still elevated, Hawaii's unemployment rate of 7.7% during the month of June 2021 is significantly down from its peak of 21.9%in April 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 moreMay of these developments could have a material adverse effect on our business, operations, consolidated financial condition, and consolidated results of operations.last year.

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.

53

Through guidance from regulatory agencies, the Company ishas prudently workingworked with its borrowers impacted by COVID-19 to defer principal payments, interest, and fees. The Company is currently working on returning borrowers to payment as the economy begins to recover. Loans on active payment forbearance or deferrals granted to borrowers impacted by the COVID-19 pandemic declined significantly from $567.9$120.2 million or, 11.3%2.4% of the total loan portfolio (or 12.7% excluding PPP loans) as of June 30,December 31, 2020, to $290.8$3.5 million, or 5.8%0.1% of the total loan portfolio (or 6.5% excluding PPP loans), as of SeptemberJune 30, 2020. The following table sets forth loans on active payment forbearance or deferral2021, as of September 30, 2020:
many borrowers resumed payments.
(dollars in thousands)Loan CountBalanceAccrued Interest ReceivableTotal Loans% of Total LoansTotal Loans, excl. PPP% of Total Loans, excl. PPP
Commercial, financial and agricultural363 $64,298 $844 $1,056,651 6.1 %$528,070 12.2 %
Real estate:
Construction— — — 118,247 — %118,247 — %
Residential mortgage216 103,130 1,803 1,680,060 6.1 %1,680,060 6.1 %
Home equity— — — 534,056 — %534,056 — %
Commercial mortgage25 69,420 469 1,141,265 6.1 %1,141,265 6.1 %
Consumer3,209 53,993 1,323 500,347 10.8 %500,347 10.8 %
Total loans3,813 $290,841 $4,439 $5,030,626 5.8 %$4,502,045 6.5 %

The Company’s interest income could also be reduced due to COVID-19. In the third quarter of 2020, the Company continued to grant or extend loan payment deferrals on a case-by-case basis and therefore expects that the accrued interest receivable balance on the deferred loans will continue to increase. Interest and fees still accrue on amounts that are deemed collectible during the deferral period, however, should the Company later determine that collection of payments is not expected and eventual credit losses on these deferred payments emerge, accrued and unpaid interest income and fees will need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. During the third quarter of 2020, the Company recorded a reserve on the accrued interest receivable for loans on active forbearance or deferral totaling $0.2 million. The Company may need to increase thisThis reserve or reverse accrued interest receivable which may negatively impact interest income in future periods if it is determined that the accrued interest receivable is uncollectible.

The Company’s aggregate fee income could be reduced due to COVID-19. The Company has experienced a decline in transactional activity due to COVID-19. In addition, to support our customersbalance was reversed during this difficult time, the Company temporarily waived non-CPB ATM fees and early withdrawal fees on our time deposits and granted temporary increases on debit card and mobile deposit transaction limits throughout the second quarter of 2020. Beginning July 1, 2020, we reinstated these fees that were waived throughout2021 due to the previous quarter, butsignificant decline in loans on active forbearance or deferral and the temporary increasesCompany no longer has a reserve on debit card and mobile deposit transaction limits remain in place.accrued interest receivable as of June 30, 2021.

Liquidity and capital

Through our past experience during the Great Recession in the late 2000s, we believe we have developed robust liquidity and capital stress tests and comprehensive liquidity and capital contingency plans. We further believe our liquidity and capital positions are strong. TheTo further strengthen its capital position, the Company currently estimates that it has sufficient liquidityissued $55.0 million in subordinated debt in October 2020, which is classified as tier 2 capital for regulatory purposes, and capitaldown-streamed $46.8 million to withstand an economic recession brought about by COVID-19. However the Company's regulatory capital ratios could be adversely impacted by significant credit losses and lower interest income and fees or by a longer and deeper recession than we currently anticipate. bank.

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 or the bank is otherwise
50

restricted in its ability to pay dividends to the Company, the Company may not be able to service its debt or pay dividends to its shareholders.

The Company’s liquidity will be impacted byrisk related to loan principal and interest payment deferrals that are beingwere 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 three to six months. Requests for loan payment deferrals declined in the third quarterCOVID-19, is currently low as a significant number of 2020. While some loan payment deferrals ended in the third quarterfirst half of 2021. Additionally, requests for loan payment deferrals continued to decline significantly in the first half of 2021. Further, during 2020 and the first half of 2021, we anticipate some borrowers will be requesting second or third deferrals. Additionally, liquidity could be adversely impacted if customers withdrawexperienced a significant deposit balancesinflow of deposits due to COVID-19 concerns.government stimulus and general market uncertainty. However, this may not continue.

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 four months even when such payment was not collected from the borrower due to payment forbearance granted or payment delinquency. Such amounts advanced are recorded
54

as a receivable by the Company and are expected to be collected from the borrower and/or government agencies (FNMA or FHLMC).

The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile. The collateral that is pledged for wholesale funding lines, could lose value and may result in less funding availability. The Company has access to 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 effectHowever, the PPPLF expires 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.July 30, 2021.

In March 2020, we decided to suspend our share repurchase program foras a result of the time being untiluncertainty posed by the pandemic. In January 2021, our Board of Directors approved a new authorization to repurchase up to $25 million in common stock and we know more about the extent the pandemic will have on the economy and our business.resumed repurchases in May 2021. We can provide no assurance when or ifon how many shares in the aggregate we will reinstate our sharemay repurchase under this repurchase program.

Asset valuation

The Company currently doesCOVID-19 has not expect COVID-19 to affect itsaffected the Company's 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, thesheet. The Company doesalso has not anticipatemade significant changes in the methodology used to determine the fair value of assets measured in accordance with GAAP.GAAP, except for updating certain valuation assumptions to account for pandemic-related circumstances such as widening credit spreads.

The Company has a significant real estate loan portfolio. Due to COVID-19,Thus far, the Hawaii real estate loanmarket continues to be extremely strong and real estate collateral usedvalues have remained relatively stable, but we cannot provide any assurance as to secure such loans could experience a reduction in value. Further, the ability for the Company to obtain appraisalsfuture levels of property value could be difficult during COVID-19. This may lead to credit impairments and asset write-downs.stability.

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, during the third quarter of 2020 the Company launched its premier digital banking platform which is one of the key initiatives and milestones in its RISE2020 initiative.

The Company is implementingdeveloping 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 rise in COVID-19 cases in Hawaii and nationwide, the return-to-office plan was delayed as a precautionary measure. The Company may incur additional cost related to its continued deployment of the remote workforce plan. Adeployed a remote workforce plan potentially could introduce operational or internal control challengesat the onset of the pandemic in 2020 and risks, including resource constraints. The Company is closely monitoringhas been able to continue operations to mitigate those risks, and currently does not anticipate significant challenges to its ability towithout disruption as well as 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,As an essential service provider, the health and well-being of our workforce, orCOVID-19 vaccine became available to our critical systems and vendors, there could be an adverse impact on our operations.employees in March 2021. Most of the Company's employees are fully vaccinated at this point.

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 offeringoffered an employment disruption loan as well as consumer, commercial, commercial mortgage, and residential mortgage payment deferral programs. In addition, as previously mentioned, we waived non-CPB ATM fees and early withdrawal fees on our time deposits throughout the second quarter of 2020 and increased spending cap limits on debit cards and mobile deposit limits to $10,000
51

$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 actively participated in assisting customers with loan applications for the SBA’s Paycheck Protection Program, or PPP, which was part of the CARES Act. PPP loans have a
55

two or five-year term and earn interest at 1%. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan, which the Company is recognizing over the life of the loan. The Company saw tremendous interest in the PPP. From April 3, 2020, the date the SBA began accepting submissions for the initial round of PPP loans through the end of the program in August 2020, the Company funded over 7,200 PPP loans totaling over $558 million and received gross processing fees of over $21 million. Certain PPP loans paid-off shortly after funding resulting in a total outstanding balance of $545.3 million and net deferred fees of $16.7 million as of September 30, 2020. The Company has developed a PPP forgiveness portal and has begun the process of assisting our customers with applying for forgiveness from the SBA. The Company has engaged 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 liabilities by the Company that cannot be determined at this time.

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

The SBA began accepting submissions for the initial round of PPP loans on April 3, 2020. In April 2020, the Paycheck Protection Program and Health Care Enhancement Act added an additional round of funding for the PPP. In June 2020, the Paycheck Protection Program Flexibility Act of 2020 was enacted, which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Through the end of the second round in August 2020, the Company funded over 7,200 PPP loans totaling over $558 million and received gross processing fees of over $21.2 million.

In December 2020, the Consolidated Appropriations Act, 2021 was passed which among other things, included a third round of funding and a new simplified forgiveness procedure for PPP loans of $150,000 or less. During the first half of 2021, the Company funded over 4,600 loans totaling over $320.9 million in the third round, earning additional gross processing fees of over $18.4 million.

The Company becamedeveloped a PPP forgiveness portal and with assistance from a third party vendor has assisted its customers with applying for forgiveness from the SBA. We have received forgiveness payments and repayments from borrowers totaling over $416.3 million as of June 30, 2021. A total outstanding balance of $450.5 million and net deferred fees of $15.9 million remain as of June 30, 2021. Although the Company believes that the majority of the remaining loans will ultimately be forgiven by the SBA or repaid by the borrower in accordance with the terms of the program, there could be risks and liabilities by the Company that cannot be determined at this time.

The Company has become aware in September 2020 of a Federal criminal complaint related totwo PPP loan fraud on aloans that it originated for $10.0 million PPP loan that the Bank originatedand $3.0 million, in April 2020. The CEO of thewhich they are under investigation for borrower was charged by the U.S. Department of Justice for submitting a fraudulent PPP loan application to the Bank. The Federal investigation is ongoing and charges are currently pending. Neither the Company nor the Bank is a party to the Federal complaint, and we have been cooperating with Federal authorities.fraud and/or misrepresentations. We believe that we originated the subjectboth PPP loanloans in accordance with all SBA PPP requirements. Accordingly,requirements, therefore we currently expect that the SBA guarantee remains in effect. Based on current facts and circumstances, we expect to be fully repaid on the loan.both loans through SBA forgiveness, borrower paydowns, SBA guarantee, or a combination of such methods. Therefore, we continue to hold the $10.0 million PPP loanboth loans on our balance sheet as a performing assetassets as of SeptemberJune 30, 2020.2021.

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

The Company provided initial three-month principal and interest payment forbearance for our residential mortgage customers, and three-month principal and interest payment deferrals for our consumer customers. Both residential mortgage and consumer customers were granted extensions to their forbearance or deferral, if needed. The Company is deferringdeferred either the full loan payment or the principal component of the loan payment for typicallygenerally three to six months for its commercial real estate and commercial and industrial loan customers on a case-by-case basis depending on need. The majority of loans that were granted forbearance or deferral have returned to payment. As of SeptemberJune 30, 20202021, the Company had loan payment forbearance or deferrals on outstanding balances of $290.8$3.5 million, or 5.8%0.1% of total loans (or 6.5% of total loans, excluding PPP loans). Of this amount, $192.9 million and $2.5 million were on second and third payment forbearance or deferrals, respectively, as of September 30, 2020.

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 (time of modification program implementation) and December 31, 2019, respectively. The As of June 30, 2021, the Company has identified eleven consumer loansone loan totaling $0.2$0.7 million including three consumer loans totaling $0.1 million in the third quarter of 2020, that werewas modified and did not meet the criteria under Section 4013 of the CARES Act or the interagency guidance. As a result, these loans are included in TDRs as of
September 30, 2020
. Collectibility of the accrued interest on deferred loans is uncertain. During the third quarter of 2020, the Company recorded a reserve on the accrued interest receivable of loans on active forbearance or deferral totaling $0.2 million, with the offset recorded to provision for credit losses. TheThis reserve balance was reversed during the second quarter of 2021 due to the significant decline in loans on active forbearance or deferral and the Company may need to increase thisno longer has a reserve or reverseon accrued interest receivable which may negatively impact interest income in future periods if it is determined that the accrued interest receivable is uncollectible. as ofAdditional loan modifications to capitalize interest and/or extend loan terms may also be necessary.June 30, 2021. The Company anticipates requests forlimited new or extended loan deferrals will continue atin the second half of 2021 as the Hawaii economic recovery progresses.

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As part of the CARES Act, the Section 1112 debt relief program authorized the SBA to pay, for a slower pace through6-month period, the fourth quarterprincipal, interest, and associated fees that borrowers owed on covered 7(a) loans, 504 loans, and Microloans reported in regular servicing status (excluding PPP loans). Under Section 325 of 2020.the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) enacted December 29, 2020, Section 1112 was amended and authorized a second round of payments covering the principal, interest, and associated fees that borrowers owed on covered loans for a 3-month period beginning with payments due February 1, 2021, followed by an additional payment for a 2-month period for borrowers with an assigned North American Industry Classification System code beginning with 61, 71, 72, 213, 315, 448, 451, 481, 485, 487, 511, 512, 515, 532, or 812. As of June 30, 2021, the Company had $0.5 million in SBA loans under the SBA Debt Relief Program. During the six months ended June 30, 2021, the Company received $0.9 million in loan payments from the SBA.

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.

In the final week of March 2020, the Company reviewed its entire commercial loan portfolio and actively reached out to its customers to determine the initial impact, if any, of COVID-19 on their businesses. The review continued throughout the second and third quarters.remainder of 2020. The Company proactively worked with many of its customers in providing loan payment deferrals, as well as assisted in the application and approval of PPP loans.
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The volume of loan payment deferrals granted peaked in May 2020 at approximately $605 million in total loan balances, and has since declined to $290.8$3.5 million, or 5.8%0.1% of total loans (or 6.5% of total loans, excluding PPP loans), at September 30, 2020. The Company continues to support its consumer and residential customers with a second 90-day loan payment deferral or forbearance, as needed. Our consumer loan payment deferrals totaled $54.0 million at September 30, 2020, compared to $65.8 million at June 30, 2020.

Our residential mortgage loans on active payment forbearance totaled $103.1 million at September 30, 2020, compared to $176.6 million at June 30, 2020. The majority of the residential mortgage loans in forbearance were in their second 90-day forbearance period at September 30, 2020. Some2021. Most borrowers are beginning to resumehave resumed payments with the total count on active deferral dropping from a peak of 467 at May 31, 2020 to 21654 at SeptemberJune 30, 2021. The Company is providing alternative payment plans on a limited basis following the end of the payment deferral periods. Our consumer loan payment deferrals totaled $0.5 million at June 30, 2021, compared to $2.3 million at December 31, 2020.

In our Our residential mortgage loans on active payment forbearance totaled $3.0 million at June 30, 2021, compared to $70.4 million at December 31, 2020. There were no commercial, commercial real estate and construction loan portfolios, loans on active payment deferral totaled $133.7 million at September 30, 2020, compared to $325.4 million at June 30, 2020. The two highest exposures by industry are real estate and rental and leasing totaling approximately $472021, compared to $47.5 million or 1% of the total loan portfolio excluding PPP loans, and food-service totaling approximately $46 million, or 1% of the total loan portfolio excluding PPP loans. The majority of the loans in the real estate category are supported by low loan-to-value ratios. The majority of the loans in the food-service category are supported by owners with good liquidity and access to capital. The Company expects some of its borrowers will need a loan modification at the end of their second loan payment deferral, which will be handled on a case-by-case basis. Loan payment deferrals for our high-risk industries totaled approximately $66 million, or 1.5% of the total loan portfolio excluding PPP loans.December 31, 2020.

In the third quarterfirst half of 2020,2021, we continued our stepped-up credit assessment and monitoring as well as our outreach to our customers. Criticized loans increaseddeclined by $34$49.2 million from the previous quarterDecember 31, 2020 to $196.8$143.1 million, or 4.4%3.1% of the total loan portfolio excluding PPP loans. Special mention loans increaseddeclined by $33$41.6 million to $148.8$100.9 million, or 3.3%2.2% of the total loan portfolio excluding PPP loans. Classified loans increaseddeclined by $1.5$7.6 million to $48.0$42.2 million, or 1.1%0.9% of the total loan portfolio excluding PPP loans. The loan downgradesimprovements were the result of our continued assessment of borrower risk based on the borrower’s performance near-term strategy and outlook, management strength and actions they’ve taken, overall financial condition, and external funding and deferral support.outlook. Approximately 12%21% of special mention balances and 5%7% of classified balances also received PPP loans.

The Company believes that the residential, home equity and commercial real estate and construction loan portfolios are lower risk. The weighted average loan-to-values at origination in these portfolios are 62%, 63%, and 61%, respectively, and we believe they will be less impacted by the pandemic. These loans comprise of approximately $3.5 billion or 77% of our total loan portfolio, net of PPP loans. Overall, the Company's loan portfolio remains well diversified.

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.

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.

Following the solid performances of our leading economic indicators in 2019, Hawaii's economy was greatly impacted by the COVID-19 pandemic in 2020. Hawaii's visitor industry continues to be impacted by the COVID-19 pandemic, however the state is making progress towards economic recovery as travel restrictions have started to loosen.

According to preliminary statistics from the Hawaii tourism startedTourism Authority ("HTA"), a total of 883,063 visitors arrived by air service to the year strong with solid growthHawaiian Islands in June 2021, mainly from the U.S. West and U.S. East. In comparison, only 43,587 visitors arrived by air in June 2020 due to the global COVID-19 pandemic and Hawaii’s quarantine requirement for travelers. Total spending for visitors arriving in May 2021 was $1.10 billion. There is no comparative visitor spending data available for May 2020. Prior to the pandemic, Hawaii experienced record-level visitor expenditures and arrivals in 2019 and spending in the first two months of 2020. However, the COVID-19 outbreak has impacted Hawaii’s tourism significantly since late February. TotalWhen compared to 2019, visitor arrivals in the eight months ended August 31, 2020, decreased 65.1%June 2021 were down 17.6% from the same prior year period. The mandated 14-day self-quarantine for arrivingJune 2019 count of 1,071,205 visitors (air and residents began on March 26, 2020. During April through August, total visitors werecruise), and visitor spending was down approximately 98.3%22.2% from the same year-ago period.$1.41 billion spent in May 2019.

A few airlines have announced temporary suspensionAccording to projections provided by the Hawaii Department of flightsBusiness Economic Development and Tourism ("DBEDT") in late May 2021, total visitor arrivals are expected to international destinations. Many hotels throughout the state continueincrease to remain temporarily closed. Many shopping centers are still on reduced hours. However, some restaurants are now open for dine-in service, take-out, curbside pick-up and delivery.

approximately 6.6 million visitors in 2021, an increase of
5753

The full144.4% from the 2020 level. Visitor arrivals are projected to increase to 8.6 million in 2022, 9.5 million in 2023, and 10.1 million in 2024. Visitor spending is expected to increase to approximately $11.13 billion in 2021.

Recent statistics provided by DBEDT indicate the tourism industry may be rebounding quicker than initially expected with visitor arrivals exceeding 30,000 per day in July 2021, or partial shutdownapproximately 90% of pre-pandemic levels. We believe tourism restaurant, and retail industries has significantly impacted employmentgains will further increase in the state. second half of 2021 as vaccinations continue to increase and travel restrictions continue to loosen.

The Hawai‘i State Department of Labor &and Industrial Relations ("DLIR") announcedreported that Hawaii's seasonally adjusted annual unemployment rate was 7.7% in the month of June 2021. The unemployment rate of 7.7% in June 2021 ranked highest in the nation, above the national seasonally adjusted unemployment rate for September was 15.1%of 5.9% but has significantly improved compared to a peakhigh of 23.8% in April. The significant decrease21.9% in the months of April and May 2020. DBEDT projects Hawaii's seasonally adjusted annual unemployment rate mayto be due to PPP funds and other government stimulus programs. There is still potential for an increasearound 7.7% in the unemployment rate in future months. Statewide, 520,200 were employed and 92,550 unemployed in September for a total seasonally adjusted labor force of 612,750. Nationally, the seasonally adjusted unemployment rate was 7.9% in September, down from 14.7% in April.2021.

Oahu home sales started the year strong with healthy year-over-year increases in closed sales of single-family homes and condominiums during the first quarter of 2020; however as expected, home sales slowed during the second and third quarters of 2020 due to the challenges presented by COVID-19. According to the latest data available from the Honolulu Board of Realtors, Oahu unit sales volume decreased by 1.4% forof Oahu single-family homes and 18.9% for condominiums forsaw significant double-digit growth compared to a year-ago. In the ninesix months ended SeptemberJune 30, 2020, compared2021, sales of single family homes and condominiums are up 32.9% and 70.7%, respectively. For single-family homes, the median days on market declined to eight in the same time period last year. While home sale volumes slowed, sale prices remained very strong in Hawaii. For the ninesix months ended SeptemberJune 30, 2020, the median sales price for single-family homes on Oahu was $811,000, representing a 3.3% increase2021 from $785,00021 in the same prior year ago period. For condominiums, the median days on market declined to 13 in the six months ended June 30, 2021 from 31 in the same year ago period. The median sales price for condominiums on Oahua single-family home in June 2021 set a new record high of $979,000, representing a 27.1% year-over-year increase. The median price for the nine months ended September 30, 2020 was $430,000, representing an increase of 1.2% from $425,000a condominium increased by 9.1% to $460,000, compared to $421,500 in the same prior year period.June 2020.

RISE2020

Commencing in the second quarter of 2019, the Company launched RISE2020, a 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 premier 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 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 Company's revitalization of its building headquarters is in full steam with major parts of the construction underway and on track for an opening date of January 2021. Digital strategies continue to push forward. After significant development, the Company's new online and mobile banking platforms for its retail customers launched in August 2020. Digital technology is even more critical to businesses during crises like the current pandemic and will remain a high priority strategy for the Company's future. The rollout of newly upgraded ATMs continueswas completed in the fourth quarter of 2020. Despite several challenges resulting from the impact of the COVID-19 pandemic, the Company completed its RISE2020 initiative culminating with the grand opening of the fully renovated Central Pacific Plaza headquarters building and is nearly 90% complete. The Company continues to see a decline inflagship main branch, transaction activity offset by strong increases in customer on-line transaction activity and believes its digital initiatives have been well-timed to meet the changing needs of its customers and the community.launch of a new brand design in early January 2021.

Results of Operations

Net Interest Income

Net interest income, when annualized and expressed as a percentage of average interest earning assets, is referred to as "net interest margin." Interest income, which includes loan fees and resultant yield information, is expressed on a taxable equivalent basis using a federal statutory tax rate of 21% for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019.2020. A comparison of net interest income on a taxable-equivalent basis ("net interest income") for the three and ninesix months ended SeptemberJune 30, 20202021 and 20192020 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.

5854

(dollars in thousands)Three Months Ended September 30,
20202019Variance
Average
Balance		Average
Yield/
Rate		Interest
Income/
Expense		Average
Balance		Average
Yield/
Rate		Interest
Income/
Expense		Average
Balance		Average
Yield/
Rate		Interest
Income/
Expense
Assets     
Interest earning assets: 
Interest-bearing deposits in other banks$12,262 0.09 %3 $6,295 2.05 %33 $5,967 (1.96)%(30)
Investment securities, excluding ACL:
Taxable (1)1,029,987 2.04 5,250 1,093,352 2.63 7,192 (63,365)(0.59)(1,942)
Tax-exempt (1)88,749 3.54 786 117,784 3.04 896 (29,035)0.50 (110)
Total investment securities1,118,736 2.16 6,036 1,211,136 2.67 8,088 (92,400)(0.51)(2,052)
Loans, including loans held for sale (2)5,016,955 3.64 45,751 4,293,455 4.25 45,861 723,500 (0.61)(110)
Federal Home Loan Bank stock12,428 4.12 128 16,646 4.46 186 (4,218)(0.34)(58)
Total interest earning assets6,160,381 3.36 51,918 5,527,532 3.90 54,168 632,849 (0.54)(2,250)
Noninterest-earning assets414,111   379,675   34,436  
Total assets$6,574,492   $5,907,207   $667,285  
Liabilities and Equity
Interest-bearing liabilities:         
Interest-bearing demand deposits$1,092,976 0.04 %115 $1,002,875 0.08 %207 $90,101 (0.04)%(92)
Savings and money market deposits1,910,971 0.09 417 1,582,795 0.39 1,549 328,176 (0.30)(1,132)
Time deposits under $100,000160,634 0.57 232 167,331 0.69 293 (6,697)(0.12)(61)
Time deposits $100,000 and over769,030 0.54 1,052 874,192 1.88 4,139 (105,162)(1.34)(3,087)
Total interest-bearing deposits3,933,611 0.18 1,816 3,627,193 0.68 6,188 306,418 (0.50)(4,372)
Short-term borrowings79,984 0.35 71 191,564 2.34 1,130 (111,580)(1.99)(1,059)
Long-term debt105,131 2.82 746 101,547 3.96 1,013 3,584 (1.14)(267)
Total interest-bearing liabilities4,118,726 0.25 2,633 3,920,304 0.84 8,331 198,422 (0.59)(5,698)
Noninterest-bearing deposits1,794,536  1,360,221  434,315 
Other liabilities111,851   102,599   9,252  
Total liabilities6,025,113   5,383,124   641,989  
Shareholders’ equity549,378   524,083   25,295  
Non-controlling interest1   —   1  
Total equity549,379   524,083   25,296  
Total liabilities and equity$6,574,492   $5,907,207   $667,285  
Net interest income  $49,285   $45,837   $3,448 
Interest rate spread3.11 %3.06 %0.05 %
Net interest margin 3.19 %  3.30 %  (0.11)% 
(1)  At amortized cost.
(2)  Includes nonaccrual loans.

(dollars in thousands)Three Months Ended June 30,
20212020Variance
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$222,934 0.11 %61 $15,777 0.10 %3 $207,157 0.01 %58 
Investment securities, excluding ACL:
Taxable (1)1,172,183 1.52 4,465 1,042,441 2.43 6,327 129,742 (0.91)(1,862)
Tax-exempt (1)92,702 1.89 438 100,485 3.02 758 (7,783)(1.13)(320)
Total investment securities1,264,885 1.55 4,903 1,142,926 2.48 7,085 121,959 (0.93)(2,182)
Loans, including loans held for sale (2)5,110,820 3.84 49,024 4,902,905 3.76 45,915 207,915 0.08 3,109 
Federal Home Loan Bank stock8,140 3.11 63 11,753 3.62 106 (3,613)(0.51)(43)
Total interest earning assets6,606,779 3.28 54,051 6,073,361 3.51 53,109 533,418 (0.23)942 
Noninterest-earning assets433,149   394,768   38,381  
Total assets$7,039,928   $6,468,129   $571,799  
Liabilities and Equity
Interest-bearing liabilities:         
Interest-bearing demand deposits$1,269,676 0.03 %93 $1,056,885 0.04 %114 $212,791 (0.01)%(21)
Savings and money market deposits2,028,583 0.06 282 1,856,621 0.12 567 171,962 (0.06)(285)
Time deposits up to $250,000231,922 0.34 196 260,319 0.81 525 (28,397)(0.47)(329)
Time deposits over $250,000617,745 0.20 302 708,831 0.91 1,599 (91,086)(0.71)(1,297)
Total interest-bearing deposits4,147,926 0.08 873 3,882,656 0.29 2,805 265,270 (0.21)(1,932)
Federal Home Loan Bank advances and other short-term borrowings— — — 63,104 0.48 74 (63,104)(0.48)(74)
Long-term debt105,456 3.90 1,025 136,939 2.38 812 (31,483)1.52 213 
Total interest-bearing liabilities4,253,382 0.18 1,898 4,082,699 0.36 3,691 170,683 (0.18)(1,793)
Noninterest-bearing deposits2,121,590  1,731,939  389,651 
Other liabilities112,852   112,687   165  
Total liabilities6,487,824   5,927,325   560,499  
Shareholders’ equity552,102   540,802   11,300  
Non-controlling interest2   2   —  
Total equity552,104   540,804   11,300  
Total liabilities and equity$7,039,928   $6,468,129   $571,799  
Net interest income  $52,153   $49,418   $2,735 
Interest rate spread3.10 %3.15 %(0.05)%
Net interest margin 3.16 %  3.26 %  (0.10)% 
(1)  At amortized cost.
(2)  Includes nonaccrual loans.
5955

(dollars in thousands)Nine Months Ended September 30,
20202019Variance
Average
Balance		Average
Yield/
Rate		Interest
Income/
Expense		Average
Balance		Average
Yield/
Rate		Interest
Income/
Expense		Average
Balance		Average
Yield/
Rate		Interest
Income/
Expense
Assets     
Interest earning assets:   
Interest-bearing deposits in other banks$13,038 0.43 %42 $8,540 2.30 %147 $4,498 (1.87)%(105)
Investment securities, excluding ACL:
Taxable investment securities (1)1,033,362 2.37 18,351 1,147,217 2.67 23,014 (113,855)(0.30)(4,663)
Tax-exempt investment securities (1)98,153 3.25 2,390 137,750 2.93 3,023 (39,597)0.32 (633)
Total investment securities1,131,515 2.44 20,741 1,284,967 2.70 26,037 (153,452)(0.26)(5,296)
Loans, including loans held for sale (2)4,794,883 3.84 137,870 4,183,703 4.32 135,169 611,180 (0.48)2,701 
Federal Home Loan Bank stock12,921 3.78 366 15,650 4.33 508 (2,729)(0.55)(142)
Total interest earning assets5,952,357 3.57 159,019 5,492,860 3.94 161,861 459,497 (0.37)(2,842)
Noninterest-earning assets398,339   365,364   32,975  
Total assets$6,350,696   $5,858,224   $492,472  
Liabilities and Equity      
Interest-bearing liabilities:         
Interest-bearing demand deposits$1,054,692 0.05 %405 $972,316 0.08 %598 $82,376 (0.03)%(193)
Savings and money market deposits1,806,829 0.16 2,102 1,544,759 0.33 3,847 262,070 (0.17)(1,745)
Time deposits under $100,000162,255 0.64 777 172,204 0.69 884 (9,949)(0.05)(107)
Time deposits $100,000 and over807,346 0.98 5,899 921,003 1.96 13,507 (113,657)(0.98)(7,608)
Total interest-bearing deposits3,831,122 0.32 9,183 3,610,282 0.70 18,836 220,840 (0.38)(9,653)
Short-term borrowings94,248 0.93 653 168,350 2.50 3,146 (74,102)(1.57)(2,493)
Long-term debt114,504 2.88 2,472 101,547 4.09 3,104 12,957 (1.21)(632)
Total interest-bearing liabilities4,039,874 0.41 12,308 3,880,179 0.86 25,086 159,695 (0.45)(12,778)
Noninterest-bearing deposits1,657,825  1,370,972   286,853 
Other liabilities110,669   99,143   11,526  
Total liabilities5,808,368   5,350,294   458,074  
Shareholders’ equity542,326   507,930   34,396  
Non-controlling interest2   —   2  
Total equity542,328   507,930   34,398  
Total liabilities and equity$6,350,696   $5,858,224   $492,472  
Net interest income  $146,711   $136,775   $9,936 
Interest rate spread3.16 %3.08 %0.08 %
Net interest margin 3.29 %  3.32 %  (0.03)% 
(1)  At amortized cost.
(2)  Includes nonaccrual loans.
Three Months Ended June 30, 2021 Compared To Three Months Ended June 30, 2020
Increase (Decrease) Due to Change In:
(dollars in thousands)VolumeRateNet Change
Interest earning assets:
Interest-bearing deposits in other banks$52 $6 $58 
Investment securities, excluding ACL:
Taxable (1)792 (2,654)(1,862)
Tax-exempt (1)(59)(261)(320)
Total investment securities733 (2,915)(2,182)
Loans, including loans held for sale (2)2,041 1,068 3,109 
Federal Home Loan Bank stock(33)(10)(43)
Total interest earning assets2,793 (1,851)942 
Interest-bearing liabilities:
Interest-bearing demand deposits17 (38)(21)
Savings and money market deposits47 (332)(285)
Time deposits up to $250,000(58)(271)(329)
Time deposits over $250,000(206)(1,091)(1,297)
Total interest-bearing deposits(200)(1,732)(1,932)
Federal Home Loan Bank advances and other short-term borrowings(74)— (74)
Long-term debt(186)399 213 
Total interest-bearing liabilities(460)(1,333)(1,793)
Net interest income$3,253 $(518)$2,735 

56

(dollars in thousands)Six Months Ended June 30,
20212020Variance
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$133,684 0.11 %71 $13,430 0.59 %39 $120,254 (0.48)%32 
Investment securities, excluding ACL:
Taxable investment securities (1)1,126,978 1.70 9,589 1,035,068 2.53 13,101 91,910 (0.83)(3,512)
Tax-exempt investment securities (1)93,181 2.34 1,089 102,907 3.12 1,604 (9,726)(0.78)(515)
Total investment securities1,220,159 1.75 10,678 1,137,975 2.58 14,705 82,184 (0.83)(4,027)
Loans, including loans held for sale (2)5,095,433 3.75 95,098 4,682,626 3.95 92,119 412,807 (0.20)2,979 
Federal Home Loan Bank stock7,839 3.12 122 13,171 3.61 238 (5,332)(0.49)(116)
Total interest earning assets6,457,115 3.30 105,969 5,847,202 3.67 107,101 609,913 (0.37)(1,132)
Noninterest-earning assets433,080 390,390 42,690 
Total assets$6,890,195 $6,237,592 $652,603 
Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits$1,228,548 0.03 %179 $1,035,340 0.06 %290 $193,208 (0.03)%(111)
Savings and money market deposits2,000,845 0.06 556 1,754,186 0.19 1,685 246,659 (0.13)(1,129)
Time deposits up to $250,000234,361 0.38 437 163,074 1.38 1,116 71,287 (1.00)(679)
Time deposits over $250,000637,266 0.21 649 826,714 1.04 4,276 (189,448)(0.83)(3,627)
Total interest-bearing deposits4,101,020 0.09 1,821 3,779,314 0.39 7,367 321,706 (0.30)(5,546)
Federal Home Loan Bank advances and other short-term borrowings1,221 0.30 2 101,459 1.15 582 (100,238)(0.85)(580)
Long-term debt105,429 3.93 2,052 119,243 2.91 1,726 (13,814)1.02 326 
Total interest-bearing liabilities4,207,670 0.19 3,875 4,000,016 0.49 9,675 207,654 (0.30)(5,800)
Noninterest-bearing deposits2,013,955 1,588,742 425,213 
Other liabilities116,529 110,070 6,459 
Total liabilities6,338,154 5,698,828 639,326 
Shareholders’ equity552,039 538,762 13,277 
Non-controlling interest2 2 — 
Total equity552,041 538,764 13,277 
Total liabilities and equity$6,890,195 $6,237,592 $652,603 
Net interest income$102,094 $97,426 $4,668 
Interest rate spread3.11 %3.18 %(0.07)%
Net interest margin3.18 %3.34 %(0.16)%
(1)  At amortized cost.
(2)  Includes nonaccrual loans.

57

Six Months Ended June 30, 2021 Compared To Six Months Ended June 30, 2020
Increase (Decrease) Due to Change In:
(dollars in thousands)VolumeRateNet Change
Interest earning assets:
Interest-bearing deposits in other banks$354 $(322)$32 
Investment securities, excluding ACL:
Taxable investment securities (1)1,163 (4,675)(3,512)
Tax-exempt investment securities (1)(152)(363)(515)
Total investment securities1,011 (5,038)(4,027)
Loans, including loans held for sale (2)8,104 (5,125)2,979 
Federal Home Loan Bank stock(97)(19)(116)
Total interest earning assets9,372 (10,504)(1,132)
Interest-bearing liabilities:
Interest-bearing demand deposits62 (173)(111)
Savings and money market deposits225 (1,354)(1,129)
Time deposits up to $250,000492 (1,171)(679)
Time deposits over $250,000(984)(2,643)(3,627)
Total interest-bearing deposits(205)(5,341)(5,546)
Federal Home Loan Bank advances and other short-term borrowings(575)(5)(580)
Long-term debt(204)530 326 
Total interest-bearing liabilities(984)(4,816)(5,800)
Net interest income$10,356 $(5,688)$4,668 

Net interest income (expressed on a taxable-equivalent basis) was $49.3$52.2 million for the third quarter of 2020,three months ended June 30, 2021, representing an increase of 7.5%5.5% from $45.8$49.4 million in the year-ago quarter.three months ended June 30, 2020. Net interest income (expressed on a taxable-equivalent basis) was $146.7$102.1 million for the ninesix months ended SeptemberJune 30, 2020,2021, representing an increase of 7.3%4.8% from $136.8$97.4 million in the ninesix months ended SeptemberJune 30, 2019.2020. The increase in the three and ninesix months ended SeptemberJune 30, 20202021 was primarily due to the recognition of net loan growth, includingfees related to loans originated and forgiven under the SBA Paycheck Protection Program ("PPP"), combined with lower rates paid on interest-bearing liabilities. These increases were partially offset by decreases in yields earned on interest-earning assets.

Net interest income for the three and ninesix months ended SeptemberJune 30, 20202021 included $3.4$7.9 million and $5.9$13.1 million, respectively, 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. NoDuring the three and six months ended June 30, 2021, approximately$195.8 million and $296.5 million, respectively, in PPP loans were forgiven duringforgiven. During the three and ninesix months ended SeptemberJune 30, 2020.2021, the Company had an average PPP loan balance of $553.0 million and $540.0 million, respectively, which earned approximately 5.75% and 4.90%, respectively, in net interest income and net loan fees. The decreases in yields earned on interest-earning assets and rates paid on interest-bearing liabilities were primarily attributable to
60

the fivehistorically low interest rate cuts by the Federal Reserve from August 2019 through March 2020. During the three and nine months ended September 30, 2020, the Company had an average PPP loan balance of $544.7 million and $309.1 million, respectively, which earned approximately 2.48% and 2.53%, respectively,environment we are operating in net interest income and net loan fees.during this pandemic environment.

Interest Income

Taxable-equivalent interest income was $51.9$54.1 million for the thirdsecond quarter of 2020,2021, representing a decreasean increase of 4.2%1.8% from $54.2$53.1 million in the year-ago quarter. The 61 bp decrease in the average yields earned on loans and investment securities balances increased by $207.9 million and $122.0 million, respectively, during the thirdsecond quarter of 2020,2021, compared to the year-ago quarter, decreasedwhich increased interest income by approximately $7.7 million. In addition, run-off of the investment securities portfolio of $92.4$2.0 million combined with the 51 bp decline in yields earned on investment securities during the third quarter of 2020, compared to the year-ago quarter, decreased interest income by approximately $2.1 million. These decreases were partially offset by a $723.5and $0.7 million, increase in average loans during the third quarter of 2020, compared to the year-ago quarter, accounting for an increase of approximately $7.6 million in interest income during the third quarter of 2020.respectively. The significant increase in average loans was primarily attributable to the origination of the aforementioned PPP loans.

Taxable-equivalent interest income was $159.0 million for In addition, the nine months ended September 30, 2020, representing a decrease of 1.8% from $161.9 million in the nine months ended September 30, 2019. The 488 bp decreaseincrease in the average yields earned on loans during the nine months ended September 30, 2020,second quarter of 2021, compared to the same prior year period, decreasedyear-ago quarter, increased interest income by approximately $17.2$1.1 million. In addition, run-off ofThese increases were partially offset by a 93 bp decrease in the investment securities portfolio of $153.5 million, combined with the 26 bp decline inaverage yields earned on investment securities during the nine months ended September 30, 2020,second quarter of 2021, compared to the same prior year period,year-ago quarter, which decreased interest income by approximately $5.3$2.9 million.

Taxable-equivalent interest income was $106.0 million for the six months ended June 30, 2021, representing a decrease of 1.1% from $107.1 million in the same year-ago period. The average yields earned on loans and investment securities decreased by 20
58

bp and 83 bp, respectively, during the six months ended June 30, 2021, compared to the same year-ago period, which decreased interest income by $5.1 million and $5.0 million, respectively. These decreases were partially offset by a $611.2 million increaseincreases in average loans and investment securities balances of $412.8 million and $82.2 million, respectively, during the six months ended June 30, 2021, compared to the nine months ended September 30, 2019, accounting for an increase of approximately $19.9 million insame year-ago period, which increased interest income during the nine months ended September 30, 2020.by approximately $8.1 million and $1.0 million, respectively.

Interest Expense

Interest expense for the thirdsecond quarter of 20202021 was $2.6$1.9 million, representing a decrease of 68.4%48.6% from $8.3$3.7 million in the year-ago quarter. The decrease was primarily attributable to declines in rates paid on deposits, combined with improved deposit composition as noninterest-bearing deposits and lower-cost interest-bearing demand and savings and money market deposits increased significantly from the year-ago quarter. Rates paid on savings and money market deposits and time deposits $100,000up to and over short-term borrowings and long-term debt of 30$250,000 declined by 6 bp, 134 bp, 19947 bp and 11471 bp, respectively, which decreased interest expense by approximately $1.4$0.3 million, $2.6 million, $0.4$0.3 million, and $0.3 million, respectively. In addition, average time deposits $100,000 and over and short-term borrowings declined by $105.2 million and $111.6 million resulting in a decrease in interest expense of approximately $0.5 million and $0.7$1.1 million, respectively. Time deposits $100,000 and over $250,000 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 ninesix months ended SeptemberJune 30, 20202021 was $12.3$3.9 million, representing a decrease of 50.9%59.9% from $25.1$9.7 million in the nine months ended September 30, 2019.same year-ago period. The decrease was primarily attributable to declines in rates paid on deposits, combined with improved deposit composition as noninterest-bearing deposits and lower-cost interest-bearing demand and savings and money market deposits increased significantly from the same year-ago period. Rates paid on savings and money market deposits and time deposits $100,000up to and over short-term borrowings and long-term debt of 17$250,000 declined by 13 bp, 98 bp, 157100 bp and 12183 bp, respectively, which decreased interest expense by approximately $2.4$1.4 million, $5.9 million, $1.1$1.2 million, and $1.0$2.6 million, respectively. In addition, average time deposits $100,000over $250,000 and overFederal Home Loan Bank advances and other short-term borrowings declineddecreased by $113.7$189.4 million and $74.1$100.2 million, respectively, resulting in a decrease inwhich reduced interest expense ofby approximately $1.7$1.0 million and $1.4$0.6 million, respectively.

Net Interest Margin

Our net interest margin of 3.19%3.16% for the thirdsecond quarter of 20202021 decreased by 1110 bp from 3.30%3.26% in the year-ago quarter. Our net interest margin of 3.18% for the six months ended June 30, 2021 decreased by 16 bp from 3.34% in the same year-ago period.

The declineAs previously discussed, the declines in net interest margin for the thirdsecond quarter of 20202021 and six months ended June 30, 2021 compared to the same year-ago quarter isperiods are primarily due to lower yielding PPP loans and lower yields earned on average loans and investment securities, partiallyinterest-earning assets, offset by lower rates paid on interest-bearing liabilities, primarily attributable to the fivehistorically low interest rate cuts byenvironment we are currently operating in since the Federal Reserve from August 2019 through March 2020.beginning of the COVID-19 pandemic.

Our net interest margin of 3.29% for the nine months ended September 30, 2020 decreased by 3 bp from 3.32% in the nine months ended September 30, 2019.

The average rates paid on our interest-bearing liabilities, which declined by 45 bp in the nine months ended September 30, 2020, compared to the same prior year period, outpaced the decline in average yields earned on our interest-earning assets, which declined by 37 bp in the nine months ended September 30, 2020, compared to the same prior year period.

61

Provision for Credit Losses

OurIn the three months ended June 30, 2021, our provision for credit losses was a credit of $3.4 million, which consisted of a credit to the provision for credit losses on loans under ASC 326 was $14.5of $3.0 million, and $34.4 million duringa credit to the three and nine months ended September 30, 2020, respectively, compared to an expense of $1.5 million and $4.2 million in the three and nine months ended September 30, 2019, respectively, under previous GAAP. During the third quarter of 2020, the Company elected to measure a reserveprovision for credit losses on the accrued interest receivable for loans on active payment forbearance or deferral. A reserve of $0.2 million, was recorded against accrued interest receivable withand a credit to the offset recorded to provision for credit losses.

In addition, we recorded a provision forlosses on off-balance sheet credit exposures of $0.2 million and $2.6 million, included in other operating expense, duringmillion. In the three and nine months ended SeptemberJune 30, 2020, respectively, comparedour provision for credit loss was a debit of $11.2 million, which consisted of a debit to athe provision for credit losses on loans of $0.5$10.6 million and a provision of $0.2 million indebit to the three and nine months ended September 30, 2019, respectively, under previous GAAP. The increases in the provisionsprovision for credit losses andon off-balance sheet credit exposures fromof $0.6 million.

In the same prior yearsix months ended June 30, 2021, our provision for credit losses was a credit of $4.3 million, which consisted of a credit to the provision for credit losses on loans of $3.9 million, a credit to the provision for credit losses on accrued interest receivable of $0.3 million, and a credit to the provision for credit losses on off-balance sheet credit exposures of $0.1 million. In the six months ended June 30, 2020, our provision for credit loss was a debit of $22.3 million, which consisted of a debit to the provision for credit losses on loans of $20.0 million and a debit to the provision for credit losses on off-balance sheet credit exposures of $2.4 million.

The provision for credit losses in the year-ago periods were primarily due to adverse economic conditions brought on by the COVID-19 pandemic, while the credits to the provision for credit losses in the current year were primarily due to improved economic forecasts and positive migration of loan grades as the State of Hawaii begins to recover from the pandemic.

We did not record a provision for credit losses on investment securities under ASC 326 during the three and ninesix months ended SeptemberJune 30, 2021 and June 30, 2020.

59

Our net charge-offs were $1.3$0.8 million during the thirdsecond quarter of 2020,2021, compared to net charge-offs of $1.6$2.9 million in the year-ago quarter. Our net charge-offs were $5.4$1.6 million during the ninesix months ended SeptemberJune 30, 2020,2021, compared to net charge-offs of $4.0$4.2 million in the nine months ended September 30, 2019.same year-ago period.

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)September 30, 2020September 30, 2019$ Change% Change(dollars in thousands)June 30, 2021June 30, 2020$ Change% Change
Other operating income:Other operating income:Other operating income:
Mortgage banking incomeMortgage banking income$4,345 $1,994 $2,351 117.9 %Mortgage banking income$1,533 $3,566 $(2,033)-57.0 %
Service charges on deposit accountsService charges on deposit accounts1,475 2,125 (650)-30.6 %Service charges on deposit accounts1,443 1,149 294 25.6 %
Other service charges and feesOther service charges and fees3,345 3,894 (549)-14.1 %Other service charges and fees4,619 2,916 1,703 58.4 %
Income from fiduciary activitiesIncome from fiduciary activities1,149 1,126 23 2.0 %Income from fiduciary activities1,269 1,270 (1)-0.1 %
Equity in earnings of unconsolidated subsidiaries104 86 18 20.9 %
Investment securities gains (losses)Investment securities gains (losses)(352)36 (388)-1,077.8 Investment securities gains (losses)50 — 50 N.M.
Income from bank-owned life insuranceIncome from bank-owned life insurance1,179 645 534 82.8 %Income from bank-owned life insurance1,210 1,424 (214)-15.0 %
Net gain (loss) on sales of foreclosed assets— 17 (17)-100.0 
Other:Other:  Other: 
Equity in earnings of unconsolidated subsidiariesEquity in earnings of unconsolidated subsidiaries79 104 (25)-24.0 %
Net gain (loss) on sales of foreclosed assetsNet gain (loss) on sales of foreclosed assets— (6)6 -100.0 %
Income recovered on nonaccrual loans previously charged-offIncome recovered on nonaccrual loans previously charged-off47 73 (26)-35.6 %Income recovered on nonaccrual loans previously charged-off37 37 — — %
Other recoveriesOther recoveries22 42 (20)-47.6 %Other recoveries16 26 (10)-38.5 %
Commissions on sale of checksCommissions on sale of checks73 75 (2)-2.7 %Commissions on sale of checks80 56 24 42.9 %
OtherOther176 153 23 15.0 %Other194 150 44 29.3 %
Total other operating incomeTotal other operating income$11,563 $10,266 $1,297 12.6 %Total other operating income$10,530 $10,692 $(162)-1.5 %
* Not meaningful ("N.M.")
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 third quarter of 2020,three months ended June 30, 2021, total other operating income of $11.6$10.5 million decreased by $0.2 million, or 1.5%, from $10.7 million in the year-ago quarter. The decrease from the year-ago quarter was primarily due to lower mortgage banking income of $2.0 million and lower income from bank-owned life insurance of $0.2 million in the second quarter of 2021. These decreases were partially offset by higher other service charges and fees of $1.7 million and higher service charges on deposit accounts of $0.3 million, resulting from higher transactional activity in the second quarter of 2021 as the State of Hawaii begins to recover from the pandemic.
60

 Six Months Ended
(dollars in thousands)June 30, 2021June 30, 2020$ Change% Change
Other operating income:
Mortgage banking income$4,503 $3,903 $600 15.4 %
Service charges on deposit accounts2,921 3,199 (278)-8.7 %
Other service charges and fees8,409 7,813 596 7.6 %
Income from fiduciary activities2,500 2,567 (67)-2.6 %
Investment securities gains (losses)50 — 50 N.M.
Income from bank-owned life insurance2,007 1,405 602 42.8 %
Other:  
Equity in earnings of unconsolidated subsidiaries186 130 56 43.1 %
Net gain (loss) on sales of foreclosed assets— (6)6 -100.0 %
Income recovered on nonaccrual loans previously charged-off72 60 12 20.0 %
Other recoveries44 66 (22)-33.3 %
Commissions on sale of checks157 137 20 14.6 %
Other392 304 88 28.9 %
Total other operating income$21,241 $19,578 $1,663 8.5 %
* 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.

For the six months ended June 30, 2021, total other operating income of $21.2 million increased by $1.3$1.7 million, or 12.6%8.5%, from $10.3$19.6 million in the year-ago quarter. The increase from the year-ago quarter was primarily due to higher mortgage banking income of $2.4$0.6 million, higher other service charges and fees of $0.6 million, and higher income from bank-owned life insurance of $0.5$0.6 million. The higher mortgage banking income was primarily attributable to lower amortization of mortgage servicing rights of $1.1 million, in the third quartercombined with higher loan placement fees of 2020. Strong residential mortgage demand enabled the Company to grow its residential mortgage portfolio and realize higher$0.9 million, partially offset by lower gains on sales of residential mortgage loans of $3.4 million (included in mortgage banking income), which was partially offset by higher amortization of mortgage servicing rights of $0.7 million (included in mortgage banking income), attributable to the decline in market interest rates.$1.6 million. The higher income from bank-owned life insurance was primarily attributable to gains in the equity markets during the third quarter of 2020. These increases were partially offset by lowermarkets. The higher other service charges and fees of $0.6 million was primarily due to higher transactional activity.

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$0.5 million and lower service charges on deposit accounts of $0.7 million resulting from lower transactional activity in the third quarter of 2020 due to the pandemic. Beginning July 1, 2020, certain service charges that were temporarily suspended in the previous quarter due to the pandemic were reinstated. The Company also sold certain investment securities during the third quarter of 2020 at a loss of $0.4 million.

 Nine Months Ended
(dollars in thousands)September 30, 2020September 30, 2019$ Change% Change
Other operating income:
Mortgage banking income$8,248 $5,275 $2,973 56.4 %
Service charges on deposit accounts4,674 6,247 (1,573)-25.2 %
Other service charges and fees11,158 11,018 140 1.3 %
Income from fiduciary activities3,716 3,220 496 15.4 %
Equity in earnings of unconsolidated subsidiaries234 165 69 41.8 %
Investment securities gains (losses)(352)36 (388)-1,077.8 
Income from bank-owned life insurance2,584 2,511 73 2.9 %
Net gain (loss) on sales of foreclosed assets(6)17 (23)-135.3 
Other:  
Income recovered on nonaccrual loans previously charged-off107 240 (133)-55.4 %
Other recoveries88 94 (6)-6.4 %
Commissions on sale of checks210 234 (24)-10.3 %
Gain on sale of MasterCard stock— 2,555 (2,555)-100.0 %
Other480 421 59 14.0 %
Total other operating income$31,141 $32,033 $(892)-2.8 %
Note: Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period.

For the nine months ended September 30, 2020, total other operating income of $31.1 million decreased by $0.9 million, or 2.8%, from $32.0 million in the nine months ended September 30, 2019. The decrease from the same prior year period was primarily due to a $2.6 million gain on sale of MasterCard stock (included in other) recognized in the nine months ended September 30, 2019, combined with lower service charges on deposit accounts of $1.6 million and the aforementioned loss on sale of investment securities of $0.4 million. As previously noted, certain service charges were temporarily suspended in the second quarter of 2020 to support our customers through the pandemic and there has been lower transactional activity during the second and third quarters of 2020 due to the pandemic resulting in lower service charges on deposit accounts. These decreases were partially offset by higher mortgage banking income of $3.0 million and higher income from fiduciary activities of $0.5 million. Other service charges and fees in the nine months ended September 30, 2020 includes $1.2 million in net income related to an interest rate swap initially recognized in the first quarter of 2020.
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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)September 30, 2020September 30, 2019$ Change% Change(dollars in thousands)June 30, 2021June 30, 2020$ Change% Change
Other operating expense:Other operating expense:Other operating expense:
Salaries and employee benefitsSalaries and employee benefits$20,729 $20,631 $98 0.5 %Salaries and employee benefits$23,790 $20,329 $3,461 17.0 %
Net occupancyNet occupancy3,834 3,697 137 3.7 %Net occupancy4,055 3,645 410 11.2 %
EquipmentEquipment1,234 1,067 167 15.7 %Equipment1,048 1,043 5 0.5 %
Communication expenseCommunication expense856 1,008 (152)-15.1 %Communication expense756 774 (18)-2.3 %
Legal and professional servicesLegal and professional services2,262 1,933 329 17.0 %Legal and professional services2,572 2,238 334 14.9 %
Computer software expenseComputer software expense3,114 2,713 401 14.8 %Computer software expense3,398 3,035 363 12.0 %
Advertising expenseAdvertising expense1,020 711 309 43.5 %Advertising expense1,329 923 406 44.0 %
Foreclosed asset expense6 15 (9)-60.0 %
Other:Other:  Other:  
Pension and SERP expensePension and SERP expense380 293 87 29.7 %
Foreclosed asset expenseForeclosed asset expense— — — N.M.
Charitable contributionsCharitable contributions12 230 (218)-94.8 %Charitable contributions51 10 41 410.0 %
FDIC insurance assessmentFDIC insurance assessment649 5 644 12,880.0 %FDIC insurance assessment502 475 27 5.7 %
Miscellaneous loan expensesMiscellaneous loan expenses497 274 223 81.4 %Miscellaneous loan expenses379 399 (20)-5.0 %
ATM and debit card expensesATM and debit card expenses573 660 (87)-13.2 %ATM and debit card expenses1,103 584 519 88.9 %
Armored car expensesArmored car expenses192 220 (28)-12.7 %Armored car expenses257 229 28 12.2 %
Entertainment and promotionsEntertainment and promotions132 323 (191)-59.1 %Entertainment and promotions207 165 42 25.5 %
Stationery and suppliesStationery and supplies226 240 (14)-5.8 %Stationery and supplies214 220 (6)-2.7 %
Directors’ fees and expensesDirectors’ fees and expenses213 242 (29)-12.0 %Directors’ fees and expenses132 196 (64)-32.7 %
Directors' deferred compensation plan expenseDirectors' deferred compensation plan expense(237)(155)(82)52.9 %Directors' deferred compensation plan expense100 103 (3)-2.9 %
Provision for off-balance sheet credit exposures221 (465)686 -147.5 %
Branch consolidation costs321 — 321 N.M.
Loss on disposal of fixed assetsLoss on disposal of fixed assets4 — 4 N.M.
OtherOther1,118 1,585 (467)-29.5 %Other1,156 1,193 (37)-3.1 %
Total other operating expenseTotal other operating expense$36,972 $34,934 $2,038 5.8 %Total other operating expense$41,433 $35,854 $5,579 15.6 %
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 third quarter of 2020,three months ended June 30, 2021, total other operating expense was $37.0$41.4 million and increased by $2.0$5.6 million, or 5.8%15.6%, from $34.9$35.9 million in the year-ago quarter. The increase was primarily due to higher FDIC insurance assessmentsalaries and employee benefits of $0.6$3.5 million, attributable to Small Bank Assessment Credits received in the second halfhigher ATM and debit card expenses of 2019,$0.5 million, and higher net occupancy, computer software expense and advertising expense of $0.4 million each. The higher salaries and employee benefits are primarily due to annual merit increases effective April 1, higher base salaries due to strategic hires, higher commissions and incentives, and higher legal and professional services and advertising expense of $0.3 million each. In addition, the Company recorded a provision for off-balance sheet credit exposures of $0.2 millionICP accruals in the third quartercurrent quarter. The higher ATM and debit card expenses are primarily due to the issuance of 2020, comparednew contactless ATM and debit cards to a credit for off-balance sheet credit exposures of $0.5our cardholders.
62

 Six Months Ended
(dollars in thousands)June 30, 2021June 30, 2020$ Change% Change
Other operating expense:
Salaries and employee benefits$43,617 $40,383 $3,234 8.0 %
Net occupancy7,819 7,317 502 6.9 %
Equipment2,048 2,140 (92)-4.3 %
Communication expense1,525 1,611 (86)-5.3 %
Legal and professional services4,949 4,266 683 16.0 %
Computer software expense7,181 5,978 1,203 20.1 %
Advertising expense2,987 2,015 972 48.2 %
Other:  
Pension and SERP expense627 586 41 7.0 %
Foreclosed asset expense3 67 (64)-95.5 %
Charitable contributions72 197 (125)-63.5 %
FDIC insurance assessment942 475 467 98.3 %
Miscellaneous loan expenses749 699 50 7.2 %
ATM and debit card expenses1,768 1,218 550 45.2 %
Armored car expenses449 523 (74)-14.1 %
Entertainment and promotions406 445 (39)-8.8 %
Stationery and supplies427 468 (41)-8.8 %
Directors’ fees and expenses349 437 (88)-20.1 %
Directors’ deferred compensation plan expense1,002 (1,380)2,382 -172.6 %
Loss on disposal of fixed assets36 — 36 N.M.
Other2,323 2,851 (528)-18.5 %
Total other operating expense$79,279 $70,296 $8,983 12.8 %
Note: Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period.
For the six months ended June 30, 2021, total other operating expense was $79.3 million and increased by $9.0 million, or 12.8%, from $70.3 million in the year-ago quarter. The Company also recognized costs related to the consolidation of three in-store branches during the third quarter of 2020 totaling $0.3 million (included in other). These in-store branches had a small square footage which did not allow for adequate social distancing.


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 Nine Months Ended
(dollars in thousands)September 30, 2020September 30, 2019$ Change% Change
Other operating expense:
Salaries and employee benefits$61,698 $61,083 $615 1.0 %
Net occupancy11,151 10,680 471 4.4 %
Equipment3,374 3,211 163 5.1 %
Communication expense2,467 2,645 (178)-6.7 %
Legal and professional services6,528 5,231 1,297 24.8 %
Computer software expense9,092 7,870 1,222 15.5 %
Advertising expense3,035 2,134 901 42.2 %
Foreclosed asset expense73 223 (150)-67.3 %
Other:  
Charitable contributions209 559 (350)-62.6 %
FDIC insurance assessment1,124 868 256 29.5 %
Miscellaneous loan expenses1,196 885 311 35.1 %
ATM and debit card expenses1,791 1,930 (139)-7.2 %
Armored car expenses715 629 86 13.7 %
Entertainment and promotions577 1,576 (999)-63.4 %
Stationery and supplies694 744 (50)-6.7 %
Directors’ fees and expenses650 722 (72)-10.0 %
Directors’ deferred compensation plan expense(1,617)413 (2,030)-491.5 %
Provision for residential mortgage loan repurchase losses— (403)403 -100.0 
Provision for off-balance sheet credit exposures2,592 189 2,403 1,271.4 %
Branch consolidation and relocation costs321 — 321 N.M.
Other3,969 4,200 (231)-5.5 %
Total other operating expense$109,639 $105,389 $4,250 4.0 %

For the nine months ended September 30, 2020, total other operating expense was $109.6 million and increased by $4.3 million, or 4.0%, from $105.4 million in the nine months ended September 30, 2019. The increase was primarily due to a higher provision for off-balance sheet credit exposuressalaries and employee benefits of $2.4 million under ASC 326, higher legal and professional services of $1.3$3.2 million, higher computer software expense of $1.2 million, higher advertising expense of $0.9$1.0 million, higher legal and professional services of $0.7 million, higher ATM and debit card expenses of $0.6 million, and higher salariesnet occupancy and employee benefitsFDIC insurance assessment of $0.6$0.5 million partially offset byeach. In addition, the Company recorded directors' deferred compensation plan expenses of $1.0 million during the six months ended June 30, 2021, compared to a $2.0credit of $1.4 million variancein the same year-ago period. These expenses are related to changes in the directors' deferred compensation plan expenseliability and lower entertainment and promotions of $1.0 million. The lower directors' deferred compensation plan expense was primarily due to volatilityare impacted by fluctuations in the Company's stock price and the equity markets. The higher entertainment and promotions expense in the nine months ended September 30, 2019 was primarily due to expenses related to a core deposit gathering campaign.

Efficiency Ratio

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.

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

Three Months Ended
September 30,		Nine Months Ended
September 30,		Three Months Ended
June 30,		Six Months Ended
June 30,
(dollars in thousands)(dollars in thousands)2020201920202019(dollars in thousands)2021202020212020
Total other operating expenseTotal other operating expense$36,972 $34,934 $109,639 $105,389 Total other operating expense$41,433 $35,854 $79,279 $70,296 
Net interest incomeNet interest income$49,120 $45,649 $146,209 $136,140 Net interest income$52,061 $49,259 $101,865 $97,089 
Total other operating incomeTotal other operating income11,563 10,266 31,141 32,033 Total other operating income10,530 10,692 21,241 19,578 
Total revenue before provision for credit lossesTotal revenue before provision for credit losses$60,683 $55,915 $177,350 $168,173 Total revenue before provision for credit losses$62,591 $59,951 $123,106 $116,667 
Efficiency ratioEfficiency ratio60.93 %62.48 %61.82 %62.67 %Efficiency ratio66.20 %59.81 %64.40 %60.25 %

Our efficiency ratio improvedincreased to 60.93%66.20% in the third quarter of 2020,three months ended June 30, 2021, compared to 62.48%59.81% in the year-ago quarter. The efficiency ratio in the thirdsecond quarter of 20202021 was positivelynegatively impacted by the aforementioned higher other operating expenses, offset by an increase in net interest income. Our efficiency ratio increased to 64.40% in the six months ended June 30, 2021, compared to 60.25% in the same year-ago period. The efficiency ratio in the six months ended June 30, 2021 was also negatively impacted by the aforementioned higher other operating expenses, offset by increases in net interest income primarily attributable to the increase in average loan balances and lower rates paid on average interest-bearing liabilities, combined with higher other operating income, primarily attributable to the strong mortgage banking activity. Ourincome. The current year increases in our efficiency ratio improved to 61.82%are reflective of the Company's strategic investments in the nine months ended September 30, 2020, compared to 62.67% infuture. Longer term, the nine months ended September 30, 2019.Company believes these investments will improve profitability and shareholder returns.

Income Taxes

The Company recorded income tax expense of $2.2$5.9 million and $8.0$11.3 million for the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively, compared to $4.9$3.0 million and $14.4$5.8 million in the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively. The effective tax rate for the three and ninesix months ended SeptemberJune 30, 20202021 was 24.29%23.93% and 24.14%23.58%, respectively, compared to 25.17%23.03% and 24.66%24.09% in the three and ninesix months ended SeptemberJune 30, 2019.2020, respectively.

The valuation allowance on our net deferred tax assets ("DTA") totaled $3.4 million at SeptemberJune 30, 20202021 and $3.4 million at December 31, 2019,2020, 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 SeptemberJune 30, 20202021 and December 31, 20192020 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 $23.5$35.1 million at SeptemberJune 30, 2020,2021, compared to a net DTA of $16.5$26.4 million as of December 31, 2019,2020, and is included in other assets on our consolidated balance sheets.

Financial Condition

Total assets at SeptemberJune 30, 20202021 of $6.65$7.18 billion increased by $635.5$583.9 million from $6.01$6.59 billion at December 31, 2019.2020.

Investment Securities

Investment securities of $1.17$1.41 billion at SeptemberJune 30, 20202021 increased by $39.4$225.0 million, or 3.5%19.0%, from $1.18 billion at December 31, 2019.2020. The increase reflects $265.2$421.4 million in net purchases, combined withpartially offset by a $19.3$21.3 million increasedecrease in the market valuation on the available-for-sale portfolio partially offset by $244.8and $175.1 million in principal runoff.

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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)September 30,
2020		December 31,
2019		$ Change% Change(dollars in thousands)June 30,
2021		December 31,
2020		$ Change% Change
Hawaii:Hawaii:    Hawaii:    
Commercial, financial and agricultural:Commercial, financial and agricultural:Commercial, financial and agricultural:
SBA Paycheck Protection ProgramSBA Paycheck Protection Program$485,286 $— $485,286 — %SBA Paycheck Protection Program$395,352 $375,879 $19,473 5.2 %
OtherOther414,754 454,582 (39,828)(8.8)Other389,341 426,670 (37,329)(8.7)
Real estate:Real estate:Real estate:
ConstructionConstruction118,247 95,854 22,393 23.4 Construction133,457 125,407 8,050 6.4 
Residential mortgageResidential mortgage1,680,060 1,599,801 80,259 5.0 Residential mortgage1,711,801 1,690,212 21,589 1.3 
Home equityHome equity534,056 490,734 43,322 8.8 Home equity583,430 551,266 32,164 5.8 
Commercial mortgageCommercial mortgage914,144 909,798 4,346 0.5 Commercial mortgage926,006 898,055 27,951 3.1 
ConsumerConsumer342,203 373,451 (31,248)(8.4)Consumer328,332 332,430 (4,098)(1.2)
LeasesLeases— — — — Leases— — — — 
Total loansTotal loans4,488,750 3,924,220 564,530 14.4 Total loans4,467,719 4,399,919 67,800 1.5 
Allowance for credit losses ("ACL")Allowance for credit losses ("ACL")(71,575)(42,592)(28,983)68.0 Allowance for credit losses ("ACL")(67,773)(73,152)5,379 (7.4)
Loans, net of ACLLoans, net of ACL$4,417,175 $3,881,628 $535,547 13.8 Loans, net of ACL$4,399,946 $4,326,767 $73,179 1.7 
U.S. Mainland:U.S. Mainland:    U.S. Mainland:    
Commercial, financial and agricultural:Commercial, financial and agricultural:Commercial, financial and agricultural:
SBA Paycheck Protection ProgramSBA Paycheck Protection Program$43,295 $— $43,295 — %SBA Paycheck Protection Program$39,258 $40,496 $(1,238)(3.1)%
OtherOther113,316 115,722 (2,406)(2.1)Other96,884 118,421 (21,537)(18.2)
Real estate:Real estate:Real estate:
ConstructionConstruction— — — — Construction— — — — 
Residential mortgageResidential mortgage— — — — Residential mortgage— — — — 
Home equityHome equity— — — — Home equity— — — — 
Commercial mortgageCommercial mortgage227,121 213,617 13,504 6.3 Commercial mortgage260,424 258,273 2,151 0.8 
ConsumerConsumer158,144 195,981 (37,837)(19.3)Consumer213,033 147,004 66,029 44.9 
LeasesLeases— — — — Leases— — — — 
Total loansTotal loans541,876 525,320 16,556 3.2 Total loans609,599 564,194 45,405 8.0 
ACLACL(8,967)(5,379)(3,588)66.7 ACL(10,008)(10,117)109 (1.1)
Loans, net of ACLLoans, net of ACL$532,909 $519,941 $12,968 2.5 Loans, net of ACL$599,591 $554,077 $45,514 8.2 
Total:Total:    Total:    
Commercial, financial and agricultural:Commercial, financial and agricultural:Commercial, financial and agricultural:
SBA Paycheck Protection ProgramSBA Paycheck Protection Program$528,581 $— $528,581 — %SBA Paycheck Protection Program$434,610 $416,375 $18,235 4.4 %
OtherOther528,070 570,304 (42,234)(7.4)Other486,225 545,091 (58,866)(10.8)
Real estate:Real estate:Real estate:
ConstructionConstruction118,247 95,854 22,393 23.4 Construction133,457 125,407 8,050 6.4 
Residential mortgageResidential mortgage1,680,060 1,599,801 80,259 5.0 Residential mortgage1,711,801 1,690,212 21,589 1.3 
Home equityHome equity534,056 490,734 43,322 8.8 Home equity583,430 551,266 32,164 5.8 
Commercial mortgageCommercial mortgage1,141,265 1,123,415 17,850 1.6 Commercial mortgage1,186,430 1,156,328 30,102 2.6 
ConsumerConsumer500,347 569,432 (69,085)(12.1)Consumer541,365 479,434 61,931 12.9 
LeasesLeases— — — — Leases— — — — 
Total loansTotal loans5,030,626 4,449,540 581,086 13.1 Total loans5,077,318 4,964,113 113,205 2.3 
ACLACL(80,542)(47,971)(32,571)67.9 ACL(77,781)(83,269)5,488 (6.6)
Loans, net of ACLLoans, net of ACL$4,950,084 $4,401,569 $548,515 12.5 Loans, net of ACL$4,999,537 $4,880,844 $118,693 2.4 

Loans, net of deferred costs, of $5.03$5.08 billion at SeptemberJune 30, 20202021 increased by $581.1$113.2 million, or 13.1%2.3%, from $4.96 billion at December 31, 2019.2020. The increase reflects net increases in the following loan portfolios: SBA Paycheck Protection Program loans of $528.6$18.2 million, construction of $8.1 million, residential mortgage of $80.3$21.6 million, home equity of $43.3$32.2 million, construction of $22.4 million and commercial mortgage of $17.9$30.1 million and consumer of $61.9 million. These increases were partially offset by a net decreasesdecrease in the consumer and other
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the other commercial portfoliosloans of $69.1$58.9 million. Excluding PPP loans, loans, net of deferred costs, totaled $4.64 billion at June 30, 2021 and increased by $95.0 million, and $42.2 million, respectively. During the third quarter of 2020, the Company transferred $6.6 million in commercial and commercial real estate loans to a single borrower to loans-held-for-sale. In October 2020, the Company sold the loansor 2.1%, from $4.55 billion at a loss of less than $0.1 million.December 31, 2020.

The Hawaii loan portfolio increased by $564.5$67.8 million, or 14.4%1.5%, from December 31, 2019.2020. The increase reflects net increases in the following loan portfolios: SBA Paycheck Protection Program loans of $485.3$19.5 million, construction of $8.1 million, residential mortgage of $80.3$21.6 million, home equity of $43.3 million, construction of $22.4$32.2 million, and commercial mortgage of $4.3 million,$28.0 million.These increases were partially offset by net decreases in the consumer and other commercial and consumer portfolios of $31.2$37.3 million and $39.8$4.1 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 $16.6$45.4 million, or 3.2%8.0% from December 31, 2019.2020. The net increase was primarily attributable to a net increasesincrease in the SBA Paycheck Protection Program and commercial mortgageconsumer loan portfoliosportfolio of $43.3$66.0 million and $13.5 million, respectively,due to loan portfolio purchases, partially offset by a net decrease in the consumerother commercial loan portfolio of $37.8$21.5 million.

In Refer to Note 4 - Loans and Credit Quality in the third quarter of 2020, we purchasedaccompanying notes to the consolidated financial statements in this report for information on U.S. Mainland unsecured consumer loans totaling $6.7 million, which reflected a net discount of $0.3 million from the $7.0 million outstanding balance.

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.

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. The purchases during the nine months ended September 30, 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. 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. The unsecured consumer loan purchases during 2019 were made under two forward flow purchase agreements.purchases.

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

The following table sets forth nonperforming assets, accruing loans delinquent for 90 days or more and restructured loans still accruing interest as of the dates indicated.
(dollars in thousands)June 30,
2021		December 31,
2020		$ Change% Change
Nonperforming Assets ("NPAs") [1]  
Nonaccrual loans:  
Commercial, financial and agricultural - Other$699 $1,461 $(762)(52.2)%
Real estate:
Residential mortgage5,280 4,115 1,165 28.3 
Home equity434 524 (90)(17.2)
Consumer332 92 240 260.9 
Total nonaccrual loans6,745 6,192 553 8.9 
Other real estate owned ("OREO"): 
Real estate:
Residential mortgage— — — — 
Total OREO— — — — 
Total nonperforming assets6,745 6,192 553 8.9 
Accruing Loans Delinquent for 90 Days or More [1]
Commercial, financial and agricultural - Other29 — 29 — 
Real estate:
Residential mortgage1,438 567 871 153.6 
Consumer100 240 (140)(58.3)
Total accruing loans delinquent for 90 days or more1,567 807 760 94.2 
Restructured Loans Still Accruing Interest [1] 
Commercial, financial and agricultural - Other26 100 (74)(74.0)
Real estate:
Residential mortgage4,258 5,718 (1,460)(25.5)
Commercial mortgage1,636 1,761 (125)(7.1)
Consumer132 207 (75)(36.2)
Total restructured loans still accruing interest6,052 7,786 (1,734)(22.3)
Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest$14,364 $14,785 $(421)(2.8)
Ratio of nonaccrual loans to total loans0.13 %0.12 %0.01 %
Ratio of NPAs to total loans and OREO0.13 %0.12 %0.01 %
Ratio of NPAs and accruing loans delinquent for 90 days or more to total loans and OREO0.16 %0.14 %0.02 %
Ratio of NPAs, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO0.28 %0.30 %(0.02)%
[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 or restructured loan balances presented above.

(dollars in thousands)September 30,
2020		December 31,
2019		$ Change% Change
Nonperforming Assets ("NPAs") [1]  
Nonaccrual loans:  
Commercial, financial and agricultural$1,536 $467 $1,069 228.9 %
Real estate:
Residential mortgage4,032 979 3,053 311.8 
Home equity533 92 441 479.3 
Commercial mortgage6,889 — 6,889 — 
Consumer69 17 52 305.9 
Total nonaccrual loans13,059 1,555 11,504 739.8 
Other real estate owned ("OREO"): 
Real estate:
Residential mortgage128 — 128 — 
Home equity— 164 (164)(100.0)
Total OREO128 164 (36)(22.0)
Total nonperforming assets13,187 1,719 11,468 667.1 
Accruing Loans Delinquent for 90 Days or More [1]
Real estate:
Residential mortgage588 724 (136)(18.8)
Consumer321 286 35 12.2 
Total accruing loans delinquent for 90 days or more909 1,010 (101)(10.0)
Restructured Loans Still Accruing Interest [1] 
Commercial, financial and agricultural137 135 2 1.5 
Real estate:
Residential mortgage5,178 5,502 (324)(5.9)
Commercial mortgage1,825 1,839 (14)(0.8)
Consumer214 — 214 — 
Total restructured loans still accruing interest7,354 7,476 (122)(1.6)
Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest$21,450 $10,205 $11,245 110.2 
Ratio of nonaccrual loans to total loans0.26 %0.03 %0.23 %
Ratio of NPAs to total loans and OREO0.26 %0.04 %0.22 %
Ratio of NPAs and accruing loans delinquent for 90 days or more to total loans and OREO0.28 %0.06 %0.22 %
Ratio of NPAs, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO0.43 %0.23 %0.20 %
Ratio of classified assets and OREO to tier 1 capital and ACL7.36 %6.75 %0.61 %
[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 or restructured loan balances presented above.
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The following table sets forth year-to-date activity in nonperforming assets as of the date indicated:

(dollars in thousands)
Balance at December 31, 20192020$1,7196,192 
Additions12,8874,136 
Reductions: 
Payments(820)(1,412)
Return to accrual status(123)(183)
Sales of NPAs(94)— 
Net charge-offs, valuation and other adjustments(382)(1,988)
Total reductions(1,419)(3,583)
Net increase11,468553 
Balance at SeptemberJune 30, 20202021$13,1876,745 

Nonperforming assets, which includes nonaccrual loans and other real estate owned, totaled $13.2$6.7 million at SeptemberJune 30, 2020,2021, compared to $1.7$6.2 million at December 31, 2019.2020. There were no nonperforming loans classified as held for sale at SeptemberJune 30, 20202021 and December 31, 2019.2020. The increase in nonperforming assets from December 31, 20192020 was primarily attributable to additions to nonaccrual loans totaling $12.9$4.1 million, of which $7.6 million were to two borrowers consisting of commercial and commercial real estate loans that the Company believes is well-secured. The additions were offset by $0.8 million in repayments of nonaccrual loans, $0.4$2.0 million in net charge-offs, valuation and other adjustments, $0.1$1.4 million in repayments of nonaccrual loans, and $0.2 million in loans returned to accrual status, and the sale of a foreclosed asset of $0.1 million.status.

Troubled debt restructurings ("TDRs") included in nonperforming assets at SeptemberJune 30, 20202021 consisted of twothree Hawaii residential mortgage loans with a combined principal balance of $0.3$0.4 million. There were $7.4$6.3 million of TDRs still accruing interest at SeptemberJune 30, 2020, none2021, of which weretwo loans totaling $0.2 million was more than 90 days delinquent. At December 31, 2019,2020, there were $7.5$7.8 million of TDRs still accruing interest, none of which wereone loan totaling $0.7 million was more than 90 days delinquent.

Loan payment forbearance or deferrals were made for borrowers impacted by the COVID-19 pandemic with loan balances totaling $290.8$3.5 million, or 5.8%0.1% of total loans (or 6.5% of total loans, excluding PPP loans), as of SeptemberJune 30, 2020,2021, compared to $567.9$120.2 million, or 11.3%2.4% of the total loan portfolio (or 12.7% excluding PPP loans) as of June 30,December 31, 2020.

The Company's ratio of classified assets and other real estate owned to tier 1 capital and the ACL increaseddecreased from 6.75%7.49% at December 31, 20192020 to 7.36%6.20% at SeptemberJune 30, 2020.

2021.

7068

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
June 30,		Six Months Ended
June 30,
(dollars in thousands)2021202020212020
Allowance for Credit Losses:    
Balance at beginning of period$81,553 $59,645 $83,269 $47,971 
Adoption of ASU 2016-13— — — 3,566 
Adjusted balance at beginning of period81,553 59,645 83,269 51,537 
(Credit) provision for credit losses on loans [1] [2](2,963)10,640 (3,937)19,969 
Charge-offs:
Commercial, financial and agricultural - Other401 1,103 1,010 1,540 
Residential mortgage— 52 — 52 
Consumer1,523 2,626 2,621 4,843 
Total charge-offs1,924 3,781 3,631 6,435 
Recoveries:    
Commercial, financial and agricultural - Other276 305 365 647 
Real estate:
Construction— — — 131 
Residential mortgage186 20 292 201 
Home equity— — 9 31 
Commercial mortgage65 1 73 3 
Consumer588 509 1,341 1,255 
Total recoveries1,115 835 2,080 2,268 
Net charge-offs809 2,946 1,551 4,167 
Balance at end of period$77,781 $67,339 $77,781 $67,339 
ACL as a percentage of total loans1.53 %1.35 %1.53 %1.35 %
ACL as a percentage of total loans, excluding PPP loans1.68 %1.50 %1.68 %1.50 %
ACL as a percentage of nonaccrual loans1153.17 %1420.35 %1153.17 %1420.35 %
Annualized ratio of net charge-offs to average loans0.06 %0.24 %0.06 %0.18 %
[1] The Company recorded a reserve on accrued interest receivable for loans on active payment forbearance or deferral, which were granted to borrowers impacted by the COVID-19 pandemic. This reserve was recorded as a contra-asset against accrued interest receivable with the offset to provision for credit losses. In the second quarter of 2021, the entire reserve was reversed as loans on active payment forbearance or deferral have declined significantly. The provision for credit losses on loans presented in this table excludes the adjustments to the provision for credit losses on accrued interest receivable.
[2] As of January 1, 2021, the provision for credit losses on off-balance sheet credit exposures (previously included in other operating expense) is included in the provision for credit losses line on the consolidated statements of income. The allowance for off-balance sheet credit exposures continues to be included in other liabilities. For roll-forward purposes, in this table we exclude the provision for credit losses on off-balance sheet credit exposures.
Three Months Ended
September 30,		Nine Months Ended
September 30,
(dollars in thousands)2020201920202019
Allowance for Credit Losses:    
Balance at beginning of period$67,339 $48,267 $47,971 $47,916 
Adoption of ASU 2016-13— — 3,566 — 
Adjusted balance at beginning of period67,339 48,267 51,537 47,916 
Provision for credit losses on loans [1]14,465 1,532 34,434 4,219 
Charge-offs:
Commercial, financial and agricultural810 797 2,350 2,099 
Real estate:
Residential mortgage11 — 63 — 
Home equity— 5 — 5 
Commercial mortgage75 — 75 — 
Consumer1,492 1,832 6,335 5,542 
Total charge-offs2,388 2,634 8,823 7,646 
Recoveries:    
Commercial, financial and agricultural321 362 968 910 
Real estate:
Construction— 6 131 604 
Residential mortgage13 104 214 498 
Home equity— 24 31 42 
Commercial mortgage12 — 15 25 
Consumer780 506 2,035 1,599 
Total recoveries1,126 1,002 3,394 3,678 
Net charge-offs1,262 1,632 5,429 3,968 
Balance at end of period$80,542 $48,167 $80,542 $48,167 
ACL as a percentage of total loans1.60 %1.10 %1.60 %1.10 %
ACL as a percentage of total loans, excluding PPP loans1.79 %1.10 %1.79 %1.10 %
ACL as a percentage of nonaccrual loans616.75 %5387.81 %616.75 %5387.81 %
Annualized ratio of net charge-offs to average loans0.10 %0.15 %0.15 %0.13 %
[1] The Company recorded a reserve on accrued interest receivable for loans on active payment forbearance or deferral, which were granted to borrowers impacted by the COVID-19 pandemic. This reserve was recorded as a contra-asset against accrued interest receivable with the offset to provision for credit losses. The provision for credit losses presented in this table excludes the provision for credit losses on accrued interest receivable of $0.2 million.

Our ACL at SeptemberJune 30, 20202021 totaled $80.5$77.8 million compared to $48.0$83.3 million at December 31, 2019.2020.

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
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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.
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During the three months ended SeptemberJune 30, 2020,2021, we recorded a credit to the provision for credit losses on loans of $14.5$3.0 million and net charge-offs of $1.3$0.8 million. During the ninesix months ended SeptemberJune 30, 2020,2021, we recorded a credit to the provision for credit losses on loans of $34.4$3.9 million and net charge-offs of $5.4$1.6 million. The provisions reflectcredit to the incorporationprovision is driven by improved economic forecasts and positive migration of estimated life-of-loan losses under ASC 326 andloan grades as the economic forecast underState of Hawaii continues to recover from the current COVID-19 pandemic.

Our ACL as a percentage of total loans increaseddecreased from 1.08%1.68% at December 31, 20192020 to 1.60%1.53% at SeptemberJune 30, 2020.2021. Excluding the PPP loan portfolio, which is guaranteed by the SBA, our ACL as a percentage of total loans was 1.79%1.68% at SeptemberJune 30, 2021, compared to 1.83% at December 31, 2020. The increase in our ACL as a percentage of total loans reflects the adoption of ASU 2016-13. Our ACL as a percentage of nonaccrual loans decreased from 3084.95%1344.78% at December 31, 20192020 to 616.75%1153.17% at SeptemberJune 30, 2020.2021.

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 $17.5$8.1 million at SeptemberJune 30, 2020 increased2021 decreased by $2.5$0.1 million, or 16.6%1.1%, from the FHLB stock balance of $8.2 million at December 31, 2019.2020.  FHLB stock has an activity-based stock requirement, thus as borrowings increase,decline, so will our holdings of FHLB stock. There isAs a condition of membership in the FHLB, members are required to purchase and hold a minimum requirementnumber of $7.2 million in FHLB stock based on a percentage of total assets 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)September 30,
2020		December 31,
2019		$ Change% Change(dollars in thousands)June 30,
2021		December 31,
2020		$ Change% Change
Noninterest-bearing demand depositsNoninterest-bearing demand deposits$1,762,476 $1,450,532 $311,944 21.5 %Noninterest-bearing demand deposits$2,203,806 $1,790,269 $413,537 23.1 %
Interest-bearing demand depositsInterest-bearing demand deposits1,114,123 1,043,010 71,113 6.8 Interest-bearing demand deposits1,341,280 1,174,888 166,392 14.2 
Savings and money market depositsSavings and money market deposits1,881,104 1,600,028 281,076 17.6 Savings and money market deposits2,048,945 1,932,043 116,902 6.1 
Time deposits less than $100,000Time deposits less than $100,000157,051 165,755 (8,704)(5.3)Time deposits less than $100,000141,498 149,063 (7,565)(5.1)
Time deposits $100,000 to $250,000Time deposits $100,000 to $250,00089,710 90,149 (439)(0.5)
Core depositsCore deposits4,914,754 4,259,325 655,429 15.4 Core deposits5,825,239 5,136,412 688,827 13.4 
Government time depositsGovernment time deposits500,762 533,088 (32,326)(6.1)Government time deposits403,755 500,344 (96,589)(19.3)
Other time deposits $100,000 to $250,00095,918 107,550 (11,632)(10.8)
Other time deposits greater than $250,000Other time deposits greater than $250,000167,495 220,060 (52,565)(23.9)Other time deposits greater than $250,000168,165 159,362 8,803 5.5 
Total time deposits $100,000 and greater764,175 860,698 (96,523)(11.2)
Total time deposits greater than $250,000Total time deposits greater than $250,000571,920 659,706 (87,786)(13.3)
Total depositsTotal deposits$5,678,929 $5,120,023 $558,906 10.9 Total deposits$6,397,159 $5,796,118 $601,041 10.4 
[1] As of January 1, 2021, other time deposits $100,000 to $250,000 have been included in core deposits. Prior period amounts have been reclassified to conform to current period presentation.[1] As of January 1, 2021, other time deposits $100,000 to $250,000 have been included in core deposits. Prior period amounts have been reclassified to conform to current period presentation.

Total deposits of $5.68$6.40 billion at SeptemberJune 30, 20202021 increased by $558.9$601.0 million, or 10.4%, from total deposits of $5.12$5.80 billion at December 31, 2019.2020. Net increases in noninterest-bearing demand deposits of $311.9$413.5 million, interest-bearing demand deposits of $166.4 million, savings and money market deposits of $281.1$116.9 million, and interest-bearing demand deposits of $71.1 million, were partially offset by net decreases in other time deposits greater than $250,000 of $52.6$8.8 million governmentwere offset by net decreases in time deposits less than $100,000 of $32.3$7.6 million, other time deposits $100,000 to $250,000 of $11.6$0.4 million, and government time deposits less than $100,000 of $8.7$96.6 million.

Core deposits, which we define as demand deposits, savings and money market deposits, and time deposits less than $100,000,up to $250,000, totaled $4.91$5.83 billion at SeptemberJune 30, 20202021 and increased by $655.4$688.8 million, or 15.4%13.4%, from $5.14 billion at December 31, 2019.2020. The deposit of PPP funds and other government stimulus 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
70

businesses we assisted with PPP. Core deposits as a percentage of total deposits was 86.5%91.1% at SeptemberJune 30, 2020,2021, compared to 83.2%88.6% at December 31, 2019.2020.

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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, the need for raising additional capital or returningthe ability to return capital to our shareholders, including the ability to declare cash dividends or repurchase our securities.

Common and Preferred Equity

Shareholders' equity totaled $543.9$552.8 million at SeptemberJune 30, 2020,2021, compared to $528.5$546.7 million at December 31, 2019.2020. The change in total shareholders' equity was primarily attributable to net income of $25.1 million and other comprehensive income of $15.1$36.8 million, partially offset by other comprehensive loss of $15.2 million, cash dividends declared of $13.3 million, and the repurchase of 206,802$4.3 million in shares of our common stock under our stock repurchase program at a cost of $4.7 million and cash dividends declared of $19.5 million in the ninesix months ended SeptemberJune 30, 2020. In the nine months ended September 30, 2020, we repurchased approximately 0.7% of our common stock outstanding as of December 31, 2019.2021.

Our total shareholders' equity to total assets ratio was 8.18%7.70% at SeptemberJune 30, 2020,2021, compared to 8.79%8.29% at December 31, 2019.2020. 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 $528.6$434.6 million in PPP loans, net of deferred fees and costs. Our book value per share was $19.30$19.59 and $18.68$19.40 at SeptemberJune 30, 20202021 and December 31, 2019,2020, 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.securities, and payments on its subordinated notes.

CPF relies on the bank to pay dividends to fund its obligations. As of SeptemberJune 30, 2020,2021, on a stand-alone basis, CPF had an available cash balance of approximately $10.0$12.9 million in order to meet its ongoing obligations.

As a Hawaii state-chartered bank, the bank may only pay dividends to the extent it has retained earnings as defined under Hawaii banking law ("Statutory Retained Earnings"), which differs from GAAP retained earnings. As of SeptemberJune 30, 2020,2021, the bank had Statutory Retained Earnings of $68.6$101.7 million. Provisions of federal law also impact the ability of the bank to pay dividends to the Company and the ability of the Company to pay dividends to our shareholders and repurchase our common stock. On OctoberJuly 27, 2020,2021, the Company's Board of Directors declared a cash dividend of $0.23$0.24 per share on the Company's outstanding common stock, which remained unchangedincreased by 4.3% from the $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.debentures and subordinated notes.

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 replacesreplaced and supersedessuperseded in its entirety the share repurchase program previously approved by the Company's Board of Directors, which had $19.8$26.6 million in remaining repurchase authority. The Company's Repurchase Plan iswas subject to a one year expiration. In the first quarter of 2020, the Company repurchased 206,802 shares of common stock, at a cost of $4.7 million, 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.

InOn January 26, 2021, the nine months ended September 30, 2020,Company's Board of Directors approved a totalnew share repurchase authorization of 206,802up to $25 million of its common stock. During the second quarter of 2021, the Company resumed repurchases and repurchased 156,600 shares of common stock at a cost of $4.7 million, were repurchased under the Company's stock repurchase plans. As of September 30, 2020, $26.6 million remained available for repurchase under the Company's Repurchase Plan.$4.3 million. We cannot provide any assurance whenwhether or to what extentnot we will resume repurchasescontinue to repurchase common stock under our Repurchase Plan.share repurchase program..

7371

Trust Preferred Securities

In December 2018 and January 2019 we completed the redemption of an aggregate of $40 million in trust preferred securities issued by two trust preferred subsidiaries we previously had organized.

As of SeptemberJune 30, 2020,2021, 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.

The Company determined that its investments in Trust IV and Trust V did not represent a variable interest and therefore the Company was not the primary beneficiary of each of the trusts. As a result, consolidation of the trusts by the Company were not required.

Subordinated Notes

On October 20, 2020, the Company completed a $55 million private placement of ten-year fixed-to-floating rate subordinated notes, which will be used to support regulatory capital ratios and for general corporate purposes. The Company exchanged the privately placed notes for registered notes with the same terms and in the same aggregate principal amount at the end of the fourth quarter of 2020. The notes bear a fixed interest rate of 4.75% for the first five years and will reset quarterly thereafter for the remaining five years to the then current three-month Secured Overnight Financing Rate, as published by the Federal Reserve Bank of New York, plus 456 basis points. The subordinated notes had a carrying value of $53.9 million, net of unamortized debt issuance costs of $1.1 million, at June 30, 2021.

The subordinated notes may be included in Tier 2 capital, with certain limitations applicable, under current regulatory
guidelines and interpretations.

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 20192020 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 September 30, 2020, theThe Company has elected to exercise the option to delay for two years an estimate of the CECL methodologymethodology's effect on regulatory capital.

The Company's and the bank's leverage capital, tier 1 risk-based capital, total risk-based capital, and CET1 risk-based capital ratios as of SeptemberJune 30, 20202021 were above the levels required for a "well capitalized" regulatory designation.

On October 20, 2020, the Company completed its private placement with registration rights of $55.0 million in ten-year fixed-to-floating rate subordinated notes due 2030 (the “Notes”). The Notes bear a fixed interest rate of 4.75% for the first five years and will reset quarterly thereafter for the remaining five years to the then current three-month Secured Overnight Financing Rate, as published by the Federal Reserve Bank of New York, plus 456 basis points. The Company is entitled to redeem the Notes, in whole or in part, on any interest payment date on or after November 1, 2025, or at any time, in whole but not in part, upon certain other specified events prior to the Notes’ maturity on November 1, 2030.

The Notes have been structured to qualify initially as Tier 2 capital for the Company for regulatory capital purposes. The Company intends to use the net proceeds from the offering for general corporate purposes and capital flexibility.
7472

The following table sets forth the Company's and the bank's capital ratios, as well as the minimum capital adequacy requirements applicable to all financial institutions as of the dates indicated.
 ActualMinimum Required
for Capital Adequacy
Purposes		Minimum Required
to be
Well Capitalized
(dollars in thousands)AmountRatioAmountRatioAmountRatio
Company      
At September 30, 2020:      
Leverage capital$573,636 8.8 %$261,718 4.0 %N/A
Tier 1 risk-based capital573,636 12.8 269,814 6.0 N/A
Total risk-based capital623,157 13.9 359,752 8.0 N/A
CET1 risk-based capital523,636 11.6 202,360 4.5 N/A
At December 31, 2019:      
Leverage capital$568,529 9.5 %$238,630 4.0 %N/A
Tier 1 risk-based capital568,529 12.6 271,788 6.0 N/A
Total risk-based capital617,772 13.6 362,384 8.0 N/A
CET1 risk-based capital518,529 11.5 203,841 4.5 N/A
Central Pacific Bank      
At September 30, 2020:      
Leverage capital$559,750 8.6 %$261,540 4.0 %$326,925 5.0 %
Tier 1 risk-based capital559,750 12.5 269,555 6.0 359,407 8.0 
Total risk-based capital609,203 13.6 359,407 8.0 449,259 10.0 
CET1 risk-based capital559,750 12.5 202,166 4.5 292,018 6.5 
At December 31, 2019:      
Leverage capital$556,077 9.3 %$238,342 4.0 %$297,928 5.0 %
Tier 1 risk-based capital556,077 12.3 271,350 6.0 361,800 8.0 
Total risk-based capital605,320 13.4 361,800 8.0 452,250 10.0 
CET1 risk-based capital556,077 12.3 203,512 4.5 293,962 6.5 
 ActualMinimum Required
for Capital Adequacy
Purposes		Minimum Required
to be
Well Capitalized
(dollars in thousands)AmountRatioAmountRatioAmountRatio
Company      
At June 30, 2021:      
Leverage capital$602,668 8.6 %$281,587 4.0 %N/A
Tier 1 risk-based capital602,668 12.7 285,449 6.0 N/A
Total risk-based capital710,382 14.9 380,599 8.0 N/A
CET1 risk-based capital552,668 11.6 214,087 4.5 N/A
At December 31, 2020:      
Leverage capital$581,358 8.8 %$263,979 4.0 %N/A
Tier 1 risk-based capital581,358 12.9 271,027 6.0 N/A
Total risk-based capital686,130 15.2 361,370 8.0 N/A
CET1 risk-based capital531,358 11.8 203,270 4.5 N/A
Central Pacific Bank      
At June 30, 2021:      
Leverage capital$639,542 9.1 %$281,163 4.0 %$351,454 5.0 %
Tier 1 risk-based capital639,542 13.5 285,065 6.0 380,086 8.0 
Total risk-based capital692,163 14.6 380,086 8.0 475,108 10.0 
CET1 risk-based capital639,542 13.5 213,798 4.5 308,820 6.5 
At December 31, 2020:      
Leverage capital$620,372 9.4 %$263,735 4.0 %$329,668 5.0 %
Tier 1 risk-based capital620,372 13.7 270,820 6.0 361,094 8.0 
Total risk-based capital670,087 14.9 361,094 8.0 451,367 10.0 
CET1 risk-based capital620,372 13.7 203,115 4.5 293,389 6.5 

Asset/Liability Management and Interest Rate Risk

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

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

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

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The following reflects our net interest income sensitivity analysis as of SeptemberJune 30, 2020.2021. 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
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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 ChangeEstimated Net Interest Income Sensitivity
+100 bp3.794.10 %
-100 bp(2.92)(3.86)%

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 $1.79$1.81 billion line of credit with the FHLB as of SeptemberJune 30, 2020,2021, compared to $1.84$1.81 billion at December 31, 2019.2020. There were $206.0 million inno short-term borrowings under this arrangement at SeptemberJune 30, 2020,2021, compared to $150.0$22.0 million at December 31, 2019.2020. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled $267.0$230.8 million at SeptemberJune 30, 2020,2021, compared to $78.9$268.0 million at December 31, 2019. Long-term2020. There were no long-term borrowings under this arrangement totaled $50.0 million at SeptemberJune 30, 20202021 and December 31, 2019.2020. FHLB advances and standby letters of credit available at SeptemberJune 30, 20202021 were secured by certain real estate loans with a carrying value of $2.71$2.67 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB. At SeptemberJune 30, 2020, $1.262021, $1.58 billion was undrawn under this arrangement, compared to $1.57$1.52 billion at December 31, 2019.2020.

At SeptemberJune 30, 20202021 and December 31, 2019,2020, our bank had additional unused borrowings available at the Federal Reserve discount window of $59.2$64.4 million and $65.3$64.5 million, respectively. As of SeptemberJune 30, 20202021 and December 31, 2019,2020, certain commercial and commercial real estate loans with a carrying value totaling $125.0$130.6 million and $126.1$136.9 million, respectively, were pledged as collateral on our line of credit with the Federal Reserve discount window. The Federal Reserve does not have the right to sell or repledge these loans.

To bolster the effectiveness of the PPP, the Federal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provides loans to small businesses so that they can keep their workers on the payroll. The Paycheck Protection Program Liquidity Facility ("PPPLF") will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. At SeptemberJune 30, 2020,2021, there were no funds drawn from the Federal Reserve Bank under the PPPLF and no PPP loans pledged to the Federal Reserve Bank. The PPPLF expires on July 30, 2021.

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, 2019.2020. There have been no material changes in our contractual obligations since December 31, 2019.2020.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

The primary analytical tool we use to measure and manage our interest rate risk is a simulation model that projects changes in net interest income ("NII") as market interest rates change. Our ALCO policy requires that simulated changes in NII should be within certain specified ranges, or steps must be taken to reduce interest rate risk. The results of the model indicate that the mix of rate-sensitive assets and liabilities at SeptemberJune 30, 20202021 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,As of the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurementend 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 wereperiod covered by this report, there have been no other changes in the Company’s internal control over financial reporting (as defined in Rule 13a15(f) and 15d-15(f) of the Exchange Act) 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, 2019,2020, 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 which can negatively impact our results of operations, including our net income. In addition, material adverse effects on our business may include all or a combination of valuation impairments on our investments, loans, mortgage servicing rights, deferred tax assets or counter-party risk derivatives.

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

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

We and our customers have been, and will continue to be adversely affected by the COVID-19 pandemic. The extent to which the COVID-19 pandemic continues to negatively impact our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic and the fulfillment of government guarantees under the government's Paycheck Protection Program.23, 2021.

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

Issuer Purchases of Equity Securities
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
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approved byOn January 26, 2021, the Company's Board of Directors which had $19.8approved a new share repurchase authorization of up to $25 million in remaining repurchase authority. The current Repurchase Plan is subject to a one year expiration.

In March 2020, the Company temporarily suspended the Repurchase Plan due to uncertainty during the current COVID-19 pandemic. As a result, the Company did not repurchase any shares of its common stock under the Company's Repurchase Plan during the three months ended September 30, 2020.stock. As of SeptemberJune 30, 2020, a total of $26.62021, $20.7 million remained available for repurchase underas the Company's Repurchase Plan.Company repurchased 156,600 shares of common stock, at a cost of $4.3 million, during the second quarter of 2021. We cannot provide any assurance as to whenwhether or ifnot we will recommencecontinue to repurchase common stock under our Repurchase Plan.
Issuer Purchases of Equity Securities
PeriodTotal
Number
of Shares
Purchased		Average
Price Paid
per Share		Total Shares
Purchased as
Part of Publicly
Announced
Programs		Maximum Dollar
Value of
Shares That
May Yet Be
Purchased Under
the Program
July 1-31, 2020— $— — $26,600,028 
August 1-31, 2020— — — 26,600,028 
September 1-30, 2020— — — 26,600,028 
Total— $— — 26,600,028 
share repurchase program.

 Issuer Purchases of Equity Securities
PeriodTotal
Number
of Shares
Purchased		Average
Price Paid
per Share		Total Shares
Purchased as
Part of Publicly
Announced
Programs		Maximum Dollar
Value of
Shares That
May Yet Be
Purchased Under
the Program
April 1-30, 2021— $— — $25,000,000 
May 1-31, 202159,500 28.03 59,500 23,332,469 
June 1-30, 202197,100 27.38 97,100 20,673,628 
Total156,600 $27.63 156,600 20,673,628 


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Item 6. Exhibits
Exhibit No. Document
  
31.1
  
31.2
  
32.1
  
32.2
  
101.INSXBRL Instance Document*
  
101.SCHXBRL Taxonomy Extension Schema Document*
  
101.CALXBRL Taxonomy Extension Calculation Linkbase Document*
  
101.LABXBRL Taxonomy Extension Label Linkbase Document*
  
101.PREXBRL Taxonomy Extension Presentation Linkbase Document*
  
101.DEFXBRL Taxonomy Extension Definition Linkbase Document*
104Cover Page Interactive Data File (formatted as Inline XBRL and included within the Exhibit 101 attachments)
*Filed herewith.
**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:OctoberJuly 28, 20202021/s/ Paul K. Yonamine
 Paul K. Yonamine
 Chairman and Chief Executive Officer
  
Date:OctoberJuly 28, 20202021/s/ David S. Morimoto
 David S. Morimoto
 Executive Vice President and Chief Financial Officer

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