UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~September 30, 2018~~March 31, 2019

o 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~~number: 001-31567

CENTRAL PACIFIC FINANCIAL CORP.

(Exact name of registrant as specified in its charter)



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

220 South King Street, Honolulu, Hawaii 96813

(Address of principal executive offices) (Zip Code)

(808) 544-0500

(Registrant's telephone number, including area code)

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 ý No o

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). Yes ý No o

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 x	Accelerated filer o
Non-accelerated filer o~~(Do not check if a smaller reporting company)~~	Smaller reporting company o
Emerging growth company o

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 ~~7(a)(2)(B)~~13(a) of the Securities ~~Act .~~Act. o

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

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, No Par Value	CPF	New York Stock Exchange

The number of shares outstanding of registrant's common stock, no par value, on ~~October 26, 2018~~April 30, 2019 was ~~29,172,431~~28,629,541 shares.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

Form 10-Q

Table of Contents



		Page

Part I.	Financial Information	3

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets - ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018	4

	Consolidated Statements of Income - Three months ended March 31, 2019 and ~~nine months ended September 30,~~ 2018 ~~and 2017~~	5

	Consolidated Statements of Comprehensive Income - Three months ended March 31, 2019 and ~~nine months ended September 30,~~ 2018 ~~and 2017~~	6

	Consolidated Statements of Changes in Equity - Three months ended March 31, 2019 and ~~nine months ended September 30,~~ 2018 ~~and 2017~~	7

	Consolidated Statements of Cash Flows - ~~Nine~~Three months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~	8

	Notes to Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4638

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6555

Item 4.	Controls and Procedures	6655

Part II.	Other Information	6756

Item 1A.	Risk Factors	6756

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6756

Item 6.	Exhibits	6857

Signatures		6958

PART I. FINANCIAL INFORMATION

Forward-Looking Statements

This document may contain forward-looking statements concerning: projections of revenues, income/loss, earnings/loss per share, capital expenditures, dividends, capital structure, net interest margin or other financial items, plans and objectives of management for future operations, future economic performance, or any of the assumptions underlying or relating to any of the foregoing. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts, and may include the words "believes," "plans," "intends," "expects," "anticipates," "forecasts," "hopes," "should," "estimates" or words of similar meaning. 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 materially differ from projections for a variety of reasons, to include, but not be limited to: 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; the impact of local, national, and international economies and events (including natural disasters such as volcanoes, wildfires, tsunamis, storms and earthquakes) 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, changes in capital standards, other regulatory reform, including but not limited to regulations promulgated by the Consumer Financial Protection Bureau, government-sponsored enterprise reform, and any related rules and regulations on our business operations and competitiveness; the costs and effects of legal and regulatory developments, including the resolution of legal proceedings or regulatory or other governmental inquiries, the results of regulatory examinations or reviews and the effect of, and our ability to comply with, any regulatory orders or actions we are or may become subject to; ability to successfully implement our initiatives to lower our efficiency ratio; the ability to address any material weakness in our internal controls over financial reporting or disclosure controls and procedures; 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; inflation, interest rate, securities market and monetary fluctuations; 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; changes in consumer spending, borrowings and savings habits; failure to maintain effective internal control over financial reporting or disclosure controls and procedures; technological changes; 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 and other accounting standard setters; 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 on factors that could cause actual results to materially differ from projections, 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. The Company does not update any of its forward-looking statements except as required by law.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)


(dollars in thousands)	September 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
Assets
Cash and due from banks	$	82,668		$	75,318		$	90,869		$	80,569
Interest-bearing deposits in other banks	7,051			6,975			7,310			21,617
Investment securities:
Available-for-sale debt securities, at fair value	1,233,002			1,304,066			1,319,450			1,205,478
Held-to-maturity debt securities, at amortized cost; fair value of: $146,466 at September 30, 2018 and $189,201 at December 31, 2017	152,852			191,753
Held-to-maturity debt securities, at amortized cost; fair value of: none at March 31, 2019 and $144,272 at December 31, 2018							—			148,508
Equity securities, at fair value	885			825			910			826
Total investment securities	1,386,739			1,496,644			1,320,360			1,354,812

Loans held for sale	4,460			16,336			3,539			6,647

Loans and leases	3,978,027			3,770,615			4,101,571			4,078,366
Allowance for loan and lease losses	(46,826		)	(50,001		)	(47,267		)	(47,916		)
Net loans and leases	3,931,201			3,720,614			4,054,304			4,030,450

Premises and equipment, net	46,184			48,348			44,527			45,285
Accrued interest receivable	16,755			16,581			17,082			17,000
Investment in unconsolidated subsidiaries	15,283			7,088			16,054			14,008
Other real estate owned	414			851			276			414
Mortgage servicing rights	15,634			15,843			15,347			15,596
Core deposit premium	—			2,006
Bank-owned life insurance	157,085			156,293			158,392			157,440
Federal Home Loan Bank stock	10,965			7,761			16,145			16,645
Right of use lease asset							54,781			—
Other assets	54,201			53,050			42,366			46,543
Total assets	$	5,728,640		$	5,623,708		$	5,841,352		$	5,807,026

Liabilities
Deposits:
Noninterest-bearing demand	$	1,403,534		$	1,395,556		$	1,357,890		$	1,436,967
Interest-bearing demand	935,130			933,054			965,316			954,011
Savings and money market	1,503,465			1,481,876			1,562,798			1,448,257
Time	1,161,551			1,145,868			1,062,124			1,107,255
Total deposits	5,003,680			4,956,354			4,948,128			4,946,490

Short-term borrowings	105,000			32,000			179,000			197,000
Long-term debt	92,785			92,785			101,547			122,166
Lease liability							54,861			—
Other liabilities	49,024			42,534			55,178			49,645
Total liabilities	5,250,489			5,123,673			5,338,714			5,315,301

Equity
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding: none at September 30, 2018 and December 31, 2017	—			—
Common stock, no par value, authorized 185,000,000 shares; issued and outstanding: 29,270,398 at September 30, 2018 and 30,024,222 at December 31, 2017	478,721			503,988
Shareholders' Equity
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding: none at March 31, 2019 and December 31, 2018							—			—
Common stock, no par value, authorized 185,000,000 shares; issued and outstanding: 28,723,041 at March 31, 2019 and 28,967,715 at December 31, 2018							462,952			470,660
Additional paid-in capital	87,939			86,098			89,374			88,876
Accumulated deficit	(61,406		)	(89,036		)	(41,733		)	(51,718		)
Accumulated other comprehensive income (loss)	(27,103		)	(1,039		)	(7,955		)	(16,093		)
Total shareholders' equity	478,151			500,011			502,638			491,725
Non-controlling interest	—			24
Total equity	478,151			500,035
Total liabilities and equity	$	5,728,640		$	5,623,708
Total liabilities and shareholders' equity							$	5,841,352		$	5,807,026

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,					Three Months Ended March 31,
(dollars in thousands, except per share data)	2018			2017			2018		2017			2019		2018
Interest income:
Interest and fees on loans and leases	$	40,531		$	36,289		$	116,620	$	106,777		$	43,768	$	37,390
Interest and dividends on investment securities:
Taxable interest	8,490			8,540			26,050		25,156			8,260		8,843
Tax-exempt interest	920			966			2,786		2,919			866		933
Dividends	26			12			44		36			18		15
Interest on deposits in other banks	109			163			310		298			68		84
Dividends on Federal Home Loan Bank stock	60			23			145		100			161		45
Total interest income	50,136			45,993			145,955		135,286			53,141		47,310
Interest expense:
Interest on deposits:
Demand	181			177			554		471			192		180
Savings and money market	593			281			1,421		797			791		369
Time	4,744			2,637			12,203		6,490			5,092		3,425
Interest on short-term borrowings	146			9			237		86			893		43
Interest on long-term debt	1,147			894			3,221		2,563			1,060		971
Total interest expense	6,811			3,998			17,636		10,407			8,028		4,988
Net interest income	43,325			41,995			128,319		124,879			45,113		42,322
Provision (credit) for loan and lease losses	(59		)	(126		)	262		(2,488		)	1,283		(211		)
Net interest income after provision (credit) for loan and lease losses	43,384			42,121			128,057		127,367			43,830		42,533
Other operating income:
Mortgage banking income	1,923			1,531			5,545		5,431			1,424		1,847
Service charges on deposit accounts	2,189			2,182			6,169		6,338			2,081		2,003
Other service charges and fees	3,286			3,185			9,697		8,986			3,064		3,034
Income from fiduciary activities	1,159			911			3,132		2,739			965		956
Equity in earnings of unconsolidated subsidiaries	71			176			151		388			8		43
Fees on foreign exchange	220			101			708		394			151		211
Investment securities gains (losses)	—			—			—		(1,640		)
Income from bank-owned life insurance	1,055			1,074			1,874		2,774			952		318
Loan placement fees	115			86			532		366			149		197
Net gain on sales of foreclosed assets	—			19			—		205
Other	802			304			1,596		1,472			2,879		345
Total other operating income	10,820			9,569			29,404		27,453			11,673		8,954
Other operating expense:
Salaries and employee benefits	19,011			18,157			56,299		53,527			19,889		18,505
Net occupancy	3,488			3,404			10,114		10,153			3,458		3,266
Equipment	1,048			969			3,160		2,778			1,006		1,068
Amortization of core deposit premium	669			669			2,006		2,006			—		669
Communication expense	903			944			2,547		2,735			734		898
Legal and professional services	1,528			1,854			5,118		5,633			1,570		1,821
Computer software expense	2,672			2,346			7,244		6,788			2,597		2,267
Advertising expense	612			626			1,841		1,408			711		612
Foreclosed asset expense	212			24			537		123			159		294
Other	3,996			4,518			12,515		12,155			4,224		4,004
Total other operating expense	34,139			33,511			101,381		97,306			34,348		33,404
Income before income taxes	20,065			18,179			56,080		57,514			21,155		18,083
Income tax expense	4,872			6,367			12,386		20,598			5,118		3,806
Net income	$	15,193		$	11,812		$	43,694	$	36,916		$	16,037	$	14,277
Per common share data:
Basic earnings per common share	$	0.52		$	0.39		$	1.48	$	1.21		$	0.56	$	0.48
Diluted earnings per common share	$	0.52		$	0.39		$	1.47	$	1.20		$	0.55	$	0.48
Cash dividends declared	$	0.21		$	0.18		$	0.61	$	0.52		$	0.21	$	0.19
Weighted average common shares outstanding used in computation:
Basic shares	29,297,465			30,300,195			29,536,536		30,526,260			28,758,310		29,807,572
Diluted shares	29,479,812			30,514,459			29,743,238		30,758,989			28,979,855		30,041,351

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,					Three Months Ended March 31,
(dollars in thousands)	2018			2017			2018			2017		2019		2018
Net income	$	15,193		$	11,812		$	43,694		$	36,916	$	16,037	$	14,277
Other comprehensive income (loss), net of tax:
Net change in unrealized gain (loss) on investment securities	(6,072		)	(293		)	(24,712		)	4,626		10,996		(14,971		)
Defined benefit plans	217			285			623			111		242		256
Total other comprehensive income (loss), net of tax	(5,855		)	(8		)	(24,089		)	4,737		11,238		(14,715		)
Comprehensive income	$	9,338		$	11,804		$	19,605		$	41,653
Comprehensive income (loss)												$	27,275	$	(438	)

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)

Common
Shares
Outstanding Preferred
Stock Common
Stock Additional Paid-In Capital Accumulated
Deficit Accumulated
Other
Comprehensive
Income (Loss) Non-
Controlling
Interest Total
(dollars in thousands, except per share data)
Balance at December 31, 2017 30,024,222
$ —
$ 503,988
$ 86,098
$ (89,036 ) $ (1,039 ) $ 24
$ 500,035
Impact of the adoption of new accounting standards (1) —
—
—
—
139
(139 ) —
—
Adjusted balance at January 1, 2018 30,024,222
—
503,988
86,098
(88,897 ) (1,178 ) 24
500,035
Impact of the adoption of new accounting standards (2) —
—
—
—
1,836
(1,836 ) —
—
Net income —
—
—
—
43,694
—
—
43,694
Other comprehensive loss —
—
—
—
—
(24,089 ) —
(24,089 )
Cash dividends ($0.61 per share) —
—
—
—
(18,039 ) —
—
(18,039 )
16,950 net shares of common stock purchased by directors' deferred compensation plan —
—
(504 ) —
—
—
—
(504 )
849,290 shares of common stock repurchased and retired and other related costs (849,290 ) —
(24,763 )

—
—
—
(24,763 )
Share-based compensation 95,466
—
—
1,841
—
—
—
1,841
Distribution from variable interest entity —
—
—
—
—
—
(24 ) (24 )
Balance at September 30, 2018 29,270,398
$ —
$ 478,721
$ 87,939
$ (61,406 ) $ (27,103 ) $ —
$ 478,151

Balance at December 31, 2016 30,796,243
$ —
$ 530,932
$ 84,180
$ (108,941 ) $ (1,521 ) $ 25
$ 504,675
Net income —
—
—
—
36,916
—
—
36,916
Other comprehensive income —
—
—
—
—
4,737
—
4,737
Cash dividends ($0.52 per share) —
—
—
—
(15,888 ) —
—
(15,888 )
12,020 net shares of common stock purchased by directors' deferred compensation plan —
—
(385 ) —
—
—
—
(385 )
697,483 shares of common stock repurchased and retired and other related costs (697,483 ) —
(21,304 ) —
—
—
—
(21,304 )
Share-based compensation 89,988
—
—
1,120
—
—
—
1,120
Net loss from variable interest entity —
—
—
—
—
—
(1 ) (1 )
Balance at September 30, 2017 30,188,748
$ —
$ 509,243
$ 85,300
$ (87,913 ) $ 3,216
$ 24
$ 509,870

(1) Represents the impact of the adoption of Accounting Standards Update ("ASU") ASU 2016-01. See Notes 1 and 2 to the consolidated financial statements for additional information.
(2) Represents the impact of the adoption of ASU 2018-02. See Note 2 to the consolidated financial statements for additional information.



	Common Shares Outstanding		Preferred Stock		Common Stock			Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Non- Controlling Interest			Total
	(dollars in thousands, except per share data)
Balance at December 31, 2018	28,967,715		$	—	$	470,660		$	88,876	$	(51,718	)	$	(16,093	)	$	—		$	491,725
Impact of the adoption of new accounting standards (1)	—		—		—			—		—			(3,100		)	—			(3,100		)
Adjusted balance at January 1, 2019	28,967,715		—		470,660			88,876		(51,718		)	(19,193		)	—			488,625
Net income	—		—		—			—		16,037			—			—			16,037
Other comprehensive income	—		—		—			—		—			11,238			—			11,238
Cash dividends ($0.21 per share)	—		—		—			—		(6,052		)	—			—			(6,052		)
277,000 shares of common stock repurchased and retired and other related costs	(277,000	)	—		(7,708		)	—		—			—			—			(7,708		)
Share-based compensation	32,326		—					498		—			—			—			498
Balance at March 31, 2019	28,723,041		$	—	$	462,952		$	89,374	$	(41,733	)	$	(7,955	)	$	—		$	502,638

Balance at December 31, 2017	30,024,222		$	—	$	503,988		$	86,098	$	(89,036	)	$	(1,039	)	$	24		$	500,035
Impact of the adoption of new accounting standards (2)	—		—		—			—		139			(139		)	—			—
Adjusted balance at January 1, 2018	30,024,222		—		503,988			86,098		(88,897		)	(1,178		)	24			500,035
Impact of the adoption of new accounting standards (3)	—		—		—			—		1,836			(1,836		)	—			—
Net income	—		—		—			—		14,277			—			—			14,277
Other comprehensive loss	—		—		—			—		—			(14,715		)	—			(14,715		)
Cash dividends ($0.19 per share)	—		—		—			—		(5,670		)	—			—			(5,670		)
2,850 net shares of common stock purchased by directors' deferred compensation plan	—		—		(83		)	—		—			—			—			(83		)
344,362 shares of common stock repurchased and retired and other related costs	(344,362	)	—		(10,111		)	—		—			—			—			(10,111		)
Share-based compensation	27,262		—		—			399		—			—			—			399
Net loss from variable interest entity	—		—		—			—		—			—			(24		)	(24		)
Balance at March 31, 2018	29,707,122		$	—	$	493,794		$	86,497	$	(78,454	)	$	(17,729	)	$	—		$	484,108

(1) Represents the impact of the adoption of Accounting Standards Update ("ASU") ASU 2017-12. See Note 2 to the consolidated financial statements for additional information.
(2) Represents the impact of the adoption of ASU 2016-01.
(3) Represents the impact of the adoption of ASU 2018-02.

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Nine Months Ended September 30,						Three Months Ended March 31,
(dollars in thousands)	2018			2017			2019			2018
Cash flows from operating activities:
Net income	$	43,694		$	36,916		$	16,037		$	14,277
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for loan and lease losses	262			(2,488		)	1,283			(211		)
Depreciation and amortization of premises and equipment	4,700			4,768			1,540			1,599
Noncash lease expense							79			—
Cash flows from operating leases							(1,549		)	—
Gain or loss on sale of other real estate, net of write-downs	431			(192		)	138			256
Amortization of core deposit premium and mortgage servicing rights	3,419			3,549			471			1,126
Net amortization and accretion of premium/discounts on investment securities	8,465			8,960			2,211			2,922
Share-based compensation expense	1,841			1,120			498			399
Net loss on sales of investment securities	—			1,640
Net gain on sales of residential mortgage loans	(3,013		)	(3,101		)	(611		)	(972		)
Proceeds from sales of loans held for sale	183,967			249,866			31,877			64,106
Originations of loans held for sale	(169,078		)	(225,712		)	(28,158		)	(54,290		)
Equity in earnings of unconsolidated subsidiaries	(151		)	(388		)	(8		)	(43		)
Distributions from unconsolidated subsidiaries							82			539
Net increase in cash surrender value of bank-owned life insurance	(792		)	(3,256		)	(952		)	(318		)
Deferred income taxes	12,201			19,984			5,013			3,734
Net tax benefits from share-based compensation	185			614			105			72
Net change in other assets and liabilities	(7,925		)	(15,701		)	(2,173		)	(3,312		)
Net cash provided by operating activities	78,206			76,579			25,883			29,884
Cash flows from investing activities:
Proceeds from maturities of and calls on investment securities available-for-sale	114,508			128,588			43,093			40,039
Proceeds from sales of investment securities available-for-sale	—			96,019
Purchases of investment securities available-for-sale	(85,334		)	(333,242		)	—			(85,240		)
Proceeds from maturities of and calls on investment securities held-to-maturity	38,491			19,455			—			14,545
Proceeds from sale of MasterCard stock							2,555			—
Net loan proceeds (originations)	(190,022		)	(63,835		)	(6,851		)	(46,144		)
Purchases of loan portfolios	(20,867		)	(50,725		)	(18,286		)	—
Proceeds from sale of foreclosed loans/other real estate owned	46			286			—			40
Proceeds from bank-owned life insurance	—			2,921
Net purchases of premises and equipment	(2,536		)	(4,849		)	(782		)	(687		)
Net return of capital from unconsolidated subsidiaries	614			549			622			—
Contributions to unconsolidated subsidiaries	—			(4		)
Net (purchases of) proceeds from redemption of FHLB stock	(3,204		)	5,088			500			(1,246		)
Net cash used in investing activities	(148,304		)	(199,749		)	20,851			(78,693		)
Cash flows from financing activities:
Net increase in deposits	47,326			319,296			1,638			24,077
Repayments of long-term debt							(20,619		)	—
Net increase (decrease) in short-term borrowings	73,000			(135,000		)	(18,000		)	24,000
Cash dividends paid on common stock	(18,039		)	(15,888		)	(6,052		)	(5,670		)
Repurchases of common stock and other related costs	(24,763		)	(21,304		)	(7,708		)	(10,111		)
Net cash provided by financing activities	77,524			147,104			(50,741		)	32,296
Net increase (decrease) in cash and cash equivalents	7,426			23,934			(4,007		)	(16,513		)
Cash and cash equivalents at beginning of period	82,293			84,341			102,186			82,293
Cash and cash equivalents at end of period	$	89,719		$	108,275		$	98,179		$	65,780

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	15,969		$	9,097		$	8,402		$	4,877
Income taxes	23			7,900			—			22
Supplemental disclosure of non-cash investing and financing activities:
Net change in common stock held by directors’ deferred compensation plan	504			385
Supplemental disclosure of non-cash information:
Net reclassification of loans to foreclosed loans/other real estate owned	40			154			—			40
Net transfer of investment securities held to maturity to available for sale							149,042			—
Right-of-use lease assets obtained in exchange for lease liabilities							55,887			—

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

These interim condensed consolidated financial statements and notes should be read in conjunction with the Company's consolidated financial statements and notes thereto filed on Form 10-K ~~as amended by our Form 10-K/A~~ for the fiscal year ended December 31, ~~2017.~~2018. In the opinion of management, all adjustments necessary for a fair presentation have been made and include all normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.

Principles of Consolidation

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

In December 2015, we acquired a 50% ownership interest in a mortgage loan origination and brokerage company, One Hawaii HomeLoans, LLC. The bank concluded that the investment meets the consolidation requirements under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 810, "Consolidation." The bank concluded that the entity meets the definition of a variable interest entity and that we are the primary beneficiary of the variable interest entity. Accordingly, the investment was consolidated into our financial statements. One Hawaii HomeLoans, LLC was terminated in 2017, and final payment of taxes and distributions to members was made in March 2018.

We have 50% ownership interests in three other mortgage loan origination and brokerage companies which are accounted for using the equity method and are included in investment in unconsolidated subsidiaries: Gentry HomeLoans, LLC, Haseko HomeLoans, LLC and Island Pacific HomeLoans, LLC. We also had 50% ownership interest in one additional mortgage loan origination and brokerage company, Pacific Access Mortgage, LLC, which was also accounted for using the equity method and was included in investment in unconsolidated subsidiaries. Pacific Access Mortgage, LLC was terminated in 2017, and final payment of taxes and distributions to members was made in March 2018.

During the fourth quarter of 2018, we voluntarily changed our accounting policy for investments in low income housing tax credit ("LIHTC") partnerships from the cost method to the proportional amortization method using the practical expedient available under ASC 323, "Investments - Equity Method and Joint Ventures", which permits an investor to amortize the initial cost of the investment in proportion to only the tax credits allocated to the investor. We believe the proportional amortization method is preferable because it better reflects the economics of an investment that is made for the primary purpose of receiving tax credits and other tax benefits. In addition to a change in the timing of the recognition of amortization expense on LIHTC investments, amortization expense on LIHTC investments is now reflected in the income tax expense line, which provides users a better understanding of the nature of the returns of such investments, instead of in other operating expenses on the consolidated statements of income. The change did not impact net income, the consolidated balance sheets and the consolidated statements of cash flows.

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

Our investments in unconsolidated subsidiaries accounted for under the equity, proportional amortization and cost methods were ~~$0.2~~$0.1 million, $14.3 million and ~~$15.1~~$1.6 million, respectively, at ~~September 30, 2018~~March 31, 2019 and ~~$0.6~~$0.2 million, $11.6 million and ~~$6.5~~$2.2 million, respectively, at December 31, ~~2017.~~2018. Our policy for determining impairment of these investments includes an evaluation of whether a loss in value of an investment is other than temporary. Evidence of a loss in value includes absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. We perform impairment tests whenever indicators of impairment are

present. If the value of an investment declines and it is considered other than temporary, the investment is written down to its respective fair value in the period in which this determination is made.

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

Reclassifications

~~The Company's equity investment securities~~Certain prior year amounts in the ~~prior year~~consolidated financial statements and the notes thereto have been reclassified ~~from available-for-sale debt securities~~ to conform to the ~~current year's presentation in accordance with Accounting Standards Update ("ASU") 2016-01,~~ ~~"Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Liabilities~~." ~~The reclassification~~fiscal 2019 presentation. Such reclassifications had no ~~impact~~effect on the Company's reported net income or shareholders' equity.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Adopted in ~~2018~~

~~In May 2014, the FASB issued ASU 2014-09,~~ ~~"Revenue from Contracts with Customers (Topic 606)."~~ ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU replaces most existing revenue recognition guidance in GAAP. ASU 2014-09 was initially effective for the Company's reporting period beginning on January 1, 2017. However, in August 2015, the FASB issued ASU 2015-14, ~~"Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date"~~ which deferred the effective date by one year. For financial reporting purposes, the standard allows for either a full retrospective or modified retrospective adoption. The FASB has also issued additional updates to provide further clarification to specific implementation issues associated with ASU 2014-09. These updates include ASU 2016-08, ~~"Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations,"~~ ~~ASU 2016-10,~~ ~~"Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,"~~ ~~ASU 2016-12,~~ ~~"Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,"~~ ~~and ASU 2016-20~~ ~~"Technical Corrections and Improvements to Topic 606."~~ Our revenue is comprised of net interest income on financial assets and financial liabilities, which is our main source of income, and other operating income. The scope of ASU 2014-09 explicitly excludes net interest income, as well as other revenues associated with financial assets and liabilities, including loans, leases, securities and derivatives. With respect to other operating income, the Company conducted a comprehensive scoping exercise to determine the revenue streams that are in scope of the guidance. This included reviewing the contracts potentially impacted by the standard in revenue streams such as deposit-related fees, merchant fees, bank card fees, interchange fees, commissions income, trust and asset management fees, foreign exchange fees, and loan placement fees. We adopted ASU 2014-09 and all subsequent amendments to the standard beginning January 1, 2018 under the modified retrospective approach. Based on our analysis, the standard required us to change how we recognize certain recurring revenue streams on a gross versus net basis. This resulted in an increase in other service charges and fees totaling $0.2 million and $0.5 million during the three and nine months ended September 30, 2018, respectively, and the resultant increase in other operating expense-other for the same amount. These changes did not have an impact to our net income; as such a cumulative effect adjustment to opening accumulated deficit was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606 while prior period amounts continue to be recorded in accordance with legacy GAAP. Refer to Note 11 - Revenue from Contracts with Customers for further discussion on the Company's accounting policies for revenue sources within the scope of Accounting Standards Codification ("ASC") 606.

~~In January 2016, the FASB issued ASU 2016-01,~~ ~~"Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Liabilities~~." The amendments in ASU 2016-01 made targeted improvements to GAAP as follows: 1) required equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, 2) simplified the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, 3) eliminated the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities, 4) eliminated the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, 5) required public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, 6) required an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, 7) required separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements, and 8) clarified that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The Company adopted ASU 2016-01 beginning January 1, 2018, which resulted in a reclassification of the Company's equity investment securities portfolio of $0.9 million and $0.8 million as of September 30, 2018 and December 31, 2017, respectively, from available-for-sale debt securities to equity securities on the Company's consolidated balance sheets. Changes in fair value are recognized in net income. In addition, during the first quarter of 2018, the Company recorded a cumulative effect adjustment which increased opening retained earnings (or reduced opening accumulated deficit) and decreased accumulated other comprehensive income (loss) ("AOCI") by $0.1 million related to the unrealized gains on the equity investment securities portfolio and changes in the fair value of the equity investment securities portfolio were recognized in net income. The Company also engaged a third-party consultant, who used a refined calculation to determine the fair value of our loans held for investment portfolio using the exit price notion, which is included in our fair value disclosures in Note 17 - Fair Value of Financial Assets and Liabilities. The refined calculation did not have a material impact on our fair value disclosures.

~~In August 2016, the FASB issued ASU 2016-15,~~ ~~"Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments."~~ ASU 2016-15 provided guidance on eight statement of cash flow classification issues and was intended to reduce the current and future diversity in practice described in the amendments. Current GAAP is either unclear or does not include specific guidance on the eight statement of cash flow classification issues included in ASU 2016-15. The Company adopted ASU 2016-15 effective January 1, 2018. The amendments in ASU 2016-15 did not impact the Company's financial statements as our current practice was consistent with the update.

~~In March 2017, the FASB issued ASU 2017-07,~~ ~~"Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost."~~ ASU 2017-07 requires an entity to present the service cost component of the net periodic benefit cost in the same line item or items in the statement of income as other employee compensation costs arising from services rendered by the pertinent employees during the period. In addition, only the service cost component is eligible for capitalization. The other components of net benefit costs should be presented in the statement of income separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item is used to present the other components, that line item shall be described appropriately. The line items used in the income statement to present the components other than the service cost component shall be disclosed if a Company elects to not present them in a separate line item. The Company adopted ASU 2017-07 effective January 1, 2018. The amendments in ASU 2017-07 did not impact the Company's financial statements.

~~In March 2017, the FASB issued ASU 2017-08,~~ ~~"Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities."~~ ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. ASU 2017-08 does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. Although ASU 2017-08 is effective for the Company's reporting period beginning on January 1, 2019 ~~the Company elected to early adopt the standard effective January 1, 2018. The amendments in ASU 2017-08 did not have a material impact to the Company's financial statements.~~

~~In May 2017, the FASB issued ASU 2017-09,~~ ~~"Compensation-Stock Compensation (Topic 718): Scope of Modification."~~ ASU 2017-09 was issued to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation - Stock Compensation, to a change to the terms or conditions of a share-based payment award. Diversity in practice has arisen in part because some entities apply modification accounting under Topic 718 for modifications to terms and conditions that they consider substantive, but do not when they conclude that particular modifications are not substantive. Others apply modification accounting for any change to an award, except for changes that they consider purely administrative in nature. Still others apply modification accounting when a change to an award changes the fair value, the vesting, or the classification of the award. In practice, it appears that the evaluation of a change in fair value, vesting, or classification may be used to evaluate whether a change is substantive. ASU 2017-09 includes guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The Company adopted ASU 2017-09 effective January 1, 2018. The amendments in ASU 2017-09 did not impact the Company's financial statements as the Company has not historically had any scope modifications and has no plans to do so in the near future.

~~In February 2018, the FASB issued ASU 2018-02,~~ ~~"Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income."~~ ASU 2018-02 was issued to address certain stranded tax effects in AOCI as a result of H.R.1., commonly referred to as the Tax Cuts and Jobs Act ("Tax Reform"). ASU 2018-02 provides companies the option to reclassify stranded tax effects within AOCI to retained earnings (or accumulated deficit) in each period in which the effect of the change from the newly enacted corporate tax rate is recorded. The amount of the reclassification is calculated on the basis of the difference between the historical and newly enacted tax rates for deferred tax assets and liabilities related to items within AOCI. ASU 2018-02 requires companies to disclose its accounting policy related to releasing income tax effects from accumulated other comprehensive income, whether it has elected to reclassify the stranded tax effects, and information about the other income tax effects that are reclassified. Although ASU 2018-02 is effective for the Company's reporting period beginning on January 1, 2019, the Company elected to early adopt the standard effective January 1, 2018. As a result, the Company recorded cumulative effect adjustments which increased opening retained earnings (or reduced opening accumulated deficit) and decreased AOCI for the stranded tax effects related to the Company's defined benefit pension and supplemental retirement plan obligations and the unrealized loss on the Company's investment securities portfolio by $1.4 million and $0.5 million, respectively.

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

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key

information about leasing arrangements. The ASU establishes a right-of-use ("ROU") model that requires a lessee to recognize a ROU lease asset and lease liability on the balance sheet for all leases with a term of longer than 12 months. The FASB has also made available several practical expedients to assist entities with the adoption of ASU 2016-02. Among other things, these practical expedients require no reassessment of whether existing contracts are or contain leases as well as no reassessment of lease classification for current leases. In July 2018, the FASB released ASU 2018-11, ~~"Leases~~"Leases (Topic ~~842~~842): Targeted ~~Improvements)~~Improvements," which adds an additional practical expedient that allows entities to elect not to recast comparative periods presented when transitioning to Topic 842. The Company elected to adopt the practical expedient allowed under ASU 2018-11. During the ~~quarter~~year ended ~~September 30,~~December 31, 2018, the Company ~~has~~ engaged a software vendor to assist in the implementation of ASU 2016-02. The Company adopted ASU 2016-02 effective January 1, 2019 using the modified retrospective approach and ~~has completed testing~~recorded a ROU lease asset and corresponding lease liability on the Company's consolidated balance sheet of ~~completeness~~$55.9 million for its operating leases where it is a lessee. There was no impact to the Company's financial statements for its leases where it is a lessor. As of March 31, 2019, the ROU lease asset and ~~accuracy~~lease liability was $54.8 million and $54.9 million, respectively. See Note 12 - Leases for required disclosures on this new standard.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." ASU 2017-12 was issued to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The FASB believes that such amendments will: 1) improve the ~~lease population.~~transparency of information about an entity’s risk management activities and 2) simplify the application of hedge accounting. The ASU ~~is effective~~allows an entity that qualifies for the ~~Company's reporting period beginning~~last-of-layer method to reclassify securities from the held-to-maturity category to the available-for-sale category. The Company adopted ASU 2017-12 effective January 1, 2019 and ~~must be applied using~~transferred its entire held-to-maturity investment securities portfolio with a fair value of $144.3 million at January 1, 2019 to the ~~modified retrospective approach. Based~~available-for-sale portfolio. On the date of adoption, the Company recorded a cumulative effect adjustment related to the unrealized loss on ~~preliminary evaluation,~~ the investment securities transferred, which decreased available-for-sale investments by $4.2 million, increased deferred tax assets by $1.1 million, and decreased opening accumulated other comprehensive income (loss) ("AOCI") by $3.1 million. The ASU ~~will~~did not have a material impact on our ~~consolidated financial statements as the projected minimum lease payments under existing leases subject to the ASU are less than one percent~~current derivative activities.

Impact of ~~our total assets as of September 30, 2018.~~Other Recently Issued Accounting Pronouncements on Future Filings

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s “incurred loss” guidance delays the recognition of credit losses on loans, leases, held-to-maturity debt securities, loan commitments, and financial guarantees, and instead provides for a current expected credit loss (“CECL”) approach to determine the allowance for credit losses. CECL requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. In addition, this guidance modifies the accounting treatment for other-than-temporary impairment for available-for-sale debt securities. Organizations will continue to use judgment to determine which loss estimation methods are appropriate for their circumstances. This guidance requires entities to record a cumulative effect adjustment to the consolidated balance sheet as of the beginning of the first reporting period in which the guidance is effective. However, an organization may elect to phase in the regulatory capital impact over a three-year transition period if adoption of the new standard results in a reduction of retained earnings. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with earlier adoption permitted. As such, the Company will implement CECL for the reporting period

beginning January 1, 2020. The new guidance will require significant operational changes, particularly in existing processes, data collection and analysis.

The Company has formed a steering committee that is responsible for oversight of the Company’s implementation strategy for compliance with provisions of the new standard. The Company has also established a project management governance process to manage the implementation across affected disciplines. AnWith the help of an external third-party provider specializing in ~~community bank loss driver and~~ CECL reserving model design as well as other related consulting services, ~~has been retained, and~~ we have begun ~~to evaluate~~evaluating several potential CECL ~~modeling alternatives.~~test models. As part of this process, the Company has determined potential loan pool segmentation and sub-segmentation under CECL, as well as evaluated ~~the~~various key economic loss drivers for each segment. Further, the Company has engaged aan additional third party specializing in economic forecasting ~~service~~services, to ~~utilize in developing~~enable the ~~Company's~~Company to develop reasonable and supportable forecasts under CECL. ~~The~~Finally, the Company ~~presently~~has begun developing internal controls around the CECL process, data, calculations and implementation. Later in the year, the Company plans to generate and evaluate model scenarios under CECL in tandem with its current reserving processes for select interim ~~and annual~~ reporting periods in 2019. While the Company is currently unable to reasonably estimate the impact of adopting this new guidance, management expects the impact of adoption will be significantly influenced by its own historical experience, the composition and quality of the Company’s loans ~~and investment securities~~ as well as ~~the~~ economic forecast conditions as of the date of adoption. The Company also anticipates significant changes to the processes and procedures for calculating the reserve for credit losses and continues to evaluate the potential impact on our consolidated financial statements.

~~In August 2017, the FASB issued ASU 2017-12,~~ ~~"Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities."~~ ASU 2017-12 was issued to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The FASB believes that such amendments will: 1) improve the transparency of information about an entity’s risk management activities and 2) simplify the application of hedge accounting. The ASU allows an entity that qualifies for the last-of-layer method to reclassify securities from the held-to-maturity category to the available-for-sale category. The ASU is effective for the the Company's reporting period beginning on January 1, 2019. Early adoption is permitted. We are currently in the process of evaluating the potential impact the amendments will have on our consolidated financial statements, but we do not expect the adoption of the ASU to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement." The ASU is part of the FASB's disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by generally accepted accounting principles. The ASU modifies disclosure requirements on fair value

measurements in Topic 820 and is effective for the Company's reporting period beginning January 1, 2020. Early adoption is permitted. Based on preliminary evaluation, the ASU will not have a material impact on disclosures in our consolidated financial statements.

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 August 2018, the FASB issued ASU 2018-15, "Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which requires an entity in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs should be presented in the same line item on the balance sheet as amounts prepaid for the hosted service, if any (generally as an “other asset”). The capitalized costs will be amortized over the term of the hosting arrangement, with the amortization expense being presented in the same income statement line item as the fees paid for the hosted service. ASU 2018-15 is effective for the Company's reporting period beginning January 1, 2020 and early adoption is permitted. We are currently in the process of evaluating the potential impact the amendments will have on our consolidated financial statements, but we do not expect the adoption of the ASU to have a material impact on our consolidated financial statements.

3. INVESTMENT SECURITIES

A summary of our investment portfolio is as follows:


(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2018
Held-to-maturity:
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	$	87,356	$	—	$	(4,339	)	$	83,017
Commercial - U.S. Government-sponsored entities	65,496		—		(2,047		)	63,449
Total held-to-maturity securities	$	152,852	$	—	$	(6,386	)	$	146,466

March 31, 2019
Available-for-sale:
Debt securities:
States and political subdivisions	$	175,495	$	788	$	(2,731	)	$	173,552	$	161,638	$	1,532	$	(562	)	$	162,608
Corporate securities	65,587		23		(477		)	65,133		52,893		90		(87		)	52,896
U.S. Treasury obligations and direct obligations of U.S Government agencies	34,566		—		(647		)	33,919		31,985		—		(448		)	31,537
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	763,635		297		(29,575		)	734,357		791,994		1,183		(13,517		)	779,660
Commercial - U.S. Government agencies and sponsored entities	53,618		—		(2,413		)	51,205		117,671		87		(1,283		)	116,475
Residential - Non-government agencies	42,069		132		(831		)	41,370		40,648		573		(112		)	41,109
Commercial - Non-government agencies	134,914		321		(1,769		)	133,466		134,819		1,138		(792		)	135,165
Total available-for-sale securities	$	1,269,884	$	1,561	$	(38,443	)	$	1,233,002	$	1,331,648	$	4,603	$	(16,801	)	$	1,319,450

Equity securities	$	712	$	173	$	—		$	885	$	910	$	—	$	—		$	910



(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2018
Held-to-maturity:
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	$	83,436	$	19	$	(3,174	)	$	80,281
Commercial - U.S. Government-sponsored entities	65,072		—		(1,081		)	63,991
Total held-to-maturity securities	$	148,508	$	19	$	(4,255	)	$	144,272

Available-for-sale:
Debt securities:
States and political subdivisions	$	174,114	$	1,035	$	(1,475	)	$	173,674
Corporate securities	55,259		—		(410		)	54,849
U.S. Treasury obligations and direct obligations of U.S Government agencies	33,257		—		(683		)	32,574
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	736,175		369		(19,492		)	717,052
Commercial - U.S. Government agencies and sponsored entities	53,014		—		(1,531		)	51,483
Residential - Non-government agencies	41,245		337		(464		)	41,118
Commercial - Non-government agencies	134,867		1,013		(1,152		)	134,728
Total available-for-sale securities	$	1,227,931	$	2,754	$	(25,207	)	$	1,205,478

Equity securities	$	826	$	—	$	—		$	826

(dollars in thousands) Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
December 31, 2017

Held-to-maturity:

Mortgage-backed securities:

Residential - U.S. Government-sponsored entities $ 100,279
$ 106
$ (2,222 ) $ 98,163
Commercial - U.S. Government-sponsored entities 91,474
—
(436 ) 91,038
Total held-to-maturity securities $ 191,753
$ 106
$ (2,658 ) $ 189,201

Available-for-sale:

Debt securities:

States and political subdivisions $ 178,459
$ 2,041
$ (719 ) $ 179,781
Corporate securities 73,772
582
(76 ) 74,278
U.S. Treasury obligations and direct obligations of U.S Government agencies 25,519
60
(69 ) 25,510
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities 808,242
2,230
(9,789 ) 800,683
Commercial - U.S. Government agencies and sponsored entities 40,012
—
(287 ) 39,725
Residential - Non-government agencies 45,679
1,084
—
46,763
Commercial - Non-government agencies 135,058
2,461
(193 ) 137,326
Total available-for-sale securities $ 1,306,741
$ 8,458
$ (11,133 ) $ 1,304,066

Equity securities $ 686
$ 139
$ —
$ 825

As discussed in Note 2 - Recent Accounting Pronouncements, on January 1, 2019 in connection with the adoption of ASU 2017-12, the Company transferred all of its held-to-maturity investment securities with an amortized cost of $148.5 million and fair value of $144.3 million to its available-for-sale investment securities portfolio.

The amortized cost and estimated fair value of investment securities at ~~September 30, 2018~~March 31, 2019 by contractual maturity are shown below. ~~Expected~~Actual maturities ~~will~~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.


	September 30, 2018				March 31, 2019
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Held-to-maturity:
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	$	87,356	$	83,017
Commercial - U.S. Government-sponsored entities	65,496		63,449
Total held-to-maturity securities	$	152,852	$	146,466

Available-for-sale:
Due in one year or less	$	63,878	$	63,916	$	58,360	$	58,394
Due after one year through five years	103,852		103,115		88,840		89,162
Due after five years through ten years	50,639		49,629		50,939		51,278
Due after ten years	57,279		55,944		48,377		48,207

Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	763,635		734,357		791,994		779,660
Commercial - U.S. Government agencies and sponsored entities	53,618		51,205		117,671		116,475
Residential - Non-government agencies	42,069		41,370		40,648		41,109
Commercial - Non-government agencies	134,914		133,466		134,819		135,165
Total available-for-sale securities	$	1,269,884	$	1,233,002	$	1,331,648	$	1,319,450

Equity securities	$	712	$	885	$	910	$	910

~~We did not sell any available-for-sale securities during the three and nine months ended September 30, 2018.~~

investment securities sold had an average yield of 1.91%. Gross proceeds of the sale of $96.0 million were immediately reinvested back into investment securities with an average yield of 2.57%. The new securities were classified in the available-for-sale portfolio. There were no gross realized gains on the sale of the investment securities. Gross realized losses on the sale of the investment securities were $1.6 million. The specific identification method was used as the basis for determining the cost of all securities sold.

We did not sell any available-for-sale securities during the three months ended March 31, ~~2017~~2019 and ~~September 30, 2017.~~March 31, 2018.

Investment securities of ~~$1.00~~$0.80 billion and ~~$1.08~~$0.98 billion at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively, were pledged to secure public funds on deposit and other ~~long-term debt and~~ short-term borrowings.

Provided below is a summary of the ~~379~~245 and ~~223~~336 investment securities which were in an unrealized or unrecognized loss position at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively, aggregated by major security type and length of time in a continuous unrealized or unrecognized loss position.


	Less Than 12 Months					12 Months or Longer					Total					Less Than 12 Months					12 Months or Longer					Total
(dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2018
March 31, 2019
Debt securities:
States and political subdivisions	$	87,069	$	(1,225	)	$	26,654	$	(1,506	)	$	113,723	$	(2,731	)	$	13,980	$	(20	)	$	35,577	$	(542	)	$	49,557	$	(562	)
Corporate securities	54,275		(301		)	5,130		(176		)	59,405		(477		)	—		—			25,054		(87		)	25,054		(87		)
U.S. Treasury obligations and direct obligations of U.S Government agencies	31,220		(602		)	2,699		(45		)	33,919		(647		)	12,630		(93		)	18,907		(355		)	31,537		(448		)
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	285,808		(7,950		)	513,681		(25,964		)	799,489		(33,914		)	22,533		(461		)	645,030		(13,056		)	667,563		(13,517		)
Residential - Non-government agencies	24,690		(831		)	—		—			24,690		(831		)	—		—			15,478		(112		)	15,478		(112		)
Commercial - U.S. Government agencies and sponsored entities	57,509		(1,873		)	57,145		(2,587		)	114,654		(4,460		)	—		—			102,257		(1,283		)	102,257		(1,283		)
Commercial - Non-government agencies	93,778		(1,769		)	—		—			93,778		(1,769		)	14,888		(48		)	60,637		(744		)	75,525		(792		)
Total temporarily impaired securities	$	634,349	$	(14,551	)	$	605,309	$	(30,278	)	$	1,239,658	$	(44,829	)	$	64,031	$	(622	)	$	902,940	$	(16,179	)	$	966,971	$	(16,801	)

Less Than 12 Months 12 Months or Longer Total
(dollars in thousands) Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses
December 31, 2017

Debt securities:

States and political subdivisions $ 53,811
$ (305 ) $ 15,403
$ (414 ) $ 69,214
$ (719 )
Corporate securities —
—
5,307
(76 ) 5,307
(76 )
U.S. Treasury obligations and direct obligations of U.S Government agencies 10,740
(69 ) —
—
10,740
(69 )
Mortgage-backed securities:

Residential - U.S. Government-sponsored entities 335,883
(3,372 ) 340,219
(8,639 ) 676,102
(12,011 )
Residential - Non-government agencies —
—
—
—
—
—
Commercial - U.S. Government-sponsored entities 130,763
(723 ) —
—
130,763
(723 )
Commercial - Non-government agencies 28,490
(193 ) —
—
28,490
(193 )
Total temporarily impaired securities $ 559,687
$ (4,662 ) $ 360,929
$ (9,129 ) $ 920,616
$ (13,791 )

~~Other-Than-Temporary Impairment ("OTTI")~~

Management evaluates investment securities for OTTI on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation, to determine whether the unrealized losses on investment securities, or the decline in their value below amortized cost is "other-than-temporary." The term "other-than-temporary" is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. In conducting this assessment, for securities in an unrealized loss position we evaluate a number of factors including, but not limited to:

~~The length of time and the extent to which fair value has been less than the amortized cost basis;~~

~~Adverse conditions specifically related to the security, an industry, or a geographic area;~~

~~The historical and implied volatility of the fair value of the security;~~

~~The payment structure of the debt security and the likelihood of the issuer being able to make payments;~~

~~Failure of the issuer to make scheduled interest or principal payments;~~

~~Any rating changes by a rating agency; and~~

~~Recoveries or additional declines in fair value subsequent to the balance sheet date.~~

Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding impairment charge to earnings is recognized for anticipated credit losses.

For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

The declines in market value were primarily attributable to changes in interest rates and volatility in the credit and financial markets. Because we have no intent to sell securities in an unrealized loss position and it is not more likely than not that we will be required to sell such securities before recovery of its amortized cost basis, we do not consider our investments to be other-than-temporarily impaired.



	Less Than 12 Months					12 Months or Longer					Total
(dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2018
Debt securities:
States and political subdivisions	$	38,099	$	(157	)	$	49,505	$	(1,318	)	$	87,604	$	(1,475	)
Corporate securities	49,729		(250		)	5,120		(160		)	54,849		(410		)
U.S. Treasury obligations and direct obligations of U.S Government agencies	30,029		(613		)	2,545		(70		)	32,574		(683		)
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	88,957		(1,229		)	666,685		(21,437		)	755,642		(22,666		)
Residential - Non-government agencies	—		—			24,515		(464		)	24,515		(464		)
Commercial - U.S. Government-sponsored entities	13,973		(247		)	101,500		(2,365		)	115,473		(2,612		)
Commercial - Non-government agencies	33,847		(233		)	46,680		(919		)	80,527		(1,152		)
Total temporarily impaired securities	$	254,634	$	(2,729	)	$	896,550	$	(26,733	)	$	1,151,184	$	(29,462	)

Visa and MasterCard Class B Common Stock

As of ~~September 30, 2018,~~March 31, 2019, the Company owns 34,631 ~~shares and 11,170~~ shares of Class B common stock of Visa, Inc. ("Visa") ~~and MasterCard, Inc.~~. These shares were received in 2008 as part of Visa's initial public offering ("~~MasterCard"~~IPO")~~, respectively. Due~~. These shares are transferable only under limited circumstances until they can be converted into shares of the publicly traded Class A common stock. This conversion will not occur until the resolution of certain litigation, which is indemnified by Visa members. Since its IPO, Visa has funded a litigation reserve to ~~transfer restrictions and~~settle these litigation claims. At its discretion, Visa may continue to increase the ~~lack~~litigation reserve based upon a change in the conversion ratio of ~~readily determinable fair values 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 ~~and MasterCard,~~litigation, the Company has determined that the Visa Class B common stock does not have a readily determinable fair value and chooses to carry the shares on the Company's consolidated balance sheets at zero cost basis.

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

4. LOANS AND LEASES

Loans and leases, excluding loans held for sale, consisted of the ~~following:~~following as of March 31, 2019 and December 31, 2018:


(dollars in thousands)	September 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Commercial, financial and agricultural	$	564,900	$	503,738	$	566,248	$	581,177
Real estate:
Construction	69,065		64,525		71,483		67,269
Residential mortgage	1,388,925		1,337,193		1,447,970		1,424,384
Home equity	455,599		412,230		465,798		468,966
Commercial mortgage	1,034,951		979,239		1,059,401		1,041,685
Consumer	462,198		470,819		487,888		492,268
Leases	170		362		83		124
Gross loans and leases	3,975,808		3,768,106		4,098,871		4,075,873
Net deferred costs	2,219		2,509		2,700		2,493
Total loans and leases, net of deferred costs	$	3,978,027	$	3,770,615	$	4,101,571	$	4,078,366

During the ~~nine~~three months ended ~~September 30,~~March 31, 2019, we did not foreclose on any loans.

During the three months ended March 31, 2018, we foreclosed on one loan totaling $40 ~~thousand, which was sold at a small premium to book value.~~thousand.

During the ~~nine~~three months ended ~~September 30, 2017, we foreclosed on one loan totaling $0.1 million.~~

~~During the nine months ended September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ we did not transfer any loans to the held-for-sale category.

We did not sell any portfolio loans during the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018.

In ~~May 2018~~,the first quarter of 2019, we purchased ~~an auto loan portfolio~~consumer loans totaling ~~$20.6~~$18.3 million which represented the outstanding balance at the time of purchase.

In 2018, we purchased consumer loans totaling $58.6 million, which included a ~~$0.1~~0.1 million premium over the ~~$20.5~~$58.5 million outstanding ~~balance. At~~balance at the time of ~~purchase, the auto loans had a weighted average remaining term of 63 months and a weighted average yield, net of the premium paid and servicing costs, of 3.89%.~~

In ~~November 2017~~, we purchased an auto loan portfolio totaling $33.1 million which included a $1.1 million premium over the $31.9 million outstanding balance. At the time of purchase, the auto loans had a weighted average remaining term of 76 months and a weighted average yield, net of the premium paid and servicing costs, of 3.04%.

In ~~May 2017~~, we purchased an auto loan portfolio totaling $26.6 million which included a $0.9 million premium over the $25.7 million outstanding balance. At the time of purchase, the auto loans had a weighted average remaining term of 77 months and a weighted average yield, net of the premium paid and servicing costs, of 2.67%.

In ~~March 2017~~, we purchased an auto loan portfolio totaling $24.1 million which included a $0.4 million premium over the $23.8 million outstanding balance. At the time of purchase, the auto loans had a weighted average remaining term of 55 months and a weighted average yield, net of the premium paid and servicing costs, of 2.60%.purchase.

Impaired Loans

The following tables present by class, the balance in the allowance for loan and lease losses (the "Allowance") and the recorded investment in loans and leases based on the Company's impairment measurement method as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


			Real Estate																			Real Estate
(dollars in thousands)	Comml, Fin & Ag		Constr			Resi Mortgage		Home Equity		Comml Mortgage			Consumer			Leases		Total		Comml, Fin & Ag		Constr			Resi Mortgage		Home Equity		Comml Mortgage			Consumer			Leases		Total
September 30, 2018
March 31, 2019
Allowance:
Individually evaluated for impairment	$	—	$	—		$	87	$	—	$	—		$	—		$	—	$	87	$	—	$	—		$	—	$	—	$	—		$	—		$	—	$	—
Collectively evaluated for impairment	7,867		1,291			14,048		3,718		13,470			6,345			—		46,739		7,847		1,299			12,851		4,278		12,036			8,956			—		47,267
Total ending balance	$	7,867	$	1,291		$	14,135	$	3,718	$	13,470		$	6,345		$	—	$	46,826	$	7,847	$	1,299		$	12,851	$	4,278	$	12,036		$	8,956		$	—	$	47,267

Loans and leases:
Individually evaluated for impairment	$	388	$	2,355		$	12,660	$	415	$	3,439		$	—		$	—	$	19,257	$	199	$	2,194		$	9,633	$	570	$	2,222		$	—		$	—	$	14,818
Collectively evaluated for impairment	564,512		66,710			1,376,265		455,184		1,031,512			462,198			170		3,956,551		566,049		69,289			1,438,337		465,228		1,057,179			487,888			83		4,084,053
Subtotal	564,900		69,065			1,388,925		455,599		1,034,951			462,198			170		3,975,808		566,248		71,483			1,447,970		465,798		1,059,401			487,888			83		4,098,871
Net deferred costs (income)	464		(424		)	3,744		—		(1,501		)	(64		)	—		2,219		547		(308		)	3,824		107		(1,395		)	(75		)	—		2,700
Total loans and leases, net of deferred costs (income)	$	565,364	$	68,641		$	1,392,669	$	455,599	$	1,033,450		$	462,134		$	170	$	3,978,027	$	566,795	$	71,175		$	1,451,794	$	465,905	$	1,058,006		$	487,813		$	83	$	4,101,571


			Real Estate																			Real Estate
(dollars in thousands)	Comml, Fin & Ag		Constr			Resi Mortgage		Home Equity		Comml Mortgage			Consumer			Leases		Total		Comml, Fin & Ag		Constr			Resi Mortgage		Home Equity		Comml Mortgage			Consumer			Leases		Total
December 31, 2017
December 31, 2018
Allowance:
Individually evaluated for impairment	$	—	$	—		$	—	$	—	$	—		$	—		$	—	$	—	$	—	$	—		$	—	$	—	$	—		$	—		$	—	$	—
Collectively evaluated for impairment	7,594		1,835			14,328		3,317		16,801			6,126			—		50,001		8,027		1,202			14,349		3,788		13,358			7,192			—		47,916
Total ending balance	$	7,594	$	1,835		$	14,328	$	3,317	$	16,801		6,126			$	—	$	50,001	$	8,027	$	1,202		$	14,349	$	3,788	$	13,358		7,192			$	—	$	47,916

Loans and leases:
Individually evaluated for impairment	$	491	$	2,597		$	13,862	$	416	$	3,914		$	—		$	—	$	21,280	$	220	$	2,273		$	10,075	$	275	$	2,348		$	—		$	—	$	15,191
Collectively evaluated for impairment	503,247		61,928			1,323,331		411,814		975,325			470,819			362		3,746,826		580,957		64,996			1,414,309		468,691		1,039,337			492,268			124		4,060,682
Subtotal	503,738		64,525			1,337,193		412,230		979,239			470,819			362		3,768,106		581,177		67,269			1,424,384		468,966		1,041,685			492,268			124		4,075,873
Net deferred costs (income)	281		(285		)	4,028		—		(1,442		)	(73		)	—		2,509		483		(342		)	3,821		—		(1,407		)	(62		)	—		2,493
Total loans and leases, net of deferred costs (income)	$	504,019	$	64,240		$	1,341,221	$	412,230	$	977,797		$	470,746		$	362	$	3,770,615	$	581,660	$	66,927		$	1,428,205	$	468,966	$	1,040,278		$	492,206		$	124	$	4,078,366

~~There was one impaired loan with an allowance of $0.1 million recorded as of September 30, 2018.~~ There were no impaired loans with an allowance recorded as of March 31, 2019 and December 31, ~~2017.~~2018. The following table presents by class, information related to impaired loans as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


	September 30, 2018						December 31, 2017						March 31, 2019						December 31, 2018
	Unpaid Principal Balance		Recorded Investment		Allowance Allocated		Unpaid Principal Balance		Recorded Investment		Allowance Allocated		Unpaid Principal Balance		Recorded Investment		Allowance Allocated		Unpaid Principal Balance		Recorded Investment		Allowance Allocated
	(dollars in thousands)												(dollars in thousands)
Impaired loans:
Commercial, financial and agricultural	$	498	$	388	$	—	$	602	$	491	$	—	$	309	$	199	$	—	$	330	$	220	$	—
Real estate:
Construction	7,705		2,355		—		7,947		2,597		—		2,996		2,194		—		3,076		2,273		—
Residential mortgage	13,689		12,660		87		14,920		13,862		—		10,578		9,633		—		11,019		10,075		—
Home equity	415		415		—		416		416		—		570		570		—		275		275		—
Commercial mortgage	3,439		3,439		—		3,914		3,914		—		2,222		2,222		—		2,348		2,348		—
Total impaired loans	$	25,746	$	19,257	$	87	$	27,799	$	21,280	$	—	$	16,675	$	14,818	$	—	$	17,048	$	15,191	$	—

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, 2018~~March 31, 2019 and ~~2017:~~2018:


	Three Months Ended								Nine Months Ended								Three Months Ended
	September 30, 2018				September 30, 2017				September 30, 2018				September 30, 2017				March 31, 2019				March 31, 2018
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial, financial and agricultural	$	399	$	12	$	1,212	$	3	$	498	$	17	$	1,500	$	7	$	209	$	3	$	483	$	2
Real estate:
Construction	2,382		30		2,704		26		2,476		84		2,800		74		2,233		30		2,557		26
Residential mortgage	12,857		123		16,444		189		13,208		419		17,951		1,356		9,818		106		13,744		137
Home equity	447				1,418		—		516				1,343		1		497		—		567		—
Commercial mortgage	3,483		36		4,440		179		3,653		110		5,143		272		2,285		23		3,809		38
Total	$	19,568	$	201	$	26,218	$	397	$	20,351	$	630	$	28,737	$	1,710	$	15,042	$	162	$	21,160	$	203

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

Foreclosure Proceedings

The Company had ~~$0.1~~$0.5 million and $0.7 million of residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure at ~~September 30, 2018. The Company had $40 thousand of residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure at~~March 31, 2019 and December 31, ~~2017.~~2018, respectively.

Aging Analysis of Accruing and Non-Accruing Loans and Leases

For all loan types, the Company determines delinquency status by considering the number of days full payments required by the contractual terms of the loan are past due. The following tables present by class, the aging of the recorded investment in past due loans and leases as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


(dollars in thousands)	Accruing Loans 30 - 59 Days Past Due		Accruing Loans 60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due and Nonaccrual		Loans and Leases Not Past Due		Total		Accruing Loans 30 - 59 Days Past Due		Accruing Loans 60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due and Nonaccrual		Loans and Leases Not Past Due		Total
September 30, 2018
March 31, 2019
Commercial, financial and agricultural	$	1,821	$	326	$	—	$	—	$	2,147	$	563,217	$	565,364	$	924	$	565	$	—	$	—	$	1,489	$	565,306	$	566,795
Real estate:
Construction	—		—		—		—		—		68,641		68,641		—		—		—		—		—		71,175		71,175
Residential mortgage	98		708		—		2,197		3,003		1,389,666		1,392,669		3,559		—		—		2,492		6,051		1,445,743		1,451,794
Home equity	1,582		—		—		415		1,997		453,602		455,599		108		—		—		570		678		465,227		465,905
Commercial mortgage	12		—		—		—		12		1,033,438		1,033,450		—		—		—		—		—		1,058,006		1,058,006
Consumer	1,849		604		333		—		2,786		459,348		462,134		1,712		518		159		—		2,389		485,424		487,813
Leases	—		—		—		—		—		170		170		—		—		—		—		—		83		83
Total	$	5,362	$	1,638	$	333	$	2,612	$	9,945	$	3,968,082	$	3,978,027	$	6,303	$	1,083	$	159	$	3,062	$	10,607	$	4,090,964	$	4,101,571


(dollars in thousands)	Accruing Loans 30 - 59 Days Past Due		Accruing Loans 60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due and Nonaccrual		Loans and Leases Not Past Due		Total		Accruing Loans 30 - 59 Days Past Due		Accruing Loans 60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due and Nonaccrual		Loans and Leases Not Past Due		Total
December 31, 2017
December 31, 2018
Commercial, financial and agricultural	$	410	$	355	$	—	$	—	$	765	$	503,254	$	504,019	$	1,348	$	162	$	—	$	—	$	1,510	$	580,150	$	581,660
Real estate:
Construction	—		—		—		—		—		64,240		64,240		—		—		—		—		—		66,927		66,927
Residential mortgage	4,037		2,127		49		2,280		8,493		1,332,728		1,341,221		3,966		157		—		2,048		6,171		1,422,034		1,428,205
Home equity	105		264		—		416		785		411,445		412,230		433		104		298		275		1,110		467,856		468,966
Commercial mortgage	—		—		—		79		79		977,718		977,797		—		—		—		—		—		1,040,278		1,040,278
Consumer	2,126		1,056		515		—		3,697		467,049		470,746		2,340		872		238		—		3,450		488,756		492,206
Leases	—		—		—		—		—		362		362		—		—		—		—		—		124		124
Total	$	6,678	$	3,802	$	564	$	2,775	$	13,819	$	3,756,796	$	3,770,615	$	8,087	$	1,295	$	536	$	2,323	$	12,241	$	4,066,125	$	4,078,366

Modifications

Troubled debt restructurings ("TDRs") included in nonperforming assets at ~~September 30, 2018~~March 31, 2019 consisted of three Hawaii residential mortgage loans with a combined principal balance of $0.4 million.

Concessions made to the original contractual terms of these loans consisted primarily of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. The principal balances on these TDRs had matured and/or were in default at the time of restructure, and we have no commitments to lend additional funds to any of these borrowers. There were ~~$11.3~~$11.8 million of TDRs still accruing interest at ~~September 30, 2018,~~March 31, 2019, none of which were more than 90 days delinquent. At December 31, ~~2017,~~2018, there were ~~$12.6~~$12.9 million of TDRs still accruing interest, none of which were more than 90 days delinquent.

Some loans modified in a TDR may already be on nonaccrual status and partial charge-offs may have already been taken against the outstanding loan balance. Thus, these loans have already been identified as impaired and have already been evaluated under the Company's allowance for loan and lease losses (the "Allowance") methodology. Loans that were not on nonaccrual status when modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan. The loans modified in a TDR did not have a material effect on our provision for loan and lease losses (the "Provision") and the Allowance during the three ~~and nine~~ months ended ~~September 30, 2018.~~March 31, 2019.

~~The following table presents by class, information related to~~No loans were modified in a TDR during the ~~period presented.~~

(dollars in thousands) Number of
Contracts Recorded
Investment
(as of Period End) Increase in the
Allowance
Three Months Ended September 30, 2018

Real estate: Residential mortgage 3
$ 575
$ —
Total 3
$ 575
$ —

Nine Months Ended September 30, 2018

Real estate: Residential mortgage 3
$ 575
$ —
Total 3
$ 575
$ —

Three Months Ended September 30, 2017

Real estate: Residential mortgage 1
70
—
Total 1
$ 70
$ —

Nine Months Ended September 30, 2017

Commercial, financial and agricultural 1
$ 632
$ —
Real estate: Residential mortgage 1
70
—
Total 2
$ 702
$ —
three months ended March 31, 2019 and 2018.

No loans were modified as a TDR within the previous twelve months that subsequently defaulted during the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018.

We had no commitments on TDRs during the three months ended March 31, 2019 and 2018.

Credit Quality Indicators

The Company categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases individually by classifying the loans and leases by credit risk. This analysis includes non-homogeneous loans and leases, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans and leases classified as special mention, while still adequately protected by the borrower's capital adequacy and payment capability, exhibit distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment. These exposures require management's close attention so as to avoid becoming undue or unwarranted credit exposures.

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

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

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

Loans and leases not meeting the criteria above are considered to be pass-rated. The following table presents by class and credit indicator, the recorded investment in the Company's loans and leases as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


(dollars in thousands)	Pass		Special Mention		Substandard		Loss		Subtotal		Net Deferred Costs (Income)			Total		Pass		Special Mention		Substandard		Loss		Subtotal		Net Deferred Costs (Income)			Total
September 30, 2018
March 31, 2019
Commercial, financial and agricultural	$	535,574	$	11,496	$	17,830	$	—	$	564,900	$	464		$	565,364	$	554,400	$	2,142	$	9,706	$	—	$	566,248	$	547		$	566,795
Real estate:
Construction	69,065		—		—		—		69,065		(424		)	68,641		71,483		—		—		—		71,483		(308		)	71,175
Residential mortgage	1,386,630		—		2,295		—		1,388,925		3,744			1,392,669		1,445,385		—		2,585		—		1,447,970		3,824			1,451,794
Home equity	455,184		—		415		—		455,599		—			455,599		465,228		—		570		—		465,798		107			465,905
Commercial mortgage	1,022,854		10,982		1,115		—		1,034,951		(1,501		)	1,033,450		1,033,791		11,881		13,729		—		1,059,401		(1,395		)	1,058,006
Consumer	461,865		—		135		198		462,198		(64		)	462,134		487,729		—		114		45		487,888		(75		)	487,813
Leases	170		—		—		—		170		—			170		83		—		—		—		83		—			83
Total	$	3,931,342	$	22,478	$	21,790	$	198	$	3,975,808	$	2,219		$	3,978,027	$	4,058,099	$	14,023	$	26,704	$	45	$	4,098,871	$	2,700		$	4,101,571


(dollars in thousands)	Pass		Special Mention		Substandard		Loss		Subtotal			Net Deferred Costs (Income)			Total		Pass		Special Mention		Substandard		Loss		Subtotal		Net Deferred Costs (Income)			Total
December 31, 2017
December 31, 2018
Commercial, financial and agricultural	$	474,995	$	7,543	$	21,200	$	—	$	503,738		$	281		$	504,019	$	552,706	$	7,961	$	20,510	$	—	$	581,177	$	483		$	581,660
Real estate:
Construction	55,646		8,879		—		—		64,525			(285		)	64,240		67,269		—		—		—		67,269		(342		)	66,927
Residential mortgage	1,334,760		—		2,433		—		1,337,193			4,028			1,341,221		1,422,240		—		2,144		—		1,424,384		3,821			1,428,205
Home equity	411,814		—		416		—		412,230			—			412,230		468,394		—		572		—		468,966		—			468,966
Commercial mortgage	955,865		12,735		10,639		—		979,239			(1,442		)	977,797		1,029,581		10,412		1,692		—		1,041,685		(1,407		)	1,040,278
Consumer	470,243		—		305		271		470,819			(73		)	470,746		492,030		—		80		158		492,268		(62		)	492,206
Leases	362		—		—		—		362		��	—			362		124		—		—		—		124		—			124
Total	$	3,703,685	$	29,157	$	34,993	$	271	$	3,768,106		$	2,509		$	3,770,615	$	4,032,344	$	18,373	$	24,998	$	158	$	4,075,873	$	2,493		$	4,078,366

5. ALLOWANCE FOR LOAN AND LEASE LOSSES

The following table presents by class, the activity in the Allowance for the periods indicated:


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

Three Months Ended September 30, 2017
Three Months Ended March 31, 2018																							Three Months Ended March 31, 2018
Beginning balance	$	8,598		$	3,212		$	14,034		$	3,370		$	18,184		$	5,430	$	—	$	52,828		$	7,594	$	1,835		$	14,328		$	3,317		$	16,801		$	6,126	$	—	$	50,001
Provision (credit) for loan and lease losses	(690		)	(207		)	(526		)	(134		)	(541		)	1,972		—		(126		)	236		(1,314		)	(147		)	8			(630		)	1,636		—		(211		)
	7,908			3,005			13,508			3,236			17,643			7,402		—		52,702			7,830		521			14,181			3,325			16,171			7,762		—		49,790
Charge-offs	429			—			—			—			—			1,709		—		2,138			498		—			—			—			—			1,933		—		2,431
Recoveries	165			40			124			6			7			311		—		653			144		1,193			26			3			15			477		—		1,858
Net charge-offs (recoveries)	264			(40		)	(124		)	(6		)	(7		)	1,398		—		1,485			354		(1,193		)	(26		)	(3		)	(15		)	1,456		—		573
Ending balance	$	7,644		$	3,045		$	13,632		$	3,242		$	17,650		$	6,004	$	—	$	51,217		$	7,476	$	1,714		$	14,207		$	3,328		$	16,186		$	6,306	$	—	$	49,217

Real Estate
Commercial,
Financial &
Agricultural Construction Residential Mortgage Home Equity Commercial Mortgage Consumer Leases Total
(dollars in thousands)
Nine Months Ended September 30, 2018
Beginning balance $ 7,594
$ 1,835
$ 14,328
$ 3,317
$ 16,801
$ 6,126
$ —
$ 50,001
Provision (credit) for loan and lease losses 1,227
(1,749 ) (291 ) 383
(3,383 ) 4,075
—
262
8,821
86
14,037
3,700
13,418
10,201
—
50,263
Charge-offs 1,971
—
—
—
—
5,424
—
7,395
Recoveries 1,017
1,205
98
18
52
1,568
—
3,958
Net charge-offs (recoveries) 954
(1,205 ) (98 ) (18 ) (52 ) 3,856
—
3,437
Ending balance $ 7,867
$ 1,291
$ 14,135
$ 3,718
$ 13,470
$ 6,345
$ —
$ 46,826

Nine Months Ended September 30, 2017
Beginning balance $ 8,637
$ 4,224
$ 15,055
$ 3,502
$ 19,104
$ 6,109
$ —
$ 56,631
Provision (credit) for loan and lease losses (403 ) (1,296 ) (2,280 ) (295 ) (1,600 ) 3,386
—
(2,488 )
8,234
2,928
12,775
3,207
17,504
9,495
—
54,143
Charge-offs 1,266
—
—
—
—
4,676
—
5,942
Recoveries 676
117
857
35
146
1,185
—
3,016
Net charge-offs (recoveries) 590
(117 ) (857 ) (35 ) (146 ) 3,491
—
2,926
Ending balance $ 7,644
$ 3,045
$ 13,632
$ 3,242
$ 17,650
$ 6,004
$ —
$ 51,217

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

Our Provision was a ~~credit of $0.1 million and a~~ debit of ~~$0.3~~$1.3 million in the three ~~and nine~~ months ended ~~September 30, 2018, respectively,~~March 31, 2019, compared to a credit of ~~$0.1 million and a credit of $2.5~~$0.2 million in the three ~~and nine~~ months ended ~~September 30, 2017, respectively.~~March 31, 2018.

6. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

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


(dollars in thousands)	September 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Investments in low income housing tax credit partnerships	$	12,267	$	3,608	$	14,345	$	11,603
Trust preferred investments	2,792		2,792
Investments in common securities of statutory trusts					1,547		2,169
Investments in affiliates	170		634		108		182
Other	54		54		54		54
Total	$	15,283	$	7,088	$	16,054	$	14,008

The Company ~~had $9.5 million~~invests in unfunded low income housing commitments as of September 30, 2018 compared to $2.6 million at December 31, 2017. The Company expects to fund $1.9 million in 2018, $4.0 million in 2019, and $3.6 million in 2020.

~~Investments in low income~~low-income housing tax credit ("LIHTC") partnerships. As of March 31, 2019 and December 31, 2018, the Company had $10.8 million and $8.3 million, respectively, in unfunded commitments related to the LIHTC partnerships. The expected payments for the unfunded commitments as of March 31, 2019 are as follows (in thousands):



Year Ending December 31,
2019 (remainder)	$	4,167
2020	6,466
2021	94
2022	10
2023	10
2024	26
Thereafter	49
Total unfunded commitments	$	10,822

Prior to 2018, the Company's investments in LIHTC partnerships ~~are~~were accounted for using the cost method. In 2018, the Company voluntarily changed its accounting policy for LIHTC partnerships from the cost method to the proportional amortization method using the practical expedient available under ASC 323, "Investments - Equity Method and Joint Ventures", which permits an investor to amortize the initial cost of the investment in proportion to only the tax credits allocated to the investor. The Company believes the proportional amortization method is preferable because it better reflects the economics of an investment that is made for the primary purpose of receiving tax credits and other tax benefits. In addition to a change in the timing of the recognition of amortization expense on LIHTC investments, amortization expense on LIHTC investments is now reflected in the income tax expense line, which provides users a better understanding of the nature of the returns of such investments, instead of in other operating expenses on the consolidated statements of income.

The following table presents amortization and tax credits recognized associated with our investments in LIHTC partnerships for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~September 30, 2017:~~March 31, 2018:


(dollars in thousands)	Three Months Ended September 30, 2018		Three Months Ended September 30, 2017		Nine Months Ended September 30, 2018		Nine Months Ended September 30, 2017		Three Months Ended March 31, 2019		Three Months Ended March 31, 2018
Cost method:
Amortization expense recognized in other operating expense	$	114	$	174	$	341	$	630
Proportional amortization method:
Amortization expense recognized in income tax expense									$	258	$	114
Tax credits recognized in income tax expense	152		218		457		744		277		152

7. CORE DEPOSIT PREMIUM AND MORTGAGE SERVICING RIGHTS

The following table presents changes in core deposit premium and mortgage servicing rights for the periods presented:


(dollars in thousands)	Core Deposit Premium			Mortgage Servicing Rights			Total			Core Deposit Premium			Mortgage Servicing Rights			Total
Balance, January 1, 2017	$	4,680		$	15,779		$	20,459
Additions	—			1,857			1,857
Amortization	(2,006		)	(1,543		)	(3,549		)
Balance, September 30, 2017	$	2,674		$	16,093		$	18,767

Balance, January 1, 2018	$	2,006		$	15,843		$	17,849		$	2,006		$	15,843		$	17,849
Additions	—			1,204			1,204			—			435			435
Amortization	(2,006		)	(1,413		)	(3,419		)	(669		)	(457		)	(1,126		)
Balance, September 30, 2018	$	—		$	15,634		$	15,634
Balance, March 31, 2018										$	1,337		$	15,821		$	17,158

Balance, January 1, 2019										$	—		$	15,596		$	15,596
Additions										—			222			222
Amortization										—			(471		)	(471		)
Balance, March 31, 2019										$	—		$	15,347		$	15,347

Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans and totaled ~~$0.4 million and $1.2~~$0.2 million for the three ~~and nine~~ months ended ~~September 30, 2018, respectively,~~March 31, 2019 compared to ~~$0.6 million and $1.9~~$0.4 million for the three ~~and nine~~ months ended ~~September 30, 2017, respectively.~~March 31, 2018.

Amortization of mortgage servicing rights was $0.5 million ~~and $1.4 million, respectively,~~ for the three ~~and nine~~ months ended ~~September 30, 2018,~~March 31, 2019, compared to $0.5 million ~~and $1.5 million~~ for the three ~~and nine~~ months ended ~~September 30, 2017, respectively.~~

March 31, 2018.

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


	Nine Months Ended			Nine Months Ended			Three Months Ended			Three Months Ended
(dollars in thousands)	September 30, 2018			September 30, 2017			March 31, 2019			March 31, 2018
Fair market value, beginning of period	$	17,161		$	18,087		$	17,696		$	17,161
Fair market value, end of period	18,315			16,777			16,541			18,463
Weighted average discount rate	9.5		%	9.5		%	9.5		%	9.5		%
Forecasted constant prepayment rate assumption(1)	14.0			16.5			16.2			14.2

⁽¹⁾ Represents annualized loan prepayment rate assumption.

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


	September 30, 2018							December 31, 2017							March 31, 2019							December 31, 2018
(dollars in thousands)	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Gross Carrying Value		Accumulated Amortization			Net Carrying Value
Core deposit premium	$	44,642	$	(44,642	)	$	—	$	44,642	$	(42,636	)	$	2,006	$	44,642	$	(44,642	)	$	—	$	44,642	$	(44,642	)	$	—
Mortgage servicing rights	65,605		(49,971		)	15,634		64,401		(48,558		)	15,843		66,235		(50,888		)	15,347		66,013		(50,417		)	15,596
Total	$	110,247	$	(94,613	)	$	15,634	$	109,043	$	(91,194	)	$	17,849	$	110,877	$	(95,530	)	$	15,347	$	110,655	$	(95,059	)	$	15,596

Based on the mortgage servicing rights held as of ~~September 30, 2018,~~March 31, 2019, estimated amortization expense for the remainder of fiscal year ~~2018,~~2019, the next five succeeding fiscal years and all years thereafter are as follows:


(dollars in thousands)
2018 (remainder)	$	450
2019	1,566
2019 (remainder)			$	1,263
2020	1,292		1,382
2021	1,087		1,130
2022	919		945
2023	789		786
2024			704
Thereafter	9,531		9,137
	$	15,634
Total			$	15,347

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 swaps,~~ interest rate lock commitments and forward sale commitments. We measure all derivatives at fair value on our consolidated balance sheet. In each reporting period, we record the derivative instruments in other assets or other liabilities depending on whether the derivatives are in an asset or liability position. For derivative instruments that are designated as cash flow hedging instruments, we record the effective portion of the changes in the fair value of the derivative in AOCI, net of tax, until earnings are affected by the variability of cash flows of the hedged transaction. We immediately recognize the portion of the gain or loss in the fair value of the derivative that represents hedge ineffectiveness in current period earnings. For derivative instruments that are not designated as hedging instruments, changes in the fair value of the derivative are included in current period earnings. At ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, we were not party to any derivatives designated as part of a fair value or cash flow hedge.

Interest Rate Lock and Forward Sale Commitments

We enter into interest rate lock commitments on certain mortgage loans that are intended to be sold. To manage interest rate risk on interest rate lock commitments, we also enter into forward loan sale commitments. The interest rate locks and forward loan sale commitments are accounted for as undesignated derivatives and are recorded at their respective fair values in other assets or other liabilities, with changes in fair value recorded in current period earnings. These instruments serve to reduce our exposure to movements in interest rates. At ~~September 30, 2018,~~March 31, 2019, we were a party to interest rate lock and forward sale commitments on ~~$15.5~~$2.3 million and ~~$19.9~~$5.8 million of mortgage loans, respectively.

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

Derivatives Financial Instruments Not Designated as Hedging Instruments

Asset Derivatives

Liability Derivatives

Derivatives Financial Instruments Not Designated as Hedging Instruments

Asset Derivatives

Liability Derivatives

Fair Value at

(dollars in thousands)

Balance Sheet Location

September 30,
2018

December 31,
2017

September 30,
2018

December 31,
2017

Balance Sheet Location

March 31,
2019

December 31,
2018

March 31,
2019

December 31,
2018

Interest rate lock and forward sale commitments

Other assets / other liabilities

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

Location of Gain (Loss)
Recognized in
Earnings on Derivatives

Amount of Gain (Loss)
Recognized in
Earnings on Derivatives

(dollars in thousands)

Three Months Ended September 30, 2018

Three Months Ended March 31, 2019

Interest rate lock and forward sale commitments

Mortgage banking income

Three Months Ended March 31, 2018

Interest rate lock and forward sale commitments

Mortgage banking income

Loans held for sale

Other income

)

Other income

)

Three Months Ended September 30, 2017

Interest rate lock and forward sale commitments

Mortgage banking income

(21

)

Loans held for sale

Other income

)

Nine Months Ended September 30, 2018

Interest rate lock and forward sale commitments

Mortgage banking income

Loans held for sale

Other income

)

Nine Months Ended September 30, 2017

Interest rate lock and forward sale commitments

Mortgage banking income

(148

)

Loans held for sale

Other income

—

9. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Federal Home Loan Bank Advances and Other Borrowings

The bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB") and maintained a ~~$1.67~~$1.72 billion line of credit as of ~~September 30, 2018,~~March 31, 2019, compared to ~~$1.50~~$1.43 billion at December 31, ~~2017.~~2018. At ~~September 30, 2018, $1.56~~March 31, 2019, $1.42 billion was undrawn under this arrangement, compared to ~~$1.47~~$1.18 billion at December 31, ~~2017.~~2018. Short-term borrowings under this arrangement totaled ~~$105.0~~$179.0 million at ~~September 30, 2018,~~March 31, 2019, compared to ~~$32.0~~$197.0 million at December 31, ~~2017. There were no long-term~~2018. Long-term borrowings under this arrangement totaled $50.0 million at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018. FHLB advances available at ~~September 30, 2018~~March 31, 2019 were secured by certain real estate loans with a carrying value of ~~$2.26~~$2.32 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB.

At ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, our bank had additional unused borrowings available at the Federal Reserve discount window of ~~$76.5~~$70.6 million and ~~$73.0~~$73.9 million, respectively. As of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, certain commercial and commercial real estate loans with a carrying value totaling ~~$124.6~~$122.0 million and ~~$129.2~~$123.3 million, respectively, were pledged as collateral on our line of credit with the Federal Reserve discount window. The Federal Reserve does not have the right to sell or repledge these loans.

Subordinated Debentures

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

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

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

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

trust preferred securities. The redemption was pursuant to the optional prepayment provisions of the indenture. On January 9, 2019, Trust III was canceled with the state of Connecticut.

In September 2004, we created a wholly-owned statutory trust, CPB Capital Trust IV ("Trust IV"). Trust IV issued $30.0 million in floating rate trust preferred securities bearing an interest rate of three-month LIBOR plus 2.45% and maturing on December 15, 2034. The principal assets of Trust IV are $30.9 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust IV trust preferred securities. Trust IV issued $0.9 million of common securities to the Company.

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

The floating trust preferred securities, the junior subordinated debentures that are the assets of Trusts ~~II, III,~~ IV and V and the common securities issued by Trusts ~~II, III,~~ IV and V are redeemable in whole or in part on any interest payment date ~~on or after October 7, 2008 for Trusts II and III, and~~ on or after December 15, 2009 for Trust IV and V, or at any time in whole but not in part within 90 days following the occurrence of certain events. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from time to time to defer interest payments on the subordinated debentures, which would result in a deferral of distribution payments on the related trust preferred securities, for up to 20 consecutive quarterly periods without default or penalty.

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

10. ~~EQUITY~~

As a Hawaii state-chartered bank, Central Pacific Bank may only pay dividends to the extent it has retained earnings as defined under Hawaii banking law ("Statutory Retained Earnings"), which differs from GAAP retained earnings. As of September 30, 2018, the bank had Statutory Retained Earnings of $87.5 million.

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 January 2016, the Board of Directors authorized the repurchase of up to $30.0 million of the Company's common stock from time to time in the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase program (the "2016 Repurchase Plan"), which superseded in its entirety the repurchase plan that was previously approved by the Board of Directors.

In January 2017, the Board of Directors authorized the repurchase of up to $30.0 million of the Company's common stock from time to time in the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase program (the "2017 Repurchase Plan"). The 2017 Repurchase Plan replaced and superseded in its entirety the 2016 Repurchase Plan. In January 2017, prior to the 2017 Repurchase Plan being approved, 1,750 shares of common stock, at a cost of $0.1 million, were repurchased under the 2016 Repurchase Plan.

In November 2017, the Board of Directors authorized an increase in the share repurchase program authority by an additional $50.0 million (known henceforth as the "Repurchase Plan"). This amount is in addition to the $30.0 million in planned repurchases authorized in January 2017. There is no expiration date on the Repurchase Plan.

~~In the year ended December 31, 2017, 864,483 shares of common stock, at a cost of $26.6 million, were repurchased under the 2016 Repurchase Plan and the Repurchase Plan combined.~~

In the nine months ended September 30, 2018, a total of 849,290 shares of common stock, at a cost of $24.8 million, were repurchased under the Repurchase Plan. A total of $28.7 million remained available for repurchase under the Repurchase Plan as of September 30, 2018.

~~11.~~ REVENUE FROM CONTRACTS WITH CUSTOMERS

~~Revenue Recognition~~

~~Accounting Standards Codification ("ASC") 606,~~ ~~"Revenue from Contracts with Customers"~~, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts to provide goods or services to its customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services. Revenue is recognized as performance obligations are satisfied.

The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. Our principal source of revenue is derived from interest income on financial instruments, such as our loan and investment securities portfolios, as well as revenue related to our mortgage banking activities. These revenue-generating transactions are out of scope of ASC 606, but are subject to other GAAP and discussed elsewhere within our disclosures.

We also generate other revenue in connection with our broad range of banking products and financial services. Descriptions of our other revenue-generating activities that are within the scope of ASC 606, which are presented in our consolidated statements of income as components of other operating income are as follows:

~~Service charges on deposit accounts~~

Revenue from service charges on deposit accounts includes general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as stop payment fees). Payment for such performance obligations are generally received at the time the performance obligations are satisfied.

~~Other Service Charges and Fees~~

~~Revenue from other service charges and fees includes cards and payments income, safe deposit rental income and other service charges, commissions and fees.~~

Cards and payments income includes interchange fees from debit cards processed through card association networks, merchant services, and other card related services. Interchange rates are generally set by the credit card associations and based on purchase volumes and other factors. Interchange fees are recognized as transactions occur. Interchange expenses related to cards and payments income are presented gross in other operating expense. Merchant services income represents account management fees and transaction fees charged to merchants for the processing of card association network transactions. Merchant services revenue is recognized as transactions occur, or as services are performed.

Other service charges, commissions and fees include automated teller machines ("ATM") surcharge and interchange fees, bill payment fees, cashier’s check and money order fees, wire transfer fees, loan brokerage fees, and commissions on sales of insurance, broker-dealer products, letters of credit, and travelers’ checks. Revenue from these fees and commissions is recorded in a manner that reflects the timing of when transactions occur, and as services are provided.

Based on the nature of the commission agreement with the broker-dealer and each insurance provider, we may recognize revenue from broker-dealer and insurance commissions over time or at a point-in-time as our performance obligation is satisfied.

~~Income from Fiduciary Activities~~

Income from fiduciary activities includes fees from wealth management, trust, custodial and escrow services provided to individual and institutional customers. Revenue is generally recognized monthly based on a minimum annual fee and/or the market value of assets in custody. Additional fees are recognized for transactional activity.

Revenue from trade execution and brokerage services is earned through commissions from trade execution on behalf of clients. Revenue from these transactions is recognized at the trade date. Any ongoing service fees are recognized on a monthly basis as services are performed.

~~Fees on Foreign Exchange~~

The Company provides foreign currency exchange services to customers, whereby cash can be converted to different foreign currencies, and vice versa. As a result of the services, a gain or loss is recognized on foreign currency transactions, as well as income related to commissions and fees earned on each transaction.

Revenue from the commissions and fees earned on the transactions fall within the scope of ASC 606, and is recorded in a manner that reflects the timing of when transactions occur, and as services are provided. Realized and unrealized gains or losses related to foreign currency are out of scope of ASC 606.

~~Loan Placement Fees~~

Loan placement fees primarily represent revenues earned by the Company for loan placement and underwriting. Revenues for these services are recorded at a point-in-time, upon completion of a contractually identified transaction, or when an advisory opinion is provided.

~~Gain on Sales of Foreclosed Assets~~

The Company records a gain or loss on the sale of a foreclosed property when control of the property transfers to the Company, which typically occurs at the time the deed is executed. The Company does not finance the sale of the foreclosed property.

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 ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018.


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
(dollars in thousands)	2018		2017		2018		2017		2019		2018
Other operating income:
In-scope of ASC 606
Service charges on deposit accounts	$	2,189	$	2,182	$	6,169	$	6,338	$	2,081	$	2,003
Other service charges and fees	2,778		2,766		8,169		7,490		2,568		2,556
Income on fiduciary activities	1,159		911		3,132		2,739		965		956
Fees on foreign exchange	26		29		86		112		26		32
Loan placement fees	115		86		532		366		149		197
Net gain on sales of foreclosed assets	—		19		—		205
In-scope other operating income	6,267		5,993		18,088		17,250		5,789		5,744
Out-of-scope other operating income	4,553		3,576		11,316		10,203		5,884		3,210
Total other operating income	$	10,820	$	9,569	$	29,404	$	27,453	$	11,673	$	8,954

~~12. MORTGAGE BANKING INCOME~~

~~Noninterest income from the Company's mortgage banking activities include the following components for the periods indicated:~~

Three Months Ended
September 30, Nine Months Ended
September 30,
(dollars in thousands) 2018 2017 2018 2017
Mortgage banking income:
Loan servicing fees $ 1,269
$ 1,323
$ 3,869
$ 4,021
Amortization of mortgage servicing rights (519 ) (476 ) (1,413 ) (1,543 )
Gain on sale of residential mortgage loans 1,082
705
3,013
3,101
Unrealized gain (loss) on interest rate locks 91
(21 ) 76
(148 )
Total mortgage banking income $ 1,923
$ 1,531
$ 5,545
$ 5,431

~~13.~~11. SHARE-BASED COMPENSATION

Restricted Stock ~~Awards and~~ Units

The table below presents the activity of restricted stock ~~awards and~~ units for the ~~nine~~three months ended ~~September 30, 2018:~~March 31, 2019:


	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Non-vested restricted stock awards and units, beginning of period	397,551		$	25.49
Non-vested restricted stock units, beginning of period					362,725		$	26.98
Changes during the period:
Granted	116,152		29.51		111,478		29.27
Vested	(123,629	)	24.40		(50,062	)	22.03
Forfeited	(20,294	)	27.47		(5,890	)	29.83
Non-vested restricted stock awards and units, end of period	369,780		27.01
Non-vested restricted stock units, end of period					418,251		28.15

~~14. PENSION AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS~~12. LEASES

~~Central Pacific Bank has~~We lease certain land and buildings for our bank branches and ATMs. In some instances, a ~~defined benefit retirement plan (the "Pension Plan") which covers certain eligible employees.~~lease may contain renewal options to extend the term of the lease. All renewal options are likely to be exercised and therefore have been recognized as part of our right-of-use assets and lease liabilities in accordance with ASC 842, "Leases". Certain leases also contain variable payments that are primarily determined based on common area maintenance costs and Hawaii state tax rates. All leases are operating leases and we do not have any short term leases. The ~~plan~~most significant assumption related to the Company’s application of ASC 842 was ~~curtailed effective December 31, 2002, and accordingly, plan benefits were fixed~~the discount rate assumption. As most of the Company’s lease agreements do not provide for an implicit interest rate, the Company used the collateralized interest rate that the Company would have to pay to borrow over a similar term to estimate the Company’s lease liability as of ~~that date. The following table sets forth the components of net periodic benefit~~January 1, 2019.

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

Three Months Ended
September 30, Nine Months Ended
September 30,
(dollars in thousands) 2018 2017 2018 2017
Interest cost $ 199
$ 232
$ 597
$ 694
Expected return on plan assets (302 ) (264 ) (906 ) (792 )
Amortization of net actuarial loss 245
298
735
894
Net periodic cost $ 142
$ 266
$ 426
$ 796



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

Other information:
Operating cash flows from operating leases	$	(1,549	)
Weighted-average remaining lease term - operating leases	14.10 years
Weighted-average discount rate - operating leases	3.92		%

~~Our bank also established Supplemental Executive Retirement Plans ("SERPs"), which provide certain (current~~The following is a schedule of annual undiscounted cash flows for our operating leases and ~~former) officers~~a reconciliation of ~~our bank with supplemental retirement benefits. We have not entered into a SERP since December 31, 2008.~~those cash flows to the operating lease liabilities:



Year Ending December 31,	Undiscounted cash flows		Lease liability expense		Lease liability reduction
2019 (remainder)	$	4,663	$	1,557	$	3,106
2020	6,015		1,939		4,076
2021	5,705		1,787		3,918
2022	5,268		1,645		3,623
2023	4,970		1,512		3,458
2024	4,812		1,383		3,429
Thereafter	40,920		7,669		33,251
Total	$	72,353	$	17,492	$	54,861

In ~~the second quarter of 2017,~~addition, the Company, ~~settled a portion~~as lessor, leases certain properties that it owns. All of the SERP obligation of a former executive. As a result of the settlement, the Company remeasured the related SERP obligation and net periodic benefit cost and recognized a pro-rata net actuarial loss of $0.1 million in SERP expense and other comprehensive income.

these leases are operating leases. The following ~~table sets forth the components of net periodic benefit cost~~represents lease income related to these leases that was recognized for the ~~SERPs for the periods~~period indicated:

Three Months Ended
September 30, Nine Months Ended
September 30,
(dollars in thousands) 2018 2017 2018 2017
Interest cost $ 97
$ 107
$ 292
$ 322
Amortization of net actuarial loss 44
26
130
77
Amortization of net transition obligation 5
4
14
13
Amortization of prior service cost 4
5
13
13
Settlement —
—
—
138
Net periodic cost $ 150
$ 142
$ 449
$ 563



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

~~All components of net periodic benefit cost are included in salaries and employee benefits in~~Based on the Company's ~~consolidated statements~~leases as lessor as of ~~income.~~March 31, 2019, estimated lease payments for the remainder of fiscal year 2019, the next five succeeding fiscal years and all years thereafter are as follows:



Year Ending December 31,
2019 (remainder)	$	1,486
2020	1,774
2021	1,849
2022	1,275
2023	446
2024	88
Thereafter	267
Total	$	7,185

~~15.~~

13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the components of other comprehensive income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ by component:

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

Net unrealized losses on investment securities:

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

Defined benefit plans:

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

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



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

Defined benefit plans:
Amortization of net actuarial loss	263		29		234
Amortization of net transition obligation	5		1		4
Amortization of prior service cost	5		1		4
Defined benefit plans, net	273		31		242

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


(dollars in thousands)	Before Tax			Tax Effect			Net of Tax			Before Tax			Tax Effect			Net of Tax
Three Months Ended September 30, 2017
Three Months Ended March 31, 2018
Net unrealized losses on investment securities:
Net unrealized losses arising during the period	$	(487	)	$	(194	)	$	(293	)	$	(20,455	)	$	(5,484	)	$	(14,971	)
Less: Reclassification adjustments from AOCI realized in net income	—			—			—			—			—			—
Net unrealized losses on investment securities	(487		)	(194		)	(293		)	(20,455		)	(5,484		)	(14,971		)

Defined benefit plans:
Amortization of net actuarial loss	324			44			280			341			93			248
Amortization of net transition obligation	4			2			2			5			1			4
Amortization of prior service cost	5			2			3			5			1			4
Settlement	—			—			—
Defined benefit plans, net	333			48			285			351			95			256

Other comprehensive loss	$	(154	)	$	(146	)	$	(8	)	$	(20,104	)	$	(5,389	)	$	(14,715	)

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

Net unrealized losses on investment securities:

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

Defined benefit plans:

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

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

(dollars in thousands) Before Tax Tax Effect Net of Tax
Nine Months Ended September 30, 2017

Net unrealized gains on investment securities:

Net unrealized gains arising during the period $ 6,042
$ 2,403
$ 3,639
Less: Reclassification adjustments from AOCI realized in net income 1,640
653
987
Net unrealized gains on investment securities 7,682
3,056
4,626

Defined benefit plans:

Net actuarial losses arising during the period (1,042 ) (415 ) (627 )
Amortization of net actuarial loss 971
331
640
Amortization of net transition obligation 13
5
8
Amortization of prior service cost 13
5
8
Settlement 138
56
82
Defined benefit plans, net 93
(18 ) 111

Other comprehensive income $ 7,775
$ 3,038
$ 4,737

The following tables present the changes in each component of AOCI, net of tax, for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017:~~

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

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

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

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

(dollars in thousands) Investment
Securities Defined
Benefit
Plans AOCI
Three Months Ended September 30, 2017

Balance at beginning of period $ 9,648
$ (6,424 ) $ 3,224

Other comprehensive income before reclassifications (293 ) —
(293 )
Reclassification adjustments from AOCI —
285
285
Total other comprehensive income (loss) (293 ) 285
(8 )

Balance at end of period $ 9,355
$ (6,139 ) $ 3,216

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

Balance at beginning of period $ 5,073
$ (6,112 ) $ (1,039 )
Impact of the adoption of new accounting standards (139 ) —
(139 )
Adjusted balance at beginning of period 4,934
(6,112 ) (1,178 )

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

Other comprehensive income (loss) before reclassifications (24,712 ) —
(24,712 )
Reclassification adjustments from AOCI —
623
623
Total other comprehensive income (loss) (24,712 ) 623
(24,089 )

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

2018:


(dollars in thousands)	Investment Securities		Defined Benefit Plans			AOCI			Investment Securities			Defined Benefit Plans			AOCI
Nine Months Ended September 30, 2017
Three Months Ended March 31, 2019
Balance at beginning of period	$	4,729	$	(6,250	)	$	(1,521	)	$	(9,643	)	$	(6,450	)	$	(16,093	)
Impact of the adoption of new accounting standards									(3,100		)	—			(3,100		)
Adjusted balance at beginning of period									(12,743		)	(6,450		)	(19,193		)

Other comprehensive income (loss) before reclassifications	3,639		(627		)	3,012
Other comprehensive income before reclassifications									10,996			—			10,996
Reclassification adjustments from AOCI	987		738			1,725			—			242			242
Total other comprehensive income (loss)	4,626		111			4,737
Total other comprehensive income									10,996			242			11,238

Balance at end of period	$	9,355	$	(6,139	)	$	3,216		$	(1,747	)	$	(6,208	)	$	(7,955	)



(dollars in thousands)	Investment Securities			Defined Benefit Plans			AOCI
Three Months Ended March 31, 2018
Balance at beginning of period	$	5,073		$	(6,112	)	$	(1,039	)
Impact of the adoption of new accounting standards	(139		)	—			(139		)
Adjusted balance at beginning of period	4,934			(6,112		)	(1,178		)

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

Other comprehensive income before reclassifications	(14,971		)	—			(14,971		)
Reclassification adjustments from AOCI	—			256			256
Total other comprehensive income (loss)	(14,971		)	256			(14,715		)

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

The following table presents the amounts reclassified out of each component of AOCI for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017:~~2018:

Amount Reclassified from AOCI Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI Components Three months ended September 30,
(dollars in thousands) 2018 2017
Sale of investment securities available-for-sale $ —
$ —
Investment securities gains (losses)
—
—
Income tax benefit (expense)
$ —
$ —
Net of tax

Amortization of defined benefit retirement and supplemental executive retirement plan items

Net actuarial loss $ (289 ) $ (324 ) (1)
Net transition obligation (5 ) (4 ) (1)
Prior service cost (4 ) (5 ) (1)
Settlement —
—
(1)
(298 ) (333 ) Total before tax
81
48
Income tax benefit (expense)
$ (217 ) $ (285 ) Net of tax

Total reclassification adjustments from AOCI for the period $ (217 ) $ (285 ) Net of tax



	Amount Reclassified from AOCI						Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI Components	Three months ended March 31,
(dollars in thousands)	2019			2018
Sale of investment securities available-for-sale:
Realized losses on securities available-for-sale	$	—		$	—		Investment securities gains (losses)
Tax effect	—			—			Income tax benefit (expense)
Net of tax	$	—		$	—

Defined benefit retirement and supplemental executive retirement plan items:
Amortization of net actuarial loss	$	(263	)	$	(341	)	Salaries and employee benefits
Amortization of net transition obligation	(5		)	(5		)	Salaries and employee benefits
Amortization of prior service cost	(5		)	(5		)	Salaries and employee benefits
Total before tax	(273		)	(351		)
Tax effect	31			95			Income tax benefit (expense)
Net of tax	$	(242	)	$	(256	)

Total reclassification adjustments from AOCI for the period, net of tax	$	(242	)	$	(256	)

Amount Reclassified from AOCI Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI Components Nine months ended September 30,
(dollars in thousands) 2018 2017
Sale of investment securities available-for-sale $ —
$ (1,640 ) Investment securities gains (losses)
—
653
Income tax benefit (expense)
$ —
$ (987 ) Net of tax

Amortization of defined benefit retirement and supplemental executive retirement plan items

Net actuarial loss $ (865 ) $ (971 ) (1)
Net transition obligation (14 ) (13 ) (1)
Prior service cost (13 ) (13 ) (1)
Settlement —
(138 ) (1)
(892 ) (1,135 ) Total before tax
269
397
Income tax benefit (expense)
$ (623 ) $ (738 ) Net of tax

Total reclassification adjustments from AOCI for the period $ (623 ) $ (1,725 ) Net of tax


~~(1)~~	~~These AOCI components are included in the computation of net periodic pension cost (see Note 14 - Pension and Supplemental Executive Retirement Plans for additional details).~~

~~16.~~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 March 31,
(dollars in thousands, except per share data)	2018		2017		2018		2017		2019		2018
Net income	$	15,193	$	11,812	$	43,694	$	36,916	$	16,037	$	14,277

Weighted average common shares outstanding - basic	29,297,465		30,300,195		29,536,536		30,526,260		28,758,310		29,807,572
Dilutive effect of employee stock options and awards	182,347		214,264		206,702		232,729		221,545		233,779
Weighted average common shares outstanding - diluted	29,479,812		30,514,459		29,743,238		30,758,989		28,979,855		30,041,351

Basic earnings per common share	$	0.52	$	0.39	$	1.48	$	1.21	$	0.56	$	0.48
Diluted earnings per common share	$	0.52	$	0.39	$	1.47	$	1.20	$	0.55	$	0.48

Anti-dilutive employee stock options and awards outstanding	—		80		—		8		—		—

~~17.~~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. In accordance with ASU 2016-01, the fair value of loans ~~as of September 30, 2018~~ are measured based on the notion of exit ~~price. The fair value of loans as of December 31, 2017 was measured based on the notion of entry~~ 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.

~~Mortgage Servicing Rights~~

The initial fair value of mortgage servicing rights is calculated by a discounted cash flow model prepared by a third-party service provider based on market value assumptions at the time of origination. We assess the servicing right for impairment using current market value assumptions at each reporting period. Critical assumptions used in the discounted cash flow model include mortgage prepayment speeds, discount rates, costs to service, and ancillary income. Variations in our assumptions could materially affect the estimated fair values. Changes to our assumptions are made when current trends and market data indicate that new trends have developed. Current market value assumptions based on loan product types (fixed rate, adjustable rate and balloon loans) include average discount rates and prepayment speeds. Many of these assumptions are subjective and require a high level of management judgment. Our mortgage servicing rights portfolio and valuation assumptions are periodically reviewed by management.

~~Federal Home Loan Bank Stock~~

~~It is not practical to determine the fair value of FHLB stock due to the restrictions placed on its transferability.~~

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. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Long-Term Debt

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

Derivatives

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

Off-Balance Sheet Financial Instruments

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

Limitations

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

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


					Fair Value Measurement Using										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)		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, 2018
Financial assets
March 31, 2019
Financial assets:
Cash and due from banks	$	82,668	$	82,668	$	82,668	$	—	$	—	$	90,869	$	90,869	$	90,869	$	—	$	—
Interest-bearing deposits in other banks	7,051		7,051		7,051		—		—		7,310		7,310		7,310		—		—
Investment securities	1,386,739		1,380,353		885		1,368,324		11,144		1,320,360		1,320,360		910		1,308,186		11,264
Loans held for sale	4,460		4,460		—		4,460		—		3,539		3,539		—		3,539		—
Net loans and leases	3,931,201		3,804,844		—		19,170		3,785,674		4,054,304		3,986,933		—		14,818		3,972,115
Mortgage servicing rights	15,634		18,315		—		—		18,315
Federal Home Loan Bank stock	10,965		N/A		N/A		N/A		N/A
Accrued interest receivable											17,082		17,082		17,082		—		—

Financial liabilities
Financial liabilities:
Deposits:
Noninterest-bearing demand	1,403,534		1,403,534		1,403,534		—		—		1,357,890		1,357,890		1,357,890		—		—
Interest-bearing demand and savings and money market	2,438,595		2,438,595		2,438,595		—		—		2,528,114		2,528,114		2,528,114		—		—
Time	1,161,551		1,152,739				—		1,152,739		1,062,124		1,056,236		—		—		1,056,236
Short-term borrowings	105,000		105,000		—		105,000		—		179,000		179,000		—		179,000		—
Long-term debt	92,785		88,344		—		88,344		—		101,547		97,737		—		97,737		—
Accrued interest payable (included in other liabilities)											4,677		4,677		4,677				—



									Fair Value Measurement Using
(dollars in thousands)	Notional Amount		Carrying Amount			Estimated Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
March 31, 2019
Derivatives:
Interest rate lock commitments	$	2,309	$	15		$	15		$	—	$	15		$	—
Forward sale commitments	5,790		(61		)	(61		)	—		(61		)	—

Off-balance sheet financial instruments:
Commitments to extend credit	1,056,453		1,270			1,270			—		1,270			—
Standby letters of credit and financial guarantees written	12,683		190			190			—		190			—

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, 2018

Derivatives
Interest rate lock commitments $ 15,463
$ (4 ) $ (4 ) $ —
$ (4 ) $ —
Forward sale commitments 19,861
67
67
—
67
—

Off-balance sheet financial instruments

Commitments to extend credit 1,066,761
—
1,272
—
1,272
—
Standby letters of credit and financial guarantees written 13,465
—
202
—
202
—



					Fair Value Measurement Using
(dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2018
Financial assets:
Cash and due from banks	$	80,569	$	80,569	$	80,569	$	—	$	—
Interest-bearing deposits in other banks	21,617		21,617		21,617		—		—
Investment securities	1,354,812		1,350,576		826		1,338,581		11,169
Loans held for sale	6,647		6,647		—		6,647		—
Net loans and leases	4,030,450		3,938,380		—		—		3,938,380
Accrued interest receivable	17,000		17,000		17,000		—		—

Financial liabilities:
Deposits:
Noninterest-bearing demand	1,436,967		1,436,967		1,436,967		—		—
Interest-bearing demand and savings and money market	2,402,268		2,402,268		2,402,268		—		—
Time	1,107,255		1,099,560		—		—		1,099,560
Short-term borrowings	197,000		197,000		—		197,000		—
Long-term debt	122,166		118,057		—		118,057		—
Accrued interest payable (included in other liabilities)	5,051		5,051		5,051		—		—

Fair Value Measurement Using
(dollars in thousands) 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, 2017

Financial assets

Cash and due from banks $ 75,318
$ 75,318
$ 75,318
$ —
$ —
Interest-bearing deposits in other banks 6,975
6,975
6,975
—
—
Investment securities 1,496,644
1,494,092
825
1,481,473
11,794
Loans held for sale 16,336
16,336
—
16,336
—
Net loans and leases 3,720,614
3,684,834
—
21,280
3,663,554
Mortgage servicing rights 15,843
17,161
—
—
17,161
Federal Home Loan Bank stock 7,761
N/A
N/A
N/A
N/A

Financial liabilities

Deposits:

Noninterest-bearing demand 1,395,556
1,395,556
1,395,556
—
—
Interest-bearing demand and savings and money market 2,414,930
2,414,930
2,414,930
—
—
Time 1,145,868
1,140,064
—
—
1,140,064
Short-term borrowings 32,000
32,000
—
32,000
—
Long-term debt 92,785
70,139
—
70,139
—

Fair Value Measurement Using
(dollars in thousands) Notional
Amount Carrying
Amount Estimated
Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant
Unobservable
Inputs
(Level 3)
December 31, 2017
Derivatives
Interest rate lock commitments $ 2,494
$ 12
$ 12
$ —
$ 12
$ —
Forward sale commitments 18,748
(26 ) (26 ) —
(26 ) —

Off-balance sheet financial instruments

Commitments to extend credit 917,405
—
1,140
—
1,140
—
Standby letters of credit and financial guarantees written 13,551
—
203
—
203
—



									Fair Value Measurement Using
(dollars in thousands)	Notional Amount		Carrying Amount			Estimated Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
December 31, 2018
Derivatives:
Interest rate lock commitments	$	2,158	$	11		$	11		$	—	$	11		$	—
Forward sale commitments	8,530		(95		)	(95		)	—		(95		)	—

Off-balance sheet financial instruments:
Commitments to extend credit	1,030,322		1,205			1,205			—		1,205			—
Standby letters of credit and financial guarantees written	13,377		201			201			—		201			—

Fair Value Measurements

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

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

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

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

We base our fair values on the price that we would expect to receive if an asset were sold or pay to transfer a liability in an orderly transaction between market participants at the measurement date. We also maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.

We use fair value measurements to record adjustments to certain financial assets and liabilities and to determine fair value disclosures. Available-for-sale and equity securities and derivatives are recorded at fair value on a recurring basis. From time to time, we may be required to record other financial assets at fair value on a nonrecurring basis such as loans held for sale, impaired loans, mortgage servicing rights, and other real estate owned. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.

The Company's policy is to recognize transfers into or out of a level as of the end of the reporting period. There were no transfers of financial assets and liabilities between Level 1 and Level 2 of the fair value hierarchy during the three ~~and nine~~ months ended ~~September 30, 2018.~~March 31, 2019. Also, there were no transfers of financial assets and liabilities into or out of Level 3 of the fair value hierarchy during the three ~~and nine~~ months ended ~~September 30, 2018.~~

March 31, 2019.

The following tables present the fair value of assets and liabilities measured on a recurring basis as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


			Fair Value at Reporting Date Using									Fair Value at Reporting Date Using
(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		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, 2018
Available-for-sale securities
March 31, 2019
Available-for-sale securities:
Debt securities:
States and political subdivisions	$	173,552	$	—	$	162,408	$	11,144	$	162,608		$	—	$	151,344		$	11,264
Corporate securities	65,133		—		65,133		—		52,896			—		52,896			—
U.S. Treasury obligations and direct obligations of U.S Government agencies	33,919		—		33,919		—		31,537			—		31,537			—
Mortgage-backed securities:
Residential - U.S. Government sponsored entities	734,357		—		734,357		—		779,660			—		779,660			—
Commercial - U.S. Government agencies and sponsored entities	51,205		—		51,205		—		116,475			—		116,475			—
Residential - Non-government agencies	41,370		—		41,370		—		41,109			—		41,109			—
Commercial - Non-government agencies	133,466		—		133,466		—		135,165			—		135,165			—
Total available-for-sale securities	1,233,002		—		1,221,858		11,144		1,319,450			—		1,308,186			11,264

Equity securities	885		885		—		—		910			910		—			—

Derivatives - Interest rate lock and forward sale commitments	63		—		63		—		(46		)	—		(46		)	—
Total	$	1,233,950	$	885	$	1,221,921	$	11,144	$	1,320,314		$	910	$	1,308,140		$	11,264

Fair Value at Reporting Date Using
(dollars in thousands) Fair Value Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
December 31, 2017

Available-for-sale securities

Debt securities:

States and political subdivisions $ 179,781
$ —
$ 167,987
$ 11,794
Corporate securities 74,278
—
74,278
—
U.S. Treasury obligations and direct obligations of U.S Government agencies 25,510
—
25,510
—
Mortgage-backed securities:

Residential - U.S. Government sponsored entities 800,683
—
800,683
—
Commercial - U.S. Government agencies and sponsored entities 39,725
—
39,725
—
Residential - Non-government agencies 46,763
—
46,763
—
Commercial - Non-government agencies 137,326
—
137,326
—
Total available-for-sale securities 1,304,066
—
1,292,272
11,794

Equity securities 825
825
—
—

Derivatives - Interest rate lock and forward sale commitments (14 ) —
(14 ) —
Total $ 1,304,877
$ 825
$ 1,292,258
$ 11,794



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

Equity securities	826			826		—			—

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

For the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ the changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:


(dollars in thousands)	Available for Sale Debt Securities: States and Political Subdivisions			Available for Sale Debt Securities: States and Political Subdivisions
Balance at December 31, 2018				$	11,169
Principal payments received				(105		)
Unrealized net gain (loss) included in other comprehensive income				200
Balance at March 31, 2019				$	11,264

Balance at December 31, 2017	$	11,794		$	11,794
Principal payments received	(280		)	(91		)
Unrealized net gain (loss) included in other comprehensive income	(370		)	(165		)
Balance at September 30, 2018	$	11,144

Balance at December 31, 2016	$	12,196
Principal payments received	(268		)
Unrealized net gain (loss) included in other comprehensive income	170
Balance at September 30, 2017	$	12,098
Balance at March 31, 2018				$	11,538

Within the states and political subdivisions available-for-sale debt securities category, the Company holds four mortgage revenue bonds issued by the City & County of Honolulu with an aggregate fair value of ~~$11.1~~$11.3 million and ~~$12.1~~$11.5 million at ~~September 30,~~March 31, 2019 and March 31, 2018, ~~and September 30, 2017,~~ respectively. The Company estimates the fair value of its mortgage revenue bonds by using a discounted cash flow model to calculate the present value of estimated future principal and interest payments.

The significant unobservable input used in the fair value measurement of the Company's mortgage revenue bonds is the weighted average discount rate. As of ~~September 30, 2018,~~March 31, 2019, the weighted average discount rate utilized was ~~5.28%~~4.71% compared to ~~4.50%~~5.02% at ~~September 30, 2017~~March 31, 2018 and ~~4.81%~~5.06% at December 31, ~~2017,~~2018, which was derived by incorporating a credit spread over the FHLB Fixed-Rate Advance curve. Significant increases (decreases) in the weighted average discount rate could result in a significantly lower (higher) fair value measurement.

The following table presents the fair value of assets measured on a nonrecurring basis and the level of valuation assumptions used to determine the respective fair values as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:

Fair Value Measurements Using
(dollars in thousands) Fair Value Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
September 30, 2018

Impaired loans ⁽¹⁾
$ 19,170
$ —
$ 19,170
$ —
Mortgage servicing rights 18,315
—
—
18,315
Other real estate ⁽²⁾
414
—
414
—

December 31, 2017

Impaired loans ⁽¹⁾
$ 21,280
$ —
$ 21,280
$ —
Mortgage servicing rights 17,161
—
—
17,161
Other real estate ⁽²⁾
851
—
851
—



			Fair Value Measurements Using
(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2019
Other real estate ⁽¹⁾	$	276	$	—	$	276	$	—

December 31, 2018
Other real estate ⁽¹⁾	$	414	$	—	$	414	$	—


⁽¹⁾	~~Represents carrying value and related write-downs of loans for which adjustments are based on agreed upon purchase prices for the loans or the appraised value of the collateral.~~


⁽²⁾	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.

The significant unobservable inputs used in the fair value measurement of the Company's mortgage servicing rights are the weighted average discount rate and the forecasted constant prepayment rate. As of September 30, 2018, the weighted average discount rate and the forecasted constant prepayment rate utilized were 9.5% and 14.0%, respectively, compared to 9.5% and 16.5%, respectively, as of September 30, 2017 and 9.5% and 16.0%, respectively, as of December 31, 2017. Significant increases (decreases) in the weighted average discount rate and/or the forecasted constant prepayment rate could result in a significantly lower (higher) fair value measurement.

~~18.~~16. SEGMENT INFORMATION

We have the following three reportable segments: Banking Operations, Treasury and All Others. These segments are consistent with our internal functional reporting lines and are managed separately because each unit has different target markets, technological requirements, and specialized skills.

The Banking Operations segment includes construction and real estate development lending, commercial lending, residential mortgage lending, indirect auto lending, trust services, retail brokerage services and our retail branch offices, which provide a full range of deposit and loan products, as well as various other banking services. The Treasury segment is responsible for managing the Company's investment securities portfolio and wholesale funding activities. The All Others segment consists of all activities not captured by the Banking Operations or Treasury segments described above and includes activities such as electronic banking, data processing and management of bank owned properties.

The accounting policies of the segments are consistent with the Company's accounting policies that are described in Note 1 - Summary of Significant Accounting Policies to the consolidated financial statements in the Annual Report on Form 10-K ~~as amended by our Form 10-K/A~~ for the year ended December 31, ~~2017~~2018 filed with the SEC. The majority of the Company's net income is derived from net interest income. Accordingly, management focuses primarily on net interest income, rather than gross interest income and expense amounts, in evaluating segment profitability.

Intersegment net interest income (expense) was allocated to each segment based upon a funds transfer pricing process that assigns costs of funds to assets and earnings credits to liabilities based on market interest rates that reflect interest rate sensitivity and maturity characteristics. All administrative and overhead expenses are allocated to the segments at cost. Cash, investment securities, loans and leases and their related balances are allocated to the segment responsible for acquisition and maintenance of those assets. Segment assets also include all premises and equipment used directly in segment operations.

Segment profits and assets are provided in the following table for the periods indicated.


(dollars in thousands)	Banking Operations			Treasury			All Others			Total			Banking Operations			Treasury			All Others			Total
Three Months Ended September 30, 2018
Three Months Ended March 31, 2019
Net interest income	$	38,872		$	4,453		$	—		$	43,325		$	41,680		$	3,433		$	—		$	45,113
Inter-segment net interest income (expense)	7,524			(4,327		)	(3,197		)	—			6,690			(2,606		)	(4,084		)	—
Credit (provision) for loan and lease losses	59			—			—			59			(1,283		)	—			—			(1,283		)
Other operating income:
Mortgage banking income	1,173			—			750			1,923			650			—			774			1,424
Service charges on deposit accounts	2,189			—			—			2,189			2,081			—			—			2,081
Other service charges and fees	1,318			8			1,960			3,286			1,076			—			1,988			3,064
Income from fiduciary activities	1,159			—			—			1,159			965			—			—			965
Equity in earnings of unconsolidated subsidiaries	71			—			—			71			8			—			—			8
Fees on foreign exchange	22			198			—			220			22			129			—			151
Income from bank-owned life insurance	—			1,055			—			1,055			—			952			—			952
Loan placement fees	115			—			—			115			149			—			—			149
Other	448			58			296			802			146			2,554			179			2,879
Other operating income	6,495			1,319			3,006			10,820			5,097			3,635			2,941			11,673
Other operating expense	(16,265		)	(335		)	(17,539		)	(34,139		)	(15,904		)	(346		)	(18,098		)	(34,348		)
Administrative and overhead expense allocation	(15,481		)	(206		)	15,687			—			(15,397		)	(209		)	15,606			—
Income before taxes	21,204			904			(2,043		)	20,065			20,883			3,907			(3,635		)	21,155
Income tax (expense) benefit	(5,128		)	(215		)	471			(4,872		)	(5,052		)	(945		)	879			(5,118		)
Net income (loss)	$	16,076		$	689		$	(1,572	)	$	15,193		$	15,831		$	2,962		$	(2,756	)	$	16,037


(dollars in thousands)	Banking Operations			Treasury			All Others			Total			Banking Operations			Treasury			All Others			Total
Three Months Ended September 30, 2017
Three Months Ended March 31, 2018
Net interest income	$	35,191		$	6,804		$	—		$	41,995		$	36,142		$	6,180		$	—		$	42,322
Inter-segment net interest income (expense)	8,530			(6,299		)	(2,231		)	—			6,921			(5,449		)	(1,472		)	—
Credit (provision) for loan and lease losses	126			—			—			126			211			—			—			211
Other operating income:
Mortgage banking income	684			—			847			1,531			993			—			854			1,847
Service charges on deposit accounts	2,182			—			—			2,182			2,003			—			—			2,003
Other service charges and fees	1,303			—			1,882			3,185			1,143			6			1,885			3,034
Income from fiduciary activities	911			—			—			911			956			—			—			956
Equity in earnings of unconsolidated subsidiaries	176			—			—			176			43			—			—			43
Fees on foreign exchange	23			78						101			24			187						211
Income from bank-owned life insurance	—			1,074			—			1,074			—			318			—			318
Loan placement fees	86			—			—			86			197			—			—			197
Net gain (loss) sale of foreclosed assets	—			—			19			19
Other	140			7			157			304			155			—			190			345
Other operating income	5,505			1,159			2,905			9,569			5,514			511			2,929			8,954
Other operating expense	(15,242		)	(338		)	(17,931		)	(33,511		)	(15,925		)	(385		)	(17,094		)	(33,404		)
Administrative and overhead expense allocation	(15,635		)	(311		)	15,946			—			(14,946		)	(223		)	15,169			—
Income before taxes	18,475			1,015			(1,311		)	18,179			17,917			634			(468		)	18,083
Income tax (expense) benefit	(6,470		)	(360		)	463			(6,367		)	(3,681		)	(130		)	5			(3,806		)
Net income (loss)	$	12,005		$	655		$	(848	)	$	11,812		$	14,236		$	504		$	(463	)	$	14,277

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

Net interest income $ 112,295
$ 16,024
$ —
$ 128,319
Inter-segment net interest income (expense) 21,360
(14,717 ) (6,643 ) —
Credit (provision) for loan and lease losses (262 ) —
—
(262 )
Other operating income:
Mortgage banking income 3,089
—
2,456
5,545
Service charges on deposit accounts 6,169
—
—
6,169
Other service charges and fees 3,748
22
5,927
9,697
Income from fiduciary activities 3,132
—
—
3,132
Equity in earnings of unconsolidated subsidiaries 151
—
—
151
Fees on foreign exchange 75
633
—
708
Income from bank-owned life insurance —
1,874
—
1,874
Loan placement fees 532
—
—
532
Other 803
60
733
1,596
Other operating income 17,699
2,589
9,116
29,404
Other operating expense (47,967 ) (1,078 ) (52,336 ) (101,381 )
Administrative and overhead expense allocation (45,594 ) (652 ) 46,246
—
Income before taxes 57,531
2,166
(3,617 ) 56,080
Income tax (expense) benefit (12,707 ) (478 ) 799
(12,386 )
Net income (loss) $ 44,824
$ 1,688
$ (2,818 ) $ 43,694



(dollars in thousands)	Banking Operations		Treasury		All Others		Total
March 31, 2019
Investment securities	$	—	$	1,320,360	$	—	$	1,320,360
Loans and leases (including loans held for sale)	4,105,110		—		—		4,105,110
Other	26,332		249,054		140,496		415,882
Total assets	$	4,131,442	$	1,569,414	$	140,496	$	5,841,352

(dollars in thousands) Banking
Operations Treasury All Others Total
Nine Months Ended September 30, 2017

Net interest income $ 103,839
$ 21,040
$ —
$ 124,879
Inter-segment net interest income (expense) 24,618
(18,828 ) (5,790 ) —
Credit (provision) for loan and lease losses 2,488
—
—
2,488
Other operating income:
Mortgage banking income 2,953
—
2,478
5,431
Service charges on deposit accounts 6,338
—
—
6,338
Other service charges and fees 3,288
—
5,698
8,986
Income from fiduciary activities 2,739
—
—
2,739
Equity in earnings of unconsolidated subsidiaries 388
—
—
388
Fees on foreign exchange 65
329
—
394
Investments securities gains (losses) —
(1,640 ) —
(1,640 )
Income from bank-owned life insurance —
2,774
—
2,774
Loan placement fees 366
—
—
366
Net gain (loss) sale of foreclosed assets —
—
205
205
Other 936
24
512
1,472
Other operating income 17,073
1,487
8,893
27,453
Other operating expense (45,095 ) (1,048 ) (51,163 ) (97,306 )
Administrative and overhead expense allocation (44,360 ) (741 ) 45,101
—
Income before taxes 58,563
1,910
(2,959 ) 57,514
Income tax (expense) benefit (20,974 ) (684 ) 1,060
(20,598 )
Net income $ 37,589
$ 1,226
$ (1,899 ) $ 36,916

(dollars in thousands) Banking
Operations Treasury All Others Total
September 30, 2018
Investment securities $ —
$ 1,386,739
$ —
$ 1,386,739
Loans and leases (including loans held for sale) 3,982,487
—
—
3,982,487
Other 40,814
237,043
81,557
359,414
Total assets $ 4,023,301
$ 1,623,782
$ 81,557
$ 5,728,640


(dollars in thousands)	Banking Operations		Treasury		All Others		Total		Banking Operations		Treasury		All Others		Total
December 31, 2017
December 31, 2018
Investment securities	$	—	$	1,496,644	$	—	$	1,496,644	$	—	$	1,354,812	$	—	$	1,354,812
Loans and leases (including loans held for sale)	3,786,951		—		—		3,786,951		4,085,013		—		—		4,085,013
Other	42,243		228,608		69,262		340,113		36,905		256,652		73,644		367,201
Total assets	$	3,829,194	$	1,725,252	$	69,262	$	5,623,708	$	4,121,918	$	1,611,464	$	73,644	$	5,807,026

~~19.~~17. LEGAL PROCEEDINGS

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

~~20. SUBSEQUENT EVENTS~~

On October 24, 2018, the Company submitted a redemption notice to the trustee and security holder to redeem, in whole, $20 million of floating rate trust preferred securities issued by Trust III. The trust preferred securities are being redeemed, along with $0.6 million in common securities issued by Trust III and held by the Company, as a result of the concurrent redemption of 100% of the Company's outstanding floating rate junior subordinated debentures due in December 2033 and held by Trust III, which underlie the trust preferred securities. The redemption is pursuant to the optional prepayment provisions of the indenture and is scheduled to occur on December 17, 2018.

The redemption price for the floating rate junior subordinated debentures will be equal to 100% of the principal amount plus accrued interest, if any, up to, but not including, the redemption date. The proceeds from the redemption of the floating rate junior subordinated debentures will be simultaneously applied to redeem all of the outstanding floating rate trust preferred securities at a price of 100% of the aggregate liquidation amount of the securities plus accumulated but unpaid distributions up to but not including the redemption date.

~~The Company has received all necessary regulatory approvals for the redemption. The redemption will be funded with excess cash currently available to the Company.~~

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

Overview

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

Central Pacific Bank is a full-service community bank with 35 branches and 7879 ATMs located throughout the state of Hawaii. The bank offers a broad range of products and services including accepting time, savings, money market, and demand deposits and originating loans, including commercial loans, construction loans, commercial and 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 ~~as amended by our Form 10-K/A~~ for the year ended December 31, ~~2017~~2018 filed with the U.S. Securities and Exchange Commission (the "SEC") on February 28, ~~2018 and March 5, 2018, respectively.~~2019.

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

Allowance for Loan and Lease Losses

The allowance for loan and lease losses (the "Allowance") is management's estimate of incurred credit losses inherent in our loan and lease portfolio at the balance sheet date. ~~In determining the amount of our Allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions, as well as regulatory requirements.~~ We maintain our Allowance at an amount we expect to be sufficient to absorb probable losses incurred in our loan and lease portfolio. ~~At September 30, 2018, we had an Allowance of $46.8 million, compared to $50.0 million at December 31, 2017.~~

The Company's approach to developing the Allowance has three basic elements. These elements include specific reserves for individually impaired loans, a general allowance for loans other than those analyzed as individually impaired, and qualitative adjustments based on environmental and other factors which may be internal or external to the Company.

Specific Reserve

Individually impaired loans in all loan categories are evaluated using one of three valuation methods as prescribed under Accounting Standards Codification ("ASC") 310-10, "Fair Value of Collateral, Observable Market Price, or Cash Flow". A loan is generally evaluated for impairment on an individual basis if it meets one or more of the following characteristics: risk-rated as substandard, doubtful or loss, loans on nonaccrual status, troubled debt restructures, or any loan deemed prudent by management to so analyze. If the valuation of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the Allowance or, alternatively, a specific reserve will be established and included in the overall Allowance balance. The Company ~~recorded a specific reserve of $0.1 million as of September 30, 2018 and~~ did not record a specific reserve as of March 31, 2019 and December 31, ~~2017.~~2018.

General Allowance

In determining the general allowance component of the Allowance, the Company utilizes a comprehensive approach to segment the loan portfolio into homogeneous groups. The Company's methodology segments the portfolio generally by FDIC Call

Report ~~codes~~codes. In the second quarter of 2017, an additional segment was added for auto dealer purchased loans. In the third quarter of 2018, another segment was broken out for multifamily commercial real estate loans. This results in eleven segments, and is consistent with general industry practice. For the purpose of determining general allowance loss factors, loss experience is derived from a migration analysis, with the exception of national syndicated loans and auto dealer purchased loans where an

average historical loss rate is applied due to limited historical loss experience. The key inputs to run a migration analysis are the length 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'. The Allowance methodology applies a look back period to January 1, 2010. The Company extends its look back period with each additional quarter passing. As of March 31, 2019, the look back period was nine years and three months.

Qualitative Adjustments

Our Allowance methodology uses qualitative adjustments to address changes in conditions, trends, and circumstances such as economic conditions and industry changes that could have a significant impact on the risk profile of the loan portfolio, and provide for losses in the loan portfolio that may not be reflected and/or captured in the historical loss data. In order to ensure that the qualitative adjustments are in compliance with current regulatory standards and U.S. GAAP, the Company is primarily basing adjustments on the nine standard factors outlined in the 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses. These factors include: lending policies, economic conditions, loan profile, lending staff, problem loan trends, loan review, collateral, credit concentrations and other internal and external factors.

In recognizing that current and relevant environmental (economic, market or other) conditions that can affect repayment may not yet be fully reflected in historical loss experience, qualitative adjustments are applied to factor in current loan portfolio and market intelligence. These adjustments, which are added to the historical loss rate, consider the nature of the Company's primary markets and are reasonable, consistently determined and appropriately documented. Management reviews the results of the qualitative adjustment quarterly to ensure it is consistent with the trends in the overall economy, and from time to time may make adjustments, if necessary, to ensure directional consistency.

Financial Summary

Net income for the three months ended ~~September 30, 2018~~March 31, 2019 was ~~$15.2~~$16.0 million, or ~~$0.52~~$0.55 per diluted share, compared to ~~$11.8~~$14.3 million, or ~~$0.39~~$0.48 per diluted share for the three months ended September 30, 2017. Net income for the nine months ended September 30, 2018 was $43.7 million, or $1.47 per diluted share, compared to $36.9 million, or $1.20 per diluted share for the nine months ended September 30, 2017.March 31, 2018.

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 September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
Return on average assets	1.06		%	0.85		%	1.03		%	0.90		%	1.10		%	1.01		%
Return on average shareholders’ equity	12.54			9.16			11.99			9.57			12.97			11.60
Basic earnings per common share	$	0.52		$	0.39		$	1.48		$	1.21		$	0.56		$	0.48
Diluted earnings per common share	0.52			0.39			1.47			1.20			0.55			0.48

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 and rising personal income; while an unfavorable business environment is characterized by the reverse.

~~Following~~Hawaii's general economic conditions continued to improve in 2018 but at a slower pace. The growth of Hawaii's economy has slowed, yet the ~~solid performances~~Hawaii Department of ~~our leading economic indicators~~Business, Economic Development and Tourism ("DBEDT") sees a positive forecast with continued growth at a steady pace in ~~2017, the economic outlook for Hawaii continues to be positive for the remainder of 2018.~~2019. Tourism continues to be Hawaii's center of strength and its most significant economic driver. ~~For the sixth straight year in 2017, Hawaii's strong visitor industry broke records in five keys categories, including~~While visitor arrivals ~~and visitor spending. The visitor industry recorded a strong nine~~to Hawaii grew during the three months ended ~~September 30, 2018.~~March 31, 2019, visitor spending was down from the same prior year period. According

to the Hawaii Tourism Authority ("HTA"), ~~7.5~~2.5 million visitors visited the state in the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019. This was an increase of ~~6.5%~~2.6% from the number of visitor arrivals in the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. The HTA also reported total spending by visitors ~~increased~~decreased to ~~$13.6~~$4.5 billion in the ~~nine~~three months

ended ~~September 30, 2018,~~March 31, 2019, or ~~an increase~~a decrease of ~~$1.2~~$0.3 billion, or ~~9.8%~~6.3%, from the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. According to ~~the Hawaii Department of Business, Economic Development and Tourism ("DBEDT"),~~DBEDT, total visitor arrivals and visitor spending are both expected to increase ~~6.1%~~2.0% and ~~9.2%~~3.3% in ~~2018,~~2019, respectively, and ~~1.6%~~1.9% and ~~3.2%~~3.7% in ~~2019,~~2020, respectively.

~~After two years of consecutive growth above 2%,~~ DBEDT reported Hawaii's economy, as measured by the growth of real personal income and real gross state product, continued positive growth in ~~2017, but at a slower pace. In its third quarter of 2018 report,~~2018. DBEDT projects real personal income and real gross state product to grow at a rate of ~~1.8%~~1.5% and ~~1.5%~~1.2%, respectively, for ~~2018~~2019 and ~~1.8%~~1.6% and ~~1.6%~~1.4%, respectively, for ~~2019.~~2020.

Hawaii's labor market continues to be among the ~~tightest labor market~~best in the nation. The Department of Labor and Industrial Relations reported that Hawaii's seasonally adjusted annual unemployment rate ~~remained unchanged at 2.2%~~was 2.8% in ~~September 2018,~~March 2019, compared to ~~2.2%~~2.3% in ~~September 2017.~~March 2018. Hawaii's unemployment rate in March 2019 remained below the national seasonally adjusted unemployment rate of ~~3.7%~~3.8%. DBEDT projects Hawaii's seasonally adjusted annual unemployment rate to be ~~at 2.2%~~2.7% in ~~2018~~2019 and ~~2.5%~~3.1% in ~~2019.~~2020.

Real estate lending is a primary focus for us, including residential mortgage and commercial mortgage loans. As a result, we are dependent on the strength of Hawaii's real estate market. Home sales in Hawaii ~~were~~remained strong ~~and~~in 2018. The Oahu real estate market closed out 2018 with its eighth straight year of appreciation, however the ~~housing market set several new records in 2017.~~sales volume for the year dropped. During the first quarter of 2019, Oahu single family home prices continued to rise despite lower sales. According to the Honolulu Board of Realtors, ~~after a slow start to 2018, they continue to see a steady upward trend and anticipate peak sales in the late summer months.~~ Oahu unit sales volume ~~dipped slightly~~declined by ~~3.7%~~5.7% for single-family homes and ~~0.1%~~10.5% for condominiums for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to the same time period last year. ~~The median price for a single-family home on Oahu reached an all-time high of $812,500 in the month of September 2018, passing the record set in August 2018 of $810,000.~~ For the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, the median sales price for single-family homes on Oahu was ~~$789,000,~~$780,000, representing an increase of ~~4.2%~~2.0% from ~~$757,000~~$765,000 in the same prior year period. The median sales price for condominiums on Oahu for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 was ~~$429,500,~~$411,250, representing ~~an increase~~a decrease of ~~5.5%~~3.2% from ~~$407,000~~$425,000 in the same prior year period. ~~We believe the Hawaii real estate market will continue to remain strong for the remainder of 2018, however, there can be no assurance that this will occur.~~

We are closely monitoring the Mount Kilauea lava eruptions in the Puna District on the Big Island of Hawaii. During the third quarter of 2018, we were paid off on six loans, with a total outstanding balance of $1.6 million in which the collateral properties were located in the Puna District. As of September 30, 2018, in the Puna District we have a total of 29 residential mortgage loans and home equity lines of credit remaining in our portfolio, with a total outstanding balance of $2.6 million. Within that portfolio, we are aware that one residential mortgage property with an aggregate outstanding balance of $0.1 million was destroyed by lava and the insurance claim for the remaining mortgage was denied. As such, management established a specific reserve in the same amount as of September 30, 2018 to cover the potential impairment of this loan.

During the third quarter of 2018, we also recorded an increase to the reserve for residential mortgage repurchase losses of $0.3 million, primarily due to potential losses on repurchases of loans impacted by the Mount Kilauea lava eruptions. We will continue to monitor and evaluate the impact of the Mount Kilauea lava eruptions on our business and financial condition.

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

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

During ~~2017,~~2018, the Federal Reserve increased the Federal Funds ~~rate three~~range four times, each ~~time~~ by 25 basis ~~points.~~

~~In September~~points to 2.25%-2.50% as of December 31, 2018. ~~the~~The Federal Reserve ~~raised~~left the ~~target~~ Federal Funds range ~~by 25 bp for~~unchanged during the ~~third time in 2018, to 2.00%-2.25%. The Federal Reserve also kept its forecast for a fourth hike later this year, subject to~~first quarter of 2019 and pledged future moves will be done patiently and with an eye toward how global economic ~~conditions.~~and financial developments unfold.

AsIf the Federal Reserve increases the Federal Funds rate, overall interest rates will likely rise, which may negatively impact the U.S. economic recovery. Further, changes in monetary policy, including changes in interest rates, could influence, among other things, (i) the amount of interest we receive on loans and securities, (ii) the amount of interest we pay on deposits and borrowings, (iii) our ability to originate loans and obtain deposits and (iv) the fair value of our assets and liabilities.

Results of Operations

Net Interest Income

Net interest income, when annualized and expressed as a percentage of average interest earning assets, is referred to as "net interest margin." Interest income, which includes loan fees and resultant yield information, is expressed on a taxable equivalent basis using a federal statutory tax rate of 21% for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~35% for the three and nine months ended September 30, 2017.~~2018. A comparison of net interest income on a taxable-equivalent basis ("net interest income") for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~ is set forth below.


(dollars in thousands)	Three Months Ended September 30,																				Three Months Ended March 31,
	2018						2017						Variance								2019						2018						Variance
	Average Balance		Average Yield/ Rate		Interest Income/ Expense		Average Balance		Average Yield/ Rate		Interest Income/ Expense		Average Balance			Average Yield/ Rate		Interest Income/ Expense			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	$	22,057	1.97	%	109		$	51,392	1.26	%	163		$	(29,335	)	0.71	%	(54		)	$	11,380	2.41	%	68		$	22,790	1.50	%	84		$	(11,410	)	0.91	%	(16		)
Investment securities, excluding valuation allowance:
Taxable (1)	1,284,411		2.65		8,516		1,363,289		2.51		8,552		(78,878		)	0.14		(36		)	1,201,732		2.76		8,278		1,350,135		2.62		8,858		(148,403		)	0.14		(580		)
Tax-exempt (1)	163,172		2.86		1,165		169,347		3.51		1,486		(6,175		)	(0.65	)	(321		)	153,196		2.86		1,096		165,176		2.86		1,181		(11,980		)	—		(85		)
Total investment securities	1,447,583		2.67		9,681		1,532,636		2.62		10,038		(85,053		)	0.05		(357		)	1,354,928		2.77		9,374		1,515,311		2.65		10,039		(160,383		)	0.12		(665		)
Loans and leases, including loans held for sale (2)	3,941,511		4.09		40,531		3,625,455		3.98		36,289		316,056			0.11		4,242			4,083,791		4.33		43,768		3,789,338		3.98		37,390		294,453			0.35		6,378
Federal Home Loan Bank stock	7,773		3.11		60		6,606		1.38		23		1,167			1.73		37			14,278		4.52		161		6,837		2.61		45		7,441			1.91		116
Total interest earning assets	5,418,924		3.70		50,381		5,216,089		3.55		46,513		202,835			0.15		3,868			5,464,377		3.94		53,371		5,334,276		3.59		47,558		130,101			0.35		5,813
Noninterest-earning assets	290,901						329,820						(38,919		)						345,554						303,929						41,625
Total assets	$	5,709,825					$	5,545,909					$	163,916							$	5,809,931					$	5,638,205					$	171,726

Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	933,405	0.08	%	181		$	916,885	0.08	%	177		$	16,520		—	%	4			$	951,101	0.08	%	192		$	935,483	0.08	%	180		$	15,618		—	%	12
Savings and money market deposits	1,524,121		0.15		593		1,458,393		0.08		281		65,728			0.07		312			1,472,835		0.22		791		1,499,419		0.10		369		(26,584		)	0.12		422
Time deposits under $100,000	177,108		0.53		236		187,231		0.41		192		(10,123		)	0.12		44			175,823		0.66		287		179,547		0.44		195		(3,724		)	0.22		92
Time deposits $100,000 and over	1,049,446		1.70		4,508		955,644		1.02		2,445		93,802			0.68		2,063			982,678		1.98		4,805		1,029,972		1.27		3,230		(47,294		)	0.71		1,575
Total interest-bearing deposits	3,684,080		0.59		5,518		3,518,153		0.35		3,095		165,927			0.24		2,423			3,582,437		0.69		6,075		3,644,421		0.44		3,974		(61,984		)	0.25		2,101
Short-term borrowings	25,163		2.30		146		2,934		1.27		9		22,229			1.03		137			137,544		2.63		893		8,806		1.97		43		128,738			0.66		850
Long-term debt	92,785		4.90		1,147		92,785		3.82		894		—			1.08		253			101,547		4.23		1,060		92,785		4.25		971		8,762			(0.02	)	89
Total interest-bearing liabilities	3,802,028		0.71		6,811		3,613,872		0.44		3,998		188,156			0.27		2,813			3,821,528		0.85		8,028		3,746,012		0.54		4,988		75,516			0.31		3,040
Noninterest-bearing deposits	1,378,981						1,375,625						3,356								1,396,033						1,355,687						40,346
Other liabilities	44,079						40,808						3,271								97,735						44,306						53,429
Total liabilities	5,225,088						5,030,305						194,783								5,315,296						5,146,005						169,291
Shareholders’ equity	484,737						515,580						(30,843		)						494,635						492,184						2,451
Non-controlling interest	—						24						(24		)						—						16						(16		)
Total equity	484,737						515,604						(30,867		)						494,635						492,200						2,435
Total liabilities and equity	$	5,709,825					$	5,545,909					$	163,916							$	5,809,931					$	5,638,205					$	171,726

Net interest income					$	43,570					$	42,515						$	1,055						$	45,343					$	42,570						$	2,773

Interest rate spread			2.99	%					3.11	%						(0.12	)%						3.09	%					3.05	%						0.04	%

Net interest margin			3.20	%					3.25	%						(0.05	)%						3.34	%					3.21	%						0.13	%

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

Nine Months Ended September 30,
2018 2017 Variance
Average
Balance Average
Yield/
Rate Interest
Income/
Expense Average
Balance Average
Yield/
Rate Interest
Income/
Expense Average
Balance Average
Yield/
Rate Interest
Income/
Expense
Assets

Interest earning assets:

Interest-bearing deposits in other banks $ 23,713
1.75 % 310
$ 38,089
1.05 % 298
$ (14,376 ) 0.70 % 12
Investment securities, excluding valuation allowance:
Taxable investment securities (1) 1,325,180
2.63
26,094
1,346,013
2.50
25,192
(20,833 ) 0.13
902
Tax-exempt investment securities (1) 164,174
2.86
3,527
170,211
3.52
4,491
(6,037 ) (0.66 ) (964 )
Total investment securities 1,489,354
2.65
29,621
1,516,224
2.61
29,683
(26,870 ) 0.04
(62 )
Loans and leases, including loans held for sale (2) 3,856,420
4.04
116,620
3,589,124
3.97
106,777
267,296
0.07
9,843
Federal Home Loan Bank stock 7,261
2.67
145
6,865
1.94
100
396
0.73
45
Total interest earning assets 5,376,748
3.64
146,696
5,150,302
3.55
136,858
226,446
0.09
9,838
Noninterest-earning assets 294,090

328,783

(34,693 )

Total assets $ 5,670,838

$ 5,479,085

$ 191,753

Liabilities and Equity

Interest-bearing liabilities:

Interest-bearing demand deposits $ 940,154
0.08 % 554
$ 895,850
0.07 % 471
$ 44,304
0.01 % 83
Savings and money market deposits 1,506,565
0.13
1,421
1,434,778
0.07
797
71,787
0.06
624
Time deposits under $100,000 178,363
0.48
645
190,877
0.39
560
(12,514 ) 0.09
85
Time deposits $100,000 and over 1,042,353
1.48
11,558
987,408
0.80
5,930
54,945
0.68
5,628
Total interest-bearing deposits 3,667,435
0.52
14,178
3,508,913
0.30
7,758
158,522
0.22
6,420
Short-term borrowings 14,683
2.16
237
11,877
0.97
86
2,806
1.19
151
Long-term debt 92,785
4.64
3,221
92,785
3.69
2,563
—
0.95
658
Total interest-bearing liabilities 3,774,903
0.62
17,636
3,613,575
0.39
10,407
161,328
0.23
7,229
Noninterest-bearing deposits 1,367,574

1,310,722

56,852

Other liabilities 42,414

40,626

1,788

Total liabilities 5,184,891

4,964,923

219,968

Shareholders’ equity 485,942

514,137

(28,195 )

Non-controlling interest 5

25

(20 )

Total equity 485,947

514,162

(28,215 )

Total liabilities and equity $ 5,670,838

$ 5,479,085

$ 191,753

Net interest income

$ 129,060

$ 126,451

$ 2,609

Interest rate spread 3.02 % 3.16 % (0.14 )%

Net interest margin
3.20 %

3.28 %

(0.08 )%

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

Net interest income (expressed on a taxable-equivalent basis) was ~~$43.6~~$45.3 million for the ~~third~~first quarter of ~~2018,~~2019, representing an increase of ~~2.5%~~6.5% from ~~$42.5~~$42.6 million in the ~~third~~first quarter of 2017. Net interest income (expressed on a taxable-equivalent basis) was $129.1 million for the nine months ended September 30, 2018, representing an increase of 2.1% from $126.5 million in the nine months ended September 30, 2017.2018. The increase in the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 was primarily attributable to a significant increase in average loans and leases balances funded by ~~growth in lower cost deposits,~~runoff of the investment securities portfolio, combined

with higher yields earned on the loans and leases and investment securities portfolios. Partially offsetting this increase was an increase in ~~average time~~rates paid on interest-bearing deposits ~~$100,000~~ and ~~over,~~short-term borrowings primarily attributable to the increases in the Federal Funds rate in 2018, combined with ~~a significant~~an increase in short-term borrowings.

Interest Income

Taxable-equivalent interest income was $53.4 million for the first quarter of 2019, representing an increase of 12.2% from $47.6 million in the first quarter of 2018. The increase was primarily attributable to a $294.5 million increase in average loans and leases compared to the first quarter of 2018, accounting for approximately $2.9 million of the increase in interest income during the first quarter of 2019. In addition, the average yields earned on the loans and leases and taxable investment securities portfolios during the first quarter of 2019 increased by 35 bp and 14 bp, respectively, compared to the first quarter of 2018, accounting for approximately $3.6 million and $0.4 million of the increase in interest income, respectively. These increases were partially offset by a $160.4 million decline in average investment securities, which decreased interest income by approximately $1.1 million.

Interest Expense

Interest expense for the first quarter of 2019 was $8.0 million, representing an increase of 60.9% from the first quarter of 2018. The increase was primarily attributable to 71 bp and 12 bp increases in average rates paid on time deposits $100,000 and ~~over.~~over and savings and money market deposits, respectively, which increased interest expense by approximately $1.7 million and $0.4 million, respectively. Time deposits $100,000 and over primarily consists of public funds which may be opportunistic sources of funding, but fluctuate more directly with changes in the Federal Funds ~~rates. The increase was also partially offset~~rate. In addition, average short-term borrowings increased by ~~a lower taxable-equivalent adjustment on the tax-exempt investment securities portfolio due to Tax Reform.~~

In the second quarter of 2017, we completed an investment portfolio repositioning strategy designed to enhance potential prospective earnings and improve net interest margin. In connection with the repositioning, we sold $97.7$128.7 million, ~~in lower-yielding available-for-sale investment securities, and purchased $97.4 million~~resulting in higher yielding, longer duration investment securities. The securities sold had a duration of 3.3 years and an average yield of 1.91%. Gross proceeds from the sale were immediately reinvested back into securities with a duration of 4.6 and an average yield of 2.57%. The new securities were classified in the available-for-sale portfolio. Gross realized losses on the sale of the securities were $1.6 million, recorded in other operating income.

~~Interest Income~~

Taxable-equivalent interest income was $50.4 million for the third quarter of 2018, representing an increase of 8.3% from $46.5 million in the third quarter of 2017. The increase was primarily attributable to a $316.1 million increase in average loans and leases compared to the third quarter of 2017, accounting for approximately $3.2 million of the increase in interest income during the third quarter of 2018. In addition, the average yields earned on the loans and leases and taxable investment securities portfolios during the third quarter of 2018 increased by 11 bp and 14 bp, respectively, compared to the third quarter of 2017, accounting for approximately $1.1 million and $0.4 million of the increase in interest income, respectively. These increases were partially offset by a 65 bp decline in the average taxable-equivalent yield earned on the tax-exempt investment securities portfolio, primarily due to Tax Reform, which decreased interest income by $0.3 million.

Taxable-equivalent interest income was $146.7 million for the nine months ended September 30, 2018, representing an increase of 7.2% from $136.9 million in the nine months ended September 30, 2017. The increase was primarily attributable to a $267.3 million increase in average loans and leases compared to the nine months ended September 30, 2017, accounting for approximately $7.8 million of the increase in interest income during the nine months ended September 30, 2018. In addition, the average yields earned on the loans and leases and taxable investment securities portfolios during the nine months ended September 30, 2018 increased by 7 bp and 13bp, respectively, compared to the nine months ended September 30, 2017, accounting for approximately $2.0 million and $1.3 million of the increase in interest income, respectively. These increases were partially offset by a 66 bp decline in the average taxable-equivalent yield earned on the tax-exempt investment securities portfolio, primarily due to Tax Reform, which decreased interest income by $0.8 million.

~~Interest Expense~~

Interest expense for the third quarter of 2018 was $6.8 million, representing an increase of 70.4% from the third quarter of 2017. The increase was primarily attributable to a 68 bp increase in average rates paid on time deposits $100,000 and over, which increased interest expense ~~by $1.8~~of approximately $0.6 million.

Interest expense for the nine months ended September 30, 2018 was $17.6 million, representing an increase of 69.5% from the nine months ended September 30, 2017. The increase was primarily attributable to a 68 bp increase in average rates paid on time deposits $100,000 and over, which increased interest expense by $5.3 million. The increase in average rates paid on time deposits $100,000 and over during the three and nine months ended September 30, 2018 was primarily due to an increase in average rates paid on public deposits.

Net Interest Margin

Our net interest margin of ~~3.20%~~3.34% for the ~~third~~first quarter of ~~2018 declined~~2019 increased by 513 bp from the ~~third~~first quarter of ~~2017 as deposit costs continue to increase faster than~~2018.

The average yields earned on our ~~loan yields. Our net interest margin of 3.20% for~~interest-earning assets, which increased by 35 bp in the ~~nine~~three months ended ~~September 30, 2018 declined by 8 bp from~~March 31, 2019, compared to the ~~nine months ended September 30, 2017.~~

~~The~~same prior year period, outpaced the increase in average rates paid on our interest-bearing liabilities, which increased by ~~27 bp and 23~~31 bp in the three ~~and nine~~ months ended ~~September 30, 2018, respectively,~~March 31, 2019, compared to the same prior year ~~periods, outpaced the increase~~period.

The aforementioned increases in average yields earned on our ~~interest-earning assets, which increased by 15 bp~~loans and ~~9 bp in~~leases and taxable investment securities portfolios during the three ~~and nine~~ months ended ~~September 30, 2018, respectively, compared to~~March 31, 2019 was partially offset by the ~~same prior year periods.~~

~~The~~ aforementioned increases in average rates paid on our time deposits $100,000 and over and savings and money market deposits during the three ~~and nine~~ months ended September 30, 2018 was partially offset by the aforementioned increases in average yield earned on our loans and leases and taxable investment securities portfolios. Due to Tax Reform and the resultant reduction in the federal statutory tax rate to 21% compared to 35% starting in the first quarter of 2018, the taxable-equivalent adjustment on interest income earned on the average tax-exempt investment securities portfolio decreased. This resulted in an approximately 2 bp reduction in the net interest margin in the three and nine months ended September 30, 2018.

The historically low interest rate environment that we continue to operate in is the result of the target Federal Funds range of 0%-0.25% initially set by the Federal Reserve in the fourth quarter of 2008 and other economic policies implemented by the FRB, which continued through the third quarter of 2015. In 2015 and 2016, the Federal Reserve increased the target Federal Funds range by 25 bp each year based on the improvement in labor market conditions and positive economic outlook. Citing improvement in labor market conditions, a move toward more stable prices, and a positive economic outlook, the Federal Reserve increased the target Federal Funds range three times in 2017, each by 25 bp. Furthermore, the Federal Reserve announced their intent to remove monetary policy accommodation through the gradual unwind of their balance sheet that grew following the recession through their quantitative easing programs.

In September 2018, the Federal Reserve raised the target Federal Funds range by 25 bp for the third time in 2018, to 2.00%-2.25%. The Federal Reserve also kept its forecast for a fourth hike later this year, subject to economic conditions.March 31, 2019.

Provision for Loan and Lease Losses

Our Provision was a ~~credit~~debit of ~~$0.1~~$1.3 million during the ~~third~~first quarter of ~~2018,~~2019, compared to a credit of ~~$0.1~~$0.2 million in the ~~third~~first quarter of ~~2017.~~2018. Our net charge-offs were ~~$1.3~~$1.9 million during the ~~third~~first quarter of ~~2018,~~2019, compared to net charge-offs of ~~$1.5~~$0.6 million in the ~~third~~first quarter of ~~2017.~~2018.

For the nine months ended September 30, 2018, our Provision was a debit of $0.3 million, compared to a credit of $2.5 million in the nine months ended September 30, 2017. Our net charge-offs were $3.4 million during the nine months ended September 30, 2018, compared to net charge-offs of $2.9 million in the nine months ended September 30, 2017.

Other Operating Income

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

Three Months Ended
(dollars in thousands) September 30, 2018 September 30, 2017 $ Change % Change
Other operating income:
Mortgage banking income $ 1,923
$ 1,531
$ 392
25.6 %
Service charges on deposit accounts 2,189
2,182
7
0.3 %
Other service charges and fees 3,286
3,185
101
3.2 %
Income from fiduciary activities 1,159
911
248
27.2 %
Equity in earnings of unconsolidated subsidiaries 71
176
(105 ) -59.7 %
Fees on foreign exchange 220
101
119
117.8 %
Investment securities gains (losses) —
—
—
N.M.
Income from bank-owned life insurance 1,055
1,074
(19 ) -1.8 %
Loan placement fees 115
86
29
33.7 %
Net gain on sales of foreclosed assets —
19
(19 ) -100.0 %
Other:

Income recovered on nonaccrual loans previously charged-off 395
25
370
1,480.0 %
Other recoveries 101
32
69
215.6 %
Commissions on sale of checks 79
86
(7 ) -8.1 %
Other 227
161
66
41.0 %
Total other operating income $ 10,820
$ 9,569
$ 1,251
13.1 %



	Three Months Ended
(dollars in thousands)	March 31, 2019		March 31, 2018		$ Change			% Change
Other operating income:
Mortgage banking income	$	1,424	$	1,847	$	(423	)	-22.9	%
Service charges on deposit accounts	2,081		2,003		78			3.9	%
Other service charges and fees	3,064		3,034		30			1.0	%
Income from fiduciary activities	965		956		9			0.9	%
Equity in earnings of unconsolidated subsidiaries	8		43		(35		)	-81.4	%
Fees on foreign exchange	151		211		(60		)	-28.4	%
Income from bank-owned life insurance	952		318		634			199.4	%
Loan placement fees	149		197		(48		)	-24.4	%
Other:
Income recovered on nonaccrual loans previously charged-off	82		96		(14		)	-14.6	%
Other recoveries	26		46		(20		)	-43.5	%
Commissions on sale of checks	80		86		(6		)	-7.0	%
Gain on sale of MasterCard stock	2,555		—		2,555			N.M.
Other	136		117		19			16.2	%
Total other operating income	$	11,673	$	8,954	$	2,719		30.4	%

For the ~~third~~first quarter of ~~2018,~~2019, total other operating income of ~~$10.8~~$11.7 million increased by ~~$1.3~~$2.7 million, or ~~13.1%~~30.4%, from ~~$9.6~~$9.0 million in the year-ago quarter. The increase from the year-ago quarter was primarily due to the conversion of MasterCard Class B common stock received during their initial public offering to Class A common stock and immediate sale of the converted shares resulting in a gain of $2.6 million, combined with higher income from bank-owned life insurance of $0.6 million. The higher income from bank-owned life insurance was primarily attributable to fluctuations in the stock market during the quarter. Partially offsetting these positive variances was lower net gains on sales of residential mortgage loans of $0.4 million (included in mortgage banking income)~~, higher income recovered on nonaccrual loans previously charged-off of $0.4 million, and higher income from fiduciary activities of $0.2 million.~~.

Nine Months Ended
(dollars in thousands) September 30, 2018 September 30, 2017 $ Change % Change
Other operating income:
Mortgage banking income $ 5,545
$ 5,431
$ 114
2.1 %
Service charges on deposit accounts 6,169
6,338
(169 ) -2.7 %
Other service charges and fees 9,697
8,986
711
7.9 %
Income from fiduciary activities 3,132
2,739
393
14.3 %
Equity in earnings of unconsolidated subsidiaries 151
388
(237 ) -61.1 %
Fees on foreign exchange 708
394
314
79.7 %
Investment securities gains (losses) —
(1,640 ) 1,640
-100.0 %
Income from bank-owned life insurance 1,874
2,774
(900 ) -32.4 %
Loan placement fees 532
366
166
45.4 %
Net gain on sales of foreclosed assets —
205
(205 ) -100.0 %
Other:

Income recovered on nonaccrual loans previously charged-off 621
611
10
1.6 %
Other recoveries 196
123
73
59.3 %
Commissions on sale of checks 249
258
(9 ) -3.5 %
Other 530
480
50
10.4 %
Total other operating income $ 29,404
$ 27,453
$ 1,951
7.1 %

For the nine months ended September 30, 2018, total other operating income of $29.4 million increased by $2.0 million, or 7.1%, from $27.5 million in the nine months ended September 30, 2017. The increase from the nine months ended September 30, 2017 was primarily due to investment securities losses of $1.6 million recorded in the year-ago period related to an investment portfolio repositioning, combined with higher commissions and fees on investment services of $0.6 million (included in other service charges and fees), higher income from fiduciary activities of $0.4 million, and higher fees on foreign exchange of $0.3 million. These increases were partially offset by lower income from bank-owned life insurance ("BOLI") of $0.9 million. The lower income from BOLI was primarily attributable to $1.1 million in death benefit income recorded in the year-ago period, compared to $0.4 million recorded in the current period.

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)	September 30, 2018			September 30, 2017		$ Change			% Change		March 31, 2019		March 31, 2018		$ Change			% Change
Other operating expense:
Salaries and employee benefits	$	19,011		$	18,157	$	854		4.7	%	$	19,889	$	18,505	$	1,384		7.5	%
Net occupancy	3,488			3,404		84			2.5	%	3,458		3,266		192			5.9	%
Equipment	1,048			969		79			8.2	%	1,006		1,068		(62		)	-5.8	%
Amortization of core deposit premium	669			669		—			—	%	—		669		(669		)	-100.0	%
Communication expense	903			944		(41		)	-4.3	%	734		898		(164		)	-18.3	%
Legal and professional services	1,528			1,854		(326		)	-17.6	%	1,570		1,821		(251		)	-13.8	%
Computer software expense	2,672			2,346		326			13.9	%	2,597		2,267		330			14.6	%
Advertising expense	612			626		(14		)	-2.2	%	711		612		99			16.2	%
Foreclosed asset expense	212			24		188			783.3	%	159		294		(135		)	-45.9	%
Other:
Charitable contributions	166			141		25			17.7	%	154		200		(46		)	-23.0	%
FDIC insurance assessment	437			433		4			0.9	%	501		434		67			15.4	%
Miscellaneous loan expenses	403			302		101			33.4	%	294		299		(5		)	-1.7	%
ATM and debit card expenses	686			548		138			25.2	%	650		648		2			0.3	%
Amortization of investments in low-income housing tax credit partnerships	114			174		(60		)	-34.5	%
Armored car expenses	185			176		9			5.1	%	198		166		32			19.3	%
Entertainment and promotions	185			818		(633		)	-77.4	%	230		159		71			44.7	%
Stationery and supplies	206			204		2			1.0	%	225		201		24			11.9	%
Directors’ fees and expenses	263			208		55			26.4	%	242		231		11			4.8	%
Provision for residential mortgage loan repurchase losses	331			—		331			N.M.
Increase (decrease) to the reserve for unfunded commitments	(71		)	72		(143		)	-198.6	%	167		41		126			307.3	%
Other	1,091			1,442		(351		)	-24.3	%	1,563		1,625		(62		)	-3.8	%
Total other operating expense	$	34,139		$	33,511	$	628		1.9	%	$	34,348	$	33,404	$	944		2.8	%

For the ~~third~~first quarter of ~~2018,~~2019, total other operating expense was ~~$34.1~~$34.3 million and increased by ~~$0.6~~$0.9 million, or ~~1.9%~~2.8%, from ~~$33.5~~$33.4 million in the year-ago quarter. The increase was primarily due to higher salaries and employee benefits of ~~$0.9~~$1.4 million and higher computer software expense of $0.3 million. The increase in salaries and employee benefits was ~~primarily~~partially attributable to ~~the~~a $0.6 million increase in ~~the Company's starting pay rate effective January 1, 2018 and~~deferred compensation expense with a corresponding increase in income from bank-owned life insurance, combined with merit ~~salary~~ increases ~~effective~~ in the second quarter of 2018. These increases were partially offset by lower ~~entertainment and promotions~~amortization of ~~$0.6~~core deposit premium of $0.7 million, as the intangible asset was fully amortized as of September 30, 2018, and lower legal and professional services of $0.3 million compared to the year-ago period. ~~The lower entertainment and promotions were primarily attributable to additional expenses incurred in the year-ago period related to a core deposit gathering campaign.~~

Nine Months Ended
(dollars in thousands) September 30, 2018 September 30, 2017 $ Change % Change
Other operating expense:
Salaries and employee benefits $ 56,299
$ 53,527
$ 2,772
5.2 %
Net occupancy 10,114
10,153
(39 ) -0.4 %
Equipment 3,160
2,778
382
13.8 %
Amortization of core deposit premium 2,006
2,006
—
— %
Communication expense 2,547
2,735
(188 ) -6.9 %
Legal and professional services 5,118
5,633
(515 ) -9.1 %
Computer software expense 7,244
6,788
456
6.7 %
Advertising expense 1,841
1,408
433
30.8 %
Foreclosed asset expense 537
123
414
336.6 %
Other:

Charitable contributions 497
428
69
16.1 %
FDIC insurance assessment 1,305
1,286
19
1.5 %
Miscellaneous loan expenses 1,026
856
170
19.9 %
ATM and debit card expenses 2,032
1,466
566
38.6 %
Amortization of investments in low-income housing tax credit partnerships 341
630
(289 ) -45.9 %
Armored car expenses 584
632
(48 ) -7.6 %
Entertainment and promotions 617
1,222
(605 ) -49.5 %
Stationery and supplies 643
612
31
5.1 %
Directors’ fees and expenses 777
665
112
16.8 %
Provision for residential mortgage loan repurchase losses 331
—
331
N.M.
Increase (decrease) to the reserve for unfunded commitments 36
195
(159 ) -81.5 %
Other 4,326
4,163
163
3.9 %
Total other operating expense $ 101,381
$ 97,306
$ 4,075
4.2 %

For the nine months ended September 30, 2018, total other operating expense was $101.4 million and increased by $4.1 million, or 4.2%, from $97.3 million in the nine months ended September 30, 2017. The increase from the nine months ended September 30, 2017 was primarily due to higher salaries and employee benefits of $2.8 million, higher ATM and debit card expenses of $0.6 million, higher computer software expense of $0.5 million, and higher advertising, foreclosed asset and equipment expenses of $0.4 million each. The increase in salaries and employee benefits was primarily attributable to the increase in the Company's starting pay rate and merit salary increases effective in the second quarter of 2018. These increases were partially offset by lower entertainment and promotions of $0.6 million and lower legal and professional services of $0.5 million.

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

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


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
(dollars in thousands)	2018			2017			2018			2017			2019			2018
Total other operating expense	$	34,139		$	33,511		$	101,381		$	97,306		$	34,348		$	33,404

Net interest income	$	43,325		$	41,995		$	128,319		$	124,879		$	45,113		$	42,322
Total other operating income	10,820			9,569			29,404			27,453			11,673			8,954
Total revenue	$	54,145		$	51,564		$	157,723		$	152,332		$	56,786		$	51,276

Efficiency ratio	63.05		%	64.99		%	64.28		%	63.88		%	60.49		%	65.15		%

Our efficiency ratio improved to ~~63.05%~~60.49% in the ~~third~~first quarter of ~~2018~~2019 compared to ~~64.99%~~65.15% in the year-ago quarter. The ~~improvements in net interest income and other operating income were partially offset by higher other operating expenses as noted above, and resulted in the improvement in our efficiency ratio.~~

~~Our~~ efficiency ratio ~~increased from 63.88% in the nine months ended September 30, 2017 to 64.28% in the nine months ended September 30, 2018. The higher other operating expenses, partially offset~~was positively impacted by the ~~improvements in net interest income and other operating income as noted above, resulted in a higher efficiency ratio.~~aforementioned gain on sale of MasterCard stock.

Income Taxes

The Company recorded income tax expense of ~~$4.9 million and $12.4~~$5.1 million for the three ~~and nine~~ months ended ~~September 30, 2018, respectively,~~March 31, 2019, compared to ~~$6.4 million and $20.6~~$3.8 million in the same prior year ~~periods.~~period. The effective tax ~~rates~~rate for the three ~~and nine~~ months ended ~~September 30, 2018 were 24.3% and 22.09%~~March 31, 2019 was 24.2%, ~~respectively,~~ compared to ~~35.0% and 35.81%~~21.1% in the same prior year ~~periods, respectively.~~period. The ~~decrease~~increase in income tax expense and the effective tax rate in the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 was primarily due to ~~the decline~~higher pre-tax income in the ~~U.S. federal corporate tax rate attributable to Tax Reform. In addition, in the second~~current quarter, of 2017, the Company recorded additional income tax expense of $0.9 million related to a former executive's supplemental executive retirement plan ("SERP") benefit payout and adjustment to the DTA related to SERP. In the first quarter of 2018, the Company recordedcombined with an income tax benefit of $0.7 million related to ~~a refinement~~the finalization of the ~~revaluation~~impact of ~~our DTA. In~~H.R.1, commonly referred to as the ~~second~~Tax Cuts and Jobs Act, recorded in the first quarter of 2018, the Company recorded an income tax benefit of $0.6 million related to a tax accounting method change strategy that allows the deduction for certain expenses to be accelerated into the 2017 tax year under the higher corporate tax rate.2018.

The ~~remaining~~ valuation allowance on our net DTA totaled $3.3 million at ~~September 30, 2018~~March 31, 2019 and ~~$3.3~~$3.5 million at December 31, ~~2017,~~2018, of which $3.2 million and $3.3 million, respectively, related ~~entirely~~ to our DTA from net apportioned net operating loss ("NOL") carryforwards for California state income tax purposes as we do not expect to generate sufficient income in California to utilize the DTA. The remaining valuation allowance of $0.1 million and $0.2 million as of March 31, 2019 and December 31, 2018 relates to a Hawaii capital loss carryforward balance that we do not expect to be able to utilize. Net of ~~this~~the valuation allowance, the Company's net DTA totaled ~~$24.5~~$19.3 million at ~~September 30, 2018,~~March 31, 2019, compared to a net DTA of ~~$26.5~~$21.5 million as of December 31, ~~2017,~~2018, and is included in other assets on our consolidated balance sheets.

Financial Condition

Total assets at ~~September 30, 2018~~March 31, 2019 of ~~$5.73~~$5.84 billion increased by ~~$104.9~~$34.3 million from ~~$5.62~~$5.81 billion at December 31, ~~2017. The increase in total assets was primarily due to our deposit growth and deployment of these proceeds into higher yielding assets.~~2018.

Investment Securities

Investment securities of ~~$1.39~~$1.32 billion at ~~September 30, 2018~~March 31, 2019 decreased by ~~$109.9~~$34.5 million, or ~~7.3%~~2.5%, from December 31, ~~2017.~~2018. The decrease reflects ~~$161.5~~$45.3 million in principal runoff, ~~and~~offset by a ~~$34.2~~$10.8 million ~~decrease~~increase in the market valuation on the available-for-sale ~~portfolio, partially offset by investment securities purchases totaling $85.3 million.~~portfolio.

Loans and Leases

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


(Dollars in thousands)	September 30, 2018			December 31, 2017			$ Change			% Change		March 31, 2019			December 31, 2018			$ Change			% Change
Hawaii:
Commercial, financial and agricultural	$	427,047		$	400,529		$	26,518		6.6	%	$	411,396		$	439,112		$	(27,716	)	(6.3	)%
Real estate:
Construction	66,286			61,643			4,643			7.5		68,981			64,654			4,327			6.7
Residential mortgage	1,392,669			1,341,221			51,448			3.8		1,451,794			1,428,205			23,589			1.7
Home equity	455,599			412,230			43,369			10.5		465,905			468,966			(3,061		)	(0.7	)
Commercial mortgage	845,864			807,009			38,855			4.8		869,521			861,086			8,435			1.0
Consumer	345,785			322,713			23,072			7.1		352,771			357,908			(5,137		)	(1.4	)
Leases	170			362			(192		)	(53.0	)	83			124			(41		)	(33.1	)
Total loans and leases	3,533,420			3,345,707			187,713			5.6		3,620,451			3,620,055			396			—
Allowance for loan and lease losses	(41,991		)	(44,779		)	2,788			(6.2	)	(41,413		)	(42,993		)	1,580			(3.7	)
Net loans and leases	$	3,491,429		$	3,300,928		$	190,501		5.8		$	3,579,038		$	3,577,062		$	1,976		0.1

U.S. Mainland:
Commercial, financial and agricultural	$	138,317		$	103,490		$	34,827		33.7		$	155,399		$	142,548		$	12,851		9.0
Real estate:
Construction	2,355			2,597			(242		)	(9.3	)	2,194			2,273			(79		)	(3.5	)
Residential mortgage	—			—			—			—		—			—			—			—
Home equity	—			—			—			—		—			—			—			—
Commercial mortgage	187,586			170,788			16,798			9.8		188,485			179,192			9,293			5.2
Consumer	116,349			148,033			(31,684		)	(21.4	)	135,042			134,298			744			0.6
Leases	—			—			—			—		—			—			—			—
Total loans and leases	444,607			424,908			19,699			4.6		481,120			458,311			22,809			5.0
Allowance for loan and lease losses	(4,835		)	(5,222		)	387			(7.4	)	(5,854		)	(4,923		)	(931		)	18.9
Net loans and leases	$	439,772		$	419,686		$	20,086		4.8		$	475,266		$	453,388		$	21,878		4.8

Total:
Commercial, financial and agricultural	$	565,364		$	504,019		$	61,345		12.2		$	566,795		$	581,660		$	(14,865	)	(2.6	)
Real estate:
Construction	68,641			64,240			4,401			6.9		71,175			66,927			4,248			6.3
Residential mortgage	1,392,669			1,341,221			51,448			3.8		1,451,794			1,428,205			23,589			1.7
Home equity	455,599			412,230			43,369			10.5		465,905			468,966			(3,061		)	(0.7	)
Commercial mortgage	1,033,450			977,797			55,653			5.7		1,058,006			1,040,278			17,728			1.7
Consumer	462,134			470,746			(8,612		)	(1.8	)	487,813			492,206			(4,393		)	(0.9	)
Leases	170			362			(192		)	(53.0	)	83			124			(41		)	(33.1	)
Total loans and leases	3,978,027			3,770,615			207,412			5.5		4,101,571			4,078,366			23,205			0.6
Allowance for loan and lease losses	(46,826		)	(50,001		)	3,175			(6.3	)	(47,267		)	(47,916		)	649			(1.4	)
Net loans and leases	$	3,931,201		$	3,720,614		$	210,587		5.7		$	4,054,304		$	4,030,450		$	23,854		0.6

Loans and leases, net of deferred costs, of ~~$3.98~~$4.10 billion at ~~September 30, 2018~~March 31, 2019 increased by ~~$207.4~~$23.2 million, or ~~5.5%~~0.6%, from December 31, 2017. The increase reflects net increases in the following loan portfolios: commercial, financial and agricultural of $61.3 million, commercial mortgage of $55.7 million, residential mortgage of $51.4 million, and home equity of $43.4 million. These increases were partially offset by a net decrease in the consumer loan portfolio of $8.6 million.

~~The Hawaii loan portfolio increased by $187.7 million, or 5.6%, from December 31, 2017.~~2018. The increase reflects net increases in the following loan portfolios: residential mortgage of ~~$51.4 million, home equity of $43.4~~$23.6 million, commercial mortgage of ~~$38.9~~$17.7 million, and construction of $4.2 million. These increases were partially offset by net decreases in the following loan portfolios: commercial, financial and agricultural of ~~$26.5~~$14.9 million, consumer of $4.4 million, and ~~consumer~~home equity of ~~$23.1~~$3.1 million.

The Hawaii loan portfolio increased by $0.4 million, or 0.01%, from December 31, 2018. The increase reflects net increases in the following loan portfolios: residential mortgage of $23.6 million, commercial mortgage of $8.4 million, and construction of $4.3 million. The increases in the portfolios were primarily due to an increased demand from both new and existing customers.

These increases were partially offset by net decreases in the following loan portfolios: commercial, financial and agricultural of $27.7 million consumer of $5.1 million, and home equity of $3.1 million.

The U.S. Mainland loan portfolio increased by ~~$19.7~~$22.8 million, or ~~4.6%~~5.0% from December 31, ~~2017.~~2018. The net increase was primarily attributable to net increases in the commercial, financial and agricultural loan portfolio of ~~$34.8~~$12.9 million and commercial mortgage loan portfolio of ~~$16.8 million, partially offset by a reduction in the consumer loan portfolio of $31.7~~$9.3 million.

In ~~May 2018~~,the first quarter of 2019, we purchased ~~a U.S. Mainland auto loan portfolio~~consumer loans totaling ~~$20.6~~$18.3 million which represented the outstanding balance at the time of purchase.

In 2018, we purchased consumer loans totaling $58.6 million, which included a $0.1 million premium over the ~~$20.5~~$58.5 million outstanding ~~balance. At~~balance at the time of ~~purchase, the auto loans had a weighted average remaining term of 63 months and a weighted average yield, net of the premium paid and servicing costs, of 3.89%.~~purchase.

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)	September 30, 2018			December 31, 2017			$ Change			% Change		March 31, 2019			December 31, 2018			$ Change			% Change
Nonperforming Assets
Nonaccrual loans (including loans held for sale):
Real estate:
Residential mortgage	$	2,197		$	2,280		$	(83	)	(3.6	)	$	2,492		$	2,048		$	444		21.7
Home equity	415			416			(1		)	(0.2	)	570			275			295			107.3
Commercial mortgage	—			79			(79		)	(100.0	)	—			—			—			—
Total nonaccrual loans	2,612			2,775			(163		)	(5.9	)	3,062			2,323			739			31.8

Other real estate owned ("OREO"):
Real estate:
Residential mortgage	414			851			(437		)	(51.4	)	276			414			(138		)	(33.3	)
Total OREO	414			851			(437		)	(51.4	)	276			414			(138		)	(33.3	)
Total nonperforming assets	3,026			3,626			(600		)	(16.5	)	3,338			2,737			601			22.0

Accruing Loans Delinquent for 90 Days or More
Real estate:
Residential mortgage	—			49			(49		)	(100.0	)
Home equity												—			298			(298		)	(100.0	)
Consumer	333			515			(182		)	(35.3	)	159			238			(79		)	(33.2	)
Total accruing loans delinquent for 90 days or more	333			564			(231		)	(41.0	)	159			536			(377		)	(70.3	)

Restructured Loans Still Accruing Interest
Commercial, financial and agricultural	388			491			(103		)	(21.0	)	199			220			(21		)	(9.5	)
Real estate:
Construction												2,194			2,273			(79		)	(3.5	)
Residential mortgage	9,747			10,677			(930		)	(8.7	)	7,141			8,026			(885		)	(11.0	)
Commercial mortgage	1,145			1,466			(321		)	(21.9	)	2,222			2,348			(126		)	(5.4	)
Total restructured loans still accruing interest	11,280			12,634			(1,354		)	(10.7	)	11,756			12,867			(1,111		)	(8.6	)

Total nonperforming assets, accruing loans delinquent for 90 days or more and restructured loans still accruing interest	$	14,639		$	16,824		$	(2,185	)	(13.0	)	$	15,253		$	16,140		$	(887	)	(5.5	)

Ratio of nonaccrual loans to total loans and leases	0.07		%	0.07		%				—	%	0.07		%	0.06		%				0.01	%
Ratio of nonperforming assets to total loans and leases and OREO	0.08		%	0.10		%				(0.02	)%	0.08		%	0.07		%				0.01	%
Ratio of nonperforming assets and accruing loans delinquent for 90 days or more to total loans and leases and OREO	0.08		%	0.11		%				(0.03	)%	0.09		%	0.08		%				0.01	%
Ratio of nonperforming assets, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and leases and OREO	0.37		%	0.45		%				(0.08	)%	0.37		%	0.40		%				(0.03	)%

The following table sets forth activity in nonperforming assets as of the date indicated.


Year-to-Date Changes in Nonperforming Assets:
(dollars in thousands)
Balance at December 31, 2017	$	3,626
Balance at December 31, 2018				$	2,737
Additions	593			810
Reductions:
Payments	(313		)	(71		)
Return to accrual status	(403		)	—
Sales of nonperforming assets	(40		)	—
Charge-offs and/or valuation adjustments	(437		)	(138		)
Total reductions	(1,193		)	(209		)
Net decrease	(600		)
Balance at September 30, 2018	$	3,026
Net increase				601
Balance at March 31, 2019				$	3,338

Nonperforming assets, which includes nonaccrual loans and leases and other real estate, totaled ~~$3.0~~$3.3 million at ~~September 30, 2018,~~March 31, 2019, compared to ~~$3.6~~$2.7 million at December 31, ~~2017.~~2018. There were no nonperforming loans classified as held for sale at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018. The ~~decrease~~increase in nonperforming assets from December 31, ~~2017~~2018 was primarily attributable to two additions to nonaccrual loans totaling $0.8 million, offset by a ~~$0.4~~$0.1 million ~~in write-downs~~write-down of a Hawaii residential mortgage foreclosed asset ~~$0.4 million in nonaccrual loans returned to accrual status,~~ and ~~$0.3~~$0.1 million in repayments ~~offset by $0.6 million in additions to~~of nonaccrual loans.

~~Net changes to nonperforming assets by category included net decreases in Hawaii residential mortgage assets of $0.5 million and Hawaii commercial mortgage assets of $0.1 million.~~

Concessions made to the original contractual terms of these loans consisted primarily of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. The principal balances on these TDRs had matured and/or were in default at the time of restructure and we have no commitments to lend additional funds to any of these borrowers. There were ~~$11.3~~$11.8 million of TDRs still accruing interest at ~~September 30, 2018,~~March 31, 2019, none of which were more than 90 days delinquent. At December 31, ~~2017,~~2018, there were ~~$12.6~~$12.9 million of TDRs still accruing interest, none of which were more than 90 days delinquent.

Allowance for Loan and Lease Losses

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


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
(dollars in thousands)	2018			2017			2018			2017			2019			2018
Allowance for Loan and Lease Losses:
Balance at beginning of period	$	48,181		$	52,828		$	50,001		$	56,631		$	47,916		$	50,001

Provision (credit) for loan and lease losses	(59		)	(126		)	262			(2,488		)	1,283			(211		)

Charge-offs:
Commercial, financial and agricultural	731			429			1,971			1,266			463			498
Consumer	1,762			1,709			5,424			4,676			2,251			1,933
Total charge-offs	2,493			2,138			7,395			5,942			2,714			2,431

Recoveries:
Commercial, financial and agricultural	578			165			1,017			676			233			144
Real estate:
Construction	6			40			1,205			117			6			1,193
Residential mortgage	51			124			98			857			22			26
Home equity	6			6			18			35			9			3
Commercial mortgage	8			7			52			146			—			15
Consumer	548			311			1,568			1,185			512			477
Total recoveries	1,197			653			3,958			3,016			782			1,858

Net charge-offs	1,296			1,485			3,437			2,926			1,932			573

Balance at end of period	$	46,826		$	51,217		$	46,826		$	51,217		$	47,267		$	49,217

Allowance as a percentage of total loans and leases	1.18		%	1.41		%	1.18		%	1.41		%	1.15		%	1.29		%

Annualized ratio of net charge-offs to average loans and leases	0.13		%	0.16		%	0.12		%	0.11		%	0.19		%	0.06		%

Our Allowance at ~~September 30, 2018~~March 31, 2019 totaled ~~$46.8~~$47.3 million compared to ~~$50.0~~$47.9 million at December 31, ~~2017.~~2018. During the three months ended March 31, 2019, we recorded a debit to the Provision of $1.3 million primarily due to net charge-offs of $1.9 million. The decrease in our Allowance during the ~~nine~~three months ended ~~September 30, 2018, was~~March 31, 2019, as well as the continued reduction of our reserve coverage ratio, primarily ~~attributable to continued improvement in~~reflects the credit quality of the loan portfolio, real estate markets and ~~is a direct result of $3.4 million~~general economic conditions both in ~~net charge-offs offset by a debit to~~Hawaii and the ~~Provision of $0.3 million.~~U.S. mainland.

Our Allowance as a percentage of total loans and leases decreased from ~~1.33%~~1.17% at December 31, ~~2017~~2018 to ~~1.18%~~1.15% at ~~September 30, 2018.~~March 31, 2019. Our Allowance as a percentage of nonperforming assets ~~increased~~decreased from ~~1,378.96%~~1,750.68% at December 31, ~~2017~~2018 to ~~1,547.46%~~1,416.03% at ~~September 30, 2018.~~March 31, 2019.

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

Federal Home Loan Bank Stock

The bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB"). FHLB ~~membership~~ stock of ~~$11.0~~$16.1 million at ~~September 30, 2018 increased~~March 31, 2019 decreased by ~~$3.2~~$0.5 million, or ~~41.3%~~3.0%, from the FHLB ~~membership~~ stock balance at December 31, ~~2017.~~2018. FHLB membership stock has an activity-based stock requirement, thus as borrowings ~~increase,~~decline, so will ~~the FHLB membership stock balance.~~our holdings. There is a minimum requirement of ~~$6.5~~$6.96 million in FHLB membership stock even if we have no borrowings outstanding.

Deposits

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


(dollars in thousands)	September 30, 2018		December 31, 2017		$ Change			% Change		March 31, 2019		December 31, 2018		$ Change			% Change
Noninterest-bearing demand deposits	$	1,403,534	$	1,395,556	$	7,978		0.6	%	$	1,357,890	$	1,436,967	$	(79,077	)	(5.5	)%
Interest-bearing demand deposits	935,130		933,054		2,076			0.2		965,316		954,011		11,305			1.2
Savings and money market deposits	1,503,465		1,481,876		21,589			1.5		1,562,798		1,448,257		114,541			7.9
Time deposits less than $100,000	174,920		180,748		(5,828		)	(3.2	)	174,265		176,707		(2,442		)	(1.4	)
Core deposits	4,017,049		3,991,234		25,815			0.6		4,060,269		4,015,942		44,327			1.1

Government time deposits	696,349		687,052		9,297			1.4		600,572		631,293		(30,721		)	(4.9	)
Other time deposits $100,000 to $250,000	104,339		101,560		2,779			2.7		107,051		106,783		268			0.3
Other time deposits greater than $250,000	185,943		176,508		9,435			5.3		180,236		192,472		(12,236		)	(6.4	)
Total time deposits $100,000 and greater	986,631		965,120		21,511			2.2		887,859		930,548		(42,689		)	(4.6	)

Total deposits	$	5,003,680	$	4,956,354	$	47,326		1.0		$	4,948,128	$	4,946,490	$	1,638		—

Total deposits of ~~$5.00~~$4.95 billion at ~~September 30, 2018 reflected an increase of $47.3 million, or 1.0%,~~March 31, 2019 remained relatively unchanged from total deposits of ~~$4.96~~$4.95 billion at December 31, ~~2017. The increase was attributable to net~~2018. Net increases in savings and money market deposits of ~~$21.6~~$114.5 million and interest-bearing demand deposits of $11.3 million, were partially offset by net decreases in noninterest-bearing demand deposits of $79.1 million, government time deposits of $30.7 million, and other time deposits greater than $250,000 of $9.4 million, government time deposits of $9.3 million, noninterest-bearing demand deposits of $8.0 million, other time deposits $100,000 to $250,000 of $2.8 million, and interest-bearing demand deposits of $2.1 million. These increases were partially offset by a net decrease in time deposits less than $100,000 of $5.8$12.2 million.

Core deposits, which we define as demand deposits, savings and money market deposits, and time deposits less than $100,000, totaled ~~$4.02~~$4.06 billion at ~~September 30, 2018~~March 31, 2019 and increased by ~~$25.8~~$44.3 million, or ~~0.6%~~1.1%, from December 31, ~~2017.~~2018. Core deposits as a percentage of total deposits was 82.1% at March 31, 2019, compared to 81.2% at December 31, 2018.

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

Common and Preferred Equity

Shareholders' equity totaled ~~$478.2~~$502.6 million at ~~September 30, 2018,~~March 31, 2019, compared to ~~$500.0~~$491.7 million at December 31, ~~2017.~~2018. The ~~decrease~~change in total shareholders' equity was attributable to net income of $16.0 million and other comprehensive ~~loss~~income of ~~$24.1~~$11.2 million, partially offset by the repurchase of ~~849,290~~277,000 shares of common stock under our repurchase program, at a cost of ~~$24.8~~$7.7 million and cash dividends paid of ~~$18.0 million, partially offset by net income of $43.7~~$6.1 million in the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019. During the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, we repurchased approximately ~~2.8%~~1.0% of our common stock outstanding as of December 31, ~~2017.~~2018.

The tangible common equity ratio is a non-GAAP financial measure which should be read and used in conjunction with the Company's GAAP financial information. Comparison of our tangible common equity ratio with those of other companies may not be possible because other companies may calculate the tangible common equity ratio differently. Our tangible common equity ratio is derived by dividing common shareholders' equity, less intangible assets, ~~(core deposit premium),~~ by total assets, less intangible assets. The Company did not have any intangible assets ~~(core deposit premium).~~at three months ended March 31, 2019 and December 31, 2018.

The following table sets forth a reconciliation of our tangible common equity ratio for each of the periods indicated:


(dollars in thousands)	September 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
Total shareholders' equity	$	478,151		$	500,011		$	502,638		$	491,725
Less: preferred stock							—			—
Total common equity	478,151			500,011			502,638			491,725
Less: other intangible assets (core deposit premium)	—			(2,006		)
Less: other intangible assets							—			—
Tangible common equity	$	478,151		$	498,005		$	502,638		$	491,725

Total assets	$	5,728,640		$	5,623,708		$	5,841,352		$	5,807,026
Less: other intangible assets (core deposit premium)	—			(2,006		)
Less: other intangible assets							—			—
Tangible assets	$	5,728,640		$	5,621,702		$	5,841,352		$	5,807,026

Tangible common equity ratio	8.35		%	8.86		%	8.60		%	8.47		%

Our tangible common equity ratio was ~~8.35%~~8.60% at ~~September 30, 2018,~~March 31, 2019, compared to ~~8.86%~~8.47% at December 31, ~~2017.~~2018. Our book value per share was ~~$16.34~~$17.50 and ~~$16.65~~$16.97 at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. Our tangible book value per share was ~~$16.34~~$17.50 and ~~$16.59~~$16.97 at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

Holding Company Capital Resources

CPF is required to act as a source of strength to the bank under the Dodd-Frank Act. CPF is obligated to pay its expenses and payments on its junior subordinated debentures which fund payments on the outstanding trust preferred securities.

CPF relies on the bank to pay dividends to fund its obligations. As of ~~September 30, 2018,~~March 31, 2019, on a stand-alone basis, CPF had an available cash balance of approximately ~~$13.9~~$15.6 million in order to meet its ongoing obligations.

As a Hawaii state-chartered bank, the bank may only pay dividends to the extent it has retained earnings as defined under Hawaii banking law ("Statutory Retained Earnings"), which differs from GAAP retained earnings. As of ~~September 30, 2018,~~March 31, 2019, the bank had Statutory Retained Earnings of ~~$87.5~~$51.7 million. On ~~October~~April 23, ~~2018,~~2019, the Company's Board of Directors declared a cash dividend of ~~$0.21~~$0.23 per share on the Company's outstanding common stock, which was a ~~16.7%~~9.5% increase from the ~~$0.18~~$0.21 per share a year-ago.

In ~~January 2016,~~ the ~~Board of Directors approved~~year ended December 31, 2018, the authorization to repurchase up to $30.0 million of the Company's common stock (the "2016 Repurchase Plan"), which superseded in its entirety the repurchase plan that was previously approved by the Board of Directors.

In January 2017, the Board of Directors approved the authorization to repurchase up to $30.0 million of the Company's common stock (the "2017 Repurchase Plan"), which superseded in its entirety the 2016 Repurchase Plan. In January 2017, prior to the 2017 Repurchase Plan being approved, 1,750Company repurchased 1,155,157 shares of common stock, at a cost of ~~$0.1~~$32.8 million, ~~were repurchased~~ under the ~~2016 Repurchase Plan.~~

~~In November 2017, the Board of Directors authorized an increase in the share~~Company's repurchase program authority by an additional $50.0 million (known henceforth as the "Repurchase Plan"). This amount is in addition to the $30.0 million in planned repurchases authorized in January 2017. There is no expiration date on the Repurchase Plan.plan.

In the ~~year~~three months ended ~~December~~March 31, ~~2017, 864,483~~2019, a total of 277,000 shares of common stock, at a cost of ~~$26.6~~$7.7 million, were repurchased under the ~~2016 Repurchase Plan and the Repurchase Plan combined.~~

~~In the nine months ended September 30, 2018, a total of 849,290 shares of common stock, at a cost of $24.8 million, were repurchased under the Repurchase Plan.~~Company's repurchase plan. As of ~~September 30, 2018, $28.7~~March 31, 2019, $13.0 million remained under the ~~Repurchase Plan.~~Company's current stock repurchase plan. The Company's repurchase plan has no ~~set~~ expiration ~~or termination~~ date.

Trust Preferred Securities

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

trust preferred securities. The redemption was pursuant to the optional prepayment provisions of the indenture. On January 9, 2019, Trust III was canceled with the state of Connecticut.

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

As of March 31, 2019, we have two remaining statutory trusts, CPB Capital Trust IV ("Trust IV") and CPB Statutory Trust V ("Trust V"), which issued a total of ~~$90.0~~$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 ~~II, III,~~ IV and V, and the common securities issued by Trusts ~~II, III,~~ IV and V are redeemable in whole or in part on any interest payment date ~~on or after October 7, 2008 for Trusts II and III, and~~ 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.

In October 2018, the Company announced that it submitted a notice to redeem, in whole and at par, $20.0 million of floating rate trust preferred securities issued by Trust III and the underlying floating rate junior subordinated debentures, which are reported as long-term debt on the Company's balance sheet with an interest rate of 5.18% as of September 30, 2018. The redemption is pursuant to the optional prepayment provisions of the indenture and is scheduled to occur on December 17, 2018.

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 ~~2017~~2018 Form ~~10-K, as amended by our Form 10-K/A.~~10-K.

The Company's and the bank's leverage capital, tier 1 risk-based capital, total risk-based capital, and CET1 risk-based capital ratios as of ~~September 30, 2018~~March 31, 2019 were above the levels required for a "well capitalized" regulatory designation.

The following table sets forth the Company's and the bank's capital ratios, as well as the minimum capital adequacy requirements applicable to all financial institutions as of the dates indicated.


	Actual				Minimum Required for Capital Adequacy Purposes				Minimum Required to be Well Capitalized				Actual				Minimum Required for Capital Adequacy Purposes				Minimum Required to be Well Capitalized
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Company
At September 30, 2018:
At March 31, 2019:
Leverage capital	$	590,627	10.3	%	$	229,409	4.0	%	$	286,761	5.0	%	$	554,148	9.5	%	$	233,126	4.0	%			N/A
Tier 1 risk-based capital	590,627		14.2		249,494		6.0		332,659		8.0		554,148		13.0		255,911		6.0				N/A
Total risk-based capital	639,157		15.4		332,659		8.0		415,824		10.0		602,824		14.1		341,214		8.0				N/A
CET1 risk-based capital	500,627		12.0		187,121		4.5		270,285		6.5		504,148		11.8		191,933		4.5				N/A

At December 31, 2017:
At December 31, 2018:
Leverage capital	$	578,607	10.4	%	$	223,646	4.0	%	$	279,557	5.0	%	$	570,260	9.9	%	$	230,847	4.0	%			N/A
Tier 1 risk-based capital	578,607		14.7		236,721		6.0		315,628		8.0		570,260		13.5		252,921		6.0				N/A
Total risk-based capital	628,068		15.9		315,628		8.0		394,535		10.0		619,419		14.7		337,228		8.0				N/A
CET1 risk-based capital	490,861		12.4		177,541		4.5		256,448		6.5		500,260		11.9		189,691		4.5				N/A

Central Pacific Bank
At September 30, 2018:
At March 31, 2019:
Leverage capital	$	571,949	10.0	%	$	228,985	4.0	%	$	286,231	5.0	%	$	539,390	9.3	%	$	232,969	4.0	%	$	291,211	5.0	%
Tier 1 risk-based capital	571,949		13.8		248,867		6.0		331,822		8.0		539,390		12.7		255,686		6.0		340,915		8.0
Total risk-based capital	620,479		15.0		331,822		8.0		414,778		10.0		588,066		13.8		340,915		8.0		426,144		10.0
CET1 risk-based capital	571,949		13.8		186,650		4.5		269,605		6.5		539,390		12.7		191,765		4.5		276,993		6.5

At December 31, 2017:
At December 31, 2018:
Leverage capital	$	565,412	10.1	%	$	223,431	4.0	%	$	279,289	5.0	%	$	533,166	9.3	%	$	230,638	4.0	%	$	288,298	5.0	%
Tier 1 risk-based capital	565,412		14.4		236,401		6.0		315,201		8.0		533,166		12.7		252,667		6.0		336,889		8.0
Total risk-based capital	614,732		15.6		315,201		8.0		394,002		10.0		582,325		13.8		336,889		8.0		421,111		10.0
CET1 risk-based capital	565,412		14.4		177,301		4.5		256,101		6.5		533,166		12.7		189,500		4.5		273,722		6.5

Asset/Liability Management and Interest Rate Risk

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

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

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

The following reflects our net interest income sensitivity analysis as of ~~September 30, 2018,~~March 31, 2019, over a one-year horizon, assuming no balance sheet growth and given both a 100 bp upward and 100 bp downward parallel shift in interest rates.



Rate Change	Estimated Net Interest Income Sensitivity
+~~100bp~~100 bp	~~1.10~~1.77	%
~~-100bp~~-100 bp	(~~2.65~~4.24	)%

Liquidity and Borrowing Arrangements

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

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

The bank is a member of and maintained a ~~$1.67~~$1.72 billion line of credit with the FHLB as of ~~September 30, 2018,~~March 31, 2019, compared to ~~$1.50~~$1.43 billion at December 31, ~~2017.~~2018. We had ~~$105.0~~$179.0 million in short-term borrowings under this arrangement at ~~September 30, 2018,~~March 31, 2019, compared to ~~$32.0~~$197.0 million at December 31, ~~2017. There were no long-term~~2018. Long-term borrowings under this arrangement totaled $50.0 million at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018. FHLB advances available at ~~September 30, 2018~~March 31, 2019 were secured by certain real estate loans with a carrying value of ~~$2.26~~$2.32 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB. At ~~September 30, 2018, $1.56~~March 31, 2019, $1.42 billion was undrawn under this arrangement, compared to ~~$1.47~~$1.18 billion at December 31, ~~2017.~~2018.

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 ~~as amended by our Form 10-K/A~~ for the year ended December 31, ~~2017.~~2018. During the first quarter of 2019, the Company signed an extension to its existing agreement with a computer software vendor. This extension increases the Company's contractual obligations for the years 2022 through 2024 by approximately $6 million per year. There ~~have been~~were no other material changes in our contractual obligations since December 31, ~~2017.~~2018.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

The primary analytical tool we use to measure and manage our interest rate risk is a simulation model that projects changes in net interest income ("NII") as market interest rates change. Our ALCO policy requires that simulated changes in NII should be

within certain specified ranges, or steps must be taken to reduce interest rate risk. The results of the model indicate that the mix of rate-sensitive assets and liabilities at ~~September 30, 2018~~March 31, 2019 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

As of the end of the period covered by this report, there have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes from the Risk Factors as previously disclosed in our Annual Report on Form 10-K ~~as amended by our Form 10-K/A~~ for the year ended December 31, ~~2017,~~2018, as filed with the SEC on February 28, ~~2018 and March 5, 2018, respectively, except as described below.~~

~~Natural disasters and other external events could have a material adverse affect on our financial condition and results of operations.~~

Our branch offices as well as a substantial majority of our loan portfolio is in the State of Hawaii. As a result, natural disasters and other severe weather occurrences such as tsunamis, volcanic eruptions (such as the recent eruption of Mount Kilauea), hurricanes and earthquakes and other adverse external events, could have a significant effect on our ability to conduct our business and adversely affect the tourism and visitor industry in the State of Hawaii. Such events could affect the ability of our borrowers to repay their outstanding loans, impair the value of collateral securing our loans, cause significant property damage, result in loss of revenue, adversely impact our deposit base and/or cause us to incur additional expenses. Accordingly, the occurrence of any such natural disasters or severe weather events could have a material adverse effect on our business, which, in turn, could adversely affect our financial condition and results of operations.2019.

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

Issuer Purchases of Equity Securities

~~In January 2017, our~~Our Board of Directors ~~authorized the~~most recently amended our stock repurchase ~~of up to $30.0 million of the Company's common stock from time to time on the open market or~~plan, in privately negotiated transactions, pursuant to a newly authorized share repurchase program (the "2017 Repurchase Plan"). The 2017 Repurchase Plan replaced and superseded in its entirety the previous share repurchase program.

In November 2017, ~~the Board of Directors authorized an increase in the 2017 Repurchase Plan~~when it increased such repurchase authority by an additional $50.0 million (known henceforth as the "Repurchase Plan"). We cannot provide any assurance that we will be able to repurchase any shares of our common stock. In addition, our ability to repurchase common stock may be restricted by applicable federal or Hawaii law or by our regulators.$50 million.

In the three months ended ~~September 30, 2018,~~March 31, 2019, the Company repurchased ~~235,043~~277,000 shares of common stock, at an aggregate cost of ~~$6.7~~$7.7 million, under the ~~Repurchase Plan.~~Company's stock repurchase plan. As of ~~September 30, 2018,~~March 31, 2019, a total of ~~$28.7~~$13.0 million remained available for repurchase under the ~~Repurchase Plan.~~Company's stock repurchase plan. There is no expiration date on the ~~Repurchase Plan.~~stock repurchase plan.

Issuer Purchases of Equity Securities
Period Total
Number
of Shares
Purchased Average
Price Paid
per Share Total Shares
Purchased as
Part of Publicly
Announced
Programs Maximum Dollar
Value of
Shares That
May Yet Be
Purchased Under
the Program
July 1-31, 2018 73,500
$ 29.15
73,500
$ 33,268,765
August 1-31, 2018 86,517
28.32
86,517
30,818,711
September 1-30, 2018 75,026
27.85
75,026
28,729,241
Total 235,043
$ 28.43
235,043
28,729,241



	Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Shares Purchased as Part of Publicly Announced Programs	Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program
January 1-31, 2019	110,500	$	25.98	110,500	$	17,798,165
February 1-28, 2019	71,000	29.50		71,000	15,703,976
March 1-31, 2019	95,500	28.73		95,500	12,960,324
Total	277,000	$	27.83	277,000	12,960,324

Item 6. Exhibits



Exhibit No.		Document

~~10.1~~		~~Employment Offer Letter between Central Pacific Bank and Paul Yonamine, dated September 25, 2018 (previously filed on September 26, 2018 on a Form 8-K and incorporated herein by reference)~~

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

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

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

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

101.INS		XBRL Instance Document*

101.SCH		XBRL Taxonomy Extension Schema Document*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB		XBRL Taxonomy Extension Label Linkbase Document*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*



*		Filed herewith.

**		Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		CENTRAL PACIFIC FINANCIAL CORP.
		(Registrant)


Date:	~~November 6, 2018~~May 7, 2019	/s/ Paul K. Yonamine
		Paul K. Yonamine
		Chairman and Chief Executive Officer

Date:	~~November 6, 2018~~May 7, 2019	/s/ David S. Morimoto
		David S. Morimoto
		Executive Vice President and Chief Financial Officer

Central Pacific ~~Bank~~ Financial Corp.

Exhibit Index



Exhibit No.		Document

~~10.1~~		~~Employment Offer Letter between Central Pacific Bank and Paul Yonamine, dated September 25, 2018 (previously filed on September 26, 2018 on a Form 8-K and incorporated herein by reference)~~

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

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

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

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

101.INS		XBRL Instance Document*

101.SCH		XBRL Taxonomy Extension Schema Document*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB		XBRL Taxonomy Extension Label Linkbase Document*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*



*		Filed herewith.

**		Furnished herewith.

7059



(dollars in thousands)	Number of Contracts	Recorded Investment (as of Period End)		Increase in the Allowance
Three Months Ended September 30, 2018
Real estate: Residential mortgage	3	$	575	$	—
Total	3	$	575	$	—

Nine Months Ended September 30, 2018
Real estate: Residential mortgage	3	$	575	$	—
Total	3	$	575	$	—

Three Months Ended September 30, 2017
Real estate: Residential mortgage	1	70		—
Total	1	$	70	$	—

Nine Months Ended September 30, 2017
Commercial, financial and agricultural	1	$	632	$	—
Real estate: Residential mortgage	1	70		—
Total	2	$	702	$	—



	Nine Months Ended September 30,
	2018						2017						Variance
	Average Balance		Average Yield/ Rate		Interest Income/ Expense		Average Balance		Average Yield/ Rate		Interest Income/ Expense		Average Balance			Average Yield/ Rate		Interest Income/ Expense
Assets
Interest earning assets:
Interest-bearing deposits in other banks	$	23,713	1.75	%	310		$	38,089	1.05	%	298		$	(14,376	)	0.70	%	12
Investment securities, excluding valuation allowance:
Taxable investment securities (1)	1,325,180		2.63		26,094		1,346,013		2.50		25,192		(20,833		)	0.13		902
Tax-exempt investment securities (1)	164,174		2.86		3,527		170,211		3.52		4,491		(6,037		)	(0.66	)	(964		)
Total investment securities	1,489,354		2.65		29,621		1,516,224		2.61		29,683		(26,870		)	0.04		(62		)
Loans and leases, including loans held for sale (2)	3,856,420		4.04		116,620		3,589,124		3.97		106,777		267,296			0.07		9,843
Federal Home Loan Bank stock	7,261		2.67		145		6,865		1.94		100		396			0.73		45
Total interest earning assets	5,376,748		3.64		146,696		5,150,302		3.55		136,858		226,446			0.09		9,838
Noninterest-earning assets	294,090						328,783						(34,693		)
Total assets	$	5,670,838					$	5,479,085					$	191,753

Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	940,154	0.08	%	554		$	895,850	0.07	%	471		$	44,304		0.01	%	83
Savings and money market deposits	1,506,565		0.13		1,421		1,434,778		0.07		797		71,787			0.06		624
Time deposits under $100,000	178,363		0.48		645		190,877		0.39		560		(12,514		)	0.09		85
Time deposits $100,000 and over	1,042,353		1.48		11,558		987,408		0.80		5,930		54,945			0.68		5,628
Total interest-bearing deposits	3,667,435		0.52		14,178		3,508,913		0.30		7,758		158,522			0.22		6,420
Short-term borrowings	14,683		2.16		237		11,877		0.97		86		2,806			1.19		151
Long-term debt	92,785		4.64		3,221		92,785		3.69		2,563		—			0.95		658
Total interest-bearing liabilities	3,774,903		0.62		17,636		3,613,575		0.39		10,407		161,328			0.23		7,229
Noninterest-bearing deposits	1,367,574						1,310,722						56,852
Other liabilities	42,414						40,626						1,788
Total liabilities	5,184,891						4,964,923						219,968
Shareholders’ equity	485,942						514,137						(28,195		)
Non-controlling interest	5						25						(20		)
Total equity	485,947						514,162						(28,215		)
Total liabilities and equity	$	5,670,838					$	5,479,085					$	191,753

Net interest income					$	129,060					$	126,451						$	2,609

Interest rate spread			3.02	%					3.16	%						(0.14	)%

Net interest margin			3.20	%					3.28	%						(0.08	)%

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