UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~June~~September 30, 2020

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

For the transition period from to

Commission File Number: 001-31567

CENTRAL PACIFIC FINANCIAL CORP.

(Exact name of registrant as specified in its charter)


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

220 South King Street, Honolulu, Hawaii 96813

(Address of principal executive offices) (Zip Code)

(808) 544-0500

(Registrant's telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, No Par Value

CPF

New York Stock Exchange

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

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

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


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

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

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

The number of shares outstanding of registrant's common stock, no par value, on ~~July 17,~~October 19, 2020 was ~~28,154,159~~28,179,798 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 - ~~June~~September 30,, 2020 and December 31, 2019	4

	Consolidated Statements of Income - Three months and nine ~~and six~~ months ended ~~June~~ September 3 0 , 30, 2020 and 2019	5

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

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

	Consolidated Statements of Cash Flows - ~~Six~~ Nine months ended ~~June~~September 30,, 2020 and 2019	89

	Notes to Consolidated Financial Statements (Unaudited)	911

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4951

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	7778

Item 4.	Controls and Procedures	7778

Part II.	Other Information	7879

Item 1A.	Risk Factors	7879

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7879

Item 6.	Exhibits	8081

Signatures		8182

PART I. FINANCIAL INFORMATION

Forward-Looking Statements and Factors that Could Affect Future Results

This document may contain forward-looking statements concerning: projections of revenues, expenses, income or loss, earnings or loss per share, capital expenditures, the payment or nonpayment of dividends, capital position, net interest margin or other financial items; statements of plans, objectives and expectations of Central Pacific Financial Corp. or its management or Board of Directors, including those relating to business plans, use of capital resources, products or services and regulatory developments and regulatory actions; statements of future economic performance including anticipated performance results in light of the COVID-19 pandemic and from our RISE2020 initiative; or any statements of the assumptions underlying or relating to any of the foregoing. Words such as "believes," "plans," "anticipates," "expects," "intends," "forecasts," "hopes," "targeting," "continue," "remain," "will," "should," "estimates," "may" and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

While we believe that our forward-looking statements and the assumptions underlying them are reasonably based, such statements and assumptions are by their nature subject to risks and uncertainties, and thus could later prove to be inaccurate or incorrect. Accordingly, actual results could differ materially from those statements or projections for a variety of reasons, including, but not limited to: the adverse effects of the COVID-19 pandemic virus on local, national and international economies, including, but not limited to, the adverse impact on tourism and construction in the State of Hawaii, our borrowers, customers, third-party contractors, vendors and employees as well as the effects of government programs and initiatives in response to COVID-19; the impact of our participation in the Paycheck Protection Program ("PPP") and fulfillment of government guarantees on our PPP loans; the increase in inventory or adverse conditions in the real estate market and deterioration in the construction industry; adverse changes in the financial performance and/or condition of our borrowers and, as a result, increased loan delinquency rates, deterioration in asset quality, and losses in our loan portfolio; our ability to successfully implement our RISE2020 initiative; the impact of local, national, and international economies and events (including natural disasters such as wildfires, volcanic eruptions, hurricanes, tsunamis, storms, earthquakes and pandemic virus and disease, including COVID-19) on the Company's business and operations and on tourism, the military, and other major industries operating within the Hawaii market and any other markets in which the Company does business; deterioration or malaise in domestic economic conditions, including any destabilization in the financial industry and deterioration of the real estate market, as well as the impact of declining levels of consumer and business confidence in the state of the economy in general and in financial institutions in particular; changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), changes in capital standards, other regulatory reform and federal and state legislation, including but not limited to regulations promulgated by the Consumer Financial Protection Bureau (the "CFPB"), government-sponsored enterprise reform, and any related rules and regulations which affect our business operations and competitiveness; the costs and effects of legal and regulatory developments, including legal proceedings or regulatory or other governmental inquiries and proceedings and the resolution thereof, the results of regulatory examinations or reviews and the effect of, and our ability to comply with, any regulatory orders or actions we are or may become subject to; ability to successfully implement our initiatives to lower our efficiency ratio; the effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System (the "FRB" or the "Federal Reserve"); inflation, interest rate, securities market and monetary fluctuations, including the anticipated replacement of the London Interbank Offered Rate ("LIBOR") Index and the impact on our loans and debt which are tied to that index; negative trends in our market capitalization and adverse changes in the price of the Company's common stock; political instability; acts of war or terrorism;

pandemic virus and disease, including COVID-19; changes in consumer spending, borrowings and savings habits; failure to maintain effective internal control over financial reporting or disclosure controls and procedures; cybersecurity and data privacy breaches and the consequence therefrom; the ability to address deficiencies in our internal controls over financial reporting or disclosure controls and procedures; technological changes and developments; changes in the competitive environment among financial holding companies and other financial service providers; the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board ("FASB") and other accounting standard setters and the cost and resources required to implement such changes; our ability to attract and retain key personnel; changes in our organization, compensation and benefit plans; and our success at managing the risks involved in the foregoing items.

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

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)


(dollars in thousands)	(dollars in thousands)	June 30, 2020		December 31, 2019		(dollars in thousands)	September 30, 2020		December 31, 2019
Assets	Assets					Assets
Cash and due from banks	Cash and due from banks	$	102,132	$	78,418	Cash and due from banks	$	89,665	$	78,418
Interest-bearing deposits in other banks	Interest-bearing deposits in other banks	41,201		24,554		Interest-bearing deposits in other banks	5,489		24,554
Investment securities:	Investment securities:					Investment securities:
Available-for-sale debt securities, at fair value	Available-for-sale debt securities, at fair value	1,168,594		1,126,983		Available-for-sale debt securities, at fair value	1,166,319		1,126,983

Equity securities, at fair value	Equity securities, at fair value	1,209		1,127		Equity securities, at fair value	1,204		1,127
Total investment securities	Total investment securities	1,169,803		1,128,110		Total investment securities	1,167,523		1,128,110

Loans held for sale	Loans held for sale	10,443		9,083		Loans held for sale	23,962		9,083

Loans	Loans	5,003,438		4,449,540		Loans	5,030,626		4,449,540
Allowance for credit losses	Allowance for credit losses	(67,339)		(47,971)		Allowance for credit losses	(80,542)		(47,971)
Loans, net of allowance for credit losses	Loans, net of allowance for credit losses	4,936,099		4,401,569		Loans, net of allowance for credit losses	4,950,084		4,401,569

Premises and equipment, net	Premises and equipment, net	55,032		46,343		Premises and equipment, net	61,095		46,343
Accrued interest receivable	Accrued interest receivable	19,590		16,500		Accrued interest receivable	21,478		16,500
Investment in unconsolidated subsidiaries	Investment in unconsolidated subsidiaries	16,428		17,115		Investment in unconsolidated subsidiaries	30,239		17,115
Other real estate owned	Other real estate owned	—		164		Other real estate owned	128		164
Mortgage servicing rights	Mortgage servicing rights	12,771		14,718		Mortgage servicing rights	12,429		14,718

Bank-owned life insurance	Bank-owned life insurance	161,758		159,656		Bank-owned life insurance	161,743		159,656
Federal Home Loan Bank stock	Federal Home Loan Bank stock	9,229		14,983		Federal Home Loan Bank stock	17,468		14,983
Right-of-use lease asset	Right-of-use lease asset	50,039		52,348		Right-of-use lease asset	44,896		52,348
Other assets	Other assets	48,447		49,111		Other assets	61,943		49,111
Total assets	Total assets	$	6,632,972	$	6,012,672	Total assets	$	6,648,142	$	6,012,672

Liabilities	Liabilities					Liabilities
Deposits:	Deposits:					Deposits:
Noninterest-bearing demand	Noninterest-bearing demand	$	1,851,012	$	1,450,532	Noninterest-bearing demand	$	1,762,476	$	1,450,532
Interest-bearing demand	Interest-bearing demand	1,067,483		1,043,010		Interest-bearing demand	1,114,123		1,043,010
Savings and money market	Savings and money market	1,945,744		1,600,028		Savings and money market	1,881,104		1,600,028
Time	Time	930,446		1,026,453		Time	921,226		1,026,453
Total deposits	Total deposits	5,794,685		5,120,023		Total deposits	5,678,929		5,120,023

Short-term borrowings	Short-term borrowings	—		150,000		Short-term borrowings	206,000		150,000
Long-term debt	Long-term debt	167,491		101,547		Long-term debt	101,547		101,547
Lease liability	Lease liability	50,440		52,632		Lease liability	45,355		52,632

Other liabilities	Other liabilities	76,050		59,950		Other liabilities	72,369		59,950
Total liabilities	Total liabilities	6,088,666		5,484,152		Total liabilities	6,104,200		5,484,152

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

Equity	Equity					Equity
Preferred stock, 0 par value, authorized 1,000,000 shares; issued and outstanding: NaN at June 30, 2020 and December 31, 2019		—		—
Common stock, 0 par value, authorized 185,000,000 shares; issued and outstanding: 28,154,159 at June 30, 2020 and 28,289,257 at December 31, 2019		442,699		447,602
Preferred stock, 0 par value, authorized 1,000,000 shares; issued and outstanding: NaN at September 30, 2020 and December 31, 2019						Preferred stock, 0 par value, authorized 1,000,000 shares; issued and outstanding: NaN at September 30, 2020 and December 31, 2019	0		0
Common stock, 0 par value, authorized 185,000,000 shares; issued and outstanding: 28,179,798 at September 30, 2020 and 28,289,257 at December 31, 2019						Common stock, 0 par value, authorized 185,000,000 shares; issued and outstanding: 28,179,798 at September 30, 2020 and 28,289,257 at December 31, 2019	442,635		447,602
Additional paid-in capital	Additional paid-in capital	93,007		91,611		Additional paid-in capital	94,336		91,611
Accumulated deficit	Accumulated deficit	(16,986)		(19,102)		Accumulated deficit	(16,609)		(19,102)
Accumulated other comprehensive income	Accumulated other comprehensive income	25,551		8,409		Accumulated other comprehensive income	23,541		8,409
Total shareholders' equity	Total shareholders' equity	544,271		528,520		Total shareholders' equity	543,903		528,520
Non-controlling interest	Non-controlling interest	35		—		Non-controlling interest	39		0
Total equity	Total equity	544,306		528,520		Total equity	543,942		528,520
Total liabilities and equity	Total liabilities and equity	$	6,632,972	$	6,012,672	Total liabilities and equity	$	6,648,142	$	6,012,672

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands, except per share data)	(dollars in thousands, except per share data)	2020		2019		2020		2019		(dollars in thousands, except per share data)	2020		2019		2020		2019
Interest income:	Interest income:									Interest income:
Interest and fees on loans and leases		$	45,915	$	45,540	$	92,119	$	89,308
Interest and fees on loans										Interest and fees on loans	$	45,751	$	45,861	$	137,870	$	135,169
Interest and dividends on investment securities:	Interest and dividends on investment securities:									Interest and dividends on investment securities:
Taxable interest	Taxable interest	6,310		7,530		13,067		15,790		Taxable interest	5,233		7,178		18,300		22,968
Tax-exempt interest	Tax-exempt interest	599		814		1,267		1,680		Tax-exempt interest	621		708		1,888		2,388
Dividends	Dividends	17		14		34		32		Dividends	17		14		51		46
Interest on deposits in other banks	Interest on deposits in other banks	3		46		39		114		Interest on deposits in other banks	3		33		42		147
Dividends on Federal Home Loan Bank stock	Dividends on Federal Home Loan Bank stock	106		161		238		322		Dividends on Federal Home Loan Bank stock	128		186		366		508
Total interest income	Total interest income	52,950		54,105		106,764		107,246		Total interest income	51,753		53,980		158,517		161,226
Interest expense:	Interest expense:									Interest expense:
Interest on deposits:	Interest on deposits:									Interest on deposits:
Demand	Demand	114		199		290		391		Demand	115		207		405		598
Savings and money market	Savings and money market	567		1,507		1,685		2,298		Savings and money market	417		1,549		2,102		3,847
Time	Time	2,124		4,867		5,392		9,959		Time	1,284		4,432		6,676		14,391
Interest on short-term borrowings	Interest on short-term borrowings	74		1,123		582		2,016		Interest on short-term borrowings	71		1,130		653		3,146
Interest on long-term debt	Interest on long-term debt	812		1,031		1,726		2,091		Interest on long-term debt	746		1,013		2,472		3,104
Total interest expense	Total interest expense	3,691		8,727		9,675		16,755		Total interest expense	2,633		8,331		12,308		25,086
Net interest income	Net interest income	49,259		45,378		97,089		90,491		Net interest income	49,120		45,649		146,209		136,140
Provision for credit losses	Provision for credit losses	10,640		1,404		19,969		2,687		Provision for credit losses	14,652		1,532		34,621		4,219
Net interest income after provision for credit losses	Net interest income after provision for credit losses	38,619		43,974		77,120		87,804		Net interest income after provision for credit losses	34,468		44,117		111,588		131,921
Other operating income:	Other operating income:									Other operating income:
Mortgage banking income	Mortgage banking income	3,566		1,708		3,903		3,281		Mortgage banking income	4,345		1,994		8,248		5,275
Service charges on deposit accounts	Service charges on deposit accounts	1,149		2,041		3,199		4,122		Service charges on deposit accounts	1,475		2,125		4,674		6,247
Other service charges and fees	Other service charges and fees	2,916		3,909		7,813		7,124		Other service charges and fees	3,345		3,894		11,158		11,018
Income from fiduciary activities	Income from fiduciary activities	1,270		1,129		2,567		2,094		Income from fiduciary activities	1,149		1,126		3,716		3,220
Equity in earnings of unconsolidated subsidiaries	Equity in earnings of unconsolidated subsidiaries	104		71		130		79		Equity in earnings of unconsolidated subsidiaries	104		86		234		165

Investment securities gains (losses)										Investment securities gains (losses)	(352)		36		(352)		36
Income from bank-owned life insurance	Income from bank-owned life insurance	1,424		914		1,405		1,866		Income from bank-owned life insurance	1,179		645		2,584		2,511

Net loss on sales of foreclosed assets		(6)		—		(6)		—
Net gain (loss) on sales of foreclosed assets										Net gain (loss) on sales of foreclosed assets	0		17		(6)		17

Other	Other	269		322		567		3,201		Other	318		343		885		3,544
Total other operating income	Total other operating income	10,692		10,094		19,578		21,767		Total other operating income	11,563		10,266		31,141		32,033
Other operating expense:	Other operating expense:									Other operating expense:
Salaries and employee benefits	Salaries and employee benefits	20,622		20,563		40,969		40,452		Salaries and employee benefits	20,729		20,631		61,698		61,083
Net occupancy	Net occupancy	3,645		3,525		7,317		6,983		Net occupancy	3,834		3,697		11,151		10,680
Equipment	Equipment	1,043		1,138		2,140		2,144		Equipment	1,234		1,067		3,374		3,211

Communication expense	Communication expense	774		903		1,611		1,637		Communication expense	856		1,008		2,467		2,645
Legal and professional services	Legal and professional services	2,238		1,728		4,266		3,298		Legal and professional services	2,262		1,933		6,528		5,231
Computer software expense	Computer software expense	3,035		2,560		5,978		5,157		Computer software expense	3,114		2,713		9,092		7,870
Advertising expense	Advertising expense	923		712		2,015		1,423		Advertising expense	1,020		711		3,035		2,134
Foreclosed asset expense	Foreclosed asset expense	—		49		67		208		Foreclosed asset expense	6		15		73		223

Other	Other	4,147		4,929		8,304		9,153		Other	3,917		3,159		12,221		12,312
Total other operating expense	Total other operating expense	36,427		36,107		72,667		70,455		Total other operating expense	36,972		34,934		109,639		105,389
Income before income taxes	Income before income taxes	12,884		17,961		24,031		39,116		Income before income taxes	9,059		19,449		33,090		58,565
Income tax expense	Income tax expense	2,967		4,427		5,788		9,545		Income tax expense	2,200		4,895		7,988		14,440
Net income	Net income	$	9,917	$	13,534	$	18,243	$	29,571	Net income	$	6,859	$	14,554	$	25,102	$	44,125
Per common share data:	Per common share data:									Per common share data:
Basic earnings per common share	Basic earnings per common share	$	0.35	$	0.47	$	0.65	$	1.03	Basic earnings per common share	$	0.24	$	0.51	$	0.89	$	1.54
Diluted earnings per common share	Diluted earnings per common share	$	0.35	$	0.47	$	0.65	$	1.03	Diluted earnings per common share	$	0.24	$	0.51	$	0.89	$	1.53
Cash dividends declared	Cash dividends declared	$	0.23	$	0.23	$	0.46	$	0.44	Cash dividends declared	$	0.23	$	0.23	$	0.69	$	0.67
Weighted average common shares outstanding used in computation:	Weighted average common shares outstanding used in computation:									Weighted average common shares outstanding used in computation:
Basic shares	Basic shares	28,040,802		28,546,564		28,083,602		28,651,852		Basic shares	28,060,020		28,424,898		28,075,684		28,575,369
Diluted shares	Diluted shares	28,095,230		28,729,510		28,190,132		28,847,786		Diluted shares	28,111,664		28,602,338		28,172,153		28,762,057

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	(dollars in thousands)	2020		2019		2020		2019		(dollars in thousands)	2020		2019		2020		2019
Net income	Net income	$	9,917	$	13,534	$	18,243	$	29,571	Net income	$	6,859	$	14,554	$	25,102	$	44,125
Other comprehensive income, net of tax:
Net change in unrealized gain on investment securities		6,275		12,165		16,422		23,161
Other comprehensive income (loss), net of tax:										Other comprehensive income (loss), net of tax:
Net change in unrealized gain (loss) on investment securities										Net change in unrealized gain (loss) on investment securities	(2,257)		4,386		14,165		27,547
Defined benefit plans	Defined benefit plans	204		248		720		490		Defined benefit plans	247		283		967		773
Total other comprehensive income, net of tax		6,479		12,413		17,142		23,651
Total other comprehensive income (loss), net of tax										Total other comprehensive income (loss), net of tax	(2,010)		4,669		15,132		28,320
Comprehensive income	Comprehensive income	$	16,396	$	25,947	$	35,385	$	53,222	Comprehensive income	$	4,849	$	19,223	$	40,234	$	72,445

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)


		Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-In Capital		Accum. Deficit		Accum. Other Comp. Income (Loss)		Non- Controlling Interest		Total			Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-In Capital		Accum. Deficit		Accum. Other Comp. Income (Loss)		Non- Controlling Interest		Total
		(dollars in thousands, except per share data)																													(dollars in thousands, except per share data)
Balance at December 31, 2019	Balance at December 31, 2019	28,289,257	$	—	$	447,602	$	91,611	$	(19,102)	$	8,409	$	—	$	528,520	Balance at December 31, 2019	28,289,257	$	—	$	447,602	$	91,611	$	(19,102)	$	8,409	$	0	$	528,520
Impact of the adoption of new accounting standards (1)	Impact of the adoption of new accounting standards (1)	—	—		—		—		(3,156)		—		—		(3,156)		Impact of the adoption of new accounting standards (1)	—	—		—		—		(3,156)		—		—		(3,156)
Adjusted balance at January 1, 2020	Adjusted balance at January 1, 2020	28,289,257	—		447,602		91,611		(22,258)		8,409		—		525,364		Adjusted balance at January 1, 2020	28,289,257	—		447,602		91,611		(22,258)		8,409		0		525,364
Net income	Net income	—	—		—		—		8,326		—		—		8,326		Net income	—	—		—		—		8,326		—		—		8,326
Other comprehensive income	Other comprehensive income	—	—		—		—		—		10,663		—		10,663		Other comprehensive income	—	—		—		—		—		10,663		—		10,663
Cash dividends declared ($0.23 per share)	Cash dividends declared ($0.23 per share)	—	—		—		—		(6,496)		—		—		(6,496)		Cash dividends declared ($0.23 per share)	—	—		—		—		(6,496)		—		—		(6,496)

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

Share-based compensation expense	Share-based compensation expense	38,806	—				723		—		—		—		723		Share-based compensation expense	38,806	—				723		—		—		—		723
Non-controlling interest	Non-controlling interest	—	—		—		—		—		—		(14)		(14)		Non-controlling interest	—	—		—		—		—		—		(14)		(14)
Balance at June 30, 2020	Balance at June 30, 2020	28,154,159	$	—	$	442,699	$	93,007	$	(16,986)	$	25,551	$	35	$	544,306	Balance at June 30, 2020	28,154,159	$	—	$	442,699	$	93,007	$	(16,986)	$	25,551	$	35	$	544,306
Net income																	Net income	—	—		—		—		6,859		—		—		6,859
Other comprehensive income																	Other comprehensive income	—	—		—		—		—		(2,010)		—		(2,010)
Cash dividends declared ($0.23 per share)																	Cash dividends declared ($0.23 per share)	—	—		—		—		(6,482)		—		—		(6,482)
Common stock purchased by directors' deferred compensation plan (4,200 shares, net)																	Common stock purchased by directors' deferred compensation plan (4,200 shares, net)	—	—		(64)		—		—		—		—		(64)

Share-based compensation																	Share-based compensation	25,639	—				1,329		—		—		—		1,329
Non-controlling interest																	Non-controlling interest	—	—		—		—		—		—		4		4
Balance at September 30, 2020																	Balance at September 30, 2020	28,179,798	$	—	$	442,635	$	94,336	$	(16,609)	$	23,541	$	39	$	543,942

Common
Shares
Outstanding Preferred
Stock Common
Stock Additional Paid-In Capital Accum.
Deficit Accum.
Other
Comp.
Income
(Loss) Non-
Controlling
Interest Total
(dollars in thousands, except per share data)
Balance at December 31, 2018 28,967,715 $ — $ 470,660 $ 88,876 $ (51,718) $ (16,093) $ — $ 491,725
Impact of the adoption of new accounting standards (2) — — — — — (3,100) — (3,100)
Adjusted balance at January 1, 2019 28,967,715 — 470,660 88,876 (51,718) (19,193) — 488,625
Net income — — — — 16,037 — — 16,037
Other comprehensive income — — — — — 11,238 — 11,238
Cash dividends declared ($0.21 per share) — — — — (6,052) — — (6,052)
Common stock repurchased and retired and other related costs (277,000) — (7,708) — — — — (7,708)
Share-based compensation 32,326 — — 498 — — — 498
Balance at March 31, 2019 28,723,041 $ — $ 462,952 $ 89,374 $ (41,733) $ (7,955) $ — $ 502,638
Net income — — — — 13,534 — — 13,534
Other comprehensive income — — — — — 12,413 — 12,413
Cash dividends declared ($0.23 per share) — — — — (6,581) — — (6,581)
Common stock purchased by directors' deferred compensation plan (14,600 shares, net) — — (416) — — — — (416)
Common stock repurchased and retired and other related costs (213,700) — (6,243) — — — — (6,243)
Share-based compensation 58,436 — 350 — — — 350
Balance at June 30, 2019 28,567,777 $ — $ 456,293 $ 89,724 $ (34,780) $ 4,458 $ — $ 515,695
(1) Represents the impact of the adoption of Accounting Standards Update ("ASU") ASU 2016-13. See Note 2 to the consolidated financial statements for additional information.
(2) Represents the impact of the adoption of ASU 2017-12.


	Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-In Capital		Accum. Deficit		Accum. Other Comp. Income (Loss)		Non- Controlling Interest		Total
	(dollars in thousands, except per share data)
Balance at December 31, 2018	28,967,715	$	—	$	470,660	$	88,876	$	(51,718)	$	(16,093)	$	0	$	491,725
Impact of the adoption of new accounting standards (2)	—	—		—		—		—		(3,100)		—		(3,100)
Adjusted balance at January 1, 2019	28,967,715	—		470,660		88,876		(51,718)		(19,193)		0		488,625

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

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

Balance at March 31, 2019	28,723,041	$	—	$	462,952	$	89,374	$	(41,733)	$	(7,955)	$	0	$	502,638
Net income	—	—		—		—		13,534		—		—		13,534
Other comprehensive income	—	—		—		—		—		12,413		—		12,413
Cash dividends declared ($0.23 per share)	—	—		—		—		(6,581)		—		—		(6,581)
Common stock purchased by directors' deferred compensation plan (14,600 shares, net)	—	—		(416)		—		—		—		—		(416)
Common stock repurchased and retired and other related costs	(213,700)	—		(6,243)		—		—		—		—		(6,243)
Share-based compensation	58,436	—				350		—		—		0		350

Balance at June 30, 2019	28,567,777	$	—	$	456,293	$	89,724	$	(34,780)	$	4,458	$	0	$	515,695
Net income	—	—		—		—		14,554		—		—		14,554
Other comprehensive income	—	—		—		—		—		4,669		—		4,669
Cash dividends declared ($0.23 per share)	—	—		—		—		(6,556)		—		—		(6,556)

Common stock repurchased and retired and other related costs	(140,600)	—		(4,015)		—		—		—		—		(4,015)
Share-based compensation	14,164	—				880		—		—		—		880

Balance at September 30, 2019	28,441,341	$	—	$	452,278	$	90,604	$	(26,782)	$	9,127	$	0	$	525,227









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

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


		Six Months Ended June 30,							Nine Months Ended September 30,
(dollars in thousands)	(dollars in thousands)	2020		2019		(dollars in thousands)	2020		2019
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	18,243	$	29,571	Net income	$	25,102	$	44,125
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	Provision for credit losses	19,969		2,687		Provision for credit losses	34,621		4,219
Depreciation and amortization of premises and equipment	Depreciation and amortization of premises and equipment	3,010		3,085		Depreciation and amortization of premises and equipment	4,628		4,628
Non-cash lease expense	Non-cash lease expense	117		151		Non-cash lease expense	176		220
Cash flows from operating leases	Cash flows from operating leases	(3,189)		(3,105)		Cash flows from operating leases	(4,743)		(4,663)

Loss on sale of other real estate, net of write-downs	Loss on sale of other real estate, net of write-downs	70		138		Loss on sale of other real estate, net of write-downs	70		138
Amortization of mortgage servicing rights	Amortization of mortgage servicing rights	3,217		1,072		Amortization of mortgage servicing rights	4,558		1,727
Net amortization and accretion of premium/discounts on investment securities	Net amortization and accretion of premium/discounts on investment securities	4,327		4,644		Net amortization and accretion of premium/discounts on investment securities	7,127		6,808
Share-based compensation expense	Share-based compensation expense	1,396		848		Share-based compensation expense	2,725		1,728

Net loss (gain) on sales of investment securities						Net loss (gain) on sales of investment securities	352		(36)
Net gain on sales of residential mortgage loans	Net gain on sales of residential mortgage loans	(5,273)		(1,586)		Net gain on sales of residential mortgage loans	(9,971)		(2,836)
Proceeds from sales of loans held for sale	Proceeds from sales of loans held for sale	167,643		93,490		Proceeds from sales of loans held for sale	287,924		152,684
Originations of loans held for sale	Originations of loans held for sale	(163,730)		(92,105)		Originations of loans held for sale	(292,832)		(150,217)
Equity in earnings of unconsolidated subsidiaries	Equity in earnings of unconsolidated subsidiaries	(130)		(79)		Equity in earnings of unconsolidated subsidiaries	(234)		(165)
Distributions from unconsolidated subsidiaries	Distributions from unconsolidated subsidiaries	121		101		Distributions from unconsolidated subsidiaries	225		175
Net increase in cash surrender value of bank-owned life insurance	Net increase in cash surrender value of bank-owned life insurance	(2,268)		(854)		Net increase in cash surrender value of bank-owned life insurance	(2,253)		(1,499)
Deferred income taxes	Deferred income taxes	(2,129)		8,501		Deferred income taxes	(6,953)		7,548
Net tax (expense) benefit from share-based compensation	Net tax (expense) benefit from share-based compensation	(134)		192		Net tax (expense) benefit from share-based compensation	(157)		209
Net change in other assets and liabilities	Net change in other assets and liabilities	15,798		(8,782)		Net change in other assets and liabilities	(9,955)		(12,309)
Net cash provided by operating activities	Net cash provided by operating activities	57,058		37,969		Net cash provided by operating activities	40,410		52,484
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Proceeds from maturities of and calls on investment securities available-for-sale	Proceeds from maturities of and calls on investment securities available-for-sale	123,720		121,881		Proceeds from maturities of and calls on investment securities available-for-sale	237,632		194,626

Proceeds from sales of investment securities available-for-sale						Proceeds from sales of investment securities available-for-sale	86,508		53,935
Purchases of investment securities available-for-sale	Purchases of investment securities available-for-sale	(147,359)		—		Purchases of investment securities available-for-sale	(351,701)		(54,975)

Proceeds from sale of MasterCard stock	Proceeds from sale of MasterCard stock	—		2,555		Proceeds from sale of MasterCard stock	0		2,555
Net loan originations	Net loan originations	(524,869)		(121,756)		Net loan originations	(546,954)		(214,834)
Purchases of loan portfolios	Purchases of loan portfolios	(33,196)		(49,327)		Purchases of loan portfolios	(39,876)		(78,820)

Proceeds from sale of foreclosed loans/other real estate owned	Proceeds from sale of foreclosed loans/other real estate owned	94		—		Proceeds from sale of foreclosed loans/other real estate owned	94		0
Proceeds from bank-owned life insurance	Proceeds from bank-owned life insurance	166		—		Proceeds from bank-owned life insurance	166		0

Net purchases of premises, equipment and land	Net purchases of premises, equipment and land	(11,699)		(1,400)		Net purchases of premises, equipment and land	(19,380)		(3,438)
Net return of capital from unconsolidated subsidiaries	Net return of capital from unconsolidated subsidiaries	—		622		Net return of capital from unconsolidated subsidiaries	0		622
Contributions to unconsolidated subsidiaries	Contributions to unconsolidated subsidiaries	(2,194)		—		Contributions to unconsolidated subsidiaries	(2,936)		0
Net proceeds from redemption of (purchases of) FHLB stock	Net proceeds from redemption of (purchases of) FHLB stock	5,754		(1,179)		Net proceeds from redemption of (purchases of) FHLB stock	(2,485)		(538)
Net cash used in investing activities	Net cash used in investing activities	(589,583)		(48,604)		Net cash used in investing activities	(638,932)		(100,867)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Net increase in deposits	Net increase in deposits	674,662		30,359		Net increase in deposits	558,906		91,169
Proceeds from long-term debt	Proceeds from long-term debt	65,944		—		Proceeds from long-term debt	65,944		0
Repayments of long-term debt	Repayments of long-term debt	—		(20,619)		Repayments of long-term debt	(65,944)		(20,619)
Net (decrease) increase in short-term borrowings		(150,000)		24,000
Net increase in short-term borrowings						Net increase in short-term borrowings	56,000		8,000
Cash dividends paid on common stock	Cash dividends paid on common stock	(12,971)		(12,633)		Cash dividends paid on common stock	(19,453)		(19,189)
Repurchases of common stock and other related costs	Repurchases of common stock and other related costs	(4,749)		(13,951)		Repurchases of common stock and other related costs	(4,749)		(17,966)

Net cash provided by financing activities	Net cash provided by financing activities	572,886		7,156		Net cash provided by financing activities	590,704		41,395
Net increase (decrease) in cash and cash equivalents		40,361		(3,479)
Net decrease in cash and cash equivalents						Net decrease in cash and cash equivalents	(7,818)		(6,988)
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	102,972		102,186		Cash and cash equivalents at beginning of period	102,972		102,186
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	143,333	$	98,707	Cash and cash equivalents at end of period	$	95,154	$	95,198

Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:					Supplemental disclosure of cash flow information:
Cash paid during the period for:	Cash paid during the period for:					Cash paid during the period for:
Interest	Interest	$	11,069	$	16,916	Interest	$	14,988	$	24,735
Income taxes	Income taxes	185		9,401		Income taxes	15,803		17,601

Cash received during the period for:						Cash received during the period for:
Income taxes						Income taxes	0		0
Supplemental disclosure of non-cash information:	Supplemental disclosure of non-cash information:					Supplemental disclosure of non-cash information:
Net change in common stock held by directors’ deferred compensation plan	Net change in common stock held by directors’ deferred compensation plan	154		416		Net change in common stock held by directors’ deferred compensation plan	218		416

Net reclassification of loans to foreclosed loans/other real estate owned						Net reclassification of loans to foreclosed loans/other real estate owned	128		190
Net transfer of loans to loans held for sale						Net transfer of loans to loans held for sale	6,565		0
Net transfer of investment securities held-to-maturity to available-for-sale	Net transfer of investment securities held-to-maturity to available-for-sale	—		(149,042)		Net transfer of investment securities held-to-maturity to available-for-sale	0		(149,042)
Right-of-use lease assets obtained in exchange for lease liabilities	Right-of-use lease assets obtained in exchange for lease liabilities	—		55,887		Right-of-use lease assets obtained in exchange for lease liabilities	0		55,887

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

These interim condensed consolidated financial statements and notes should be read in conjunction with the Company's consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended December 31, 2019. In the opinion of management, all adjustments necessary for a fair presentation have been made and include all normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.

Principles of Consolidation

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

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

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

Our investments in unconsolidated subsidiaries accounted for under the equity, proportional amortization and cost methods were $0.2 million, ~~$14.6~~$28.4 million and $1.6 million, respectively, at ~~June~~September 30, 2020 and $0.2 million, $15.3 million and $1.6 million, respectively, at December 31, 2019. Our policy for determining impairment of these investments includes an evaluation of whether a loss in value of an investment is other than temporary. Evidence of a loss in value includes absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. We perform impairment tests whenever indicators of impairment are present. If the value of an investment declines and it is considered other than temporary, the investment is written down to its respective fair value in the period in which this determination is made.

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

Risks and Uncertainties

COVID-19 Pandemic

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

910

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

Change in Operating Segments and Reclassifications

In the first quarter of 2020, the Company reassessed the alignment of its reportable segments and combined its 3 reportable segments (Banking Operations, Treasury and All Others segments) into a single operating segment. We believe this change better reflects how the Company's Executive Committee, or its chief operating decision maker ("CODM"), manages, allocates resources and assesses performance of the activities of the Company. The Company also believes that this change is better aligned with how the Company's CODM manages its business. Segment results for 2019 have been reclassified to reflect the realignment of the Company’s reportable segments and be comparable to the segment results for 2020. This change in reportable segments did not have an impact on the Company's previously reported historical consolidated financial statements.

Investment Securities

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

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

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

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

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

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

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

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

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

1011

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

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

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

The Company has made a policy election to exclude accrued interest receivable from the amortized cost basis of debt securities and report accrued interest receivable together with accrued interest on loans in the consolidated balance sheets. Accrued interest receivable on AFS debt securities totaled ~~$4.3~~$4.2 million as of ~~June~~September 30, 2020. Accrued interest receivable on AFS debt securities is excluded from the estimate of credit losses.

ACL for HTM Debt Securities

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

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

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

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

Federal Home Loan Bank Stock

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

Loans

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

Interest income on loans is accrued at the contractual rate of interest on the unpaid principal balance. Accrued interest receivable on loans totaled ~~$15.3~~$17.3 million at ~~June~~September 30, 2020 and is reported together with accrued interest on AFS debt securities on the consolidated balance sheets. ~~Accrued interest receivable~~Upon adoption of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on ~~loans is excluded from~~Financial Instruments,” the Company made the accounting policy election to not measure an estimate of credit ~~losses.~~

losses on accrued interest receivable as the Company writes off any uncollectible accrued interest receivable in a timely manner. The Company believes COVID-19 modified loans have distinct risk characteristics that cause

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them to be monitored and assessed for credit risk differently than their unmodified counterparts. Thus, in the third quarter of 2020, the Company elected to measure a reserve on the accrued interest receivable for loans on active payment forbearance or deferral. As a result, during the third quarter of 2020, the Company recorded a reserve of $0.2 million against accrued interest receivable with the offset recorded to provision for credit losses.

Nonaccrual Loans

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

Troubled Debt Restructuring (“TDR”)

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

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

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

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

ACL for Loans

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

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

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

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

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

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

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

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

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

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

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

Loan Segment

Historical Lifetime Loss Method

Historical
Lookback
Period

Economic
Forecast
Length

Reversion Method

Construction

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

2008-Present

One Year

One Year (straight-line basis)

Commercial real estate

Loss-Rate Migration

2008-Present

Multi-family mortgage

PD/LGD

2008-Present

Commercial, financial and agricultural

Loss-Rate Migration

2008-Present

Home equity lines of credit

Loss-Rate Migration

2008-Present

Residential mortgage

Loss-Rate Migration

2008-Present

Consumer - other revolving

Loss-Rate Migration

2008-Present

Consumer - non-revolving

Loss-Rate Migration

2008-Present

Purchased Mainland portfolios (Dealer, Other consumer)

Weighted-Average Remaining Maturity ("WARM")

2008-Present

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

Construction loans

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

Commercial real estate loans

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

Multi-family mortgage loans

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

Commercial, financial and agricultural loans

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

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

Home equity lines of credit

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

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Residential mortgage loans

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

Consumer loans - other revolving

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

Consumer loans - non-revolving

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

Purchased consumer portfolios

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

Below is a description of the methodologies mentioned above:

PD/LGD

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

Migration

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

WARM

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

Other

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

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Determining the ~~Contractual~~ Term

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

Reserve for Off-Balance Sheet Credit Exposures

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

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

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

Purchased Credit Deteriorated (“PCD”) Financial Assets

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

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

2. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Adopted in 2020

On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology (Allowance for Loan and Leases Losses or "ALLL") with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and HTM debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to accounting for AFS debt securities. One such change is to require credit losses to be presented as an allowance rather than a write-down on AFS debt securities if management intends to sell or believes that it is more likely than not they will be required to sell the debt security before recovery of the amortized cost basis.

The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for the reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable generally accepted accounting principles (“GAAP”). The Company recorded a net decrease to retained earnings (or a net increase to accumulated deficit) of $3.2 million as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13. The transition adjustment includes increases of $3.6 million to the ACL for loans and $0.7 million to other liabilities, which includes the reserve for off-balance sheet credit exposures, offset by a $1.1 million increase to other assets for the related impact to net deferred tax assets.

1617

The following table illustrates the impact of ASC 326:


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

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

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

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

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

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

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

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Impact of Other Recently Issued Accounting Pronouncements on Future Filings

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

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)." This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the provisions of this ASU, ~~and its effects~~but does not expect it to have a material impact on our consolidated financial statements.

3. INVESTMENT SECURITIES

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


(dollars in thousands)	(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		ACL		(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		ACL
June 30, 2020
September 30, 2020												September 30, 2020
Available-for-sale:	Available-for-sale:											Available-for-sale:
Debt securities:	Debt securities:											Debt securities:
States and political subdivisions	States and political subdivisions	$	136,597	$	4,882	$	(11)	$	141,468	$	—	States and political subdivisions	$	163,642	$	5,239	$	(292)	$	168,589	$	0
Corporate securities	Corporate securities	29,221		531		—		29,752		—		Corporate securities	50,318		471		(231)		50,558		0
U.S. Treasury obligations and direct obligations of U.S Government agencies	U.S. Treasury obligations and direct obligations of U.S Government agencies	36,802		25		(473)		36,354		—		U.S. Treasury obligations and direct obligations of U.S Government agencies	35,115		41		(212)		34,944		0
Mortgage-backed securities:	Mortgage-backed securities:											Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	Residential - U.S. Government-sponsored entities	692,989		21,516		(28)		714,477		—		Residential - U.S. Government-sponsored entities	743,786		20,395		(855)		763,326		0
Commercial - U.S. Government agencies and sponsored entities	Commercial - U.S. Government agencies and sponsored entities	77,743		2,926		(4)		80,665		—		Commercial - U.S. Government agencies and sponsored entities	71,335		2,451		0		73,786		0
Residential - Non-government agencies	Residential - Non-government agencies	30,697		1,389		—		32,086		—		Residential - Non-government agencies	27,525		1,185		(34)		28,676		0
Commercial - Non-government agencies	Commercial - Non-government agencies	131,679		2,290		(177)		133,792		—		Commercial - Non-government agencies	44,814		1,641		(15)		46,440		0
Total available-for-sale securities	Total available-for-sale securities	$	1,135,728	$	33,559	$	(693)	$	1,168,594	$	—	Total available-for-sale securities	$	1,136,535	$	31,423	$	(1,639)	$	1,166,319	$	0

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


(dollars in thousands)	(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2019	December 31, 2019									December 31, 2019
Available-for-sale:	Available-for-sale:									Available-for-sale:
Debt securities:	Debt securities:									Debt securities:
States and political subdivisions	States and political subdivisions	$	119,755	$	2,303	$	(40)	$	122,018	States and political subdivisions	$	119,755	$	2,303	$	(40)	$	122,018
Corporate securities	Corporate securities	30,277		252		—		30,529		Corporate securities	30,277		252		0		30,529
U.S. Treasury obligations and direct obligations of U.S Government agencies	U.S. Treasury obligations and direct obligations of U.S Government agencies	40,769		10		(398)		40,381		U.S. Treasury obligations and direct obligations of U.S Government agencies	40,769		10		(398)		40,381
Mortgage-backed securities:	Mortgage-backed securities:									Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	Residential - U.S. Government-sponsored entities	673,918		6,003		(2,099)		677,822		Residential - U.S. Government-sponsored entities	673,918		6,003		(2,099)		677,822
Commercial - U.S. Government agencies and sponsored entities	Commercial - U.S. Government agencies and sponsored entities	80,773		1,198		(746)		81,225		Commercial - U.S. Government agencies and sponsored entities	80,773		1,198		(746)		81,225
Residential - Non-government agencies	Residential - Non-government agencies	36,377		830		(16)		37,191		Residential - Non-government agencies	36,377		830		(16)		37,191
Commercial - Non-government agencies	Commercial - Non-government agencies	134,676		3,141		—		137,817		Commercial - Non-government agencies	134,676		3,141		0		137,817
Total available-for-sale securities	Total available-for-sale securities	$	1,116,545	$	13,737	$	(3,299)	$	1,126,983	Total available-for-sale securities	$	1,116,545	$	13,737	$	(3,299)	$	1,126,983

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

(dollars in thousands)

Amortized Cost

Fair Value

(dollars in thousands)

Amortized Cost

Fair Value

June 30, 2020

September 30, 2020

Equity securities

1,064

1,209

Equity securities

1,027

1,204

December 31, 2019

Equity securities

935

1,127

Equity securities

935

1,127

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

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


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

Available-for-sale:	Available-for-sale:	��				Available-for-sale:
Due in one year or less	Due in one year or less	$	44,455	$	44,638	Due in one year or less	$	27,260	$	27,378
Due after one year through five years	Due after one year through five years	43,905		44,632		Due after one year through five years	40,800		42,098
Due after five years through ten years	Due after five years through ten years	69,693		72,675		Due after five years through ten years	89,879		92,226
Due after ten years	Due after ten years	44,567		45,629		Due after ten years	91,136		92,389

Mortgage-backed securities:	Mortgage-backed securities:					Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	Residential - U.S. Government-sponsored entities	692,989		714,477		Residential - U.S. Government-sponsored entities	743,786		763,326
Commercial - U.S. Government agencies and sponsored entities	Commercial - U.S. Government agencies and sponsored entities	77,743		80,665		Commercial - U.S. Government agencies and sponsored entities	71,335		73,786
Residential - Non-government agencies	Residential - Non-government agencies	30,697		32,086		Residential - Non-government agencies	27,525		28,676
Commercial - Non-government agencies	Commercial - Non-government agencies	131,679		133,792		Commercial - Non-government agencies	44,814		46,440

Total available-for-sale securities	Total available-for-sale securities	$	1,135,728	$	1,168,594	Total available-for-sale securities	$	1,136,535	$	1,166,319

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

Investment securities with fair value of ~~$597.4~~$517.5 million and $719.8 million at ~~June~~September 30, 2020 and December 31, 2019, respectively, were pledged to secure public funds on deposit and other short-term borrowings.

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

1920

There were a total of 2548 and 81 AFS debt securities which were in an unrealized loss position, without an ACL, at ~~June~~September 30, 2020 and December 31, 2019, respectively. The following tables summarize AFS debt securities which were in an unrealized loss position at ~~June~~September 30, 2020 and December 31, 2019, aggregated by major security type and length of time in a continuous unrealized loss position.


		Less Than 12 Months						12 Months or Longer								Total					Less Than 12 Months				12 Months or Longer		Total
(dollars in thousands)	(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2020
September 30, 2020														September 30, 2020
Debt securities:	Debt securities:													Debt securities:
States and political subdivisions	States and political subdivisions	$	3,631	$	(11)	$	—	$	—	$	3,631	$	(11)	States and political subdivisions	$	39,297	$	(292)	$	0	$	0	$	39,297	$	(292)
Corporate securities	Corporate securities	—		—		—		—		—		—		Corporate securities	26,173		(231)		0		0		26,173		(231)
U.S. Treasury obligations and direct obligations of U.S Government agencies	U.S. Treasury obligations and direct obligations of U.S Government agencies	10,867		(187)		18,458		(286)		29,325		(473)		U.S. Treasury obligations and direct obligations of U.S Government agencies	4,805		(30)		22,141		(182)		26,946		(212)
Mortgage-backed securities:	Mortgage-backed securities:													Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	Residential - U.S. Government-sponsored entities	4,505		(28)		—		—		4,505		(28)		Residential - U.S. Government-sponsored entities	122,914		(855)		0		0		122,914		(855)
Residential - Non-government agencies	Residential - Non-government agencies	—		—		—		—		—		—		Residential - Non-government agencies	994		(34)		0		0		994		(34)
Commercial - U.S. Government agencies and sponsored entities		1,781		(4)		—		—		1,781		(4)

Commercial - Non-government agencies	Commercial - Non-government agencies	26,729		(177)		—		—		26,729		(177)		Commercial - Non-government agencies	3,495		(15)		0		0		3,495		(15)
Total temporarily impaired securities	Total temporarily impaired securities	$	47,513	$	(407)	$	18,458	$	(286)	$	65,971	$	(693)	Total temporarily impaired securities	$	197,678	$	(1,457)	$	22,141	$	(182)	$	219,819	$	(1,639)


		Less Than 12 Months						12 Months or Longer								Total					Less Than 12 Months				12 Months or Longer		Total
(dollars in thousands)	(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2019	December 31, 2019													December 31, 2019
Debt securities:	Debt securities:													Debt securities:
States and political subdivisions	States and political subdivisions	$	1,754	$	(9)	$	801	$	(31)	$	2,555	$	(40)	States and political subdivisions	$	1,754	$	(9)	$	801	$	(31)	$	2,555	$	(40)
Corporate securities		—		—		—		—		—		—

U.S. Treasury obligations and direct obligations of U.S Government agencies	U.S. Treasury obligations and direct obligations of U.S Government agencies	18,882		(143)		19,031		(255)		37,913		(398)		U.S. Treasury obligations and direct obligations of U.S Government agencies	18,882		(143)		19,031		(255)		37,913		(398)
Mortgage-backed securities:	Mortgage-backed securities:													Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	Residential - U.S. Government-sponsored entities	54,335		(283)		214,295		(1,816)		268,630		(2,099)		Residential - U.S. Government-sponsored entities	54,335		(283)		214,295		(1,816)		268,630		(2,099)
Residential - Non-government agencies	Residential - Non-government agencies	8,206		(16)		—		—		8,206		(16)		Residential - Non-government agencies	8,206		(16)		0		0		8,206		(16)
Commercial - U.S. Government-sponsored entities	Commercial - U.S. Government-sponsored entities	32,067		(746)		—		—		32,067		(746)		Commercial - U.S. Government-sponsored entities	32,067		(746)		0		0		32,067		(746)

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

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

2021

Visa and MasterCard Class B Common Stock

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

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

4. LOANS AND CREDIT QUALITY

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


(dollars in thousands)	(dollars in thousands)	June 30, 2020		December 31, 2019		(dollars in thousands)	September 30, 2020		December 31, 2019
Commercial, financial and agricultural:	Commercial, financial and agricultural:					Commercial, financial and agricultural:
Small Business Administration Paycheck Protection Program	Small Business Administration Paycheck Protection Program	$	543,653	$	—	Small Business Administration Paycheck Protection Program	$	545,277	$	0
Other	Other	547,768		570,089		Other	526,363		570,089
Real estate:	Real estate:					Real estate:
Construction	Construction	103,826		96,139		Construction	118,519		96,139
Residential mortgage	Residential mortgage	1,653,632		1,595,801		Residential mortgage	1,676,457		1,595,801
Home equity	Home equity	510,188		490,239		Home equity	533,139		490,239
Commercial mortgage	Commercial mortgage	1,131,959		1,124,911		Commercial mortgage	1,143,209		1,124,911
Consumer	Consumer	527,100		569,516		Consumer	500,416		569,516

Gross loans and leases		5,018,126		4,446,695
Gross loans						Gross loans	5,043,380		4,446,695
Net deferred (fees) costs	Net deferred (fees) costs	(14,688)		2,845		Net deferred (fees) costs	(12,754)		2,845
Total loans, net of deferred fees and costs	Total loans, net of deferred fees and costs	5,003,438		4,449,540		Total loans, net of deferred fees and costs	5,030,626		4,449,540
Allowance for credit losses	Allowance for credit losses	(67,339)		(47,971)		Allowance for credit losses	(80,542)		(47,971)
Total loans, net of allowance for credit losses	Total loans, net of allowance for credit losses	$	4,936,099	$	4,401,569	Total loans, net of allowance for credit losses	$	4,950,084	$	4,401,569

~~Section 1102~~The bank is a Small Business Administration ("SBA") approved lender and actively participated in assisting customers with loan applications for the SBA’s Paycheck Protection Program, or PPP, which was part of the CARES Act includes an allocation of $349 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”). This program is known as the Paycheck Protection Program (“PPP”). An additional $310 billion was allocated to the PPP with the enactment of the Paycheck Protection Program and Healthcare Enhancement Act (“CARES 2.0”) on April 21, 2020. Subsequently, on June 5, 2020, the Paycheck Protection Flexibility Act of 2020 (“Flexibility Act”) was signed into law, amending the CARES Act. Loans under the PPP are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed interest rate of 1.00%. The Flexibility Act and new guidance issued by the U.S. Department of the Treasury and the SBA on June 17, 2020, provides a maturity of two years for PPP loans ~~made before June 5, 2020, unless the borrower~~have a two or five-year term and lender mutually agree to extend the maturity of such loans to five years, and a maturity of five years for those PPP loans made on or after June 5, 2020. Through June 30, 2020, the Company did not mutually agree to extend any of the PPP loans to borrowers with two-year terms. Under the original PPP guidelines, payments of principal andearn interest are deferred for the first six months of the loan. The Flexibility Act extends the deferral period until the date the lender receives the applicable forgiven amount from the SBA. In addition, it clarifies that if a borrower fails to apply for forgiveness within 10 months after the end of the covered period, the deferral period for that loan will end on the date that is 10 months after the last day of the covered period. The loans are 100% guaranteed by the SBA.at 1%. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan, which the Company is recognizing over the life of the loan. The Company saw tremendous interest in the PPP. From April 3, 2020, the date the SBA began accepting submissions for the initial round of PPP loans through ~~June 30,~~the end of the program in August 2020, the Company ~~received approval from the SBA on~~funded over 7,200 PPP loans totaling over ~~$550~~$558 million and received gross processing fees of over $21 million. Certain PPP loans paid-off shortly after funding resulting in a total outstanding balance of $545.3 million and net deferred fees of $16.7 million as of ~~June~~September 30, ~~2020~~2020. The Company has developed a PPP forgiveness portal and has begun the process of ~~$544 million. Certain PPP loans approved by~~assisting our customers with applying for forgiveness from the ~~SBA may be cancelled or withdrawn prior~~SBA. The Company has engaged a third party to ~~closing and funding.~~assist with this process. Although the Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program, there could be risks and ~~liability to~~liabilities by the Company ~~associated with participation in the program~~ that cannot be determined at this time. ~~As of~~ ~~June 30, 2020, the Company's PPP loan portfolio totaled $526.4 million, net of deferred fees and costs.~~

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

The Company did 0t sell any loans originally held for investment during the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019.

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

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

(dollars in thousands)

Consumer - Unsecured

Three Months Ended ~~June~~September 30, 2020

Purchases:

Outstanding balance

~~11,359~~6,960

Purchase premium (discount)

~~(503)~~(280)

Purchase price

~~10,856~~6,680

~~Six~~Nine Months Ended ~~June~~September 30, 2020

Purchases:

Outstanding balance

~~34,312~~41,272

Purchase premium (discount)

~~(1,116)~~(1,396)

Purchase price

~~33,196~~39,876

Three Months Ended ~~June~~September 30, 2019

Purchases:

Outstanding balance

~~31,041~~30,669

Purchase premium (discount)

— (1,176)

Purchase price

~~31,041~~29,493

~~Six~~Nine Months Ended ~~June~~September 30, 2019

Purchases:

Outstanding balance

~~49,327~~79,996

Purchase premium (discount)

— (1,176)

Purchase price

~~49,327~~78,820

Note: Purchases of unsecured consumer loans were made under forward flow purchase agreements.

Collateral-Dependent Loans

In accordance with ASC 326, a loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table presents the amortized cost basis of collateral-dependent loans by class, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans as of ~~June~~September 30, 2020:


(dollars in thousands)	(dollars in thousands)	Secured by 1-4 Family Residential Properties		Secured by Nonfarm Nonresidential Properties		Secured by Real Estate and Business Assets		Total		Allocated ACL		(dollars in thousands)	Secured by 1-4 Family Residential Properties		Secured by Nonfarm Nonresidential Properties		Secured by Real Estate and Business Assets		Total		Allocated ACL
June 30, 2020
September 30, 2020												September 30, 2020
Commercial, financial and agricultural	Commercial, financial and agricultural	$	—	$	—	$	736	$	736	$	223	Commercial, financial and agricultural	$	0	$	0	$	1,371	$	1,371	$	213
Real estate:	Real estate:											Real estate:

Residential mortgage	Residential mortgage	8,504		—		—		8,504		—		Residential mortgage	9,210		0		0		9,210		0
Home equity	Home equity	538		—		—		538		—		Home equity	533		0		0		533		0
Commercial mortgage	Commercial mortgage	—		711		—		711		—		Commercial mortgage	0		7,558		0		7,558		307

Total	Total	$	9,042	$	711	$	736	$	10,489	$	223	Total	$	9,743	$	7,558	$	1,371	$	18,672	$	520

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


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

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

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

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

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


		Three Months Ended						Six Months Ended					Three Months Ended				Nine Months Ended
		June 30, 2019						June 30, 2019					September 30, 2019		September 30, 2019
(dollars in thousands)	(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment			Interest Income Recognized
Commercial, financial and agricultural	Commercial, financial and agricultural	$	185	$	2	$	199	$	5	Commercial, financial and agricultural	$	164	$	2	$	188		$	7
Real estate:	Real estate:									Real estate:
Construction	Construction	1,434		32		1,890		62		Construction	0		0		1,323			62
Residential mortgage	Residential mortgage	8,583		607		9,289		713		Residential mortgage	7,536		63		8,763			776
Home equity	Home equity	254		13		393		13		Home equity	190		0		332			13
Commercial mortgage	Commercial mortgage	2,138		23		2,222		46		Commercial mortgage	2,021		22		2,162			68

Total	Total	$	12,594	$	677	$	13,993	$	839	Total	$	9,911	$	87	$	12,768		$	926

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

Foreclosure Proceedings

The Company had ~~$0.9~~$0.7 million and $0.6 million of residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure at ~~June~~September 30, 2020 and December 31, 2019, respectively.

The Company did ~~not~~0t foreclose on any loans during the ~~six~~nine months ended ~~June~~September 30, 2020. The Company foreclosed on 1 loan totaling $0.2 million during the nine months ended September 30, 2019.

The Company sold 1 foreclosed property totaling $0.1 million during the nine months ended September 30, 2020 ~~and~~at a loss of less than $0.1 million. The Company did 0t sell any foreclosed properties during the nine months ended September 30, 2019.

Nonaccrual and Past Due Loans

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


(dollars in thousands)	(dollars in thousands)	Accruing Loans 30 - 59 Days Past Due		Accruing Loans 60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due and Nonaccrual		Loans and Leases Not Past Due		Total		Nonaccrual Loans With No ACL		(dollars in thousands)	Accruing Loans 30 - 59 Days Past Due		Accruing Loans 60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due and Nonaccrual		Loans and Leases Not Past Due		Total		Nonaccrual Loans With No ACL
June 30, 2020
September 30, 2020																		September 30, 2020
Commercial, financial and agricultural - SBA PPP	Commercial, financial and agricultural - SBA PPP	$	—	$	—	$	—	$	—	$	—	$	526,408	$	526,408	$	—	Commercial, financial and agricultural - SBA PPP	$	0	$	0	$	0	$	0	$	0	$	528,581	$	528,581	$	0
Commercial, financial and agricultural - Other	Commercial, financial and agricultural - Other	979		176		—		934		2,089		545,769		547,858		—		Commercial, financial and agricultural - Other	5,246		85		0		1,536		6,867		521,203		528,070		668
Real estate:	Real estate:																	Real estate:
Construction	Construction	—		—		—		—		—		103,518		103,518		—		Construction	0		0		0		0		0		118,247		118,247		0
Residential mortgage	Residential mortgage	—		1,375		726		3,215		5,316		1,652,242		1,657,558		3,215		Residential mortgage	12		556		588		4,032		5,188		1,674,872		1,680,060		4,032
Home equity	Home equity	366		—		—		538		904		510,058		510,962		538		Home equity	255		0		0		533		788		533,268		534,056		533
Commercial mortgage	Commercial mortgage	—		—		—		—		—		1,130,169		1,130,169		—		Commercial mortgage	1,778		0		0		6,889		8,667		1,132,598		1,141,265		4,296

Consumer	Consumer	1,673		964		444		54		3,135		523,830		526,965		—		Consumer	1,774		691		321		69		2,855		497,492		500,347		0

Total	Total	$	3,018	$	2,515	$	1,170	$	4,741	$	11,444	$	4,991,994	$	5,003,438	$	3,753	Total	$	9,065	$	1,332	$	909	$	13,059	$	24,365	$	5,006,261	$	5,030,626	$	9,529


(dollars in thousands)	(dollars in thousands)	Accruing Loans 30 - 59 Days Past Due		Accruing Loans 60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due and Nonaccrual		Loans and Leases Not Past Due		Total		Nonaccrual Loans With No ACL		(dollars in thousands)	Accruing Loans 30 - 59 Days Past Due		Accruing Loans 60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due and Nonaccrual		Loans and Leases Not Past Due		Total		Nonaccrual Loans With No ALLL
December 31, 2019	December 31, 2019																	December 31, 2019
Commercial, financial and agricultural	Commercial, financial and agricultural	$	476	$	865	$	—	$	467	$	1,808	$	568,496	$	570,304	$	—	Commercial, financial and agricultural	$	476	$	865	$	0	$	467	$	1,808	$	568,496	$	570,304	$	0
Real estate:	Real estate:																	Real estate:
Construction	Construction	643		—		—		—		643		95,211		95,854		—		Construction	643		0		0		0		643		95,211		95,854		0
Residential mortgage	Residential mortgage	1,830		589		724		979		4,122		1,595,679		1,599,801		979		Residential mortgage	1,830		589		724		979		4,122		1,595,679		1,599,801		979
Home equity	Home equity	759		207		—		92		1,058		489,676		490,734		92		Home equity	759		207		0		92		1,058		489,676		490,734		92
Commercial mortgage	Commercial mortgage	—		397		—		—		397		1,123,018		1,123,415		—		Commercial mortgage	0		397		0		0		397		1,123,018		1,123,415		0

Consumer	Consumer	3,223		943		286		17		4,469		564,963		569,432		—		Consumer	3,223		943		286		17		4,469		564,963		569,432		0

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

In accordance with the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" issued in April 2020, loans with deferrals granted because of COVID-19 are not considered past due and/or reported as nonaccrual if deemed collectible during the deferral period.

Troubled Debt Restructurings

Troubled debt restructurings ("TDRs") included in nonperforming assets at ~~June~~September 30, 2020 consisted of 12 Hawaii residential mortgage ~~loan~~loans with a principal balance of $0.3 million. There were ~~$7.5~~$7.4 million of TDRs still accruing interest at ~~June~~September 30, 2020, NaN of which were more than 90 days delinquent. At December 31, 2019, there were $7.5 million of TDRs still accruing interest, NaN of which were more than 90 days delinquent.

The Company offers various types of concessions when modifying a loan. Concessions made to the original contractual terms of the loan typically consists of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. In these cases, the principal balance on the TDR had matured and/or was in default at the time of restructure, and there were no commitments to lend additional funds to the borrower during the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019.

As discussed in Note 1 to these financial statements, Section 4013 of CARES Act and the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" provided banks an ~~option to elect to not account~~optional TDR election for certain loan modifications related to COVID-19 ~~as TDRs~~ as long as the borrowers were not more than 30 days past due as of December 31, 2019 ~~and~~or at the time of modification program implementation, respectively, and meets other applicable criteria. The Company has identified 911 consumer loans totaling $0.2 million, including 3 consumer loans totaling $0.1 million in the third quarter of 2020, that were modified ~~during the quarter~~ and did not meet the criteria under Section 4013 of CARES Act or the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)". As a result, these loans are included in the TDRs disclosed above. The ~~remaining TDRs disclosed above were not related to COVID-19 modifications. The~~ Company ~~executed~~had active loan deferrals onwith outstanding balances of approximately ~~$567.9~~$290.7 million resulting from the COVID-19 pandemic that were not classified as a TDR at ~~June~~September 30, 2020.The following table sets forth loans on active payment forbearance or deferral as of September 30, 2020:


(dollars in thousands)	Loan Count	Balance		Accrued Interest Receivable		Total Loans		% of Total Loans		Total Loans, excl. PPP		% of Total Loans, excl. PPP
Commercial, financial and agricultural	363	$	64,298	$	844	$	1,056,651	6.1	%	$	528,070	12.2	%
Real estate:
Construction	0	0		0		118,247		0	%	118,247		0	%
Residential mortgage	216	103,130		1,803		1,680,060		6.1	%	1,680,060		6.1	%
Home equity	0	0		0		534,056		0	%	534,056		0	%
Commercial mortgage	25	69,420		469		1,141,265		6.1	%	1,141,265		6.1	%
Consumer	3,209	53,993		1,323		500,347		10.8	%	500,347		10.8	%

Total loans	3,813	$	290,841	$	4,439	$	5,030,626	5.8	%	$	4,502,045	6.5	%

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


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

Consumer							Consumer	3	80		—
Total							Total	3	$	80	$	—

Nine Months Ended September 30, 2020							Nine Months Ended September 30, 2020

Real estate: Commercial mortgage	Real estate: Commercial mortgage	1	$	285	$	—	Real estate: Commercial mortgage	1	$	281	$	—
Consumer	Consumer	9	145		—		Consumer	11	214		—
Total	Total	10	$	430	$	—	Total	12	$	495	$	—

Six Months Ended June 30, 2020

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

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

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

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans by credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk rating of loans. Loans not meeting the following criteria that are analyzed individually as part of the described process are considered to be pass-rated loans.

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

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

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

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

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

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


		Amortized Cost of Term Loans by Origination Year																											Amortized Cost of Term Loans by Origination Year
		2020		2019		2018		2017		2016		Prior		Amortized Cost of Revolving Loans		Total
		(dollars in thousands)
June 30, 2020
(dollars in thousands)																		(dollars in thousands)	2020		2019		2018		2017		2016		Prior		Amortized Cost of Revolving Loans		Total
September 30, 2020																		September 30, 2020
Commercial, financial and agricultural - SBA PPP:	Commercial, financial and agricultural - SBA PPP:																	Commercial, financial and agricultural - SBA PPP:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	$	526,408	$	—	$	—	$	—	$	—	$	—	$	—	$	526,408	Pass	$	528,581	$	0	$	0	$	0	$	0	$	0	$	0	$	528,581

Subtotal																		Subtotal	528,581		0		0		0		0		0		0		528,581
Commercial, financial and agricultural - Other:	Commercial, financial and agricultural - Other:																	Commercial, financial and agricultural - Other:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	73,563		70,052		64,647		53,927		46,574		99,703		82,204		490,670		Pass	68,156		63,398		60,700		43,948		41,585		91,001		78,224		447,012
Special Mention	Special Mention	2,740		8,796		5,490		15,034		550		9,632		1,520		43,762		Special Mention	4,958		11,714		8,784		31,839		2,123		13,757		420		73,595
Substandard	Substandard	—		7,362		595		1,220		2,407		1,842		—		13,426		Substandard	200		1,528		1,111		1,105		2,206		1,313		0		7,463

Subtotal	Subtotal	76,303		86,210		70,732		70,181		49,531		111,177		83,724		547,858		Subtotal	73,314		76,640		70,595		76,892		45,914		106,071		78,644		528,070
Construction:	Construction:																	Construction:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	12,308		15,026		46,092		7,164		2,239		20,689		—		103,518		Pass	19,436		20,931		41,893		11,201		2,202		19,238		2,401		117,302
Special Mention																		Special Mention	0		0		945		0		0		0		0		945

Subtotal																		Subtotal	19,436		20,931		42,838		11,201		2,202		19,238		2,401		118,247
Residential mortgage:	Residential mortgage:																	Residential mortgage:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	252,833		335,607		163,136		181,703		210,585		506,943		—		1,650,807		Pass	416,073		302,683		141,156		159,808		197,665		456,398		0		1,673,783
Special Mention	Special Mention	—		—		—		1,437		153		1,145		—		2,735		Special Mention	0		0		0		1,437		147		0		0		1,584
Substandard	Substandard	—		—		545		895		888		1,688		—		4,016		Substandard	0		0		540		1,328		884		1,941		0		4,693

Loss																		Loss	0		0		0		0		0		0		0		0
Subtotal	Subtotal	252,833		335,607		163,681		184,035		211,626		509,776		—		1,657,558		Subtotal	416,073		302,683		141,696		162,573		198,696		458,339		0		1,680,060
Home equity:	Home equity:																	Home equity:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	9,200		18,464		19,080		457		298		4,923		457,792		510,214		Pass	13,407		16,993		16,713		778		390		4,794		480,238		533,313
Special Mention	Special Mention	—		—		—		—		—		—		210		210		Special Mention	0		0		0		0		0		0		210		210
Substandard	Substandard	—		—		—		—		206		332		—		538		Substandard	0		0		0		0		204		329		0		533

Subtotal	Subtotal	9,200		18,464		19,080		457		504		5,255		458,002		510,962		Subtotal	13,407		16,993		16,713		778		594		5,123		480,448		534,056
Commercial mortgage:	Commercial mortgage:																	Commercial mortgage:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	42,505		149,625		155,100		171,513		113,485		383,327		17,363		1,032,918		Pass	93,195		149,180		137,886		163,112		108,333		365,488		16,926		1,034,120
Special Mention	Special Mention	—		2,602		18,508		12,718		10,369		24,984		—		69,181		Special Mention	0		2,602		24,134		7,685		13,623		24,137		0		72,181
Substandard	Substandard	—		4,593		—		—		4,513		18,964		—		28,070		Substandard	0		2,593		11,500		1,998		4,296		14,577		0		34,964

Subtotal	Subtotal	42,505		156,820		173,608		184,231		128,367		427,275		17,363		1,130,169		Subtotal	93,195		154,375		173,520		172,795		126,252		404,202		16,926		1,141,265
Consumer:	Consumer:																	Consumer:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	61,790		136,956		73,808		57,622		25,622		99,447		71,221		526,466		Pass	72,249		133,485		77,840		52,150		21,327		71,599		71,057		499,707

Special Mention																		Special Mention	0		0		0		0		0		0		250		250
Substandard	Substandard	11		27		14		48		4		256		—		360		Substandard	27		11		40		9		1		168		0		256
Loss	Loss	—		—		—		79		45		15		—		139		Loss	15		0		0		49		0		70		0		134
Subtotal	Subtotal	61,801		136,983		73,822		57,749		25,671		99,718		71,221		526,965		Subtotal	72,291		133,496		77,880		52,208		21,328		71,837		71,307		500,347
Total	Total	$	981,358	$	749,110	$	547,015	$	503,817	$	417,938	$	1,173,890	$	630,310	$	5,003,438	Total	$	1,216,297	$	705,118	$	523,242	$	476,447	$	394,986	$	1,064,810	$	649,726	$	5,030,626

The following ~~table presents~~tables present the Company's loans by class and credit quality indicator as of September 30, 2020 and December 31, 2019:


(dollars in thousands)	(dollars in thousands)	Pass		Special Mention		Substandard		Loss		Subtotal		Net Deferred Costs (Income)		Total		(dollars in thousands)	Pass		Special Mention		Substandard		Loss		Subtotal		Net Deferred Costs (Income)		Total
December 31, 2019
Commercial, financial and agricultural		$	523,342	$	20,677	$	26,070	$	—	$	570,089	$	215	$	570,304
September 30, 2020																September 30, 2020
Commercial, financial and agricultural: SBA PPP																Commercial, financial and agricultural: SBA PPP	$	545,277	$	0	$	0	$	0	$	545,277	$	(16,696)	$	528,581
Commercial, financial and agricultural: Other																Commercial, financial and agricultural: Other	445,305		73,595		7,463		0		526,363		1,707		528,070
Real estate:	Real estate:															Real estate:
Construction	Construction	96,139		—		—		—		96,139		(285)		95,854		Construction	117,574		945		0		0		118,519		(272)		118,247
Residential mortgage	Residential mortgage	1,593,072		840		1,889		—		1,595,801		4,000		1,599,801		Residential mortgage	1,670,180		1,584		4,693		0		1,676,457		3,603		1,680,060
Home equity	Home equity	490,147		—		92		—		490,239		495		490,734		Home equity	532,396		210		533		0		533,139		917		534,056
Commercial mortgage	Commercial mortgage	1,094,364		17,440		13,107		—		1,124,911		(1,496)		1,123,415		Commercial mortgage	1,036,064		72,181		34,964		0		1,143,209		(1,944)		1,141,265

Consumer	Consumer	569,212		—		193		111		569,516		(84)		569,432		Consumer	499,776		250		256		134		500,416		(69)		500,347

Total	Total	$	4,366,276	$	38,957	$	41,351	$	111	$	4,446,695	$	2,845	$	4,449,540	Total	$	4,846,572	$	148,765	$	47,909	$	134	$	5,043,380	$	(12,754)	$	5,030,626


(dollars in thousands)	Pass		Special Mention		Substandard		Loss		Subtotal		Net Deferred Costs (Income)		Total
December 31, 2019
Commercial, financial and agricultural: Other	$	523,342	$	20,677	$	26,070	$	0	$	570,089	$	215	$	570,304
Real estate:
Construction	96,139		0		0		0		96,139		(285)		95,854
Residential mortgage	1,593,072		840		1,889		0		1,595,801		4,000		1,599,801
Home equity	490,147		0		92		0		490,239		495		490,734
Commercial mortgage	1,094,364		17,440		13,107		0		1,124,911		(1,496)		1,123,415


Consumer	569,212		0		193		111		569,516		(84)		569,432

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

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

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


		Commercial, Financial and Agricultural						Real Estate																									Commercial, Financial and Agricultural					Real Estate
(dollars in thousands)	(dollars in thousands)	SBA PPP		Other		Construction		Residential Mortgage		Home Equity		Commercial Mortgage		Consumer		Total			(dollars in thousands)		SBA PPP			Other			Construction			Residential Mortgage			Home Equity			Commercial Mortgage				Consumer			Total
Three Months Ended June 30, 2020
Beginning balance prior to ASC 326		$	—	$	8,645	$	3,057	$	13,181	$	2,309	$	19,518	$	12,935	$	59,645
Impact of adoption of ASC 326		—		—		—		—		—		—		—		—
Three Months Ended September 30, 2020																		Three Months Ended September 30, 2020

Beginning balance	Beginning balance	—		8,645		3,057		13,181		2,309		19,518		12,935		59,645			Beginning balance		388			15,507			3,274			15,025			3,651			16,148				13,346			67,339
Provision for credit losses		388		7,660		217		1,876		1,342		(3,371)		2,528		10,640
Provision for credit losses on loans [1]																		Provision for credit losses on loans [1]		2			2,620			759			3,537			2,517			3,304				1,726			14,465

		388		16,305		3,274		15,057		3,651		16,147		15,463		70,285					390			18,127			4,033			18,562			6,168			19,452				15,072			81,804
Charge-offs	Charge-offs	—		1,103		—		52		—		—		2,626		3,781			Charge-offs		0			810			0			11			0			75				1,492			2,388
Recoveries	Recoveries	—		305		—		20		—		1		509		835			Recoveries		0			321			0			13			0			12				780			1,126
Net charge-offs (recoveries)	Net charge-offs (recoveries)	—		798		—		32		—		(1)		2,117		2,946			Net charge-offs (recoveries)		0			489			0			(2)			0			63				712			1,262
Ending balance	Ending balance	$	388	$	15,507	$	3,274	$	15,025	$	3,651	$	16,148	$	13,346	$	67,339		Ending balance		$	390		$	17,638		$	4,033		$	18,564		$	6,168		$	19,389			$	14,360		$	80,542

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019																		Three Months Ended September 30, 2019
Beginning balance	Beginning balance	$	—	$	7,847	$	1,299	$	12,851	$	4,278	$	12,036	$	8,956	$	47,267		Beginning balance		$	0		$	8,109		$	1,313		$	13,367		$	4,313		$	11,668			$	9,497		$	48,267
Provision for credit losses		—		786		(578)		144		26		(393)		1,419		1,404
Provision for credit losses on loans																		Provision for credit losses on loans		0			107			374			75			(45)			541				480			1,532
		—		8,633		721		12,995		4,304		11,643		10,375		48,671					0			8,216			1,687			13,442			4,268			12,209				9,977			49,799
Charge-offs	Charge-offs	—		839		—		—		—		—		1,459		2,298			Charge-offs		0			797			0			0			5			—				1,832			2,634
Recoveries	Recoveries	—		315		592		372		9		25		581		1,894			Recoveries		0			362			6			104			24			0				506			1,002
Net charge-offs (recoveries)	Net charge-offs (recoveries)	—		524		(592)		(372)		(9)		(25)		878		404			Net charge-offs (recoveries)		0			435			(6)			(104)			(19)			0				1,326			1,632
Ending balance	Ending balance	$	—	$	8,109	$	1,313	$	13,367	$	4,313	$	11,668	$	9,497	$	48,267		Ending balance		$	0		$	7,781		$	1,693		$	13,546		$	4,287		$	12,209			$	8,651		$	48,167


	Commercial, Financial and Agricultural				Real Estate
(dollars in thousands)	SBA PPP		Other		Construction		Residential Mortgage		Home Equity		Commercial Mortgage		Consumer		Total
Nine Months Ended September 30, 2020
Beginning balance prior to ASC 326	$	0	$	8,136	$	1,792	$	13,327	$	4,206	$	11,113	$	9,397	$	47,971
Impact of adoption of ASC 326	0		(627)		479		608		(1,614)		2,624		2,096		3,566
Balance after adoption of ASC 326	0		7,509		2,271		13,935		2,592		13,737		11,493		51,537
Provision for credit losses on loans [1]	390		11,511		1,631		4,478		3,545		5,712		7,167		34,434
	390		19,020		3,902		18,413		6,137		19,449		18,660		85,971
Charge-offs	0		2,350		0		63		0		75		6,335		8,823
Recoveries	0		968		131		214		31		15		2,035		3,394
Net charge-offs (recoveries)	0		1,382		(131)		(151)		(31)		60		4,300		5,429
Ending balance	$	390	$	17,638	$	4,033	$	18,564	$	6,168	$	19,389	$	14,360	$	80,542



Nine Months Ended September 30, 2019
Beginning balance	$	0	$	8,027	$	1,202	$	14,349	$	3,788	$	13,358	$	7,192	$	47,916
Provision for credit losses on loans	0		943		(113)		(1,301)		462		(1,174)		5,402		4,219
	0		8,970		1,089		13,048		4,250		12,184		12,594		52,135
Charge-offs	0		2,099		0		0		5		0		5,542		7,646
Recoveries	0		910		604		498		42		25		1,599		3,678
Net charge-offs (recoveries)	0		1,189		(604)		(498)		(37)		(25)		3,943		3,968
Ending balance	$	0	$	7,781	$	1,693	$	13,546	$	4,287	$	12,209	$	8,651	$	48,167

[1] The Company recorded a reserve on accrued interest receivable for loans on active payment forbearance or deferral, which were granted to borrowers impacted by the COVID-19 pandemic. This reserve was recorded as a contra-asset against accrued interest receivable with the offset to provision for credit losses. The provision for credit losses presented in this table excludes the provision for credit losses on accrued interest receivable of $0.2 million.

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

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


(dollars in thousands)
Three Months Ended ~~June~~September 30, 2020


Beginning balance	$	~~3,810~~4,383
Provision for off-balance sheet credit exposures	~~573~~221
Ending balance	$	~~4,383~~4,604

Three Months Ended ~~June~~September 30, 2019
Beginning balance	$	~~1,409~~1,897


Provision for off-balance sheet credit exposures	~~488~~ (466)
Ending balance	$	~~1,897~~1,431

~~Six~~Nine Months Ended ~~June~~September 30, 2020
Beginning balance prior to ASC 326	$	1,272
Impact of adoption of ASC 326	740
Balance after adoption of ASC 326	2,012
Provision for off-balance sheet credit exposures	~~2,371~~2,592
Ending balance	$	~~4,383~~4,604

~~Six~~Nine Months Ended ~~June~~September 30, 2019
Beginning balance	$	1,242


Provision for off-balance sheet credit exposures	~~655~~189
Ending balance	$	~~1,897~~1,431

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

Our provision for credit losses on loans was ~~$10.6~~$14.5 million and ~~$20.0~~$34.4 million in the three and ~~six~~nine months ended ~~June~~September 30, 2020 under ASC 326, compared to ~~$1.4~~$1.5 million and ~~$2.7~~$4.2 million in the three and ~~six~~nine months ended ~~June~~September 30, 2019 under previous GAAP.

6. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

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


(dollars in thousands)	(dollars in thousands)	June 30, 2020		December 31, 2019		(dollars in thousands)	September 30, 2020		December 31, 2019
Investments in low income housing tax credit partnerships	Investments in low income housing tax credit partnerships	$	14,626	$	15,322	Investments in low income housing tax credit partnerships	$	28,437	$	15,322
Investments in common securities of statutory trusts	Investments in common securities of statutory trusts	1,547		1,547		Investments in common securities of statutory trusts	1,547		1,547
Investments in affiliates	Investments in affiliates	201		192		Investments in affiliates	201		192
Other	Other	54		54		Other	54		54
Total	Total	$	16,428	$	17,115	Total	$	30,239	$	17,115

The Company invests in low-income housing tax credit ("LIHTC") partnerships. As of ~~June~~September 30, 2020 and December 31, 2019, the Company had ~~$9.3~~$22.7 million and $11.5 million, respectively, in unfunded commitments related to the LIHTC partnerships. The expected payments for the unfunded commitments as of ~~June~~September 30, 2020 for the remainder of fiscal year 2020, the next five succeeding fiscal years and all years thereafter are as ~~follows (dollars in thousands):~~follows:

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


(dollars in thousands)
Year Ending December 31,
2020 (remainder)	$	12,853
2021	1,494
2022	8,253
2023	10
2024	26
2025	6
Thereafter	43
Total unfunded commitments	$	22,685

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

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


(dollars in thousands)	(dollars in thousands)	Three Months Ended June 30, 2020		Three Months Ended June 30, 2019		Six Months Ended June 30, 2020		Six Months Ended June 30, 2019		(dollars in thousands)	Three Months Ended September 30, 2020		Three Months Ended September 30, 2019		Nine Months Ended September 30, 2020		Nine Months Ended September 30, 2019
Proportional amortization method:	Proportional amortization method:									Proportional amortization method:
Amortization expense recognized in income tax expense	Amortization expense recognized in income tax expense	$	348	$	259	$	696	$	517	Amortization expense recognized in income tax expense	$	348	$	259	$	1,044	$	776
Tax credits recognized in income tax expense	Tax credits recognized in income tax expense	400		338		800		615		Tax credits recognized in income tax expense	399		307		1,199		922

7. MORTGAGE SERVICING RIGHTS

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

(dollars in thousands)

Mortgage
Servicing
Rights

Balance, January 1, 2019

15,596

Additions

~~742~~1,189

Amortization

~~(1,072)~~(1,727)

Balance, ~~June~~September 30, 2019

~~15,266~~15,058

Balance, January 1, 2020

14,718

Additions

~~1,270~~2,269

Amortization

~~(3,217)~~(4,558)

Balance, ~~June~~September 30, 2020

~~12,771~~12,429

Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans and totaled ~~$1.1~~$1.0 million and ~~$1.3~~$2.3 million for the three and ~~six~~nine months ended ~~June~~September 30, 2020 compared to ~~$0.5~~$0.4 million and ~~$0.7~~$1.2 million for the three and ~~six~~nine months ended ~~June~~September 30, 2019.

Amortization of mortgage servicing rights totaled ~~$1.7~~$1.3 million and ~~$3.2~~$4.6 million for the three and ~~six~~nine months ended ~~June~~September 30, 2020 compared to ~~$0.6~~$0.7 million and ~~$1.1~~$1.7 million for the three and ~~six~~nine months ended ~~June~~September 30, 2019.

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


		Six Months Ended		Six Months Ended			Nine Months Ended		Nine Months Ended
(dollars in thousands)	(dollars in thousands)	June 30, 2020		June 30, 2019		(dollars in thousands)	September 30, 2020		September 30, 2019
Fair market value, beginning of period	Fair market value, beginning of period	$	15,820	$	17,696	Fair market value, beginning of period	$	15,820	$	17,696
Fair market value, end of period	Fair market value, end of period	13,060		15,554		Fair market value, end of period	12,694		15,965


		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
Weighted average discount rate	Weighted average discount rate	9.6	%	9.5	%	Weighted average discount rate	9.6	%	9.5	%
Forecasted constant prepayment rate assumption ⁽¹⁾	Forecasted constant prepayment rate assumption ⁽¹⁾	21.7	%	11.9	%	Forecasted constant prepayment rate assumption (1)	24.3	%	11.9	%

⁽¹⁾ Represents annualized loan prepayment rate assumption.

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

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


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

Mortgage servicing rights	$	69,864	$	(57,435)	$	12,429	$	67,595	$	(52,877)	$	14,718

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


(dollars in thousands)				(dollars in thousands)
Year Ending December 31,	Year Ending December 31,			Year Ending December 31,
2020 (remainder)	2020 (remainder)	$	2,583	2020 (remainder)	$	957
2021	2021	4,359		2021	3,375
2022	2022	3,538		2022	2,682
2023	2023	2,291		2023	2,181
2024	2024	—		2024	1,801
2025	2025	—		2025	1,433
Thereafter	Thereafter	—		Thereafter	0
Total	Total	$	12,771	Total	$	12,429

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

8. DERIVATIVES

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

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

Interest Rate Lock and Forward Sale Commitments

We enter into interest rate lock commitments on certain mortgage loans that are intended to be sold. To manage interest rate risk on interest rate lock commitments, we also enter into forward loan sale commitments. The interest rate locks and forward loan sale commitments are accounted for as undesignated derivatives and are recorded at their respective fair values in other assets or other liabilities, with changes in fair value recorded in current period earnings. These instruments serve to reduce our exposure to movements in interest rates. At ~~June~~September 30, 2020, we were a party to interest rate lock and forward sale commitments on ~~$0.4~~$2.9 million and ~~$10.9~~$19.3 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

Derivatives Financial Instruments Not Designated as Hedging Instruments

Fair Value at

(dollars in thousands)

Balance Sheet Location

June 30,
2020

December 31,
2019

June 30,
2020

December 31,
2019

(dollars in thousands)

Balance Sheet Location

September 30,
2020

December 31,
2019

September 30,
2020

December 31,
2019

Interest rate lock and forward sale commitments

Other assets / other liabilities

Interest rate lock and forward sale commitments

Other assets / other liabilities

111

127

Risk Participation Agreement

In the first quarter of 2020, the Company entered into a credit risk participation agreement ("RPA") with a financial institution counterparty for an interest rate swap related to a loan in which we participate. The risk participation agreement entered into by us as a participant bank provides credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution. ~~The fair value of the exposure related to the RPA was not material to the consolidated financial statements at June 30, 2020.~~

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

Derivatives Financial Instruments
Not Designated as Hedging Instruments

Location of Gain (Loss)
Recognized in
Earnings on Derivatives

Amount of Gain (Loss)
Recognized in
Earnings on Derivatives

(dollars in thousands)

Three Months Ended ~~June~~September 30, 2020

Interest rate lock and forward sale commitments

Mortgage banking income

~~(149)~~109

Risk participation agreement

Other service charges and fees

(54)

Three Months Ended ~~June~~September 30, 2019

Interest rate lock and forward sale commitments

Mortgage banking income

~~(18)~~110

Loans held for sale

Other income

(1)

~~Six~~Nine Months Ended ~~June~~September 30, 2020

Interest rate lock and forward sale commitments

Mortgage banking income

~~(50)~~59

Risk participation agreement

Other service charges and fees

1,234

~~1,288~~

~~Six~~Nine Months Ended ~~June~~September 30, 2019

Interest rate lock and forward sale commitments

Mortgage banking income

21131

Loans held for sale

Other income

(1)

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 ~~$1.97~~$1.79 billion line of credit as of ~~June~~September 30, 2020, compared to $1.84 billion at December 31, 2019. At ~~June~~September 30, 2020, ~~$1.67~~$1.26 billion was undrawn under this arrangement, compared to $1.57 billion at December 31, 2019. ~~There were 0 short-term~~Short-term borrowings under this arrangement totaled $206.0 million at ~~June~~September 30, 2020, compared to $150.0 million at December 31, 2019. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled ~~$248.5~~$267.0 million at ~~June~~September 30, 2020, compared to $78.9 million at December 31, 2019. Long-term borrowings under this arrangement totaled $50.0 million at ~~June~~September 30, 2020 and December 31, 2019. FHLB advances and standby letters of credit available at ~~June~~September 30, 2020 were secured by certain real estate loans with a carrying value of ~~$2.66~~$2.71 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB.

At ~~June~~September 30, 2020 and December 31, 2019, our bank had additional unused borrowings available at the Federal Reserve discount window of ~~$54.6~~$59.2 million and $65.3 million, respectively. As of ~~June~~September 30, 2020 and December 31, 2019, certain commercial and commercial real estate loans with a carrying value totaling ~~$126.7~~$125.0 million and $126.1 million, respectively, were pledged as collateral on our line of credit with the Federal Reserve discount window. The Federal Reserve does not have the right to sell or repledge these loans.

To bolster the effectiveness of the SBA's PPP the Federal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provides loans to small businesses so that they can keep their workers on the payroll. The Paycheck Protection Program Liquidity Facility ("PPPLF") will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. At ~~June~~September 30, 2020, ~~PPP loans pledged to the Federal Reserve Bank totaled $65.9 million and~~there were no funds drawn from the Federal Reserve Bank ~~related~~under the PPPLF and no PPP loans were pledged to the ~~PPPLF as of June 30, 2020 totaled $65.9 million.~~Federal Reserve Bank.

Subordinated Debentures

In October 2003, we created 2 wholly-owned statutory trusts, CPB Capital Trust II ("Trust II") and CPB Statutory Trust III ("Trust III"). We completed the redemption of $20 million of floating rate trust preferred securities issued by Trust II in January 2019 and $20 million of floating rate trust preferred securities issued by Trust III in December 2018.

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

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

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

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

(dollars in thousands)

~~June~~September 30, 2020

Name of Trust

Subordinated Debentures

Interest Rate

Trust IV

30,928

Three month LIBOR + 2.45%

Trust V

20,619

Three month LIBOR + 1.87%

Total

51,547

December 31, 2019

Name of Trust

Subordinated Debentures

Interest Rate

Trust IV

30,928

Three month LIBOR + 2.45%

Trust V

20,619

Three month LIBOR + 1.87%

Total

51,547

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

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

10. REVENUE FROM CONTRACTS WITH CUSTOMERS

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2020		2019		2020		2019
Other operating income:
In-scope of ASC 606
Mortgage banking income	$	235	$	230	$	653	$	486
Service charges on deposit accounts	1,475		2,125		4,674		6,247
Other service charges and fees	2,932		3,281		8,517		9,096
Income on fiduciary activities	1,149		1,126		3,716		3,220

Net gain (loss) on sales of foreclosed assets	0		17		(6)		17
In-scope other operating income	5,791		6,779		17,554		19,066
Out-of-scope other operating income	5,772		3,487		13,587		12,967
Total other operating income	$	11,563	$	10,266	$	31,141	$	32,033

Three Months Ended
June 30, Six Months Ended
June 30,
(dollars in thousands) 2020 2019 2020 2019
Other operating income:
In-scope of ASC 606
Mortgage banking income $ 189 $ 107 $ 418 $ 256
Service charges on deposit accounts 1,149 2,041 3,199 4,122
Other service charges and fees 2,589 3,221 5,585 5,815
Income on fiduciary activities 1,270 1,129 2,567 2,094
Net gain on sales of foreclosed assets (6) — (6) —
In-scope other operating income 5,191 6,498 11,763 12,287
Out-of-scope other operating income 5,501 3,596 7,815 9,480
Total other operating income $ 10,692 $ 10,094 $ 19,578 $ 21,767

11. SHARE-BASED COMPENSATION

Restricted Stock Units

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


		Shares	Weighted Average Grant Date Fair Value			Shares	Weighted Average Grant Date Fair Value
Non-vested restricted stock units, beginning of period	Non-vested restricted stock units, beginning of period	366,467	$	28.89	Non-vested restricted stock units, beginning of period	366,467	$	28.89
Changes during the period:	Changes during the period:				Changes during the period:
Granted	Granted	321,722	18.11		Granted	321,722	18.11
Vested	Vested	(105,553)	30.24		Vested	(123,179)	29.47
Forfeited	Forfeited	(15,631)	26.38		Forfeited	(22,628)	24.80
Non-vested restricted stock units, end of period	Non-vested restricted stock units, end of period	567,005	22.59		Non-vested restricted stock units, end of period	542,382	22.53

12. LEASES

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

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


		Three Months Ended June 30,									Six Months Ended June 30,										Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	(dollars in thousands)	2020			2019			2020			2019			(dollars in thousands)	2020			2019			2020			2019
Lease cost:	Lease cost:													Lease cost:
Operating lease cost	Operating lease cost	$	1,653		$	1,628		$	3,306		$	3,256		Operating lease cost	$	1,613		$	1,627		$	4,919		$	4,883
Variable lease cost	Variable lease cost	688			604			1,366			1,251			Variable lease cost	732			699			2,098			1,950
Less: sublease income	Less: sublease income	(3)			(11)			(15)			(22)			Less: sublease income	0			(11)			(15)			(33)
Total lease cost	Total lease cost	$	2,338		$	2,221		$	4,657		$	4,485		Total lease cost	$	2,345		$	2,315		$	7,002		$	6,800

Other information:	Other information:													Other information:
Operating cash flows from operating leases	Operating cash flows from operating leases	$	(1,595)		$	(1,556)		$	(3,189)		$	(3,105)		Operating cash flows from operating leases	$	(1,554)		$	(1,558)		$	(4,743)		$	(4,663)
Weighted-average remaining lease term - operating leases	Weighted-average remaining lease term - operating leases	13.23 years			14.05 years			13.23 years			14.21 years			Weighted-average remaining lease term - operating leases	12.47 years			13.80 years			12.47 years			13.80 years
Weighted-average discount rate - operating leases	Weighted-average discount rate - operating leases	3.93		%	3.92		%	3.93		%	3.92		%	Weighted-average discount rate - operating leases	3.91		%	3.92		%	3.91		%	3.92		%

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


(dollars in thousands)								(dollars in thousands)
Year Ending December 31,	Year Ending December 31,	Undiscounted Cash Flows		Lease Liability Expense		Lease Liability Reduction		Year Ending December 31,	Undiscounted Cash Flows		Lease Liability Expense		Lease Liability Reduction
2020 (remainder)	2020 (remainder)	$	3,027	$	968	$	2,059	2020 (remainder)	$	1,451	$	437	$	1,014
2021	2021	5,907		1,808		4,099		2021	5,839		1,638		4,201
2022	2022	5,472		1,659		3,813		2022	5,433		1,487		3,946
2023	2023	5,175		1,519		3,656		2023	4,860		1,348		3,512
2024	2024	4,947		1,385		3,562		2024	4,539		1,222		3,317
2025	2025	4,634		1,247		3,387		2025	4,227		1,096		3,131
Thereafter	Thereafter	36,285		6,421		29,864		Thereafter	31,700		5,466		26,234
Total	Total	$	65,447	$	15,007	$	50,440	Total	$	58,049	$	12,694	$	45,355

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


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	(dollars in thousands)	2020		2019		2020		2019		(dollars in thousands)	2020		2019		2020		2019
Total rental income recognized	Total rental income recognized	$	534	$	519	$	1,067	$	1,054	Total rental income recognized	$	492	$	522	$	1,559	$	1,576

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


(dollars in thousands)				(dollars in thousands)
Year Ending December 31,	Year Ending December 31,			Year Ending December 31,
2020 (remainder)	2020 (remainder)	$	1,117	2020 (remainder)	$	530
2021	2021	2,245		2021	2,133
2022	2022	1,662		2022	1,790
2023	2023	578		2023	480
2024	2024	109		2024	84
2025	2025	72		2025	72
Thereafter	Thereafter	190		Thereafter	190
Total	Total	$	5,973	Total	$	5,279

13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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


(dollars in thousands)	(dollars in thousands)	Before Tax		Tax Effect		Net of Tax		(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Three Months Ended June 30, 2020
Net unrealized gains on investment securities:
Net unrealized gains arising during the period		$	8,570	$	2,295	$	6,275
Three Months Ended September 30, 2020								Three Months Ended September 30, 2020
Net unrealized losses on investment securities:								Net unrealized losses on investment securities:
Net unrealized losses arising during the period								Net unrealized losses arising during the period	$	(3,434)	$	(919)	$	(2,515)
Less: Reclassification adjustments from AOCI realized in net income	Less: Reclassification adjustments from AOCI realized in net income	—		—		—		Less: Reclassification adjustments from AOCI realized in net income	352		94		258
Net unrealized gains on investment securities		8,570		2,295		6,275
Net unrealized losses on investment securities								Net unrealized losses on investment securities	(3,082)		(825)		(2,257)

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

Amortization of net actuarial loss	Amortization of net actuarial loss	269		70		199		Amortization of net actuarial loss	330		89		241
Amortization of net transition obligation	Amortization of net transition obligation	4		1		3		Amortization of net transition obligation	5		1		4
Amortization of prior service cost	Amortization of prior service cost	3		1		2		Amortization of prior service cost	3		1		2

Defined benefit plans, net	Defined benefit plans, net	276		72		204		Defined benefit plans, net	338		91		247

Other comprehensive income		$	8,846	$	2,367	$	6,479
Other comprehensive loss								Other comprehensive loss	$	(2,744)	$	(734)	$	(2,010)


(dollars in thousands)	(dollars in thousands)	Before Tax		Tax Effect		Net of Tax		(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Three Months Ended June 30, 2019
Three Months Ended September 30, 2019								Three Months Ended September 30, 2019
Net unrealized gains on investment securities:	Net unrealized gains on investment securities:							Net unrealized gains on investment securities:
Net unrealized gains arising during the period	Net unrealized gains arising during the period	$	16,620	$	4,455	$	12,165	Net unrealized gains arising during the period	$	6,027	$	1,615	$	4,412
Less: Reclassification adjustments from AOCI realized in net income	Less: Reclassification adjustments from AOCI realized in net income	—		—		—		Less: Reclassification adjustments from AOCI realized in net income	(36)		(10)		(26)
Net unrealized gains on investment securities	Net unrealized gains on investment securities	16,620		4,455		12,165		Net unrealized gains on investment securities	5,991		1,605		4,386

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

Amortization of net actuarial loss	Amortization of net actuarial loss	264		22		242		Amortization of net actuarial loss	310		31		279
Amortization of net transition obligation	Amortization of net transition obligation	4		1		3		Amortization of net transition obligation	5		3		2
Amortization of prior service cost	Amortization of prior service cost	4		1		3		Amortization of prior service cost	4		2		2

Defined benefit plans, net	Defined benefit plans, net	272		24		248		Defined benefit plans, net	319		36		283

Other comprehensive income	Other comprehensive income	$	16,892	$	4,479	$	12,413	Other comprehensive income	$	6,310	$	1,641	$	4,669

3839


(dollars in thousands)	(dollars in thousands)	Before Tax		Tax Effect		Net of Tax		(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Six Months Ended June 30, 2020
Nine Months Ended September 30, 2020								Nine Months Ended September 30, 2020
Net unrealized gains on investment securities:	Net unrealized gains on investment securities:							Net unrealized gains on investment securities:
Net unrealized gains arising during the period	Net unrealized gains arising during the period	$	22,428	$	6,006	$	16,422	Net unrealized gains arising during the period	$	18,994	$	5,087	$	13,907
Less: Reclassification adjustments from AOCI realized in net income	Less: Reclassification adjustments from AOCI realized in net income	—		—		—		Less: Reclassification adjustments from AOCI realized in net income	352		94		258
Net unrealized gains on investment securities	Net unrealized gains on investment securities	22,428		6,006		16,422		Net unrealized gains on investment securities	19,346		5,181		14,165

Defined benefit plans:	Defined benefit plans:							Defined benefit plans:
Net actuarial gains arising during the period	Net actuarial gains arising during the period	427		114		313		Net actuarial gains arising during the period	427		114		313
Amortization of net actuarial loss	Amortization of net actuarial loss	537		142		395		Amortization of net actuarial loss	867		230		637
Amortization of net transition obligation	Amortization of net transition obligation	9		2		7		Amortization of net transition obligation	14		4		10
Amortization of prior service cost	Amortization of prior service cost	7		2		5		Amortization of prior service cost	10		3		7

Defined benefit plans, net	Defined benefit plans, net	980		260		720		Defined benefit plans, net	1,318		351		967

Other comprehensive income	Other comprehensive income	$	23,408	$	6,266	$	17,142	Other comprehensive income	$	20,664	$	5,532	$	15,132


(dollars in thousands)	(dollars in thousands)	Before Tax		Tax Effect		Net of Tax		(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Six Months Ended June 30, 2019
Nine Months Ended September 30, 2019								Nine Months Ended September 30, 2019
Net unrealized gains on investment securities:	Net unrealized gains on investment securities:							Net unrealized gains on investment securities:
Net unrealized gains arising during the period	Net unrealized gains arising during the period	$	31,644	$	8,483	$	23,161	Net unrealized gains arising during the period	$	37,671	$	10,098	$	27,573
Less: Reclassification adjustments from AOCI realized in net income	Less: Reclassification adjustments from AOCI realized in net income	—		—		—		Less: Reclassification adjustments from AOCI realized in net income	(36)		(10)		(26)
Net unrealized gains on investment securities	Net unrealized gains on investment securities	31,644		8,483		23,161		Net unrealized gains on investment securities	37,635		10,088		27,547

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

Amortization of net actuarial loss	Amortization of net actuarial loss	527		51		476		Amortization of net actuarial loss	837		84		753
Amortization of net transition obligation	Amortization of net transition obligation	9		2		7		Amortization of net transition obligation	14		4		10
Amortization of prior service cost	Amortization of prior service cost	9		2		7		Amortization of prior service cost	13		3		10

Defined benefit plans, net	Defined benefit plans, net	545		55		490		Defined benefit plans, net	864		91		773

Other comprehensive income	Other comprehensive income	$	32,189	$	8,538	$	23,651	Other comprehensive income	$	38,499	$	10,179	$	28,320

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


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

Three Months Ended September 30, 2020								Three Months Ended September 30, 2020
Balance at beginning of period	Balance at beginning of period	$	24,972	$	(5,900)	$	19,072	Balance at beginning of period	$	31,247	$	(5,696)	$	25,551

Other comprehensive income before reclassifications		6,275		—		6,275

Other comprehensive income (loss) before reclassifications								Other comprehensive income (loss) before reclassifications	(2,515)		0		(2,515)
Reclassification adjustments from AOCI	Reclassification adjustments from AOCI	—		204		204		Reclassification adjustments from AOCI	258		247		505
Total other comprehensive income		6,275		204		6,479
Total other comprehensive income (loss)								Total other comprehensive income (loss)	(2,257)		247		(2,010)

Balance at end of period	Balance at end of period	$	31,247	$	(5,696)	$	25,551	Balance at end of period	$	28,990	$	(5,449)	$	23,541

3940


(dollars in thousands)	(dollars in thousands)	Investment Securities		Defined Benefit Plans		AOCI		(dollars in thousands)	Investment Securities		Defined Benefit Plans		AOCI
Three Months Ended June 30, 2019
Three Months Ended September 30, 2019								Three Months Ended September 30, 2019
Balance at beginning of period	Balance at beginning of period	$	(1,747)	$	(6,208)	$	(7,955)	Balance at beginning of period	$	10,418	$	(5,960)	$	4,458

Other comprehensive loss before reclassifications	Other comprehensive loss before reclassifications	12,165		—		12,165		Other comprehensive loss before reclassifications	4,412		0		4,412
Reclassification adjustments from AOCI	Reclassification adjustments from AOCI	—		248		248		Reclassification adjustments from AOCI	(26)		283		257
Total other comprehensive income	Total other comprehensive income	12,165		248		12,413		Total other comprehensive income	4,386		283		4,669

Balance at end of period	Balance at end of period	$	10,418	$	(5,960)	$	4,458	Balance at end of period	$	14,804	$	(5,677)	$	9,127


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

Other comprehensive income before reclassifications	Other comprehensive income before reclassifications	16,422		313		16,735		Other comprehensive income before reclassifications	13,907		313		14,220
Reclassification adjustments from AOCI	Reclassification adjustments from AOCI	—		407		407		Reclassification adjustments from AOCI	258		654		912
Total other comprehensive income	Total other comprehensive income	16,422		720		17,142		Total other comprehensive income	14,165		967		15,132

Balance at end of period	Balance at end of period	$	31,247	$	(5,696)	$	25,551	Balance at end of period	$	28,990	$	(5,449)	$	23,541


(dollars in thousands)	(dollars in thousands)	Investment Securities		Defined Benefit Plans		AOCI		(dollars in thousands)	Investment Securities		Defined Benefit Plans		AOCI
Six Months Ended June 30, 2019
Nine Months Ended September 30, 2019								Nine Months Ended September 30, 2019
Balance at beginning of period	Balance at beginning of period	$	(9,643)	$	(6,450)	$	(16,093)	Balance at beginning of period	$	(9,643)	$	(6,450)	$	(16,093)
Impact of the adoption of new accounting standards	Impact of the adoption of new accounting standards	(3,100)		—		(3,100)		Impact of the adoption of new accounting standards	(3,100)		0		(3,100)
Adjusted balance at beginning of period	Adjusted balance at beginning of period	(12,743)		(6,450)		(19,193)		Adjusted balance at beginning of period	(12,743)		(6,450)		(19,193)

Other comprehensive loss before reclassifications	Other comprehensive loss before reclassifications	23,161		—		23,161		Other comprehensive loss before reclassifications	27,573		0		27,573
Reclassification adjustments from AOCI	Reclassification adjustments from AOCI	—		490		490		Reclassification adjustments from AOCI	(26)		773		747
Total other comprehensive income (loss)	Total other comprehensive income (loss)	23,161		490		23,651		Total other comprehensive income (loss)	27,547		773		28,320

Balance at end of period	Balance at end of period	$	10,418	$	(5,960)	$	4,458	Balance at end of period	$	14,804	$	(5,677)	$	9,127

4041

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


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

Sale of investment securities available-for-sale:									Sale of investment securities available-for-sale:
Realized gains (losses) on securities available-for-sale									Realized gains (losses) on securities available-for-sale	$	(352)			$	36			Investment securities gains (losses)
Tax effect							Tax effect	94				(10)				Income tax benefit (expense)
Net of tax							Net of tax	$	(258)			$	26

Defined benefit retirement and supplemental executive retirement plan items:	Defined benefit retirement and supplemental executive retirement plan items:						Defined benefit retirement and supplemental executive retirement plan items:
Amortization of net actuarial loss	Amortization of net actuarial loss	$	(269)	$	(264)	Salaries and employee benefits	Amortization of net actuarial loss	$	(330)			$	(310)			Salaries and employee benefits
Amortization of net transition obligation	Amortization of net transition obligation	(4)		(4)		Salaries and employee benefits	Amortization of net transition obligation	(5)				(5)				Salaries and employee benefits
Amortization of prior service cost	Amortization of prior service cost	(3)		(4)		Salaries and employee benefits	Amortization of prior service cost	(3)				(4)				Salaries and employee benefits

Total before tax	Total before tax	(276)		(272)			Total before tax	(338)				(319)
Tax effect	Tax effect	72		24		Income tax benefit (expense)	Tax effect	91				36				Income tax benefit (expense)
Net of tax	Net of tax	$	(204)	$	(248)		Net of tax	$	(247)			$	(283)

Total reclassification adjustments from AOCI for the period, net of tax	Total reclassification adjustments from AOCI for the period, net of tax	$	(204)	$	(248)		Total reclassification adjustments from AOCI for the period, net of tax	$	(505)			$	(257)


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

Sale of investment securities available-for-sale:									Sale of investment securities available-for-sale:
Realized gains (losses) on securities available-for-sale									Realized gains (losses) on securities available-for-sale	$	(352)			$	36			Investment securities gains (losses)
Tax effect							Tax effect	94				(10)				Income tax benefit (expense)
Net of tax							Net of tax	$	(258)			$	26

Defined benefit retirement and supplemental executive retirement plan items:	Defined benefit retirement and supplemental executive retirement plan items:						Defined benefit retirement and supplemental executive retirement plan items:
Amortization of net actuarial loss	Amortization of net actuarial loss	$	(537)	$	(527)	Salaries and employee benefits	Amortization of net actuarial loss	$	(867)			$	(837)			Salaries and employee benefits
Amortization of net transition obligation	Amortization of net transition obligation	(9)		(9)		Salaries and employee benefits	Amortization of net transition obligation	(14)				(14)				Salaries and employee benefits
Amortization of prior service cost	Amortization of prior service cost	(7)		(9)		Salaries and employee benefits	Amortization of prior service cost	(10)				(13)				Salaries and employee benefits
Settlement		—		—		Salaries and employee benefits

Total before tax	Total before tax	(553)		(545)			Total before tax	(891)				(864)
Tax effect	Tax effect	146		55		Income tax benefit (expense)	Tax effect	237				91				Income tax benefit (expense)
Net of tax	Net of tax	$	(407)	$	(490)		Net of tax	$	(654)			$	(773)

Total reclassification adjustments from AOCI for the period, net of tax	Total reclassification adjustments from AOCI for the period, net of tax	$	(407)	$	(490)		Total reclassification adjustments from AOCI for the period, net of tax	$	(912)			$	(747)

4142

14. EARNINGS PER SHARE

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


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands, except per share data)	(dollars in thousands, except per share data)	2020		2019		2020		2019		(dollars in thousands, except per share data)	2020		2019		2020		2019
Net income	Net income	$	9,917	$	13,534	$	18,243	$	29,571	Net income	$	6,859	$	14,554	$	25,102	$	44,125

Weighted average common shares outstanding - basic	Weighted average common shares outstanding - basic	28,040,802		28,546,564		28,083,602		28,651,852		Weighted average common shares outstanding - basic	28,060,020		28,424,898		28,075,684		28,575,369
Dilutive effect of employee stock options and awards	Dilutive effect of employee stock options and awards	54,428		182,946		106,530		195,934		Dilutive effect of employee stock options and awards	51,644		177,440		96,469		186,688
Weighted average common shares outstanding - diluted	Weighted average common shares outstanding - diluted	28,095,230		28,729,510		28,190,132		28,847,786		Weighted average common shares outstanding - diluted	28,111,664		28,602,338		28,172,153		28,762,057

Basic earnings per common share	Basic earnings per common share	$	0.35	$	0.47	$	0.65	$	1.03	Basic earnings per common share	$	0.24	$	0.51	$	0.89	$	1.54
Diluted earnings per common share	Diluted earnings per common share	$	0.35	$	0.47	$	0.65	$	1.03	Diluted earnings per common share	$	0.24	$	0.51	$	0.89	$	1.53

Anti-dilutive employee stock options and awards outstanding	Anti-dilutive employee stock options and awards outstanding	—		—		—		—		Anti-dilutive employee stock options and awards outstanding	0		0		0		0

15. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

Disclosures about Fair Value of Financial Instruments

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

Short-Term Financial Instruments

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

Investment Securities

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

Loans

Fair values of loans are estimated based on discounted cash flows of portfolios of loans with similar financial characteristics including the type of loan, interest terms and repayment history. Fair values are calculated by discounting scheduled cash flows through estimated maturities using estimated market discount rates. Estimated market discount rates are reflective of credit and interest rate risks inherent in the Company's various loan types and are derived from available market information, as well as specific borrower information. As of ~~June~~September 30, 2020, the weighted average discount rate used in the valuation of loans was ~~5.15%~~4.78%. In accordance with ASU 2016-01, the fair value of loans are measured based on the notion of exit price.

Loans Held for Sale

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

4243

Deposit Liabilities

The fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits and interest-bearing demand and savings accounts, are equal to the amount payable on demand. The fair value of time deposits is estimated using discounted cash flow analyses. As of ~~June~~September 30, 2020, the weighted average discount rate used in the valuation of time deposits was ~~0.47%~~0.41%. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Long-Term Debt

The fair value of our long-term debt is estimated by discounting scheduled cash flows over the contractual borrowing period at the estimated market rate for similar borrowing arrangements. As of ~~June~~September 30, 2020, the weighted average discount rate used in the valuation of long-term debt was ~~1.93%~~2.83%.

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.

4344

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


						Fair Value Measurement Using															Fair Value Measurement Using
(dollars in thousands)	(dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2020
September 30, 2020												September 30, 2020
Financial assets:	Financial assets:											Financial assets:
Cash and due from banks	Cash and due from banks	$	102,132	$	102,132	$	102,132	$	—	$	—	Cash and due from banks	$	89,665	$	89,665	$	89,665	$	0	$	0
Interest-bearing deposits in other banks	Interest-bearing deposits in other banks	41,201		41,201		41,201		—		—		Interest-bearing deposits in other banks	5,489		5,489		5,489		0		0
Investment securities	Investment securities	1,169,803		1,169,803		1,209		1,156,923		11,671		Investment securities	1,167,523		1,167,523		1,204		1,153,791		12,528
Loans held for sale	Loans held for sale	10,443		10,443		—		10,443		—		Loans held for sale	23,962		23,962		0		23,962		0
Net loans and leases		4,936,099		4,795,025		—		—		4,795,025
Net loans												Net loans	4,950,084		4,844,662		0		0		4,844,662

Accrued interest receivable	Accrued interest receivable	19,590		19,590		19,590		—		—		Accrued interest receivable	21,478		21,478		21,478		0		0

Financial liabilities:	Financial liabilities:											Financial liabilities:
Deposits:	Deposits:											Deposits:
Noninterest-bearing demand	Noninterest-bearing demand	1,851,012		1,851,012		1,851,012		—		—		Noninterest-bearing demand	1,762,476		1,762,476		1,762,476		0		0
Interest-bearing demand and savings and money market	Interest-bearing demand and savings and money market	3,013,227		3,013,227		3,013,227		—		—		Interest-bearing demand and savings and money market	2,995,227		2,995,227		2,995,227		0		0
Time	Time	930,446		932,077		—		—		932,077		Time	921,226		922,223		0		0		922,223
Short-term borrowings	Short-term borrowings	—		—		—		—		—		Short-term borrowings	206,000		206,000		0		206,000		0
Long-term debt	Long-term debt	167,491		156,386		—		—		156,386		Long-term debt	101,547		90,690		0		0		90,690
Accrued interest payable (included in other liabilities)	Accrued interest payable (included in other liabilities)	2,894		2,894		2,894		—		—		Accrued interest payable (included in other liabilities)	1,608		1,608		1,608		0		0


								Fair Value Measurement Using																	Fair Value Measurement Using
(dollars in thousands)	(dollars in thousands)	Notional Amount		Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(dollars in thousands)	Notional Amount		Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2020
September 30, 2020														September 30, 2020
Derivatives:	Derivatives:													Derivatives:
Interest rate lock commitments	Interest rate lock commitments	$	410	$	9	$	9	$	—	$	9	$	—	Interest rate lock commitments	$	2,927	$	111	$	111	$	0	$	111	$	0
Forward sale commitments	Forward sale commitments	10,879		(79)		(79)		—		(79)		—		Forward sale commitments	19,341		(73)		(73)		0		(73)		0
Risk participation agreement														Risk participation agreement	28,800		(54)		(54)		0		0		(54)

Off-balance sheet financial instruments:	Off-balance sheet financial instruments:													Off-balance sheet financial instruments:
Commitments to extend credit	Commitments to extend credit	1,186,385		1,362		1,362		—		1,362		—		Commitments to extend credit	1,195,510		1,368		1,368		0		1,368		0
Standby letters of credit and financial guarantees written	Standby letters of credit and financial guarantees written	11,505		173		173		—		173		—		Standby letters of credit and financial guarantees written	10,842		163		163		0		163		0
Risk participation agreement		28,800		49		49		—		—		49

4445


						Fair Value Measurement Using															Fair Value Measurement Using
(dollars in thousands)	(dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2019	December 31, 2019											December 31, 2019
Financial assets:	Financial assets:											Financial assets:
Cash and due from banks	Cash and due from banks	$	78,418	$	78,418	$	78,418	$	—	$	—	Cash and due from banks	$	78,418	$	78,418	$	78,418	$	0	$	0
Interest-bearing deposits in other banks	Interest-bearing deposits in other banks	24,554		24,554		24,554		—		—		Interest-bearing deposits in other banks	24,554		24,554		24,554		0		0
Investment securities	Investment securities	1,128,110		1,128,110		1,127		1,115,728		11,255		Investment securities	1,128,110		1,128,110		1,127		1,115,728		11,255
Loans held for sale	Loans held for sale	9,083		9,083		—		9,083		—		Loans held for sale	9,083		9,083		0		9,083		0
Net loans and leases		4,401,569		4,392,477		—		—		4,392,477
Net loans												Net loans	4,401,569		4,392,477		0		0		4,392,477

Accrued interest receivable	Accrued interest receivable	16,500		16,500		16,500		—		—		Accrued interest receivable	16,500		16,500		16,500		0		0

Financial liabilities:	Financial liabilities:											Financial liabilities:
Deposits:	Deposits:											Deposits:
Noninterest-bearing demand	Noninterest-bearing demand	1,450,532		1,450,532		1,450,532		—		—		Noninterest-bearing demand	1,450,532		1,450,532		1,450,532		0		0
Interest-bearing demand and savings and money market	Interest-bearing demand and savings and money market	2,643,038		2,643,038		2,643,038		—		—		Interest-bearing demand and savings and money market	2,643,038		2,643,038		2,643,038		0		0
Time	Time	1,026,453		1,023,362		—		—		1,023,362		Time	1,026,453		1,023,362		0		0		1,023,362
Short-term borrowings	Short-term borrowings	150,000		150,000		—		150,000		—		Short-term borrowings	150,000		150,000		0		150,000		0
Long-term debt	Long-term debt	101,547		97,827		—		97,827		—		Long-term debt	101,547		97,827		0		97,827		0
Accrued interest payable (included in other liabilities)	Accrued interest payable (included in other liabilities)	4,288		4,288		4,288		—		—		Accrued interest payable (included in other liabilities)	4,288		4,288		4,288		0		0


								Fair Value Measurement Using																	Fair Value Measurement Using
(dollars in thousands)	(dollars in thousands)	Notional Amount		Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(dollars in thousands)	Notional Amount		Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2019	December 31, 2019													December 31, 2019
Derivatives:	Derivatives:													Derivatives:
Interest rate lock commitments	Interest rate lock commitments	$	625	$	8	$	8	$	—	$	8	$	—	Interest rate lock commitments	$	625	$	8	$	8	$	0	$	8	$	0
Forward sale commitments	Forward sale commitments	8,968		(28)		(28)		—		(28)		—		Forward sale commitments	8,968		(28)		(28)		0		(28)		0

Off-balance sheet financial instruments:	Off-balance sheet financial instruments:													Off-balance sheet financial instruments:
Commitments to extend credit	Commitments to extend credit	1,089,135		1,230		1,230		—		1,230		—		Commitments to extend credit	1,089,135		1,230		1,230		0		1,230		0
Standby letters of credit and financial guarantees written	Standby letters of credit and financial guarantees written	10,526		158		158		—		158		—		Standby letters of credit and financial guarantees written	10,526		158		158		0		158		0

Fair Value Measurements

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

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

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

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

4546

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

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

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

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


				Fair Value at Reporting Date Using													Fair Value at Reporting Date Using
(dollars in thousands)	(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2020
September 30, 2020										September 30, 2020
Available-for-sale securities:	Available-for-sale securities:									Available-for-sale securities:
Debt securities:	Debt securities:									Debt securities:
States and political subdivisions	States and political subdivisions	$	141,468	$	—	$	129,797	$	11,671	States and political subdivisions	$	168,589	$	0	$	157,055	$	11,534
Corporate securities	Corporate securities	29,752		—		29,752		—		Corporate securities	50,558		0		50,558		0
U.S. Treasury obligations and direct obligations of U.S Government agencies	U.S. Treasury obligations and direct obligations of U.S Government agencies	36,354		—		36,354		—		U.S. Treasury obligations and direct obligations of U.S Government agencies	34,944		0		34,944		0
Mortgage-backed securities:	Mortgage-backed securities:									Mortgage-backed securities:
Residential - U.S. Government sponsored entities	Residential - U.S. Government sponsored entities	714,477		—		714,477		—		Residential - U.S. Government sponsored entities	763,326		0		763,326		0
Commercial - U.S. Government agencies and sponsored entities	Commercial - U.S. Government agencies and sponsored entities	80,665		—		80,665		—		Commercial - U.S. Government agencies and sponsored entities	73,786		0		73,786		0
Residential - Non-government agencies	Residential - Non-government agencies	32,086		—		32,086		—		Residential - Non-government agencies	28,676		0		27,682		994
Commercial - Non-government agencies	Commercial - Non-government agencies	133,792		—		133,792		—		Commercial - Non-government agencies	46,440		0		46,440		0

Total available-for-sale securities	Total available-for-sale securities	1,168,594		—		1,156,923		11,671		Total available-for-sale securities	1,166,319		0		1,153,791		12,528

Equity securities	Equity securities	1,209		1,209		—		—		Equity securities	1,204		1,204		0		0

Derivatives: Interest rate lock and forward sale commitments	Derivatives: Interest rate lock and forward sale commitments	(70)		—		(70)		—		Derivatives: Interest rate lock and forward sale commitments	(16)		0		38		(54)
Total	Total	$	1,169,733	$	1,209	$	1,156,853	$	11,671	Total	$	1,167,507	$	1,204	$	1,153,829	$	12,474

4647


				Fair Value at Reporting Date Using													Fair Value at Reporting Date Using
(dollars in thousands)	(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2019	December 31, 2019									December 31, 2019
Available-for-sale securities:	Available-for-sale securities:									Available-for-sale securities:
Debt securities:	Debt securities:									Debt securities:
States and political subdivisions	States and political subdivisions	$	122,018	$	—	$	110,763	$	11,255	States and political subdivisions	$	122,018	$	0	$	110,763	$	11,255
Corporate securities	Corporate securities	30,529		—		30,529		—		Corporate securities	30,529		0		30,529		0
U.S. Treasury obligations and direct obligations of U.S Government agencies	U.S. Treasury obligations and direct obligations of U.S Government agencies	40,381		—		40,381		—		U.S. Treasury obligations and direct obligations of U.S Government agencies	40,381		0		40,381		0
Mortgage-backed securities:	Mortgage-backed securities:									Mortgage-backed securities:
Residential - U.S. Government sponsored entities	Residential - U.S. Government sponsored entities	677,822		—		677,822		—		Residential - U.S. Government sponsored entities	677,822		0		677,822		0
Commercial - U.S. Government agencies and sponsored entities	Commercial - U.S. Government agencies and sponsored entities	81,225		—		81,225		—		Commercial - U.S. Government agencies and sponsored entities	81,225		0		81,225		0
Residential - Non-government agencies	Residential - Non-government agencies	37,191		—		37,191		—		Residential - Non-government agencies	37,191		0		37,191		0
Commercial - Non-government agencies	Commercial - Non-government agencies	137,817		—		137,817		—		Commercial - Non-government agencies	137,817		0		137,817		0

Total available-for-sale securities	Total available-for-sale securities	1,126,983		—		1,115,728		11,255		Total available-for-sale securities	1,126,983		0		1,115,728		11,255

Equity securities	Equity securities	1,127		1,127		—		—		Equity securities	1,127		1,127		0		0

Derivatives: Interest rate lock and forward sale commitments	Derivatives: Interest rate lock and forward sale commitments	(20)		—		(20)		—		Derivatives: Interest rate lock and forward sale commitments	(20)		0		(20)		0
Total	Total	$	1,128,090	$	1,127	$	1,115,708	$	11,255	Total	$	1,128,090	$	1,127	$	1,115,708	$	11,255

For the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:


~~(dollars in thousands)~~	Available-For-Sale Debt Securities: States and Political Subdivisions
~~Balance at December 31, 2019~~	$	~~11,255~~
~~Principal payments received~~	~~(212)~~
~~Unrealized net gain included in other comprehensive income~~	~~628~~

~~Balance at June 30, 2020~~	$	~~11,671~~

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

~~Balance at June 30, 2019~~	$	~~11,405~~


	Available-For-Sale Debt Securities:
(dollars in thousands)	States and Political Subdivisions		Residential - Non-Government Agencies		Total
Balance at December 31, 2019	$	11,255	$	0	$	11,255
Principal payments received	(319)		0		(319)
Unrealized net gain included in other comprehensive income	598		0		598
Purchases	0		994		994
Balance at September 30, 2020	$	11,534	$	994	$	12,528

Balance at December 31, 2018	$	11,169	$	0	$	11,169
Principal payments received	(285)		0		(285)
Unrealized net gain included in other comprehensive income	618		0		618
Purchases	0		0		0
Balance at September 30, 2019	$	11,502	$	0	$	11,502

Within the states and political subdivisions available-for-sale debt securities category, the Company holds 4 mortgage revenue bonds issued by the City & County of Honolulu with an aggregate fair value of ~~$11.7~~$11.5 million and ~~$11.4~~$11.5 million at ~~June~~September 30, 2020 and ~~June~~September 30, 2019, respectively. Within the residential non-government agency available-for-sale debt securities category, the Company purchased 2 mortgage backed bonds issued by Habitat for Humanity with a fair value of $1.0 million. The Company estimates the aggregate fair value of ~~its mortgage revenue bonds~~$12.5 million by using a discounted cash flow model to calculate the present value of estimated future principal and interest payments.

The significant unobservable input used in the fair value measurement of the Company's mortgage revenue bonds and Habitat for Humanity mortgage backed bonds is the weighted average discount rate. As of ~~June~~September 30, 2020, the weighted average

discount rate utilized was ~~2.82%~~2.79% compared to ~~4.27%~~3.94% at ~~June~~September 30, 2019 and 4.08% at December 31, 2019, which was derived by incorporating a credit spread over the FHLB Fixed-Rate Advance curve. Significant increases (decreases) in the weighted average discount rate could result in a significantly lower (higher) fair value measurement.

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 ~~June~~September 30, 2020 and December 31, 2019:


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

Other real estate ⁽¹⁾	Other real estate ⁽¹⁾	$	—	$	—	$	—	$	—	Other real estate (1)	$	128	$	0	$	128	$	0

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

Other real estate ⁽¹⁾	Other real estate ⁽¹⁾	$	164	$	—	$	164	$	—	Other real estate (1)	$	164	$	0	$	164	$	0

⁽¹⁾Represents other real estate that is carried at fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral.

16. LEGAL PROCEEDINGS

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

17. SUBSEQUENT EVENTS

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

The Notes have been structured to qualify initially as Tier 2 capital for the Company approved a plan to consolidate 4 branches on the island of Oahu later this year. NaN of the branches are in-store branches, which have been temporarily closed since March 2020 due to the COVID-19 pandemic and are expected to close during the third quarter of 2020. These in-store branches have small square footage that do not allow for adequate social distancing. The fourth branch is a full-service branch that is expected to close during the fourth quarter of 2020. Our upcoming digital rollout is well-aligned with our branch consolidation initiative, and we expect that much of the transactional activity that was processed by these branches can be migrated to our digital channels. We also have other neighboring branches in close proximity that are available for customer full-service needs.regulatory capital purposes. The Company ~~anticipates annual expense savings of approximately $1.8 million related~~intends to use the ~~consolidation of~~net proceeds from the ~~4 branches. The Company expects to incur total pre-tax expenses related to the consolidation of approximately $0.3 million~~offering for general corporate purposes and ~~$1.4 million during the third and fourth quarters of 2020, respectively.~~capital flexibility.

4849

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 3532 branches ~~nine~~and 75 ATMs located throughout the state of Hawaii as of September 30, 2020. During the third quarter of 2020, the Company consolidated three in-store branches with other existing nearby branches. These in-store branches had a small square footage which ~~were~~did not allow for adequate social distancing and have been closed since March 2020 due to the novel coronavirus pandemic ("COVID-19"). A traditional branch is expected to be consolidated during the fourth quarter of 2020. Four of the Company's 32 branches remain temporarily closed to protect the health and well-being of the Company's employees and customers from ~~the novel coronavirus pandemic ("COVID-19"), and 76 ATMs located throughout the state of Hawaii as of June 30, 2020. In July 2020, the Company re-opened two additional branches.~~ COVID-19.

The bank offers a broad range of products and services including accepting time, savings, money market, and demand deposits and originating loans, including commercial loans, construction loans, commercial real estate loans, residential mortgage loans, and consumer loans.

Basis of Presentation

Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements under "Part I, Item 1. Financial Statements (Unaudited)." The following discussion should also be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2019 filed with the U.S. Securities and Exchange Commission (the "SEC") on February 25, 2020, including the

“Risk Factors” set forth therein.

Critical Accounting Policies and Use of Estimates

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

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

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

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

Allowance for Credit Losses on Loans

Management considers the policies related to the allowance for credit losses ("ACL") on loans as the most critical to the financial statement presentation. The total ACL on loans includes activity related to allowances calculated in accordance with Accounting Standards Codification (“ASC”) 326, "Financial Instruments – Credit Losses". The ACL is established through the provision for credit losses charged to current earnings. The amount maintained in the ACL reflects management’s continuing

evaluation of the estimated loan losses expected to be recognized over the life of the loans in our loan portfolio at the balance sheet date. The ACL is comprised of specific reserves assigned to certain loans that don’t share general risk characteristics and general reserves on pools of loans that do share general risk characteristics. Factors contributing to the determination of specific reserves include the creditworthiness of the borrower, and more specifically, changes in the expected future receipt of principal

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

Financial Summary

Net income for the three months ended ~~June~~September 30, 2020 was ~~$9.9~~$6.9 million, or ~~$0.35~~$0.24 per diluted share, compared to net income of ~~$13.5~~$14.6 million, or ~~$0.47~~$0.51 per diluted share for the three months ended ~~June~~September 30, 2019. Net income for the ~~six~~nine months ended ~~June~~September 30, 2020 was ~~$18.2~~$25.1 million, or ~~$0.65~~$0.89 per diluted share, compared to net income of ~~$29.6~~$44.1 million, or ~~$1.03~~$1.53 per diluted share for the ~~six~~nine months ended ~~June~~September 30, 2019. Earnings continue to be impacted by a higher provision for credit loss expense ~~due to deteriorating~~that is driven by models that utilize Hawaii-specific economic ~~conditions brought on by the current COVID-19 pandemic.~~projections from a third party forecast.

Excluding the provision for credit losses and income tax expense, the Company's pre-tax, pre-provision income for the three and ~~six~~nine months ended ~~June~~September 30, 2020 was ~~$26.5~~$23.7 million and ~~$49.8~~$67.7 million, respectively, compared to ~~$23.8~~$21.0 million and ~~$51.3~~$62.8 million for the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively.

On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” ("CECL") and, as a result, recorded increases of $3.6 million to the allowance for credit losses on loans and $0.7 million to the reserve for off-balance sheet credit exposures, included in other liabilities. The transition adjustments recorded on January 1, 2020 were offset to retained earnings of $3.2 million and net deferred tax assets of $1.1 million. During the three and ~~six~~nine months ended ~~June~~September 30, 2020, the Company recorded total credit loss expense under ASC 326, which includes the provisions for credit losses and off-balance sheet credit exposures, of ~~$11.2~~$14.9 million and ~~$22.3~~$37.2 million, respectively, compared to ~~$1.9~~$1.1 million and ~~$3.3~~$4.4 million during the three and ~~six~~nine months ended ~~June~~September 30, 2019, which impacted our operating results.

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


		Three Months Ended June 30,									Six Months Ended June 30,										Three Months Ended September 30,						Nine Months Ended September 30,
		2020			2019			2020			2019				2020			2019			2020			2019
Return on average assets	Return on average assets	0.61		%	0.92		%	0.58		%	1.01		%	Return on average assets	0.42		%	0.99		%	0.53		%	1.00		%
Return on average shareholders’ equity	Return on average shareholders’ equity	7.34			10.73			6.77			11.84			Return on average shareholders’ equity	4.99			11.11			6.17			11.58

Basic earnings per common share	Basic earnings per common share	$	0.35		$	0.47		$	0.65		$	1.03		Basic earnings per common share	$	0.24		$	0.51		$	0.89		$	1.54
Diluted earnings per common share	Diluted earnings per common share	0.35			0.47			0.65			1.03			Diluted earnings per common share	0.24			0.51			0.89			1.53

COVID-19 Pandemic

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

In response to the anticipated economic effects of COVID-19, the Board of Governors of the Federal Reserve System (the "FRB") has taken a number of actions that have significantly affected the financial markets in the United States, including

actions intended to result in substantial decreases in market interest rates. On March 3, 2020, the 10-year Treasury yield fell below 1.00% for the first time, and the FRB reduced the target federal funds range by 50 basis points to 1.00% to 1.25%. On March 15, 2020, the FRB further reduced the target federal funds range by 100 basis points to 0% to 0.25% and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by COVID-19. On March 22,

2020, the FRB announced that it would continue its quantitative easing program in amounts necessary to support the smooth functioning of markets for Treasury securities and agency MBS. We expect that these reductions in interest rates, among other actions of the FRB and the Federal government generally, especially if prolonged, could adversely affect our net interest income, margins and profitability. In the September 2020 meeting, the FRB elected to hold the target federal funds rate at 0% to 0.25% and officials expects rates to remain near zero through 2023.

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

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

Since then, Governor Ige issued ~~the following~~fourteen supplemental emergency ~~proclamations:~~proclamations. The fourteenth supplemental emergency proclamation signed on October 13, 2020:

•~~on March 16, 2020, a Supplementary Proclamation suspending certain laws hindering State and county responses to COVID-19;~~extends the COVID-19 emergency period in Hawaiʻi through November 30, 2020.

•on March 21, 2020, a Second Supplementary Proclamation and Emergency Rules Relating to COVID-19 implementing a mandatory 14-day self-quarantine for all persons entering the State, effective March 26, 2020. All individuals, both residents and visitors, arriving or returning to the State of Hawaii are subject to a mandatory 14-day self-quarantine. The mandate -- the first such action in the nation -- applies to all arrivals at state airports from the continental U.S. and international destinations and extends ~~to other private and commercial aircrafts;~~

•on March 23, 2020, a Third Supplementary Proclamation - a "Stay-at-Home" order beginning on March 25, 2020 through April 30, 2020 - to mandate and effectuate social distancing measures throughout the State;

•~~on March 31, 2020, a Fourth Supplementary Proclamation implementing a mandatory 14-day self-quarantine for all persons traveling between any of the islands in the State, effective April 1, 2020;~~

•~~on April 16, 2020, a Fifth Supplementary Proclamation implementing enhanced social distancing requirements and an eviction moratorium;~~

•~~on April 25, 2020, a Sixth Supplementary Proclamation, which extended the Stay-at-Home order,~~ the 14-day mandatory quarantine requirement for ~~all~~out-of-state travelers to Hawaii, as well as inter-island travelers arriving into Kauai, Hawaii Island or Maui County (Maui, Molokai, Lanai), through November 30, 2020, with the ~~state~~exception of ~~Hawaii~~the pre-travel test option. The inter-island travel quarantine does not include inter-island travelers arriving to Oahu. The period of self-quarantine begins immediately upon arrival, and lasts 14 days or the ~~eviction moratorium through May 31, 2020 and amended and restated all prior proclamations and executive orders related to~~duration of the ~~COVID-19 emergency;~~person’s stay on the island, whichever is shorter.

•~~on May 5, 2020, a Seventh Supplementary Proclamation, which authorizes~~mandates that all persons must wear masks in compliance with the ~~first group of businesses to re-open since~~county orders, rules and directives approved by the COVID-19 pandemic forced the temporary closure of non-essential businesses across the state and allows residents to leave their homes to patronize certain businesses and activities under the new “Safer-at-Home” order;governor.

•cxtends the prohibition on ~~May 29, 2020, an Eighth Supplementary Proclamation, which extended the mandatory 14-day quarantine~~evictions for ~~all travelers arriving in the state~~non-payment of ~~Hawaii and the eviction moratorium through June~~rent until November 30, ~~2020;~~

•on June 10, 2020, a Ninth Supplementary Proclamation, which lifts the mandatory 14-day quarantine requirement for inter-island travelers – effective June 16, 2020 – but extends the mandatory 14-day quarantine for all travelers arriving in the state of Hawaii through July 31, 2020. Under the current "Act with Care" phase, all persons within the State of Hawaii who are not subject to the 14-day quarantine for arriving passengers may engage in permitted activities outside their home or place of residence.

~~Due~~Beginning October 15, 2020, Hawaii re-opened to ~~the recent uptick in COVID-19 cases in Hawaii and nationwide, on July 13, 2020, Governor Ige extended~~U.S mainland tourists. A pre-travel testing option allows travelers an alternative to the mandatory 14-day ~~quarantine to August 31, 2020 and delayed the launch of the state's pre-travel testing program. Beginning September 1, 2020, all~~quarantine. All travelers arriving in Hawaii from out-of-state will be required to get a valid COVID-19 Nucleic Acid Amplification Test ("NAAT") from trusted testing and travel partners within 72 hours of boarding their flight to Hawaii, and to show proof of a negative test result upon arrival at the airport, to avoid the 14-day quarantine. The FDA-approved NAAT test from a CLIA-certified laboratory will need to be done prior to arrival. No testing will be provided upon arrival at the airport.

The infection rate in the State of Hawaii ~~continues~~went from one of the lowest per capita in the country during the first half of 2020 to ~~remain very low.~~the one of the highest during the third quarter of 2020 resulting in new shutdowns and a delay in the reopening of the state. Infection rates have since improved. As of ~~July 24,~~October 20, 2020, the Centers for Disease Control and Prevention reported there were ~~1,549~~14,108 cases (7-day moving average of 67 new infections) and 26189 COVID-19-related deaths in ~~Hawaii. Of those cases, 10% have required hospitalization, and 1,449 (94%) were residents of~~ Hawaii.

During the first quarter of 2020, in response to Governor Ige's statewide restrictions on the movements of Hawaii residents and visitors to combat the potential spread of COVID-19 in Hawaii, the Company announced it would temporarily close 13 branch locations and will keep 22 branches open and fully operational. The decision to temporarily close the branches was made to protect the health and well-being of the Company's employees and customers. Some branches, such as the in-store branches with limited floor space, made it challenging to operate with social distancing in mind. The staff from the temporarily closed branches were redeployed to work at the remaining branches or assist other areas of the ~~bank or make customer telephone calls.~~bank. The Company quickly responded to the changing environment by executing its business continuity plan and the majority of our support staff, even at the executive level, were working remotely on a full-time or rotating basis. The Company believes the

actions it has taken to date, allows it to meet the needs of its customers and community while ensuring the safety of all employees and customers. In addition, to protect its employees as well as to manage its expenses, the Company has implemented internal policies to temporarily suspend all business travel and large group meetings. The Company has also reevaluated or postponed certain consulting projects. Hiring of new employees is on an exception ~~basis, and the Company is evaluating our compensation plans.~~basis.

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

Company is implementing a gradual, phased-in return-to-office plan that includes a portion of the workforce continuing with flexible, remote work schedules.

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

Our operations, like those of other financial institutions that operate in our market, are significantly influenced by economic conditions in Hawaii, including the strength of the real estate market and the tourism industry. The COVID-19 pandemic and the mandatory 14-day self quarantine has resulted in a significant decline in tourism to the state of Hawaii, with daily visitors to Hawaii down ~~99%~~97.6% during the month of ~~May,~~August and 69.0% year-to-date, compared to the same year-ago ~~period.~~periods. Hawaii's unemployment rate has gone from one of the best in the nation over the past several years to one of the worst at approximately ~~13.9%~~15.1% during the month of ~~June.~~September. As a result, many customers and businesses across the state have been significantly impacted by the COVID-19 pandemic which could lead to additional provisions for credit losses and lower interest and fee income, which if significant, could have a material impact to our results of operations and financial statements.

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

Financial position and results of operations

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

5253

~~The Company’s interest income could also be reduced due to COVID-19.~~ Through guidance from regulatory agencies, the Company is prudently working with its borrowers impacted by COVID-19 to defer payments, interest, and fees. AsLoans on active payment forbearance or deferrals granted to borrowers impacted by the COVID-19 pandemic declined significantly from $567.9 million or, 11.3% of the total loan portfolio (or 12.7% excluding PPP loans) as of June 30, 2020, to $290.8 million, or 5.8% of the ~~Company executed~~total loan portfolio (or 6.5% excluding PPP loans), as of September 30, 2020. The following table sets forth loans on active payment forbearance or ~~deferrals~~deferral as of ~~principal and interest or principal only on the following outstanding loan balances:~~ September 30, 2020:


		Loan			Accrued		% of Total		% of Total
		Count	Balance		Interest		Loans		Loans, excl. PPP
(dollars in thousands)											(dollars in thousands)	Loan Count	Balance		Accrued Interest Receivable		Total Loans		% of Total Loans		Total Loans, excl. PPP		% of Total Loans, excl. PPP
Commercial, financial and agricultural	Commercial, financial and agricultural	678	$	116,382	$	962	10.8	%	21.2	%	Commercial, financial and agricultural	363	$	64,298	$	844	$	1,056,651	6.1	%	$	528,070	12.2	%
Real estate:	Real estate:										Real estate:
Construction	Construction	7	6,601		25		6.4	%	6.4	%	Construction	—	—		—		118,247		—	%	118,247		—	%
Residential mortgage	Residential mortgage	355	176,645		1,547		10.7	%	10.7	%	Residential mortgage	216	103,130		1,803		1,680,060		6.1	%	1,680,060		6.1	%
Home equity	Home equity	—	—		—		—	%	—	%	Home equity	—	—		—		534,056		—	%	534,056		—	%
Commercial mortgage	Commercial mortgage	98	202,447		1,262		17.9	%	17.9	%	Commercial mortgage	25	69,420		469		1,141,265		6.1	%	1,141,265		6.1	%
Consumer	Consumer	3,829	65,785		876		12.5	%	12.5	%	Consumer	3,209	53,993		1,323		500,347		10.8	%	500,347		10.8	%

Total loans	Total loans	4,967	$	567,860	$	4,672	11.3	%	12.7	%	Total loans	3,813	$	290,841	$	4,439	$	5,030,626	5.8	%	$	4,502,045	6.5	%

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

The Company’s aggregate fee income could be reduced due to COVID-19. ToThe Company has experienced a decline in transactional activity due to COVID-19. In addition, to support our customers during this difficult time, wethe Company temporarily waived non-CPB ATM fees and early withdrawal fees on our time deposits and granted temporary increases on debit card and mobile deposit transaction limits throughout Q2the second quarter of 2020. ~~In addition, the Company has experienced a decline in transactional activity due to COVID-19.~~ Beginning July 1, 2020, we reinstated ~~the~~these fees that were waived throughout ~~Q2 2020,~~the previous quarter, but the temporary increases on debit card and mobile deposit transaction limits remain in place.

Liquidity and capital

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

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

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

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

The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile. The collateral that is pledged for wholesale funding lines, could lose value and may result in less funding availability. The Company has access to the Paycheck Protection Program Liquidity Facility

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

In March 2020, we decided to suspend our share repurchase program for the time being until we know more about the extent the pandemic will have on the economy and our business. We can provide no assurance when or if we will reinstate our share repurchase program.

Asset valuation

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

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

Processes, controls and business continuity plan

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

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

Lending operations and accommodations to borrowers

To support its customers during this difficult time, the Company has moved quickly to put in place a number of COVID-19 relief programs for its consumer and business customers affected by the pandemic. For its customers, the Company is offering an employment disruption loan as well as consumer, commercial, commercial mortgage, and residential mortgage payment deferral programs. In addition, as previously mentioned, we waived non-CPB ATM fees and early withdrawal fees on our time deposits throughout Q2the second quarter of 2020 and increased spending cap limits on debit cards and mobile deposit limits to $10,000 daily. Beginning July 1, 2020, the previously waived fees have been reinstated but the increased spending cap limits will remain in place temporarily.

The bank is a Small Business Administration ("SBA") approved lender and is actively ~~participating~~participated in assisting customers with loan applications for the SBA’s Paycheck Protection Program, or PPP, which iswas part of the CARES Act. PPP loans have a

two or five-year term and earn interest at 1%. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan, which the Company is recognizing over the life of the loan. The Company saw tremendous interest in the PPP. From April 3, 2020, the date the SBA began accepting submissions for the initial round of PPP loans through ~~June 30,~~the end of the program in August 2020, the Company funded over 7,200 PPP loans totaling over ~~$550~~$558 million and received gross processing fees of over $21 million. Certain PPP loans paid-off shortly after funding resulting in a total outstanding balance of $545.3 million and net deferred fees of $16.7 million as of ~~June~~September 30, ~~2020 of $543.7 million.~~2020. The Company has developed a PPP forgiveness portal and ~~is beginning~~has begun the process of assisting our customers with applying for forgiveness from the SBA. The Company ~~plans to engage~~has engaged a third party to assist with this process. Although the Company

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

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

The Company became aware in September 2020 of a Federal criminal complaint related to PPP loan fraud on a $10.0 million PPP loan that the Bank originated in April 2020. The CEO of the borrower was charged by the U.S. Department of Justice for submitting a fraudulent PPP loan application to the Bank. The Federal investigation is ongoing and charges are currently pending. Neither the Company nor the Bank is a party to the Federal complaint, and we have been cooperating with Federal authorities. We believe that we originated the subject PPP loan in accordance with all SBA PPP requirements. Accordingly, we currently expect that the SBA guarantee remains in effect. Based on current facts and circumstances, we expect to be fully repaid on the loan. Therefore we continue to hold the $10.0 million PPP loan on our balance sheet as a performing asset as of September 30, 2020.

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

The Company ~~is providing 3-month~~provided three-month principal and interest payment ~~forbearances~~forbearance for our residential mortgage customers and ~~3-month~~three-month principal and interest payment deferrals for our consumer customers. The Company is deferring either the full loan payment or the principal component of the loan payment for typically 3three to 6six months for its commercial real estate and commercial and industrial loan customers on a case-by-case basis depending on need. As of ~~June~~September 30, 2020, the Company had loan payment forbearance or deferrals on outstanding balances of ~~$567.9~~$290.8 million, or ~~11.3%~~5.8% of total loans ~~(and 12.7%~~(or 6.5% of total loans, excluding PPP loans). Of this amount, $192.9 million and $2.5 million were on second and third payment forbearance or deferrals, respectively, as of September 30, 2020.

In accordance with the revised interagency guidance issued in April 2020 and Section 4013 of the CARES Act, banks are provided an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of February 29, 2020 (time of modification program implementation) and December 31, 2019, respectively. The Company has identified ~~nine~~eleven consumer loans totaling $0.2 million, including three consumer loans totaling $0.1 million in the third quarter of 2020, that were modified ~~during the quarter~~ and did not meet the criteria under Section 4013 of the CARES Act or the interagency guidance. As a result, these loans are included in TDRs as of ~~June~~September 30, ~~2020.~~2020. Collectibility of the accrued interest on deferred loans is ~~uncertain and~~uncertain. During the third quarter of 2020, the Company recorded a reserve on the accrued interest receivable of loans on active forbearance or deferral totaling $0.2 million, with the offset recorded to provision for credit losses. The Company may need to increase this reserve or reverse ~~the~~ accrued interest receivable which may negatively impact interest income in future ~~periods.~~periods if it is determined that the accrued interest receivable is uncollectible. Additional loan modifications to capitalize interest and/or extend loan terms may also be necessary. The Company anticipates requests for new or extended loan deferrals will continue at a slower pace through the ~~third~~fourth quarter of 2020.

Credit

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

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

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

The volume of loan payment deferrals granted peaked in May at approximately $605 million in total loan balances, and has since declined to ~~$567.9~~$290.8 million, or ~~11.3%~~5.8% of total loans ~~(and 12.7%~~(or 6.5% of total loans, excluding PPP loans), at ~~June~~September 30, 2020. ~~We continue~~The Company continues to support ~~our~~its consumer and residential customers with a second 90-day loan payment deferral or forbearance, as needed. Our consumer loan payment deferrals totaled $54.0 million at September 30, 2020, compared to $65.8 million ~~and~~at June 30, 2020.

Our residential ~~loan~~mortgage loans on active payment ~~forbearances~~forbearance totaled $103.1 million at September 30, 2020, compared to $176.6 ~~million.~~million at June 30, 2020. The majority of the residential mortgage ~~forbearances~~loans in forbearance were ~~still~~ in their ~~initial~~second 90-day forbearance period at ~~June~~September 30, ~~2020; however, some~~2020. Some borrowers are beginning to resume payments with the total count dropping from a peak of 467 at May 31, 2020 to ~~350~~216 at ~~June~~September 30, 2020.

In our commercial, commercial real estate and construction loan portfolios, ~~we provided loan~~loans on active payment ~~deferrals of approximately $326~~deferral totaled $133.7 million ~~in total loan balances.~~at September 30, 2020, compared to $325.4 million at June 30, 2020. The two highest ~~amount was in the~~exposures by industry are real estate and rental and leasing totaling approximately $47 million, or 1% of the total loan portfolio excluding PPP loans, and food-service totaling approximately $46 million, or 1% of the total loan portfolio excluding PPP loans. The majority of the loans in the real estate category are supported by low loan-to-value ratios. The majority of ~~approximately $169 million which comprised~~the loans in the food-service category are supported by owners with good liquidity and access to capital. The Company expects some of ~~132 loans. We have not begun~~its borrowers will need a loan modification at the end of their second ~~round of~~ loan payment ~~deferrals yet, but expect to do so although at a lower volume and~~deferral, which will be handled on a case-by-case basis. Loan payment deferrals for our high-risk industries totaled approximately $66 million, or 1.5% of the total loan portfolio excluding PPP loans.

~~Through~~In the third quarter of 2020, we continued our stepped-up assessment and monitoring as well as our outreach to our ~~customers, we saw our Special Mention~~customers. Criticized loans ~~increase~~increased by ~~approximately $7~~$34 million ~~sequential~~from the previous quarter to ~~$115.9 million. The largest exposure is in the real estate and rental and leasing category which totaled approximately $59~~$196.8 million, or ~~1.2%~~4.4% of the total loan ~~portfolio.~~portfolio excluding PPP loans. Special mention loans increased by $33 million to $148.8 million, or 3.3% of the total loan portfolio excluding PPP loans. Classified loans increased by $1.5 million to $48.0 million, or 1.1% of the total loan portfolio excluding PPP loans. The ~~loans in this category~~loan downgrades were ~~downgraded due primarily to~~ the ~~closure~~result of ~~tenants in commercial properties; however, we believe we have strong sponsorship~~our continued assessment of borrower risk based on the borrower’s near-term strategy and ~~seasoned investors,~~outlook, management strength and ~~are currently confident these borrowers will be able to weather through the economic downturn.~~actions they’ve taken, overall financial condition, and external funding and deferral support. Approximately 12% of special mention balances and 5% of classified balances also received PPP loans.

The Company believes that the residential, home equity and commercial real estate and construction loan portfolios are lower risk. The weighted average loan-to-values at origination in these portfolios are ~~61%~~62%, 63%, and ~~60%~~61%, respectively, and we believe they will be less impacted by the pandemic. These loans comprise of approximately ~~$3.4~~$3.5 billion or ~~76%~~77% of our total loan portfolio, net of PPP loans. Overall, the Company's loan portfolio remains well diversified.

~~Economic forecasts~~The disruptions in the economy resulting from the COVID-19 pandemic has impaired and will continue to impair the ability of some of our borrowers to make their monthly loan payments, which could result in significant increases in delinquencies, defaults, foreclosures and declining collateral values. As a result, the COVID-19 pandemic could result in the recognition of credit losses in our loan portfolios and increase our ACL, particularly as businesses remain closed and as more customers are ~~utilized~~expected to ~~determine the Company’s~~draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize an allowance for credit ~~losses. With deteriorating economic conditions due to COVID-19 and~~losses in future periods on the ~~potential for a global recession, it is expected that the economic forecasts utilized~~securities we hold as well as reductions in upcoming interim financial periods will continue to reflect adverse economic conditions. This may result in the Company recognizing additional provisions for credit losses which will negatively impact netother comprehensive income.

Material Trends

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

Hawaii tourism started the year strong with solid growth in visitor arrivals and spending in the first two months of 2020. However, the COVID-19 outbreak has impacted Hawaii’s tourism significantly since late February. Total visitor arrivals in the ~~five~~eight months ended ~~May~~August 31, 2020, ~~which includes an additional day associated with leap year,~~ decreased ~~49.5%~~65.1% from the same prior year period. The mandated 14-day self-quarantine for arriving visitors and residents began on March 26, 2020. During April ~~and May,~~through August, total visitors were down approximately ~~99%~~98.3% from the same year-ago period.

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

The full or partial shutdown of tourism, restaurant, and retail industries has significantly impacted employment in the state. The Hawai‘i State Department of Labor & Industrial Relations ("DLIR") announced that the seasonally adjusted unemployment rate for ~~June~~September was ~~13.9%~~15.1% compared to ~~the revised rate~~a peak of ~~23.5%~~23.8% in ~~May.~~April. The significant decrease in the unemployment rate may be due to PPP funds and other government stimulus programs. There is still potential for an increase in the unemployment rate in future months. Statewide, ~~527,600~~520,200 were employed and ~~85,200~~92,550 unemployed in ~~June~~September for a total seasonally adjusted labor force of ~~612,800.~~612,750. Nationally, the seasonally adjusted unemployment rate was ~~11.1%~~7.9% in ~~June,~~September, down from ~~13.3 percent~~14.7% in ~~May.~~April.

Oahu home sales started the year strong with healthy year-over-year increases in closed sales of single-family homes and condominiums during the first quarter of 2020; however as expected, home sales slowed during the second ~~quarter~~and third quarters of 2020 due to the challenges presented by COVID-19. According to the latest data available from the Honolulu Board of Realtors, Oahu unit sales volume decreased by ~~4.8%~~1.4% for single-family homes and ~~22.0%~~18.9% for condominiums for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the same time period last year. While home sale volumes slowed, sale prices remained very strong in Hawaii. For the ~~six~~nine months ended ~~June~~September 30, 2020, the median sales price for single-family homes on Oahu was ~~$785,000,~~$811,000, representing a ~~1.3%~~3.3% increase from ~~$775,000~~$785,000 in the same prior year period. The median sales price for condominiums on Oahu for the ~~six~~nine months ended ~~June~~September 30, 2020 was ~~$427,750,~~$430,000, representing an increase of ~~2.1%~~1.2% from ~~$419,000~~$425,000 in the same prior year period.

RISE2020

Commencing in the second quarter of 2019, the Company launched RISE2020, a multifaceted initiative intended to enhance customer experience, drive stronger long-term growth and profitability, improve shareholder returns and lower our efficiency ratio. RISE2020 includes initiatives in the following key areas of opportunity: Digital Banking, Revenue Enhancements, Branch Transformation and Operational Excellence. RISE2020 is intended to provide Central Pacific Bank with ~~best-in class~~premier products and services in several strategic areas. During 2019, the outsourcing of the Company's residential mortgage loan servicing, the launch of its new website under the cpb.bank domain name and the implementation of its end-to-end commercial loan

origination system were completed. Despite several challenges resulting from the impact of COVID-19, the RISE2020 initiatives are continuing and the Company is making good progress. During the first quarter of 2020, the Company opened its concept branch, providing its customers a glimpse into the future of Central Pacific Bank. The Company's revitalization of its building headquarters is in full steam with major parts of the construction underway and on track for an opening date of January 2021. Digital strategies continue to push forward. ~~The~~After significant development, of the Company's new online and mobile banking platforms isfor its retail customers launched in ~~the final stages of pilot testing and the Company is excited for the public launch scheduled in late~~ August 2020. Digital technology is even more critical to businesses during crises like the current pandemic and will remain a high priority strategy for the Company's future. The rollout of newly upgraded ATMs ~~continues.~~continues and is nearly 90% complete. The Company continues to see a decline in branch transaction activity offset by strong increases in customer on-line transaction activity and believes its digital initiatives have been well-timed to meet the changing needs of its customers and the community.

Results of Operations

Net Interest Income

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

5758


(dollars in thousands)	(dollars in thousands)	Three Months Ended June 30,																																																									(dollars in thousands)	Three Months Ended September 30,
				2020															2019																Variance																		(dollars in thousands)		2020									2019	Variance
				Average Balance			Average Yield/ Rate			Interest Income/ Expense			Average Balance			Average Yield/ Rate			Interest Income/ Expense			Average Balance			Average Yield/ Rate			Interest Income/ Expense		(dollars in thousands)	Average Balance			Average Yield/ Rate					Interest Income/ Expense				Average Balance			Average Yield/ Rate					Interest Income/ Expense				Average Balance			Average Yield/ Rate				Interest Income/ Expense
Assets	Assets																											Assets
Interest earning assets:	Interest earning assets:																											Interest earning assets:
Interest-bearing deposits in other banks	Interest-bearing deposits in other banks	$	15,777		0.10	%		3			$	8,002		2.34	%		46			$	7,775		(2.24)	%		(43)		Interest-bearing deposits in other banks	$		12,262		0.09		%			3				$	6,295		2.05		%			33				$	5,967		(1.96)			%			(30)
Investment securities, excluding ACL:	Investment securities, excluding ACL:																											Investment securities, excluding ACL:
Taxable (1)	Taxable (1)	1,042,441			2.43			6,327			1,147,759			2.63			7,544			(105,318)			(0.20)			(1,217)		Taxable (1)	1,029,987			2.04				5,250				1,093,352				2.63				7,192				(63,365)				(0.59)				(1,942)
Tax-exempt (1)	Tax-exempt (1)	100,485			3.02			758			142,660			2.89			1,030			(42,175)			0.13			(272)		Tax-exempt (1)	88,749			3.54				786				117,784				3.04				896				(29,035)				0.50				(110)
Total investment securities	Total investment securities	1,142,926			2.48			7,085			1,290,419			2.66			8,574			(147,493)			(0.18)			(1,489)		Total investment securities	1,118,736			2.16				6,036				1,211,136				2.67				8,088				(92,400)				(0.51)				(2,052)
Loans, including loans held for sale (2)	Loans, including loans held for sale (2)	4,902,905			3.76			45,915			4,171,558			4.37			45,540			731,347			(0.61)			375		Loans, including loans held for sale (2)	5,016,955			3.64				45,751				4,293,455				4.25				45,861				723,500				(0.61)				(110)
Federal Home Loan Bank stock	Federal Home Loan Bank stock	11,753			3.62			106			15,998			4.02			161			(4,245)			(0.40)			(55)		Federal Home Loan Bank stock	12,428			4.12				128				16,646				4.46				186				(4,218)				(0.34)				(58)
Total interest earning assets	Total interest earning assets	6,073,361			3.51			53,109			5,485,977			3.97			54,321			587,384			(0.46)			(1,212)		Total interest earning assets	6,160,381			3.36				51,918				5,527,532				3.90				54,168				632,849				(0.54)				(2,250)
Noninterest-earning assets	Noninterest-earning assets	394,768									370,488									24,280								Noninterest-earning assets	414,111											379,675												34,436
Total assets	Total assets	$	6,468,129								$	5,856,465								$	611,664							Total assets	$	6,574,492										$	5,907,207											$	667,285

Liabilities and Equity	Liabilities and Equity																											Liabilities and Equity
Interest-bearing liabilities:	Interest-bearing liabilities:																											Interest-bearing liabilities:
Interest-bearing demand deposits	Interest-bearing demand deposits	$	1,056,885		0.04	%		114			$	962,402		0.08	%		199			$	94,483		(0.04)	%		(85)		Interest-bearing demand deposits	$	1,092,976		0.04	%			115				$	1,002,875			0.08	%			207				$	90,101			(0.04)	%			(92)
Savings and money market deposits	Savings and money market deposits	1,856,621			0.12			567			1,577,437			0.38			1,507			279,184			(0.26)			(940)		Savings and money market deposits	1,910,971			0.09				417				1,582,795				0.39				1,549				328,176				(0.30)				(1,132)
Time deposits under $100,000	Time deposits under $100,000	161,874			0.65			261			173,556			0.70			305			(11,682)			(0.05)			(44)		Time deposits under $100,000	160,634			0.57				232				167,331				0.69				293				(6,697)				(0.12)				(61)
Time deposits $100,000 and over	Time deposits $100,000 and over	807,276			0.93			1,863			907,330			2.02			4,562			(100,054)			(1.09)			(2,699)		Time deposits $100,000 and over	769,030			0.54				1,052				874,192				1.88				4,139				(105,162)				(1.34)				(3,087)
Total interest-bearing deposits	Total interest-bearing deposits	3,882,656			0.29			2,805			3,620,725			0.73			6,573			261,931			(0.44)			(3,768)		Total interest-bearing deposits	3,933,611			0.18				1,816				3,627,193				0.68				6,188				306,418				(0.50)				(4,372)
Short-term borrowings	Short-term borrowings	63,104			0.48			74			175,347			2.57			1,123			(112,243)			(2.09)			(1,049)		Short-term borrowings	79,984			0.35				71				191,564				2.34				1,130				(111,580)				(1.99)				(1,059)
Long-term debt	Long-term debt	136,939			2.38			812			101,547			4.07			1,031			35,392			(1.69)			(219)		Long-term debt	105,131			2.82				746				101,547				3.96				1,013				3,584				(1.14)				(267)
Total interest-bearing liabilities	Total interest-bearing liabilities	4,082,699			0.36			3,691			3,897,619			0.90			8,727			185,080			(0.54)			(5,036)		Total interest-bearing liabilities	4,118,726			0.25				2,633				3,920,304				0.84				8,331				198,422				(0.59)				(5,698)
Noninterest-bearing deposits	Noninterest-bearing deposits	1,731,939									1,357,056									374,883								Noninterest-bearing deposits	1,794,536											1,360,221												434,315
Other liabilities	Other liabilities	112,687									97,041									15,646								Other liabilities	111,851											102,599												9,252
Total liabilities	Total liabilities	5,927,325									5,351,716									575,609								Total liabilities	6,025,113											5,383,124												641,989
Shareholders’ equity	Shareholders’ equity	540,802									504,749									36,053								Shareholders’ equity	549,378											524,083												25,295
Non-controlling interest	Non-controlling interest	2									—									2								Non-controlling interest	1											—												1
Total equity	Total equity	540,804									504,749									36,055								Total equity	549,379											524,083												25,296
Total liabilities and equity	Total liabilities and equity	$	6,468,129								$	5,856,465								$	611,664							Total liabilities and equity	$	6,574,492										$	5,907,207											$	667,285

Net interest income	Net interest income							$	49,418								$	45,594								$	3,824	Net interest income								$	49,285											$	45,837											$	3,448

Interest rate spread	Interest rate spread				3.15	%								3.07	%								0.08	%				Interest rate spread				3.11	%											3.06	%											0.05	%

Net interest margin	Net interest margin				3.26	%								3.33	%								(0.07)	%				Net interest margin				3.19	%											3.30	%											(0.11)	%

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

5859


(dollars in thousands)	(dollars in thousands)	Six Months Ended June 30,																																																									(dollars in thousands)	Nine Months Ended September 30,
				2020															2019																Variance																		(dollars in thousands)		2020									2019	Variance
				Average Balance			Average Yield/ Rate			Interest Income/ Expense			Average Balance			Average Yield/ Rate			Interest Income/ Expense			Average Balance			Average Yield/ Rate			Interest Income/ Expense		(dollars in thousands)	Average Balance			Average Yield/ Rate					Interest Income/ Expense				Average Balance			Average Yield/ Rate					Interest Income/ Expense				Average Balance			Average Yield/ Rate				Interest Income/ Expense
Assets	Assets																											Assets
Interest earning assets:	Interest earning assets:																											Interest earning assets:
Interest-bearing deposits in other banks	Interest-bearing deposits in other banks	$	13,430		0.59	%		39			$	9,682		2.38	%		114			$	3,748		(1.79)	%		(75)		Interest-bearing deposits in other banks	$		13,038		0.43		%			42				$	8,540		2.30		%			147				$	4,498		(1.87)			%			(105)
Investment securities, excluding ACL:	Investment securities, excluding ACL:																											Investment securities, excluding ACL:
Taxable investment securities (1)	Taxable investment securities (1)	1,035,068			2.53			13,101			1,174,596			2.69			15,822			(139,528)			(0.16)			(2,721)		Taxable investment securities (1)	1,033,362			2.37				18,351				1,147,217				2.67				23,014				(113,855)				(0.30)				(4,663)
Tax-exempt investment securities (1)	Tax-exempt investment securities (1)	102,907			3.12			1,604			147,899			2.88			2,127			(44,992)			0.24			(523)		Tax-exempt investment securities (1)	98,153			3.25				2,390				137,750				2.93				3,023				(39,597)				0.32				(633)
Total investment securities	Total investment securities	1,137,975			2.58			14,705			1,322,495			2.71			17,949			(184,520)			(0.13)			(3,244)		Total investment securities	1,131,515			2.44				20,741				1,284,967				2.70				26,037				(153,452)				(0.26)				(5,296)
Loans, including loans held for sale (2)	Loans, including loans held for sale (2)	4,682,626			3.95			92,119			4,127,917			4.35			89,308			554,709			(0.40)			2,811		Loans, including loans held for sale (2)	4,794,883			3.84				137,870				4,183,703				4.32				135,169				611,180				(0.48)				2,701
Federal Home Loan Bank stock	Federal Home Loan Bank stock	13,171			3.61			238			15,143			4.26			322			(1,972)			(0.65)			(84)		Federal Home Loan Bank stock	12,921			3.78				366				15,650				4.33				508				(2,729)				(0.55)				(142)
Total interest earning assets	Total interest earning assets	5,847,202			3.67			107,101			5,475,237			3.95			107,693			371,965			(0.28)			(592)		Total interest earning assets	5,952,357			3.57				159,019				5,492,860				3.94				161,861				459,497				(0.37)				(2,842)
Noninterest-earning assets	Noninterest-earning assets	390,390									358,089									32,301								Noninterest-earning assets	398,339											365,364												32,975
Total assets	Total assets	$	6,237,592								$	5,833,326								$	404,266							Total assets	$	6,350,696										$	5,858,224											$	492,472

Liabilities and Equity	Liabilities and Equity																											Liabilities and Equity
Interest-bearing liabilities:	Interest-bearing liabilities:																											Interest-bearing liabilities:
Interest-bearing demand deposits	Interest-bearing demand deposits	$	1,035,340		0.06	%		290			$	956,783		0.08	%		391			$	78,557		(0.02)	%		(101)		Interest-bearing demand deposits	$	1,054,692		0.05	%			405				$	972,316			0.08	%			598				$	82,376			(0.03)	%			(193)
Savings and money market deposits	Savings and money market deposits	1,754,186			0.19			1,685			1,525,425			0.30			2,298			228,761			(0.11)			(613)		Savings and money market deposits	1,806,829			0.16				2,102				1,544,759				0.33				3,847				262,070				(0.17)				(1,745)
Time deposits under $100,000	Time deposits under $100,000	163,074			0.67			546			174,683			0.68			592			(11,609)			(0.01)			(46)		Time deposits under $100,000	162,255			0.64				777				172,204				0.69				884				(9,949)				(0.05)				(107)
Time deposits $100,000 and over	Time deposits $100,000 and over	826,714			1.18			4,846			944,796			2.00			9,367			(118,082)			(0.82)			(4,521)		Time deposits $100,000 and over	807,346			0.98				5,899				921,003				1.96				13,507				(113,657)				(0.98)				(7,608)
Total interest-bearing deposits	Total interest-bearing deposits	3,779,314			0.39			7,367			3,601,687			0.71			12,648			177,627			(0.32)			(5,281)		Total interest-bearing deposits	3,831,122			0.32				9,183				3,610,282				0.70				18,836				220,840				(0.38)				(9,653)
Short-term borrowings	Short-term borrowings	101,459			1.15			582			156,550			2.60			2,016			(55,091)			(1.45)			(1,434)		Short-term borrowings	94,248			0.93				653				168,350				2.50				3,146				(74,102)				(1.57)				(2,493)
Long-term debt	Long-term debt	119,243			2.91			1,726			101,547			4.15			2,091			17,696			(1.24)			(365)		Long-term debt	114,504			2.88				2,472				101,547				4.09				3,104				12,957				(1.21)				(632)
Total interest-bearing liabilities	Total interest-bearing liabilities	4,000,016			0.49			9,675			3,859,784			0.88			16,755			140,232			(0.39)			(7,080)		Total interest-bearing liabilities	4,039,874			0.41				12,308				3,880,179				0.86				25,086				159,695				(0.45)				(12,778)
Noninterest-bearing deposits	Noninterest-bearing deposits	1,588,742									1,376,437									212,305								Noninterest-bearing deposits	1,657,825											1,370,972												286,853
Other liabilities	Other liabilities	110,070									97,385									12,685								Other liabilities	110,669											99,143												11,526
Total liabilities	Total liabilities	5,698,828									5,333,606									365,222								Total liabilities	5,808,368											5,350,294												458,074
Shareholders’ equity	Shareholders’ equity	538,762									499,720									39,042								Shareholders’ equity	542,326											507,930												34,396
Non-controlling interest	Non-controlling interest	2									—									2								Non-controlling interest	2											—												2
Total equity	Total equity	538,764									499,720									39,044								Total equity	542,328											507,930												34,398
Total liabilities and equity	Total liabilities and equity	$	6,237,592								$	5,833,326								$	404,266							Total liabilities and equity	$	6,350,696										$	5,858,224											$	492,472

Net interest income	Net interest income							$	97,426								$	90,938								$	6,488	Net interest income								$	146,711											$	136,775											$	9,936

Interest rate spread	Interest rate spread				3.18	%								3.07	%								0.11	%				Interest rate spread				3.16	%											3.08	%											0.08	%

Net interest margin	Net interest margin				3.34	%								3.33	%								0.01	%				Net interest margin				3.29	%											3.32	%											(0.03)	%

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

Net interest income (expressed on a taxable-equivalent basis) was ~~$49.4~~$49.3 million for the ~~three months ended June 30,~~third quarter of 2020, representing an increase of ~~8.4%~~7.5% from ~~$45.6~~$45.8 million in the ~~three months ended June 30, 2019.~~year-ago quarter. Net interest income (expressed on a taxable-equivalent basis) was ~~$97.4~~$146.7 million for the ~~six~~nine months ended ~~June~~September 30, 2020, representing an increase of ~~7.1%~~7.3% from ~~$90.9~~$136.8 million in the ~~six~~nine months ended ~~June~~September 30, 2019. The increase in the three and ~~six~~nine months ended ~~June~~September 30, 2020 was primarily due to loan growth, ~~attributable to~~including loans originated under the SBA Paycheck Protection Program ("PPP") ~~and organic loan growth, funded by runoff of the investment securities portfolio and an increase in core deposits,~~, combined with lower rates paid on interest-bearing liabilities. ~~Partially offsetting these~~These increases were partially offset by decreases in yields earned on interest-earning assets. Net interest income for the three and nine months ended ~~June~~September 30, 2020 included ~~$2.5~~$3.4 million and $5.9 million, respectively, in PPP net interest income and net loan fees, which are accreted into income over the term of the loans and accelerated when the loans are forgiven or paid-off. No PPP loans were forgiven during the three and nine months ended September 30, 2020. The

decreases in yields earned on interest-earning assets and rates paid on interest-bearing liabilities were primarily attributable to

the five rate cuts by the Federal Reserve from August 2019 through March 2020. During the three and nine months ended ~~June~~September 30, 2020, the Company had an average PPP loan balance of ~~$379.9~~$544.7 million and $309.1 million, respectively, which earned approximately ~~2.61%~~2.48% and 2.53%, respectively, in net interest income and net loan fees.

Interest Income

Taxable-equivalent interest income was ~~$53.1~~$51.9 million for the ~~three months ended June 30,~~third quarter of 2020, representing a decrease of ~~2.2%~~4.2% from ~~$54.3~~$54.2 million in the ~~three months ended June 30, 2019.~~year-ago quarter. The 61 bp decrease in the average yields earned on loans during the ~~three months ended June 30,~~third quarter of 2020, compared to the ~~three months ended June 30, 2019,~~year-ago quarter, decreased interest income by approximately ~~$5.5~~$7.7 million. In addition, run-off of the investment securities portfolio of ~~$147.5~~$92.4 million, combined with the 1851 bp decline in yields earned on investment securities during the ~~three months ended June 30,~~third quarter of 2020, compared to the ~~three months ended June 30, 2019,~~year-ago quarter, decreased interest income by approximately ~~$1.5~~$2.1 million. These decreases were partially offset by a ~~$731.3~~$723.5 million increase in average loans during the third quarter of 2020, compared to the ~~three months ended June 30, 2019,~~year-ago quarter, accounting for an increase of approximately ~~$5.8~~$7.6 million in interest income during the ~~three months ended June 30,~~third quarter of 2020. The significant increase in average loans was primarily attributable to the aforementioned PPP loans.

Taxable-equivalent interest income was ~~$107.1~~$159.0 million for the ~~six~~nine months ended ~~June~~September 30, 2020, representing a decrease of ~~0.5%~~1.8% from ~~$107.7~~$161.9 million in the ~~six~~nine months ended ~~June~~September 30, 2019. The 4048 bp decrease in the average yields earned on loans during the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the ~~six months ended June 30, 2019,~~same prior year period, decreased interest income by approximately ~~$9.8~~$17.2 million. In addition, run-off of the investment securities portfolio of ~~$184.5~~$153.5 million, combined with the 1326 bp decline in yields earned on investment securities during the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the ~~six months ended June 30, 2019,~~same prior year period, decreased interest income by approximately ~~$3.2~~$5.3 million. These decreases were partially offset by a ~~$554.7~~$611.2 million increase in average loans compared to the ~~six~~nine months ended ~~June~~September 30, 2019, accounting for an increase of approximately ~~$12.6~~$19.9 million in interest income during the ~~six~~nine months ended ~~June~~September 30, 2020.

Interest Expense

Interest expense for the ~~three months ended June 30,~~third quarter of 2020 was ~~$3.7~~$2.6 million, representing a decrease of ~~57.7%~~68.4% from ~~$8.7~~$8.3 million in the ~~three months ended June 30, 2019.~~year-ago quarter. The decrease was primarily attributable to declines in rates paid on savings and money market deposits, time deposits $100,000 and over, short-term borrowings and long-term debt of 2630 bp, ~~109~~134 bp, ~~209~~199 bp and ~~169~~114 bp, respectively, which decreased interest expense by approximately ~~$1.2~~$1.4 million, ~~$2.2~~$2.6 million, ~~$0.3~~$0.4 million and ~~$0.6~~$0.3 million, respectively. In addition, average time deposits $100,000 and over and short-term borrowings declined by ~~$100.1~~$105.2 million and ~~$112.2~~$111.6 million resulting in a decrease in interest expense of approximately $0.5 million and $0.7 million, respectively. Time deposits $100,000 and over primarily consists of public funds which may be opportunistic sources of funding, but fluctuate more directly with changes in the Federal Funds rate.

Interest expense for the ~~six~~nine months ended ~~June~~September 30, 2020 was ~~$9.7~~$12.3 million, representing a decrease of ~~42.3%~~50.9% from ~~$16.8~~$25.1 million in the ~~six~~nine months ended ~~June~~September 30, 2019. The decrease was primarily attributable to declines in rates paid on savings and money market deposits, time deposits $100,000 and over, short-term borrowings and long-term debt of 1117 bp, 8298 bp, ~~145~~157 bp and ~~124~~121 bp, respectively, which decreased interest expense by approximately ~~$1.0~~$2.4 million, ~~$3.4~~$5.9 million, ~~$0.7~~$1.1 million and ~~$0.7~~$1.0 million, respectively. In addition, average time deposits $100,000 and over and short-term borrowings declined by ~~$118.1~~$113.7 million and ~~$55.1~~$74.1 million, respectively, resulting in a decrease in interest expense of approximately ~~$1.2~~$1.7 million and ~~$0.7~~$1.4 million, respectively.

Net Interest Margin

Our net interest margin of ~~3.26%~~3.19% for the ~~three months ended June 30,~~third quarter of 2020 decreased by 711 bp from ~~3.33%~~3.30% in the ~~three months ended June 30, 2019.~~year-ago quarter.

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

Our net interest margin of ~~3.34%~~3.29% for the ~~six~~nine months ended ~~June~~September 30, 2020 ~~increased~~decreased by 13 bp from ~~3.33%~~3.32% in the ~~six~~nine months ended ~~June~~September 30, 2019.

The average rates paid on our interest-bearing liabilities, which declined by 3945 bp in the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the same prior year period, outpaced the decline in average yields earned on our interest-earning assets, which declined by 2837 bp in the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the same prior year period.

Provision for Credit Losses

Our provision for credit losses on loans under ASC 326 was ~~$10.6~~$14.5 million and ~~$20.0~~$34.4 million during the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively, compared to an expense of ~~$1.4~~$1.5 million and ~~$2.7~~$4.2 million in the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively, under previous GAAP. During the third quarter of 2020, the Company elected to measure a reserve on the accrued interest receivable for loans on active payment forbearance or deferral. A reserve of $0.2 million was recorded against accrued interest receivable with the offset recorded to provision for credit losses.

In addition, we recorded a provision for off-balance sheet credit exposures of ~~$0.6~~$0.2 million and ~~$2.4~~$2.6 million, included in other operating expense, during the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively, compared to a ~~provision~~credit of $0.5 million and ~~$0.7~~a provision of $0.2 million in the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively, under previous GAAP. The increases in the provisions for credit losses and off-balance sheet credit exposures from the ~~year-ago~~same prior year periods were primarily due to adverse economic conditions brought on by the COVID-19 pandemic.

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

Our net charge-offs were ~~$2.9~~$1.3 million during the ~~three~~third quarter of 2020, compared to net charge-offs of $1.6 million in the year-ago quarter. Our net charge-offs were $5.4 million during the nine months ended ~~June~~September 30, 2020, compared to net charge-offs of ~~$0.4~~$4.0 million in the ~~three~~nine months ended ~~June 30, 2019. Our net charge-offs were $4.2 million during the six months ended June 30, 2020, compared to net charge-offs of $2.3 million in the six months ended June~~September 30, 2019.

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

Other Operating Income

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


		Three Months Ended																Three Months Ended
(dollars in thousands)	(dollars in thousands)	June 30, 2020		June 30, 2019		$ Change		% Change			(dollars in thousands)	September 30, 2020		September 30, 2019		$ Change		% Change
Other operating income:	Other operating income:										Other operating income:
Mortgage banking income	Mortgage banking income	$	3,566	$	1,708	$	1,858	108.8	%		Mortgage banking income	$	4,345	$	1,994	$	2,351	117.9	%
Service charges on deposit accounts	Service charges on deposit accounts	1,149		2,041		(892)		-43.7	%		Service charges on deposit accounts	1,475		2,125		(650)		-30.6	%
Other service charges and fees	Other service charges and fees	2,916		3,909		(993)		-25.4	%		Other service charges and fees	3,345		3,894		(549)		-14.1	%
Income from fiduciary activities	Income from fiduciary activities	1,270		1,129		141		12.5	%		Income from fiduciary activities	1,149		1,126		23		2.0	%
Equity in earnings of unconsolidated subsidiaries	Equity in earnings of unconsolidated subsidiaries	104		71		33		46.5	%		Equity in earnings of unconsolidated subsidiaries	104		86		18		20.9	%

Investment securities gains		—		—		—		N.M.		*
Investment securities gains (losses)											Investment securities gains (losses)	(352)		36		(388)		-1,077.8
Income from bank-owned life insurance	Income from bank-owned life insurance	1,424		914		510		55.8	%		Income from bank-owned life insurance	1,179		645		534		82.8	%

Net loss on sales of foreclosed assets		(6)		—		(6)		N.M.		*
Net gain (loss) on sales of foreclosed assets											Net gain (loss) on sales of foreclosed assets	—		17		(17)		-100.0

Other:	Other:										Other:
Income recovered on nonaccrual loans previously charged-off	Income recovered on nonaccrual loans previously charged-off	37		85		(48)		-56.5	%		Income recovered on nonaccrual loans previously charged-off	47		73		(26)		-35.6	%
Other recoveries	Other recoveries	26		26		—		—	%		Other recoveries	22		42		(20)		-47.6	%
Commissions on sale of checks	Commissions on sale of checks	56		79		(23)		-29.1	%		Commissions on sale of checks	73		75		(2)		-2.7	%
Gain on sale of MasterCard stock		—		—		—		N.M.		*

Other	Other	150		132		18		13.6	%		Other	176		153		23		15.0	%
Total other operating income	Total other operating income	$	10,692	$	10,094	$	598	5.9	%		Total other operating income	$	11,563	$	10,266	$	1,297	12.6	%

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

For the ~~three months ended June 30,~~third quarter of 2020, total other operating income of ~~$10.7~~$11.6 million increased by ~~$0.6~~$1.3 million, or ~~5.9%~~12.6%, from ~~$10.1~~$10.3 million in the year-ago quarter. The increase from the year-ago quarter was primarily due to higher mortgage banking income of ~~$1.9~~$2.4 million and higher income from bank-owned life insurance of $0.5 million in the ~~current quarter.~~third quarter of 2020. Strong residential mortgage demand enabled the Company to grow its residential mortgage portfolio and realize higher gains on sales of residential mortgage loans of ~~$3.6~~$3.4 million (included in mortgage banking income), which was partially offset by higher amortization of mortgage servicing rights of ~~$1.1~~$0.7 million (included in mortgage banking income), attributable to the decline in market interest rates. The higher income from bank-owned life insurance was primarily attributable to ~~current quarter~~ gains in the equity ~~markets.~~markets during the third quarter of 2020. These increases were partially offset by lower other service charges and fees of ~~$1.0~~

$0.5 million and lower service charges on deposit accounts of ~~$0.9~~$0.7 million asresulting from lower transactional activity in the third quarter of 2020 due to the pandemic. Beginning July 1, 2020, certain service charges that were temporarily suspended ~~during~~in the previous quarter ~~to support our customers through the pandemic. In addition, there was less transactional activity~~ due to the ~~pandemic.~~pandemic were reinstated. The Company also sold certain investment securities during the third quarter of 2020 at a loss of $0.4 million.


		Six Months Ended																Nine Months Ended
(dollars in thousands)	(dollars in thousands)	June 30, 2020		June 30, 2019		$ Change		% Change			(dollars in thousands)	September 30, 2020		September 30, 2019		$ Change		% Change
Other operating income:	Other operating income:										Other operating income:
Mortgage banking income	Mortgage banking income	$	3,903	$	3,281	$	622	19.0	%		Mortgage banking income	$	8,248	$	5,275	$	2,973	56.4	%
Service charges on deposit accounts	Service charges on deposit accounts	3,199		4,122		(923)		-22.4	%		Service charges on deposit accounts	4,674		6,247		(1,573)		-25.2	%
Other service charges and fees	Other service charges and fees	7,813		7,124		689		9.7	%		Other service charges and fees	11,158		11,018		140		1.3	%
Income from fiduciary activities	Income from fiduciary activities	2,567		2,094		473		22.6	%		Income from fiduciary activities	3,716		3,220		496		15.4	%
Equity in earnings of unconsolidated subsidiaries	Equity in earnings of unconsolidated subsidiaries	130		79		51		64.6	%		Equity in earnings of unconsolidated subsidiaries	234		165		69		41.8	%

Investment securities gains		—		—		—		N.M.		*
Investment securities gains (losses)											Investment securities gains (losses)	(352)		36		(388)		-1,077.8
Income from bank-owned life insurance	Income from bank-owned life insurance	1,405		1,866		(461)		-24.7	%		Income from bank-owned life insurance	2,584		2,511		73		2.9	%

Net loss on sales of foreclosed assets		(6)		—		(6)		N.M.		*
Net gain (loss) on sales of foreclosed assets											Net gain (loss) on sales of foreclosed assets	(6)		17		(23)		-135.3

Other:	Other:										Other:
Income recovered on nonaccrual loans previously charged-off	Income recovered on nonaccrual loans previously charged-off	60		167		(107)		-64.1	%		Income recovered on nonaccrual loans previously charged-off	107		240		(133)		-55.4	%
Other recoveries	Other recoveries	66		52		14		26.9	%		Other recoveries	88		94		(6)		-6.4	%
Commissions on sale of checks	Commissions on sale of checks	137		159		(22)		-13.8	%		Commissions on sale of checks	210		234		(24)		-10.3	%
Gain on sale of MasterCard stock	Gain on sale of MasterCard stock	—		2,555		(2,555)		-100.0	%		Gain on sale of MasterCard stock	—		2,555		(2,555)		-100.0	%
Other	Other	304		268		36		13.4	%		Other	480		421		59		14.0	%
Total other operating income	Total other operating income	$	19,578	$	21,767	$	(2,189)	-10.1	%		Total other operating income	$	31,141	$	32,033	$	(892)	-2.8	%

* Not meaningful ("N.M.")

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

For the ~~six~~nine months ended ~~June~~September 30, 2020, total other operating income of ~~$19.6~~$31.1 million decreased by ~~$2.2~~$0.9 million, or ~~10.1%~~2.8%, from ~~$21.8~~$32.0 million in the ~~six~~nine months ended ~~June~~September 30, 2019. The decrease from the ~~year-ago~~same prior year period was primarily due to a $2.6 million gain on sale of MasterCard stock (included in other) recognized in the ~~year-ago period,~~nine months ended September 30, 2019, combined with lower service charges on deposit accounts of ~~$0.9~~$1.6 million and ~~lower income from bank-owned life insurance~~the aforementioned loss on sale of ~~$0.5~~investment securities of $0.4 million. As previously noted, certain service charges ~~have been~~were temporarily suspended in the second quarter of 2020 to support our customers through the pandemic and there has been ~~less~~lower transactional activity during the second and third quarters of 2020 due to the pandemic resulting in lower service charges on deposit accounts. ~~The lower income from bank-owned life insurance was primarily due to volatility in the equity markets.~~ These decreases were partially offset by higher ~~other service charges and fees of $0.7 million, higher~~ mortgage banking income of ~~$0.6~~$3.0 million and higher income from fiduciary activities of $0.5 million. ~~The higher other~~Other service charges and fees ~~was primarily due to $1.3~~in the nine months ended September 30, 2020 includes $1.2 million in net income related to an interest rate swap initially recognized in the first quarter of 2020.

Other Operating Expense

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


		Three Months Ended															Three Months Ended
(dollars in thousands)	(dollars in thousands)	June 30, 2020		June 30, 2019		$ Change		% Change		(dollars in thousands)	September 30, 2020		September 30, 2019		$ Change		% Change
Other operating expense:	Other operating expense:									Other operating expense:
Salaries and employee benefits	Salaries and employee benefits	$	20,622	$	20,563	$	59	0.3	%	Salaries and employee benefits	$	20,729	$	20,631	$	98	0.5	%
Net occupancy	Net occupancy	3,645		3,525		120		3.4	%	Net occupancy	3,834		3,697		137		3.7	%
Equipment	Equipment	1,043		1,138		(95)		-8.3	%	Equipment	1,234		1,067		167		15.7	%

Communication expense	Communication expense	774		903		(129)		-14.3	%	Communication expense	856		1,008		(152)		-15.1	%
Legal and professional services	Legal and professional services	2,238		1,728		510		29.5	%	Legal and professional services	2,262		1,933		329		17.0	%
Computer software expense	Computer software expense	3,035		2,560		475		18.6	%	Computer software expense	3,114		2,713		401		14.8	%
Advertising expense	Advertising expense	923		712		211		29.6	%	Advertising expense	1,020		711		309		43.5	%
Foreclosed asset expense	Foreclosed asset expense	—		49		(49)		-100.0	%	Foreclosed asset expense	6		15		(9)		-60.0	%

Other:	Other:									Other:
Charitable contributions	Charitable contributions	10		175		(165)		-94.3	%	Charitable contributions	12		230		(218)		-94.8	%
FDIC insurance assessment	FDIC insurance assessment	475		362		113		31.2	%	FDIC insurance assessment	649		5		644		12,880.0	%
Miscellaneous loan expenses	Miscellaneous loan expenses	399		317		82		25.9	%	Miscellaneous loan expenses	497		274		223		81.4	%
ATM and debit card expenses	ATM and debit card expenses	584		620		(36)		-5.8	%	ATM and debit card expenses	573		660		(87)		-13.2	%

Armored car expenses	Armored car expenses	229		211		18		8.5	%	Armored car expenses	192		220		(28)		-12.7	%
Entertainment and promotions	Entertainment and promotions	165		1,023		(858)		-83.9	%	Entertainment and promotions	132		323		(191)		-59.1	%
Stationery and supplies	Stationery and supplies	220		279		(59)		-21.1	%	Stationery and supplies	226		240		(14)		-5.8	%
Directors’ fees and expenses	Directors’ fees and expenses	196		238		(42)		-17.6	%	Directors’ fees and expenses	213		242		(29)		-12.0	%
Directors' deferred compensation plan expense	Directors' deferred compensation plan expense	103		133		(30)		-22.6	%	Directors' deferred compensation plan expense	(237)		(155)		(82)		52.9	%
Provision for residential mortgage loan repurchase losses		—		(403)		403		-100.0

Provision for off-balance sheet credit exposures	Provision for off-balance sheet credit exposures	573		487		86		17.7	%	Provision for off-balance sheet credit exposures	221		(465)		686		-147.5	%

Branch consolidation costs										Branch consolidation costs	321		—		321		N.M.
Other	Other	1,193		1,487		(294)		-19.8	%	Other	1,118		1,585		(467)		-29.5	%
Total other operating expense	Total other operating expense	$	36,427	$	36,107	$	320	0.9	%	Total other operating expense	$	36,972	$	34,934	$	2,038	5.8	%

For the ~~three months ended June 30,~~third quarter of 2020, total other operating expense was ~~$36.4~~$37.0 million and increased by ~~$0.3~~$2.0 million, or ~~0.9%~~5.8%, from ~~$36.1~~$34.9 million in the year-ago quarter. The increase was primarily due to higher ~~legal and professional services~~FDIC insurance assessment of ~~$0.5~~$0.6 million attributable to Small Bank Assessment Credits received in the second half of 2019, higher computer software expense of ~~$0.5~~$0.4 million, and higher legal and professional services and advertising expense of ~~$0.2 million. The higher expenses are primarily attributable to expenses related to our RISE2020 initiative and were partially offset by lower entertainment and promotions of $0.9~~$0.3 million ~~and~~each. In addition, the Company recorded a provision for ~~residential mortgage loan repurchase losses~~off-balance sheet credit exposures of ~~$0.4~~$0.2 million ~~recorded~~in the third quarter of 2020, compared to a credit for off-balance sheet credit exposures of $0.5 million in the year-ago ~~quarter, compared to none in the current~~ quarter. The ~~lower entertainment and promotions expense was primarily attributable to higher expenses in the year-ago quarter~~Company also recognized costs related to the consolidation of three in-store branches during the third quarter of 2020 totaling $0.3 million (included in other). These in-store branches had a ~~core deposit gathering campaign.~~small square footage which did not allow for adequate social distancing.


		Six Months Ended															Nine Months Ended
(dollars in thousands)	(dollars in thousands)	June 30, 2020		June 30, 2019		$ Change		% Change		(dollars in thousands)	September 30, 2020		September 30, 2019		$ Change		% Change
Other operating expense:	Other operating expense:									Other operating expense:
Salaries and employee benefits	Salaries and employee benefits	$	40,969	$	40,452	$	517	1.3	%	Salaries and employee benefits	$	61,698	$	61,083	$	615	1.0	%
Net occupancy	Net occupancy	7,317		6,983		334		4.8	%	Net occupancy	11,151		10,680		471		4.4	%
Equipment	Equipment	2,140		2,144		(4)		-0.2	%	Equipment	3,374		3,211		163		5.1	%

Communication expense	Communication expense	1,611		1,637		(26)		-1.6	%	Communication expense	2,467		2,645		(178)		-6.7	%
Legal and professional services	Legal and professional services	4,266		3,298		968		29.4	%	Legal and professional services	6,528		5,231		1,297		24.8	%
Computer software expense	Computer software expense	5,978		5,157		821		15.9	%	Computer software expense	9,092		7,870		1,222		15.5	%
Advertising expense	Advertising expense	2,015		1,423		592		41.6	%	Advertising expense	3,035		2,134		901		42.2	%
Foreclosed asset expense	Foreclosed asset expense	67		208		(141)		-67.8	%	Foreclosed asset expense	73		223		(150)		-67.3	%

Other:	Other:									Other:
Charitable contributions	Charitable contributions	197		329		(132)		-40.1	%	Charitable contributions	209		559		(350)		-62.6	%
FDIC insurance assessment	FDIC insurance assessment	475		863		(388)		-45.0	%	FDIC insurance assessment	1,124		868		256		29.5	%
Miscellaneous loan expenses	Miscellaneous loan expenses	699		611		88		14.4	%	Miscellaneous loan expenses	1,196		885		311		35.1	%
ATM and debit card expenses	ATM and debit card expenses	1,218		1,270		(52)		-4.1	%	ATM and debit card expenses	1,791		1,930		(139)		-7.2	%

Armored car expenses	Armored car expenses	523		409		114		27.9	%	Armored car expenses	715		629		86		13.7	%
Entertainment and promotions	Entertainment and promotions	445		1,253		(808)		-64.5	%	Entertainment and promotions	577		1,576		(999)		-63.4	%
Stationery and supplies	Stationery and supplies	468		504		(36)		-7.1	%	Stationery and supplies	694		744		(50)		-6.7	%
Directors’ fees and expenses	Directors’ fees and expenses	437		480		(43)		-9.0	%	Directors’ fees and expenses	650		722		(72)		-10.0	%
Directors’ deferred compensation plan expense	Directors’ deferred compensation plan expense	(1,380)		568		(1,948)		-343.0	%	Directors’ deferred compensation plan expense	(1,617)		413		(2,030)		-491.5	%
Provision for residential mortgage loan repurchase losses	Provision for residential mortgage loan repurchase losses	—		(403)		403		-100.0		Provision for residential mortgage loan repurchase losses	—		(403)		403		-100.0
Provision for off-balance sheet credit exposures	Provision for off-balance sheet credit exposures	2,371		654		1,717		262.5	%	Provision for off-balance sheet credit exposures	2,592		189		2,403		1,271.4	%

Branch consolidation and relocation costs										Branch consolidation and relocation costs	321		—		321		N.M.
Other	Other	2,851		2,615		236		9.0	%	Other	3,969		4,200		(231)		-5.5	%
Total other operating expense	Total other operating expense	$	72,667	$	70,455	$	2,212	3.1	%	Total other operating expense	$	109,639	$	105,389	$	4,250	4.0	%

For the ~~six~~nine months ended ~~June~~September 30, 2020, total other operating expense was ~~$72.7~~$109.6 million and increased by ~~$2.2~~$4.3 million, or ~~3.1%~~4.0%, from ~~$70.5~~$105.4 million in the ~~six~~nine months ended ~~June~~September 30, 2019. The increase was primarily due to a higher provision for off-balance sheet credit exposures of ~~$1.7~~$2.4 million under ASC 326, higher legal and professional services of ~~$1.0~~$1.3 million, higher computer software expense of ~~$0.8~~$1.2 million, higher advertising expense of $0.9 million and higher ~~advertising expense~~salaries and employee benefits of $0.6 million, partially offset by a ~~$1.9~~$2.0 million variance in the directors' deferred compensation plan expense and lower entertainment and promotions of ~~$0.8~~$1.0 million. The lower directors' deferred compensation plan expense was primarily due to volatility in the equity markets. The higher entertainment and promotions expense in the nine months ended September 30, 2019 was primarily due to expenses related to a core deposit gathering campaign.

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

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

Three Months Ended
June 30, Six Months Ended
June 30,
(dollars in thousands) 2020 2019 2020 2019
Total other operating expense $ 36,427 $ 36,107 $ 72,667 $ 70,455
Net interest income $ 49,259 $ 45,378 $ 97,089 $ 90,491
Total other operating income 10,692 10,094 19,578 21,767
Total revenue before provision for credit losses $ 59,951 $ 55,472 $ 116,667 $ 112,258
Efficiency ratio 60.76 % 65.09 % 62.29 % 62.76 %


	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2020			2019			2020			2019
Total other operating expense	$	36,972		$	34,934		$	109,639		$	105,389

Net interest income	$	49,120		$	45,649		$	146,209		$	136,140
Total other operating income	11,563			10,266			31,141			32,033
Total revenue before provision for credit losses	$	60,683		$	55,915		$	177,350		$	168,173

Efficiency ratio	60.93		%	62.48		%	61.82		%	62.67		%

Our efficiency ratio improved to ~~60.76%~~60.93% in the ~~three months ended June 30,~~third quarter of 2020, compared to ~~65.09%~~62.48% in the year-ago quarter. The efficiency ratio in the ~~current~~third quarter of 2020 was positively impacted by the aforementioned higher net interest income, ~~during the quarter~~primarily attributable to the ~~PPP loans~~increase in average loan balances and lower rates paid on average interest-bearing ~~liabilities.~~liabilities, combined with higher other operating income, primarily attributable to the strong mortgage banking activity. Our efficiency ratio improved ~~slightly~~ to ~~62.29%~~61.82% in the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~62.76%~~62.67% in the ~~six~~nine months ended ~~June~~September 30, 2019.

Income Taxes

The Company recorded income tax expense of ~~$3.0~~$2.2 million and ~~$5.8~~$8.0 million for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively, compared to ~~$4.4~~$4.9 million and ~~$9.5~~$14.4 million in the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively. The effective tax rate for the three and ~~six~~nine months ended ~~June~~September 30, 2020 was ~~23.03%~~24.29% and ~~24.09%~~24.14%, respectively, compared to ~~24.65%~~25.17% and ~~24.40%~~24.66% in the three and ~~six~~nine months ended ~~June~~September 30, 2019.

The valuation allowance on our net deferred tax assets ("DTA") totaled $3.4 million at ~~June~~September 30, 2020 and $3.4 million at December 31, 2019, of which $3.2 million and $3.2 million, respectively, related to our DTA from net apportioned net operating loss ("NOL") carryforwards for California state income tax purposes as we do not expect to generate sufficient income in California to utilize the DTA. The remaining valuation allowance of $0.2 million and $0.2 million as of ~~June~~September 30, 2020 and December 31, 2019 relates to a Hawaii capital loss carryforward balance that we do not expect to be able to utilize. Net of the valuation allowance, the Company's net DTA totaled ~~$18.7~~$23.5 million at ~~June~~September 30, 2020, compared to a net DTA of $16.5 million as of December 31, 2019, and is included in other assets on our consolidated balance sheets.

Financial Condition

Total assets at ~~June~~September 30, 2020 of ~~$6.63~~$6.65 billion increased by ~~$620.3~~$635.5 million from $6.01 billion at December 31, 2019.

Investment Securities

Investment securities of $1.17 billion at ~~June~~September 30, 2020 increased by ~~$41.7~~$39.4 million, or ~~3.7%~~3.5%, from December 31, 2019. The increase reflects ~~$147.4~~$265.2 million in net purchases, combined with a ~~$22.4~~$19.3 million increase in the market valuation on the available-for-sale portfolio, partially offset by ~~$128.0~~$244.8 million in principal runoff.

Loans

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


(dollars in thousands)	(dollars in thousands)	June 30, 2020		December 31, 2019		$ Change		% Change		(dollars in thousands)	September 30, 2020		December 31, 2019		$ Change		% Change
Hawaii:	Hawaii:									Hawaii:
Commercial, financial and agricultural:	Commercial, financial and agricultural:									Commercial, financial and agricultural:
SBA Paycheck Protection Program	SBA Paycheck Protection Program	$	483,827	$	—	$	483,827	—	%	SBA Paycheck Protection Program	$	485,286	$	—	$	485,286	—	%
Other	Other	431,887		454,582		(22,695)		(5.0)		Other	414,754		454,582		(39,828)		(8.8)
Real estate:	Real estate:									Real estate:
Construction	Construction	103,518		95,854		7,664		8.0		Construction	118,247		95,854		22,393		23.4
Residential mortgage	Residential mortgage	1,657,558		1,599,801		57,757		3.6		Residential mortgage	1,680,060		1,599,801		80,259		5.0
Home equity	Home equity	510,962		490,734		20,228		4.1		Home equity	534,056		490,734		43,322		8.8
Commercial mortgage	Commercial mortgage	912,422		909,798		2,624		0.3		Commercial mortgage	914,144		909,798		4,346		0.5
Consumer	Consumer	350,414		373,451		(23,037)		(6.2)		Consumer	342,203		373,451		(31,248)		(8.4)
Leases	Leases	—		—		—		—		Leases	—		—		—		—
Total loans	Total loans	4,450,588		3,924,220		526,368		13.4		Total loans	4,488,750		3,924,220		564,530		14.4
Allowance for credit losses ("ACL")	Allowance for credit losses ("ACL")	(59,765)		(42,592)		(17,173)		40.3		Allowance for credit losses ("ACL")	(71,575)		(42,592)		(28,983)		68.0
Loans, net of ACL	Loans, net of ACL	$	4,390,823	$	3,881,628	$	509,195	13.1		Loans, net of ACL	$	4,417,175	$	3,881,628	$	535,547	13.8

U.S. Mainland:	U.S. Mainland:									U.S. Mainland:
Commercial, financial and agricultural:	Commercial, financial and agricultural:									Commercial, financial and agricultural:
SBA Paycheck Protection Program	SBA Paycheck Protection Program	$	42,581	$	—	$	42,581	—	%	SBA Paycheck Protection Program	$	43,295	$	—	$	43,295	—	%
Other	Other	115,971		115,722		249		0.2		Other	113,316		115,722		(2,406)		(2.1)
Real estate:	Real estate:									Real estate:
Construction	Construction	—		—		—		—		Construction	—		—		—		—
Residential mortgage	Residential mortgage	—		—		—		—		Residential mortgage	—		—		—		—
Home equity	Home equity	—		—		—		—		Home equity	—		—		—		—
Commercial mortgage	Commercial mortgage	217,747		213,617		4,130		1.9		Commercial mortgage	227,121		213,617		13,504		6.3
Consumer	Consumer	176,551		195,981		(19,430)		(9.9)		Consumer	158,144		195,981		(37,837)		(19.3)
Leases	Leases	—		—		—		—		Leases	—		—		—		—
Total loans	Total loans	552,850		525,320		27,530		5.2		Total loans	541,876		525,320		16,556		3.2
ACL	ACL	(7,574)		(5,379)		(2,195)		40.8		ACL	(8,967)		(5,379)		(3,588)		66.7
Loans, net of ACL	Loans, net of ACL	$	545,276	$	519,941	$	25,335	4.9		Loans, net of ACL	$	532,909	$	519,941	$	12,968	2.5

Total:	Total:									Total:
Commercial, financial and agricultural:	Commercial, financial and agricultural:									Commercial, financial and agricultural:
SBA Paycheck Protection Program	SBA Paycheck Protection Program	$	526,408	$	—	$	526,408	—	%	SBA Paycheck Protection Program	$	528,581	$	—	$	528,581	—	%
Other	Other	547,858		570,304		(22,446)		(3.9)		Other	528,070		570,304		(42,234)		(7.4)
Real estate:	Real estate:									Real estate:
Construction	Construction	103,518		95,854		7,664		8.0		Construction	118,247		95,854		22,393		23.4
Residential mortgage	Residential mortgage	1,657,558		1,599,801		57,757		3.6		Residential mortgage	1,680,060		1,599,801		80,259		5.0
Home equity	Home equity	510,962		490,734		20,228		4.1		Home equity	534,056		490,734		43,322		8.8
Commercial mortgage	Commercial mortgage	1,130,169		1,123,415		6,754		0.6		Commercial mortgage	1,141,265		1,123,415		17,850		1.6
Consumer	Consumer	526,965		569,432		(42,467)		(7.5)		Consumer	500,347		569,432		(69,085)		(12.1)
Leases	Leases	—		—		—		—		Leases	—		—		—		—
Total loans	Total loans	5,003,438		4,449,540		553,898		12.4		Total loans	5,030,626		4,449,540		581,086		13.1
ACL	ACL	(67,339)		(47,971)		(19,368)		40.4		ACL	(80,542)		(47,971)		(32,571)		67.9
Loans, net of ACL	Loans, net of ACL	$	4,936,099	$	4,401,569	$	534,530	12.1		Loans, net of ACL	$	4,950,084	$	4,401,569	$	548,515	12.5

Loans, net of deferred costs, of ~~$5.00~~$5.03 billion at ~~June~~September 30, 2020 increased by ~~$553.9~~$581.1 million, or ~~12.4%~~13.1%, from December 31, 2019. The increase reflects net increases in the following loan portfolios: SBA Paycheck Protection Program loans of ~~$526.4~~$528.6 million, residential mortgage of ~~$57.8~~$80.3 million, home equity of ~~$20.2~~$43.3 million, construction of ~~$7.7~~$22.4 million and commercial mortgage of

~~$6.8~~ $17.9 million. These increases were partially offset by net decreases in the consumer and other

commercial portfolios of ~~$42.5~~$69.1 million and ~~$22.4~~$42.2 million, respectively. During the third quarter of 2020, the Company transferred $6.6 million in commercial and commercial real estate loans to a single borrower to loans-held-for-sale. In October 2020, the Company sold the loans at a loss of less than $0.1 million.

The Hawaii loan portfolio increased by ~~$526.4~~$564.5 million, or ~~13.4%~~14.4%, from December 31, 2019. The increase reflects net increases in the following loan portfolios: SBA Paycheck Protection Program loans of ~~$483.8~~$485.3 million, residential mortgage of ~~$57.8~~$80.3 million, home equity of ~~$20.2~~$43.3 million, construction of ~~$7.7~~$22.4 million and commercial mortgage of ~~$2.6~~$4.3 million, partially offset by net decreases in the consumer and other commercial portfolios of ~~$23.0~~$31.2 million and ~~$22.7~~$39.8 million, respectively. The increases in the portfolios were primarily due to an increased demand from both new and existing customers.

The U.S. Mainland loan portfolio increased by ~~$27.5~~$16.6 million, or ~~5.2%~~3.2% from December 31, 2019. The net increase was primarily attributable to net increases in the SBA Paycheck Protection Program and commercial mortgage loan portfolios of ~~$42.6~~$43.3 million and ~~$4.1~~$13.5 million, respectively, partially offset by a net decrease in the consumer loan portfolio of ~~$19.4~~$37.8 million.

In the third quarter of 2020, we purchased U.S. Mainland unsecured consumer loans totaling $6.7 million, which reflected a net discount of $0.3 million from the $7.0 million outstanding balance.

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

In the first quarter of 2020, we purchased U.S. Mainland unsecured consumer loans totaling $22.3 million, which reflected a net discount of $0.6 million from the $23.0 million outstanding balance. ~~At the time of purchase, the unsecured consumer loans had a weighted average remaining term of 87 months and a weighted average yield, net of servicing costs, of 5.03%.~~ The purchases during the ~~first and second quarters of~~nine months ended September 30, 2020 were made under two forward flow purchase agreements.

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

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

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

(dollars in thousands) June 30,
2020 December 31,
2019 $ Change % Change
Nonperforming Assets ("NPAs") [1]
Nonaccrual loans:
Commercial, financial and agricultural $ 934 $ 467 $ 467 100.0 %
Real estate:
Residential mortgage 3,215 979 2,236 228.4
Home equity 538 92 446 484.8
Consumer 54 17 37 217.6
Total nonaccrual loans 4,741 1,555 3,186 204.9
Other real estate owned ("OREO"):
Real estate:
Home equity — 164 (164) (100.0)
Total OREO — 164 (164) (100.0)
Total nonperforming assets 4,741 1,719 3,022 175.8
Accruing Loans Delinquent for 90 Days or More [1]
Real estate:
Residential mortgage 726 724 2 0.3
Consumer 444 286 158 55.2
Total accruing loans delinquent for 90 days or more 1,170 1,010 160 15.8
Restructured Loans Still Accruing Interest [1]
Commercial, financial and agricultural 172 135 37 27.4
Real estate:
Residential mortgage 5,290 5,502 (212) (3.9)
Commercial mortgage 1,888 1,839 49 2.7
Consumer 145 — 145 —
Total restructured loans still accruing interest 7,495 7,476 19 0.3
Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest $ 13,406 $ 10,205 $ 3,201 31.4
Ratio of nonaccrual loans to total loans 0.09 % 0.03 % 0.06 %
Ratio of NPAs to total loans and OREO 0.09 % 0.04 % 0.05 %
Ratio of NPAs and accruing loans delinquent for 90 days or more to total loans and OREO 0.12 % 0.06 % 0.06 %
Ratio of NPAs, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO 0.27 % 0.23 % 0.04 %
Ratio of classified assets and OREO to tier 1 capital and ACL 7.28 % 6.75 % 0.53 %
[1] Section 4013 of the CARES Act and the revised Interagency Statement are being applied to loan modifications related to the COVID-19 pandemic as eligible and applicable. These loan modifications are not included in the delinquent, nonaccrual or restructured loan balances presented above.


(dollars in thousands)	September 30, 2020			December 31, 2019			$ Change		% Change
Nonperforming Assets ("NPAs") [1]
Nonaccrual loans:
Commercial, financial and agricultural	$	1,536		$	467		$	1,069	228.9	%
Real estate:

Residential mortgage	4,032			979			3,053		311.8
Home equity	533			92			441		479.3
Commercial mortgage	6,889			—			6,889		—
Consumer	69			17			52		305.9

Total nonaccrual loans	13,059			1,555			11,504		739.8

Other real estate owned ("OREO"):

Real estate:

Residential mortgage	128			—			128		—
Home equity	—			164			(164)		(100.0)



Total OREO	128			164			(36)		(22.0)
Total nonperforming assets	13,187			1,719			11,468		667.1

Accruing Loans Delinquent for 90 Days or More [1]

Real estate:

Residential mortgage	588			724			(136)		(18.8)


Consumer	321			286			35		12.2

Total accruing loans delinquent for 90 days or more	909			1,010			(101)		(10.0)

Restructured Loans Still Accruing Interest [1]
Commercial, financial and agricultural	137			135			2		1.5
Real estate:

Residential mortgage	5,178			5,502			(324)		(5.9)

Commercial mortgage	1,825			1,839			(14)		(0.8)
Consumer	214			—			214		—

Total restructured loans still accruing interest	7,354			7,476			(122)		(1.6)

Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest	$	21,450		$	10,205		$	11,245	110.2

Ratio of nonaccrual loans to total loans	0.26		%	0.03		%			0.23	%
Ratio of NPAs to total loans and OREO	0.26		%	0.04		%			0.22	%
Ratio of NPAs and accruing loans delinquent for 90 days or more to total loans and OREO	0.28		%	0.06		%			0.22	%
Ratio of NPAs, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO	0.43		%	0.23		%			0.20	%
Ratio of classified assets and OREO to tier 1 capital and ACL	7.36		%	6.75		%			0.61	%

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

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


(dollars in thousands)
Balance at December 31, 2019	$	1,719
Additions	~~3,827~~12,887
Reductions:
Payments	~~(427)~~(820)
Return to accrual status	(123)
Sales of NPAs	(94)
Net charge-offs, valuation and other adjustments	~~(161)~~(382)
Total reductions	~~(805)~~(1,419)
Net increase	~~3,022~~11,468
Balance at ~~June~~September 30, 2020	$	~~4,741~~13,187

Nonperforming assets, which includes nonaccrual loans and other real estate owned, totaled ~~$4.7~~$13.2 million at ~~June~~September 30, 2020, compared to $1.7 million at December 31, 2019. There were no nonperforming loans classified as held for sale at ~~June~~September 30, 2020 and December 31, 2019. The increase in nonperforming assets from December 31, 2019 was primarily attributable to additions to nonaccrual loans totaling ~~$3.8~~$12.9 million, of which $7.6 million were to two borrowers consisting of commercial and commercial real estate loans that the Company believes is well-secured. The additions were offset by ~~$0.4~~$0.8 million in repayments of nonaccrual loans, ~~$0.2~~$0.4 million in net charge-offs, valuation and other adjustments, $0.1 million in loans returned to accrual status, and the sale of a foreclosed asset of $0.1 million.

Troubled debt restructurings ("TDRs") included in nonperforming assets at ~~June~~September 30, 2020 consisted of ~~one~~two Hawaii residential mortgage ~~loan~~loans with a combined principal balance of $0.3 million. There were ~~$7.5~~$7.4 million of TDRs still accruing interest at ~~June~~September 30, 2020, none of which were more than 90 days delinquent. At December 31, 2019, there were $7.5 million of TDRs still accruing interest, none of which were more than 90 days delinquent.

Loan payment ~~forbearances~~forbearance or deferrals were made for borrowers impacted by the COVID-19 pandemic with loan balances totaling ~~$567.9~~$290.8 million, or ~~11.3%~~5.8% of total loans ~~(and 12.7%~~(or 6.5% of total loans, excluding PPP loans), as of September 30, 2020, compared to $567.9 million or, 11.3% of the total loan portfolio (or 12.7% excluding PPP loans) as of June 30, 2020.

The Company's ratio of classified assets and other real estate owned to tier 1 capital and the ACL increased from 6.75% at December 31, 2019 to ~~7.28%~~7.36% at ~~June~~September 30, 2020.

Allowance for Credit Losses

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


		Three Months Ended June 30,									Six Months Ended June 30,										Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	(dollars in thousands)	2020			2019			2020			2019			(dollars in thousands)	2020			2019			2020			2019
Allowance for Credit Losses:	Allowance for Credit Losses:													Allowance for Credit Losses:
Balance at beginning of period	Balance at beginning of period	$	59,645		$	47,267		$	47,971		$	47,916		Balance at beginning of period	$	67,339		$	48,267		$	47,971		$	47,916
Adoption of ASU 2016-13	Adoption of ASU 2016-13	—			—			3,566			—			Adoption of ASU 2016-13	—			—			3,566			—
Adjusted balance at beginning of period	Adjusted balance at beginning of period	59,645			47,267			51,537			47,916			Adjusted balance at beginning of period	67,339			48,267			51,537			47,916

Provision for credit losses		10,640			1,404			19,969			2,687
Provision for credit losses on loans [1]														Provision for credit losses on loans [1]	14,465			1,532			34,434			4,219

Charge-offs:	Charge-offs:													Charge-offs:
Commercial, financial and agricultural	Commercial, financial and agricultural	1,103			839			1,540			1,302			Commercial, financial and agricultural	810			797			2,350			2,099
Real estate:	Real estate:													Real estate:

Residential mortgage	Residential mortgage	52			—			52			—			Residential mortgage	11			—			63			—

Home equity														Home equity	—			5			—			5
Commercial mortgage														Commercial mortgage	75			—			75			—

Consumer	Consumer	2,626			1,459			4,843			3,710			Consumer	1,492			1,832			6,335			5,542

Total charge-offs	Total charge-offs	3,781			2,298			6,435			5,012			Total charge-offs	2,388			2,634			8,823			7,646

Recoveries:	Recoveries:													Recoveries:
Commercial, financial and agricultural	Commercial, financial and agricultural	305			315			647			548			Commercial, financial and agricultural	321			362			968			910
Real estate:	Real estate:													Real estate:
Construction	Construction	—			592			131			598			Construction	—			6			131			604
Residential mortgage	Residential mortgage	20			372			201			394			Residential mortgage	13			104			214			498
Home equity	Home equity	—			9			31			18			Home equity	—			24			31			42
Commercial mortgage	Commercial mortgage	1			25			3			25			Commercial mortgage	12			—			15			25

Consumer	Consumer	509			581			1,255			1,093			Consumer	780			506			2,035			1,599

Total recoveries	Total recoveries	835			1,894			2,268			2,676			Total recoveries	1,126			1,002			3,394			3,678

Net charge-offs	Net charge-offs	2,946			404			4,167			2,336			Net charge-offs	1,262			1,632			5,429			3,968

Balance at end of period	Balance at end of period	$	67,339		$	48,267		$	67,339		$	48,267		Balance at end of period	$	80,542		$	48,167		$	80,542		$	48,167

ACL as a percentage of total loans	ACL as a percentage of total loans	1.35		%	1.14		%	1.35		%	1.14		%	ACL as a percentage of total loans	1.60		%	1.10		%	1.60		%	1.10		%
ACL as a percentage of total loans, excluding PPP loans	ACL as a percentage of total loans, excluding PPP loans	1.50		%	1.14		%	1.50		%	1.14		%	ACL as a percentage of total loans, excluding PPP loans	1.79		%	1.10		%	1.79		%	1.10		%
ACL as a percentage of nonaccrual loans														ACL as a percentage of nonaccrual loans	616.75		%	5387.81		%	616.75		%	5387.81		%
Annualized ratio of net charge-offs to average loans	Annualized ratio of net charge-offs to average loans	0.24		%	0.04		%	0.18		%	0.11		%	Annualized ratio of net charge-offs to average loans	0.10		%	0.15		%	0.15		%	0.13		%

[1] The Company recorded a reserve on accrued interest receivable for loans on active payment forbearance or deferral, which were granted to borrowers impacted by the COVID-19 pandemic. This reserve was recorded as a contra-asset against accrued interest receivable with the offset to provision for credit losses. The provision for credit losses presented in this table excludes the provision for credit losses on accrued interest receivable of $0.2 million.														[1] The Company recorded a reserve on accrued interest receivable for loans on active payment forbearance or deferral, which were granted to borrowers impacted by the COVID-19 pandemic. This reserve was recorded as a contra-asset against accrued interest receivable with the offset to provision for credit losses. The provision for credit losses presented in this table excludes the provision for credit losses on accrued interest receivable of $0.2 million.

Our ACL at ~~June~~September 30, 2020 totaled ~~$67.3~~$80.5 million compared to $48.0 million at December 31, 2019.

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

During the three months ended ~~June~~September 30, 2020, we recorded a provision for credit losses on loans of ~~$10.6~~$14.5 million and net charge-offs of ~~$2.9~~$1.3 million. During the ~~six~~nine months ended ~~June~~September 30, 2020, we recorded a provision for credit losses on loans of ~~$20.0~~$34.4 million and net charge-offs of ~~$4.2~~$5.4 million. The provisions reflect the incorporation of estimated life-of-loan losses under ASC 326 and the economic ~~forecasts that anticipate deterioration due to~~forecast under the current COVID-19 pandemic.

Our ACL as a percentage of total loans increased from 1.08% at December 31, 2019 to ~~1.35%~~1.60% at ~~June~~September 30, 2020. Excluding the PPP loan portfolio, which is guaranteed by the SBA, our ACL as a percentage of total loans was ~~1.50%.~~1.79% at September 30, 2020. The increase in our ACL as a percentage of total loans reflects the adoption of ASU 2016-13. Our ACL as a percentage of ~~nonperforming assets~~nonaccrual loans decreased from ~~2,791%~~3084.95% at December 31, 2019 to ~~1,420%~~616.75% at ~~June~~September 30, 2020.

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

Federal Home Loan Bank Stock

The bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB"). FHLB stock of ~~$9.2~~$17.5 million at ~~June~~September 30, 2020 ~~decreased~~increased by ~~$5.8~~$2.5 million, or ~~38.4%~~16.6%, from the FHLB stock balance at December 31, 2019. FHLB stock has an activity-based stock requirement, thus as borrowings ~~decline,~~increase, so will our holdings of FHLB stock. There is a minimum requirement of ~~$7.0~~$7.2 million in FHLB stock even if we have no borrowings outstanding.

Deposits

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


(dollars in thousands)	(dollars in thousands)	June 30, 2020		December 31, 2019		$ Change		% Change		(dollars in thousands)	September 30, 2020		December 31, 2019		$ Change		% Change
Noninterest-bearing demand deposits	Noninterest-bearing demand deposits	$	1,851,012	$	1,450,532	$	400,480	27.6	%	Noninterest-bearing demand deposits	$	1,762,476	$	1,450,532	$	311,944	21.5	%
Interest-bearing demand deposits	Interest-bearing demand deposits	1,067,483		1,043,010		24,473		2.3		Interest-bearing demand deposits	1,114,123		1,043,010		71,113		6.8
Savings and money market deposits	Savings and money market deposits	1,945,744		1,600,028		345,716		21.6		Savings and money market deposits	1,881,104		1,600,028		281,076		17.6
Time deposits less than $100,000	Time deposits less than $100,000	159,739		165,755		(6,016)		(3.6)		Time deposits less than $100,000	157,051		165,755		(8,704)		(5.3)
Core deposits	Core deposits	5,023,978		4,259,325		764,653		18.0		Core deposits	4,914,754		4,259,325		655,429		15.4

Government time deposits	Government time deposits	509,927		533,088		(23,161)		(4.3)		Government time deposits	500,762		533,088		(32,326)		(6.1)
Other time deposits $100,000 to $250,000	Other time deposits $100,000 to $250,000	96,633		107,550		(10,917)		(10.2)		Other time deposits $100,000 to $250,000	95,918		107,550		(11,632)		(10.8)
Other time deposits greater than $250,000	Other time deposits greater than $250,000	164,147		220,060		(55,913)		(25.4)		Other time deposits greater than $250,000	167,495		220,060		(52,565)		(23.9)
Total time deposits $100,000 and greater	Total time deposits $100,000 and greater	770,707		860,698		(89,991)		(10.5)		Total time deposits $100,000 and greater	764,175		860,698		(96,523)		(11.2)

Total deposits	Total deposits	$	5,794,685	$	5,120,023	$	674,662	13.2		Total deposits	$	5,678,929	$	5,120,023	$	558,906	10.9

Total deposits of ~~$5.79~~$5.68 billion at ~~June~~September 30, 2020 increased by ~~$674.7~~$558.9 million from total deposits of $5.12 billion at December 31, 2019. Net increases in noninterest-bearing demand deposits of ~~$400.5~~$311.9 million, savings and money market deposits of ~~$345.7~~$281.1 million and interest-bearing demand deposits of ~~$24.5~~$71.1 million, were partially offset by net decreases in other time deposits greater than $250,000 of ~~$55.9~~$52.6 million, government time deposits of ~~$23.2~~$32.3 million, other time deposits $100,000 to $250,000 of ~~$10.9~~$11.6 million and time deposits less than $100,000 of ~~$6.0~~$8.7 million.

Core deposits, which we define as demand deposits, savings and money market deposits, and time deposits less than $100,000, totaled ~~$5.02~~$4.91 billion at ~~June~~September 30, 2020 and increased by ~~$764.7~~$655.4 million, or ~~18.0%~~15.4%, from December 31, 2019. The deposit of PPP funds into both new and existing deposit accounts largely contributed to the increase in core deposits. In addition, off-balance sheet investment funds from several large clients were brought back into deposit accounts. The addition of PPP funds may be temporary as the PPP monies are spent by the businesses in accordance with the program. Going forward the Company is focused on expanding banking relationships with the new businesses we assisted with PPP. Core deposits as a percentage of total deposits was ~~86.7%~~86.5% at ~~June~~September 30, 2020, compared to 83.2% at December 31, 2019.

Capital Resources

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

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

Common and Preferred Equity

Shareholders' equity totaled ~~$544.3~~$543.9 million at ~~June~~September 30, 2020, compared to $528.5 million at December 31, 2019. The change in total shareholders' equity was attributable to net income of ~~$18.2~~$25.1 million and other comprehensive income of ~~$17.1~~$15.1 million, partially offset by the repurchase of 206,802 shares of common stock under our repurchase program, at a cost of $4.7 million and cash dividends declared of ~~$13.0~~$19.5 million in the ~~six~~nine months ended ~~June~~September 30, 2020. ~~During~~In the ~~six~~nine months ended ~~June~~September 30, 2020, we repurchased approximately 0.7% of our common stock outstanding as of December 31, 2019.

Our total shareholders' equity to total assets ratio was ~~8.21%~~8.18% at ~~June~~September 30, 2020, compared to 8.79% at December 31, 2019. The decline in our total shareholders' equity to total assets ratio was primarily due to the significant increase in the total assets denominator attributable to ~~$526.4~~$528.6 million in PPP loans, net of deferred fees and costs. Our book value per share was ~~$19.33~~$19.30 and $18.68 at ~~June~~September 30, 2020 and December 31, 2019, respectively.

Holding Company Capital Resources

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

CPF relies on the bank to pay dividends to fund its obligations. As of ~~June~~September 30, 2020, on a stand-alone basis, CPF had an available cash balance of approximately ~~$8.4~~$10.0 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 ~~June~~September 30, 2020, the bank had Statutory Retained Earnings of ~~$68.4~~$68.6 million. On ~~July 28,~~October 27, 2020, the Company's Board of Directors declared a cash dividend of $0.23 per share on the Company's outstanding common stock, which remained unchanged from the $0.23 per share a year-ago.

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

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

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

In the ~~six~~nine months ended ~~June~~September 30, 2020, a total of 206,802 shares of common stock, at a cost of $4.7 million, were repurchased under the Company's stock repurchase plans. As of ~~June~~September 30, 2020, $26.6 million remained available for repurchase under the Company's Repurchase Plan. We cannot provide any assurance when or to what extent we will resume repurchases under our Repurchase Plan.

Trust Preferred Securities

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

As of ~~June~~September 30, 2020, we have two remaining statutory trusts, CPB Capital Trust IV ("Trust IV") and CPB Statutory Trust V ("Trust V"), which issued a total of $50.0 million in floating rate trust preferred securities. The trust preferred securities, the underlying floating rate junior subordinated debentures that are the assets of Trusts IV and V, and the common securities issued by Trusts IV and V are redeemable in whole or in part on any interest payment date on or after December 15, 2009 for Trust IV and V, or at any time in whole but not in part within 90 days following the occurrence of certain events. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from

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

Regulatory Capital Ratios

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

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

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

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

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

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

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

The Company's and the bank's leverage capital, tier 1 risk-based capital, total risk-based capital, and CET1 risk-based capital ratios as of ~~June~~September 30, 2020 were above the levels required for a "well capitalized" regulatory designation.

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

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

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


		Actual						Minimum Required for Capital Adequacy Purposes							Minimum Required to be Well Capitalized							Actual				Minimum Required for Capital Adequacy Purposes		Minimum Required to be Well Capitalized
(dollars in thousands)	(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		(dollars in thousands)		Amount		Ratio		Amount		Ratio		Amount		Ratio
Company	Company													Company
At June 30, 2020:
At September 30, 2020:														At September 30, 2020:
Leverage capital	Leverage capital	$	571,976	8.9	%	$	256,307	4.0	%			N/A		Leverage capital		$	573,636	8.8	%	$	261,718	4.0	%			N/A
Tier 1 risk-based capital	Tier 1 risk-based capital	571,976		12.5		274,997		6.0				N/A		Tier 1 risk-based capital		573,636		12.8		269,814		6.0				N/A
Total risk-based capital	Total risk-based capital	622,393		13.6		366,662		8.0				N/A		Total risk-based capital		623,157		13.9		359,752		8.0				N/A
CET1 risk-based capital	CET1 risk-based capital	521,976		11.4		206,247		4.5				N/A		CET1 risk-based capital		523,636		11.6		202,360		4.5				N/A

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

Central Pacific Bank	Central Pacific Bank													Central Pacific Bank
At June 30, 2020:
At September 30, 2020:														At September 30, 2020:
Leverage capital	Leverage capital	$	559,461	8.7	%	$	256,118	4.0	%	$	320,147	5.0	%	Leverage capital		$	559,750	8.6	%	$	261,540	4.0	%	$	326,925	5.0	%
Tier 1 risk-based capital	Tier 1 risk-based capital	559,461		12.2		274,739		6.0		366,319		8.0		Tier 1 risk-based capital		559,750		12.5		269,555		6.0		359,407		8.0
Total risk-based capital	Total risk-based capital	609,811		13.3		366,319		8.0		457,899		10.0		Total risk-based capital		609,203		13.6		359,407		8.0		449,259		10.0
CET1 risk-based capital	CET1 risk-based capital	559,461		12.2		206,055		4.5		297,634		6.5		CET1 risk-based capital		559,750		12.5		202,166		4.5		292,018		6.5

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

Asset/Liability Management and Interest Rate Risk

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

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

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

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


Rate Change	Estimated Net Interest Income Sensitivity
+100 bp	~~4.36~~3.79	%
-100 bp	~~(0.43)~~(2.92)	%

Liquidity and Borrowing Arrangements

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

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

The bank maintained a ~~$1.97~~$1.79 billion line of credit with the FHLB as of ~~June~~September 30, 2020, compared to $1.84 billion at December 31, 2019. There were no$206.0 million in short-term borrowings under this arrangement at ~~June~~September 30, 2020, compared to $150.0 million at December 31, 2019. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled ~~$248.5~~$267.0 million at ~~June~~September 30, 2020, compared to $78.9 million at December 31, 2019. Long-term borrowings under this arrangement totaled $50.0 million at ~~June~~September 30, 2020 and December 31, 2019. FHLB advances and standby letters of credit available at ~~June~~September 30, 2020 were secured by certain real estate loans with a carrying value of ~~$2.66~~$2.71 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB. At ~~June~~September 30, 2020, ~~$1.67~~$1.26 billion was undrawn under this arrangement, compared to $1.57 billion at December 31, 2019.

To bolster the effectiveness of the PPP, the Federal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provides loans to small businesses so that they can keep their workers on the payroll. The Paycheck Protection Program Liquidity Facility ("PPPLF") will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. At ~~June~~September 30, 2020, there were no funds drawn from the Federal Reserve Bank under the PPPLF and no PPP loans pledged to the Federal Reserve ~~Bank totaled $65.9 million and funds drawn from the Federal Reserve Bank as of June 30, 2020 totaled $65.9 million.~~Bank.

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

Contractual Obligations

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

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 ~~June~~September 30, 2020 would not result in a fluctuation of NII that would exceed the established policy limits.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology (Allowance for Loan and Leases Losses or "ALLL") with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The Company designed new controls and modified existing controls as part of its adoption. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data. There were no other changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

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

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

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

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

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

Issuer Purchases of Equity Securities

approved by the Company's Board of Directors, which had $19.8 million in remaining repurchase authority. The current Repurchase Plan is subject to a one year expiration.

In March 2020, the Company temporarily suspended the Repurchase Plan due to uncertainty during the current COVID-19 pandemic. As a result, the Company did not repurchase any shares of common stock under the Company's Repurchase Plan during the three months ended ~~June~~September 30, 2020. As of ~~June~~September 30, 2020, a total of $26.6 million remained available for repurchase under the Company's Repurchase Plan. We cannot provide any assurance as to when or if we will recommence our Repurchase Plan.


	Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Shares Purchased as Part of Publicly Announced Programs	Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program
~~April~~July 1-31, 2020	—	$	—	—	$	26,600,028
August 1-31, 2020	—	—		—	26,600,028
September 1-30, 2020	—	$	—	—	$	~~26,600,028~~
~~May 1-31, 2020~~	—	—		—	26,600,028
~~June 1-30, 2020~~	—	—		—	~~26,600,028~~
Total	—	$	—	—	26,600,028

Item 6. Exhibits


Exhibit No.						Document

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

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

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

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

101.INS						XBRL Instance Document*

101.SCH						XBRL Taxonomy Extension Schema Document*

101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB						XBRL Taxonomy Extension Label Linkbase Document*

101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document*

101.DEF						XBRL Taxonomy Extension Definition Linkbase Document*

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


*						Filed herewith.

**						Furnished herewith.

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:	~~July 29,~~October 28, 2020	/s/ Paul K. Yonamine
		Paul K. Yonamine
		Chairman and Chief Executive Officer

Date:	~~July 29,~~October 28, 2020	/s/ David S. Morimoto
		David S. Morimoto
		Executive Vice President and Chief Financial Officer


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