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 30, 2020~~March 31, 2021

☐ 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, 2020~~April 19, 2021 was ~~28,154,159~~28,292,530 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 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020	4

	Consolidated Statements of Income - Three months ended March 31, 2021 and ~~six months~~ ~~ended~~ ~~June~~ 3 0 , 2020 ~~and 2019~~	5

	Consolidated Statements of Comprehensive Income - Three months ended March 31, 2021 and ~~six~~ ~~ended~~ ~~June 30~~, 2020 ~~and 2019~~	6

	Consolidated Statements of Changes in Equity - Three months ended March 31, 2021 and ~~six months~~ ~~ended~~ ~~June 30~~, 2020 ~~and 2019~~	7

	Consolidated Statements of Cash Flows - ~~Six~~ Three months ended ~~June 30~~,March 31, 2021 and 2020 ~~and 2019~~	8

	Notes to Consolidated Financial Statements (Unaudited)	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4945

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	7769

Item 4.	Controls and Procedures	7769

Part II.	Other Information	7870

Item 1A.	Risk Factors	7870

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7870

Item 6.	Exhibits	8071

Signatures		8172

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 regulations or regulatory orders or actions we are or may become subject to; ability to successfully implement our initiatives to lower our efficiency ratio; the effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System (the "FRB" or the "Federal Reserve"); inflation, interest rate, securities market and monetary fluctuations, including the anticipated replacement of the London Interbank Offered Rate ("LIBOR") Index and the impact on our loans and debt which are tied to that index; negative trends in our market capitalization and adverse changes in the price of the Company's common stock; political instability; acts of war or terrorism;

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

For further information with respect to factors that could cause actual results to materially differ from the expectations or projections stated in the forward-looking statements, please see the Company's publicly available Securities and Exchange Commission filings, including the Company's Form 10-K for the last fiscal year and, in particular, the discussion of "Risk Factors" set forth therein and herein. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Form 10-Q. Forward-looking statements speak only as of the date on which such 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)	March 31, 2021		December 31, 2020
Assets	Assets					Assets
Cash and due from banks	Cash and due from banks	$	102,132	$	78,418	Cash and due from banks	$	93,358	$	97,546
Interest-bearing deposits in other banks	Interest-bearing deposits in other banks	41,201		24,554		Interest-bearing deposits in other banks	166,533		6,521
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	1,216,341		1,182,609

Equity securities, at fair value	Equity securities, at fair value	1,209		1,127		Equity securities, at fair value	1,435		1,351
Total investment securities	Total investment securities	1,169,803		1,128,110		Total investment securities	1,217,776		1,183,960

Loans held for sale	Loans held for sale	10,443		9,083		Loans held for sale	5,234		16,687

Loans	Loans	5,003,438		4,449,540		Loans	5,137,849		4,964,113
Allowance for credit losses	Allowance for credit losses	(67,339)		(47,971)		Allowance for credit losses	(81,553)		(83,269)
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	5,056,296		4,880,844

Premises and equipment, net	Premises and equipment, net	55,032		46,343		Premises and equipment, net	72,599		65,278
Accrued interest receivable	Accrued interest receivable	19,590		16,500		Accrued interest receivable	19,440		20,224
Investment in unconsolidated subsidiaries	Investment in unconsolidated subsidiaries	16,428		17,115		Investment in unconsolidated subsidiaries	31,487		29,968
Other real estate owned		—		164

Mortgage servicing rights	Mortgage servicing rights	12,771		14,718		Mortgage servicing rights	11,094		11,865

Bank-owned life insurance	Bank-owned life insurance	161,758		159,656		Bank-owned life insurance	167,110		163,161
Federal Home Loan Bank stock	Federal Home Loan Bank stock	9,229		14,983		Federal Home Loan Bank stock	8,155		8,237
Right-of-use lease asset	Right-of-use lease asset	50,039		52,348		Right-of-use lease asset	44,727		45,857
Other assets	Other assets	48,447		49,111		Other assets	85,456		64,435
Total assets	Total assets	$	6,632,972	$	6,012,672	Total assets	$	6,979,265	$	6,594,583

Liabilities	Liabilities					Liabilities
Deposits:	Deposits:					Deposits:
Noninterest-bearing demand	Noninterest-bearing demand	$	1,851,012	$	1,450,532	Noninterest-bearing demand	$	2,070,428	$	1,790,269
Interest-bearing demand	Interest-bearing demand	1,067,483		1,043,010		Interest-bearing demand	1,237,574		1,174,888
Savings and money market	Savings and money market	1,945,744		1,600,028		Savings and money market	2,004,368		1,932,043
Time	Time	930,446		1,026,453		Time	896,580		898,918
Total deposits	Total deposits	5,794,685		5,120,023		Total deposits	6,208,950		5,796,118

Short-term borrowings	Short-term borrowings	—		150,000		Short-term borrowings	0		22,000
Long-term debt	Long-term debt	167,491		101,547		Long-term debt	105,436		105,385
Lease liability	Lease liability	50,440		52,632		Lease liability	46,033		47,191

Other liabilities	Other liabilities	76,050		59,950		Other liabilities	75,933		77,156
Total liabilities	Total liabilities	6,088,666		5,484,152		Total liabilities	6,436,352		6,047,850

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 March 31, 2021 and December 31, 2020						Preferred stock, 0 par value, authorized 1,000,000 shares; issued and outstanding: NaN at March 31, 2021 and December 31, 2020	0		0
Common stock, 0 par value, authorized 185,000,000 shares; issued and outstanding: 28,282,530 at March 31, 2021 and 28,183,340 at December 31, 2020						Common stock, 0 par value, authorized 185,000,000 shares; issued and outstanding: 28,282,530 at March 31, 2021 and 28,183,340 at December 31, 2020	443,505		442,635
Additional paid-in capital	Additional paid-in capital	93,007		91,611		Additional paid-in capital	95,721		94,842
Accumulated deficit		(16,986)		(19,102)
Retained earnings (Accumulated deficit)						Retained earnings (Accumulated deficit)	628		(10,920)
Accumulated other comprehensive income	Accumulated other comprehensive income	25,551		8,409		Accumulated other comprehensive income	3,011		20,128
Total shareholders' equity	Total shareholders' equity	544,271		528,520		Total shareholders' equity	542,865		546,685
Non-controlling interest	Non-controlling interest	35		—		Non-controlling interest	48		48
Total equity	Total equity	544,306		528,520		Total equity	542,913		546,733
Total liabilities and equity	Total liabilities and equity	$	6,632,972	$	6,012,672	Total liabilities and equity	$	6,979,265	$	6,594,583

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 March 31,
(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)	2021		2020
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	$	46,074	$	46,204
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	5,106		6,757
Tax-exempt interest	Tax-exempt interest	599		814		1,267		1,680		Tax-exempt interest	514		668
Dividends	Dividends	17		14		34		32		Dividends	18		17
Interest on deposits in other banks	Interest on deposits in other banks	3		46		39		114		Interest on deposits in other banks	10		36
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	59		132
Total interest income	Total interest income	52,950		54,105		106,764		107,246		Total interest income	51,781		53,814
Interest expense:	Interest expense:									Interest expense:
Interest on deposits:	Interest on deposits:									Interest on deposits:
Demand	Demand	114		199		290		391		Demand	86		176
Savings and money market	Savings and money market	567		1,507		1,685		2,298		Savings and money market	274		1,118
Time	Time	2,124		4,867		5,392		9,959		Time	588		3,268
Interest on short-term borrowings	Interest on short-term borrowings	74		1,123		582		2,016		Interest on short-term borrowings	2		508
Interest on long-term debt	Interest on long-term debt	812		1,031		1,726		2,091		Interest on long-term debt	1,027		914
Total interest expense	Total interest expense	3,691		8,727		9,675		16,755		Total interest expense	1,977		5,984
Net interest income	Net interest income	49,259		45,378		97,089		90,491		Net interest income	49,804		47,830
Provision for credit losses	Provision for credit losses	10,640		1,404		19,969		2,687		Provision for credit losses	(821)		11,127
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	50,625		36,703
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	2,970		337
Service charges on deposit accounts	Service charges on deposit accounts	1,149		2,041		3,199		4,122		Service charges on deposit accounts	1,478		2,050
Other service charges and fees	Other service charges and fees	2,916		3,909		7,813		7,124		Other service charges and fees	3,790		4,897
Income from fiduciary activities	Income from fiduciary activities	1,270		1,129		2,567		2,094		Income from fiduciary activities	1,231		1,297
Equity in earnings of unconsolidated subsidiaries		104		71		130		79

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	797		(19)

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

Other	Other	269		322		567		3,201		Other	445		324
Total other operating income	Total other operating income	10,692		10,094		19,578		21,767		Total other operating income	10,711		8,886
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	19,827		20,054
Net occupancy	Net occupancy	3,645		3,525		7,317		6,983		Net occupancy	3,764		3,672
Equipment	Equipment	1,043		1,138		2,140		2,144		Equipment	1,000		1,097

Communication expense	Communication expense	774		903		1,611		1,637		Communication expense	769		837
Legal and professional services	Legal and professional services	2,238		1,728		4,266		3,298		Legal and professional services	2,377		2,028
Computer software expense	Computer software expense	3,035		2,560		5,978		5,157		Computer software expense	3,783		2,943
Advertising expense	Advertising expense	923		712		2,015		1,423		Advertising expense	1,658		1,092
Foreclosed asset expense		—		49		67		208

Other	Other	4,147		4,929		8,304		9,153		Other	4,668		2,719
Total other operating expense	Total other operating expense	36,427		36,107		72,667		70,455		Total other operating expense	37,846		34,442
Income before income taxes	Income before income taxes	12,884		17,961		24,031		39,116		Income before income taxes	23,490		11,147
Income tax expense	Income tax expense	2,967		4,427		5,788		9,545		Income tax expense	5,452		2,821
Net income	Net income	$	9,917	$	13,534	$	18,243	$	29,571	Net income	$	18,038	$	8,326
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	$	0.64	$	0.30
Diluted earnings per common share	Diluted earnings per common share	$	0.35	$	0.47	$	0.65	$	1.03	Diluted earnings per common share	$	0.64	$	0.29
Cash dividends declared	Cash dividends declared	$	0.23	$	0.23	$	0.46	$	0.44	Cash dividends declared	$	0.23	$	0.23
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	28,108,648		28,126,400
Diluted shares	Diluted shares	28,095,230		28,729,510		28,190,132		28,847,786		Diluted shares	28,313,014		28,277,753

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 March 31,
(dollars in thousands)	(dollars in thousands)	2020		2019		2020		2019		(dollars in thousands)	2021		2020
Net income	Net income	$	9,917	$	13,534	$	18,243	$	29,571	Net income	$	18,038	$	8,326
Other comprehensive income, net of tax:
Net change in unrealized gain on investment securities		6,275		12,165		16,422		23,161
Other comprehensive (loss) income, net of tax:										Other comprehensive (loss) income, net of tax:
Net change in unrealized (loss) gain on investment securities										Net change in unrealized (loss) gain on investment securities	(17,301)		10,147
Defined benefit plans	Defined benefit plans	204		248		720		490		Defined benefit plans	184		516
Total other comprehensive income, net of tax		6,479		12,413		17,142		23,651
Total other comprehensive (loss) income, net of tax										Total other comprehensive (loss) income, net of tax	(17,117)		10,663
Comprehensive income	Comprehensive income	$	16,396	$	25,947	$	35,385	$	53,222	Comprehensive income	$	921	$	18,989

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
(dollars in thousands, except per share data)
Balance at December 31, 2019 28,289,257 $ — $ 447,602 $ 91,611 $ (19,102) $ 8,409 $ — $ 528,520
Impact of the adoption of new accounting standards (1) — — — — (3,156) — — (3,156)
Adjusted balance at January 1, 2020 28,289,257 — 447,602 91,611 (22,258) 8,409 — 525,364
Net income — — — — 8,326 — — 8,326
Other comprehensive income — — — — — 10,663 — 10,663
Cash dividends declared ($0.23 per share) — — — — (6,496) — — (6,496)
Common stock repurchased and retired and other related costs (206,802) — (4,749) — — — — (4,749)
Share-based compensation 32,898 — — 673 — — — 673
Non-controlling interest — — — — — — 49 49
Balance at March 31, 2020 28,115,353 $ — $ 442,853 $ 92,284 $ (20,428) $ 19,072 $ 49 $ 533,830
Net income — — — — 9,917 — — 9,917
Other comprehensive income — — — — — 6,479 — 6,479
Cash dividends declared ($0.23 per share) — — — — (6,475) — — (6,475)
Common stock purchased by directors' deferred compensation plan (8,800 shares, net) — — (154) — — — — (154)
Share-based compensation expense 38,806 — 723 — — — 723
Non-controlling interest — — — — — — (14) (14)
Balance at June 30, 2020 28,154,159 $ — $ 442,699 $ 93,007 $ (16,986) $ 25,551 $ 35 $ 544,306


	Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings (Accum. Deficit)		Accum. Other Comp. Income (Loss)		Non- Controlling Interest		Total
	(dollars in thousands, except per share data)
Balance at December 31, 2020	28,183,340	$	—	$	442,635	$	94,842	$	(10,920)	$	20,128	$	48	$	546,733


Net income	—	—		—		—		18,038		—		—		18,038
Other comprehensive loss	—	—		—		—		—		(17,117)		—		(17,117)
Cash dividends declared ($0.23 per share)	—	—		—		—		(6,490)		—		—		(6,490)


Share-based compensation	99,190	—		870		879		—		—		—		1,749

Balance at March 31, 2021	28,282,530	$	—	$	443,505	$	95,721	$	628	$	3,011	$	48	$	542,913


		Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-In Capital		Accum. Deficit		Accum. Other Comp. Income (Loss)		Non- Controlling Interest		Total			Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-In Capital		Accum. Deficit		Accum. Other Comp. Income (Loss)		Non- Controlling Interest		Total
		(dollars in thousands, except per share data)																													(dollars in thousands, except per share data)
Balance at December 31, 2018		28,967,715	$	—	$	470,660	$	88,876	$	(51,718)	$	(16,093)	$	—	$	491,725
Balance at December 31, 2019																	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 ~~(2)~~(1)	Impact of the adoption of new accounting standards ~~(2)~~(1)	—	—		—		—		—		(3,100)		—		(3,100)		Impact of the adoption of new accounting standards ~~(2)~~(1)	—	—		—		—		(3,156)		—		—		(3,156)
Adjusted balance at January 1, 2019		28,967,715	—		470,660		88,876		(51,718)		(19,193)		—		488,625
Adjusted balance at January 1, 2020																	Adjusted balance at January 1, 2020	28,289,257	—		447,602		91,611		(22,258)		8,409		0		525,364

Net income	Net income	—	—		—		—		16,037		—		—		16,037		Net income	—	—		—		—		8,326		—		—		8,326
Other comprehensive income	Other comprehensive income	—	—		—		—		—		11,238		—		11,238		Other comprehensive income	—	—		—		—		—		10,663		—		10,663
Cash dividends declared ($0.21 per share)		—	—		—		—		(6,052)		—		—		(6,052)
Cash dividends declared ($0.23 per share)																	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	(277,000)	—		(7,708)		—		—		—		—		(7,708)		Common stock repurchased and retired and other related costs	(206,802)	—		(4,749)		—		—		—		—		(4,749)
Share-based compensation	Share-based compensation	32,326	—		—		498		—		—		—		498		Share-based compensation	32,898	—		—		673		—		—		—		673

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
Noncontrolling interest																	Noncontrolling 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

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


(1) Represents the impact of the adoption of Accounting Standards Update ("ASU") ASU 2016-13.																	(1) Represents the impact of the adoption of Accounting Standards Update ("ASU") ASU 2016-13.

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


		Six Months Ended June 30,							Three Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	2020		2019		(dollars in thousands)	2021		2020
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	$	18,038	$	8,326
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	(821)		11,127
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	1,608		1,504
Non-cash lease expense		117		151
Non-cash lease (benefit) expense						Non-cash lease (benefit) expense	(28)		59
Cash flows from operating leases	Cash flows from operating leases	(3,189)		(3,105)		Cash flows from operating leases	(1,599)		(1,594)

Loss on disposal of fixed assets						Loss on disposal of fixed assets	32		0
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	0		64
Amortization of mortgage servicing rights	Amortization of mortgage servicing rights	3,217		1,072		Amortization of mortgage servicing rights	1,232		1,547
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	2,391		1,982
Share-based compensation expense	Share-based compensation expense	1,396		848		Share-based compensation expense	879		673

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	(2,439)		(727)
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	57,439		31,498
Originations of loans held for sale	Originations of loans held for sale	(163,730)		(92,105)		Originations of loans held for sale	(43,547)		(25,598)
Equity in earnings of unconsolidated subsidiaries	Equity in earnings of unconsolidated subsidiaries	(130)		(79)		Equity in earnings of unconsolidated subsidiaries	(107)		(26)
Distributions from unconsolidated subsidiaries	Distributions from unconsolidated subsidiaries	121		101		Distributions from unconsolidated subsidiaries	181		73
Net increase in cash surrender value of bank-owned life insurance		(2,268)		(854)
Net (increase) decrease in cash surrender value of bank-owned life insurance						Net (increase) decrease in cash surrender value of bank-owned life insurance	(898)		19
Deferred income taxes	Deferred income taxes	(2,129)		8,501		Deferred income taxes	(6,687)		(406)
Net tax (expense) benefit from share-based compensation		(134)		192
Net tax benefit (expense) from share-based compensation						Net tax benefit (expense) from share-based compensation	131		(48)
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	(6,126)		2,772
Net cash provided by operating activities	Net cash provided by operating activities	57,058		37,969		Net cash provided by operating activities	19,679		31,245
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	80,015		50,878

Purchases of investment securities available-for-sale	Purchases of investment securities available-for-sale	(147,359)		—		Purchases of investment securities available-for-sale	(139,785)		(96,068)

Proceeds from sale of MasterCard stock		—		2,555

Net loan originations	Net loan originations	(524,869)		(121,756)		Net loan originations	(138,572)		(41,339)
Purchases of loan portfolios	Purchases of loan portfolios	(33,196)		(49,327)		Purchases of loan portfolios	(36,059)		(22,340)

Proceeds from sale of foreclosed loans/other real estate owned		94		—

Purchases of bank-owned life insurance						Purchases of bank-owned life insurance	(3,550)		0
Proceeds from bank-owned life insurance	Proceeds from bank-owned life insurance	166		—		Proceeds from bank-owned life insurance	499		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	(8,961)		(5,608)
Net return of capital from unconsolidated subsidiaries		—		622

Contributions to unconsolidated subsidiaries	Contributions to unconsolidated subsidiaries	(2,194)		—		Contributions to unconsolidated subsidiaries	(2,736)		(422)
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	82		(3,126)
Net cash used in investing activities	Net cash used in investing activities	(589,583)		(48,604)		Net cash used in investing activities	(249,067)		(118,025)
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	412,832		16,046
Proceeds from long-term debt		65,944		—
Repayments of long-term debt		—		(20,619)

Net (decrease) increase in short-term borrowings	Net (decrease) increase in short-term borrowings	(150,000)		24,000		Net (decrease) increase in short-term borrowings	(22,000)		72,000
Cash dividends paid on common stock	Cash dividends paid on common stock	(12,971)		(12,633)		Cash dividends paid on common stock	(6,490)		(6,496)
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	0		(4,749)

Net proceeds from issuance of common stock and stock option exercises						Net proceeds from issuance of common stock and stock option exercises	870		0
Net cash provided by financing activities	Net cash provided by financing activities	572,886		7,156		Net cash provided by financing activities	385,212		76,801
Net increase (decrease) in cash and cash equivalents	Net increase (decrease) in cash and cash equivalents	40,361		(3,479)		Net increase (decrease) in cash and cash equivalents	155,824		(9,979)
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	104,067		102,972
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	$	259,891	$	92,993

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	$	1,681	$	6,140
Income taxes	Income taxes	185		9,401		Income taxes	2,445		170

Supplemental disclosure of non-cash information:
Net change in common stock held by directors’ deferred compensation plan		154		416

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

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

These interim condensed consolidated financial statements and notes should be read in conjunction with the Company's consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended December 31, ~~2019.~~2020. In the opinion of management, all adjustments necessary for a fair presentation have been made and include all normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.

Reclassifications

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

Principles of Consolidation

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

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

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

Our investments in unconsolidated subsidiaries accounted for under the equity, proportional amortization and cost methods were $0.2 million, ~~$14.6~~$27.7 million and ~~$1.6~~$3.6 million, respectively, at ~~June 30, 2020~~March 31, 2021 and ~~$0.2~~$0.3 million, ~~$15.3~~$28.1 million and $1.6 million, respectively, at December 31, ~~2019.~~2020. Our policy for determining impairment of these investments includes an evaluation of whether a loss in value of an investment is other than temporary. Evidence of a loss in value includes absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. We perform impairment tests whenever indicators of impairment are present. If the value of an investment declines and it is considered other than temporary, the investment is written down to its respective fair value in the period in which this determination is made.

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

Risks and Uncertainties

COVID-19 Pandemic

In December 2019, a novel strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China, and has since spread ~~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, the success of the continued COVID-19 vaccine rollout, and other actions taken by governmental authorities and other third parties in response to the pandemic. If the pandemic continues to be sustained, it may further adversely impact the Company and the State of Hawaii and impair the ability of the Company's customers to fulfill their contractual obligations to the Company. This could cause the Company to experience a material adverse effect on its business operations, asset valuations,

financial condition, and results of operations. 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 30, 2020~~March 31, 2021 and the Company did not reverse any accrued interest against interest income during the three ~~and six~~ months ended ~~June 30, 2020.~~March 31, 2021.

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

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

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

rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the investment security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost

basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in AOCI.

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

As of ~~June 30, 2020,~~March 31, 2021, 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~~$3.9 million as of ~~June 30, 2020.~~March 31, 2021. Accrued interest receivable on AFS debt securities is excluded from the estimate of credit losses.

ACL for HTM Debt Securities

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

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

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

The Company did not have any HTM debt securities as of ~~June 30, 2020.~~March 31, 2021.

Federal Home Loan Bank Stock

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

Loans

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

Interest income on loans is accrued at the contractual rate of interest on the unpaid principal balance. Accrued interest receivable on loans totaled ~~$15.3~~$15.6 million at ~~June 30, 2020~~March 31, 2021 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 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. The reserve has remained unchanged through March 31, 2021.

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~~Coronavirus Aid, Relief and Economic Security ("CARES") Act. Section 4013 allows financial institutions to suspend the requirements to classify certain loan modifications as TDRs. The revised statement also provides supervisory interpretations on past due and nonaccrual regulatory reporting of loan modification programs and regulatory capital. Section 4013 and the interagency guidance are being applied by the Company to loan modifications made related to the COVID-19 pandemic as eligible and appropriate. The application of the guidance reduced the number of TDRs that were reported. In December 2020, the Consolidated Appropriations Act, 2021 was signed into law. Section 541 of this legislation, “Extension of Temporary Relief From Troubled Debt Restructurings and Insurer Clarification,” extends Section 4013 of the CARES Act to the earlier of January 1, 2022 or 60 days after the termination of the national emergency declared relating to COVID-19.

Future TDRs are indeterminable and will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the success of the continued COVID-19 vaccine rollout, and other actions taken by governmental authorities and other third parties in response to the pandemic.

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

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

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

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

The Company uses the Moody’s Analytics ~~forecasting~~Baseline forecast service for ~~the~~its economic forecast ~~considered in its ACL methodology.~~assumption. The Moody’s Analytics Baseline forecast includes both National and Hawaii specific economic indicators. The Moody’s Analytics forecast service is widely used in the industry and is reasonable and supportable. ~~The Moody’s Analytics forecast~~It is updated at least monthly and includes a variety of upside and downside economic ~~scenarios.~~scenarios from the Baseline. Generally the Company will use the most recent ~~consensus~~Baseline 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.

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.

Residential mortgage loans

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

Consumer loans - other revolving

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

Consumer loans - non-revolving

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

Purchased consumer portfolios

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

Below is a description of the methodologies mentioned above:

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.

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~~recorded as a provision for credit losses on off-balance sheet credit exposures in ~~other operating expense.~~the provision for credit losses.

Purchased Credit Deteriorated (“PCD”) Financial Assets

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

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

2. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Adopted in ~~2020~~

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

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

~~The following table illustrates the impact of ASC 326:~~

January 1, 2020
(dollars in thousands) As Reported
Under
ASC 326 Pre-ASC 326
Adoption Impact of
ASC 326
Adoption
Assets:
Allowance for credit losses on loans:
Commercial, financial & industrial $ (7,509) $ (8,136) $ 627
Real estate:
Construction (2,271) (1,792) (479)
Residential mortgage (13,935) (13,327) (608)
Home equity (2,592) (4,206) 1,614
Commercial mortgage (13,737) (11,113) (2,624)
Consumer (11,493) (9,397) (2,096)
Subtotal $ (51,537) $ (47,971) $ (3,566)
Net deferred tax assets (included in other assets) $ 17,692 $ 16,541 $ 1,151
Liabilities:
Reserve for off-balance sheet credit exposures (included in other liabilities) $ (2,012) $ (1,272) $ (740)
Equity:
Accumulated deficit $ 22,257 $ 19,102 $ 3,155
2021

In ~~August 2018,~~December 2019, the FASB issued ASU ~~2018-13,~~2019-12, "~~Fair Value Measurement~~Income Taxes (Topic ~~820): Disclosure Framework—Changes~~740)." This ASU simplifies the accounting for income taxes by removing certain exceptions to the ~~Disclosure Requirements for Fair Value Measurement."~~ The ASU is part of the FASB's disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by generally accepted accounting principles. The ASU modifies disclosure requirements on fair value measurementsgeneral principles in Topic ~~820.~~740. It also improves consistent application of GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company adopted ASU ~~2018-13~~2019-12 effective January 1, ~~2020. ASU 2018-13~~2021 and it did not have a material impact on ~~disclosures in~~ our consolidated financial statements.

In ~~April~~October 2020, ~~various regulatory agencies, including~~ the ~~Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”)~~FASB issued a revised interagency statement encouraging financial institutions to work with customers affected by the novel coronavirus pandemic ("COVID-19") and providing additional information regarding loan modifications. The revised interagency statement clarifies the interaction between the interagency statement issued on March 22, 2020 and the temporary relief provided by Section 4013 of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. Section 4013 allows financial institutions to suspend the requirements to classify certain loan modifications as troubled debt restructurings (TDRs). The revised statement also provides supervisory interpretations on past due and nonaccrual regulatory reporting of loan modification programs and regulatory capital. ASU 2020-10, "Codification Improvements." This ~~interagency guidance is being applied by the Company to loan modifications made related~~ASU issues improvements to the ~~COVID-19 pandemic as eligible and appropriate. The application of~~codification by ensuring that all guidance that requires or provides an option for an entity to provide information in the ~~guidance reduced the number of TDRs that were reported. Future TDRs are indeterminable and~~ will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in responsenotes to the ~~pandemic~~.financial statements is codified, reducing the likelihood that disclosure requirements would be missed. The Company adopted ASU 2020-10 effective January 1, 2021 and it did not have a material impact on our consolidated financial statements.

Impact of Other Recently Issued Accounting Pronouncements on Future Filings

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

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)." This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. Entities can (1) elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can also (2) elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships

affected by reference rate reform, if certain criteria are met. Finally, entities can (3) make a one-time election to sell and/or reclassify held-to-maturity (“HTM”) debt securities that reference an interest rate affected by reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company will elect (1) above for all contract modifications that meet the stated criteria. As the Company currently does not utilize hedge accounting, (2) above is ~~in the process of evaluating the provisions of this ASU~~currently not applicable. The Company currently does not have HTM debt securities and ~~its effects on our consolidated financial statements.~~therefore, (3) above is currently not applicable.

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
March 31, 2021												March 31, 2021
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	$	165,180	$	3,355	$	(2,190)	$	166,345	$	0
Corporate securities	Corporate securities	29,221		531		—		29,752		—		Corporate securities	47,175		189		(1,197)		46,167		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	41,565		90		(478)		41,177		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	814,051		13,300		(12,085)		815,266		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	85,778		1,710		(1,609)		85,879		0
Residential - Non-government agencies	Residential - Non-government agencies	30,697		1,389		—		32,086		—		Residential - Non-government agencies	18,318		594		(112)		18,800		0
Commercial - Non-government agencies	Commercial - Non-government agencies	131,679		2,290		(177)		133,792		—		Commercial - Non-government agencies	41,315		1,392		0		42,707		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	$	1,213,382	$	20,630	$	(17,671)	$	1,216,341	$	0

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


(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		ACL
December 31, 2020
Available-for-sale:
Debt securities:
States and political subdivisions	$	163,573	$	5,370	$	(177)	$	168,766	$	0
Corporate securities	47,351		788		(131)		48,008		0
U.S. Treasury obligations and direct obligations of U.S Government agencies	33,413		18		(286)		33,145		0
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	762,309		16,816		(299)		778,826		0
Commercial - U.S. Government agencies and sponsored entities	85,405		2,564		(500)		87,469		0
Residential - Non-government agencies	22,671		786		(34)		23,423		0
Commercial - Non-government agencies	41,309		1,663		0		42,972		0
Total available-for-sale securities	$	1,156,031	$	28,005	$	(1,427)	$	1,182,609	$	0

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

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

(dollars in thousands)

Amortized Cost

Fair Value

(dollars in thousands)

Amortized Cost

Fair Value

June 30, 2020

March 31, 2021

Equity securities

1,064

1,209

Equity securities

1,096

1,435

December 31, 2019

December 31, 2020

Equity securities

935

1,127

Equity securities

1,068

1,351

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 30, 2020~~March 31, 2021 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							March 31, 2021
(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	$	21,146	$	21,381
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	28,707		29,691
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	93,484		93,093
Due after ten years	Due after ten years	44,567		45,629		Due after ten years	110,583		109,524

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	814,051		815,266
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	85,778		85,879
Residential - Non-government agencies	Residential - Non-government agencies	30,697		32,086		Residential - Non-government agencies	18,318		18,800
Commercial - Non-government agencies	Commercial - Non-government agencies	131,679		133,792		Commercial - Non-government agencies	41,315		42,707

Total available-for-sale securities	Total available-for-sale securities	$	1,135,728	$	1,168,594	Total available-for-sale securities	$	1,213,382	$	1,216,341

We did 0t sell any available-for-sale securities during the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and March 31, 2020 ~~and June 30, 2019.~~

Investment securities with fair value of ~~$597.4~~$494.1 million and ~~$719.8~~$483.6 million at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, were pledged to secure public funds on deposit and other short-term borrowings.

At ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, there were no holdings of investment securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders' equity.

There were a total of 2595 and 8137 AFS debt securities which were in an unrealized loss position, without an ACL, at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. The following tables summarize AFS debt securities which were in an unrealized loss position at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, 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
March 31, 2021														March 31, 2021
Debt securities:	Debt securities:													Debt securities:
States and political subdivisions	States and political subdivisions	$	3,631	$	(11)	$	—	$	—	$	3,631	$	(11)	States and political subdivisions	$	59,427	$	(2,190)	$	0	$	0	$	59,427	$	(2,190)
Corporate securities	Corporate securities	—		—		—		—		—		—		Corporate securities	30,810		(1,197)		0		0		30,810		(1,197)
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	14,001		(329)		16,389		(149)		30,390		(478)
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	409,049		(12,085)		0		0		409,049		(12,085)
Residential - Non-government agencies	Residential - Non-government agencies	—		—		—		—		—		—		Residential - Non-government agencies	905		(112)		0		0		905		(112)
Commercial - U.S. Government agencies and sponsored entities	Commercial - U.S. Government agencies and sponsored entities	1,781		(4)		—		—		1,781		(4)		Commercial - U.S. Government agencies and sponsored entities	22,398		(1,609)		0		0		22,398		(1,609)
Commercial - Non-government agencies		26,729		(177)		—		—		26,729		(177)

Total temporarily impaired securities	Total temporarily impaired securities	$	47,513	$	(407)	$	18,458	$	(286)	$	65,971	$	(693)	Total temporarily impaired securities	$	536,590	$	(17,522)	$	16,389	$	(149)	$	552,979	$	(17,671)

Less Than 12 Months 12 Months or Longer Total
(dollars in thousands) Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses
December 31, 2019
Debt securities:
States and political subdivisions $ 1,754 $ (9) $ 801 $ (31) $ 2,555 $ (40)
Corporate securities — — — — — —
U.S. Treasury obligations and direct obligations of U.S Government agencies 18,882 (143) 19,031 (255) 37,913 (398)
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities 54,335 (283) 214,295 (1,816) 268,630 (2,099)
Residential - Non-government agencies 8,206 (16) — — 8,206 (16)
Commercial - U.S. Government-sponsored entities 32,067 (746) — — 32,067 (746)
Total temporarily impaired securities $ 115,244 $ (1,197) $ 234,127 $ (2,102) $ 349,371 $ (3,299)


	Less Than 12 Months				12 Months or Longer				Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2020
Debt securities:
States and political subdivisions	$	21,313	$	(177)	$	0	$	0	$	21,313	$	(177)
Corporate securities	4,869		(131)		0		0		4,869		(131)
U.S. Treasury obligations and direct obligations of U.S Government agencies	5,980		(24)		20,925		(262)		26,905		(286)
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	76,402		(299)		0		0		76,402		(299)
Residential - Non-government agencies	989		(34)		0		0		989		(34)
Commercial - U.S. Government-sponsored entities	16,977		(500)		0		0		16,977		(500)

Total temporarily impaired securities	$	126,530	$	(1,165)	$	20,925	$	(262)	$	147,455	$	(1,427)

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

Visa ~~and MasterCard~~ Class B Common Stock

As of ~~June 30, 2020,~~March 31, 2021, the Company owns 34,631 shares of Class B common stock of Visa, Inc. ("Visa"). These shares were received in 2008 as part of Visa's initial public offering ("IPO"). These shares are transferable only under limited circumstances until they can be converted into shares of the publicly traded Class A common stock. This conversion will not occur until the 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 30, 2020~~March 31, 2021 and ~~loans, excluding loans held for sale, net of ACL under previous GAAP as of~~ December 31, ~~2019~~2020 consisted of the following:


(dollars in thousands)	(dollars in thousands)	June 30, 2020		December 31, 2019		(dollars in thousands)	March 31, 2021		December 31, 2020
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	$	618,104	$	425,993
Other	Other	547,768		570,089		Other	514,303		545,136
Real estate:	Real estate:					Real estate:
Construction	Construction	103,826		96,139		Construction	138,284		125,625
Residential mortgage	Residential mortgage	1,653,632		1,595,801		Residential mortgage	1,684,936		1,687,251
Home equity	Home equity	510,188		490,239		Home equity	558,348		550,216
Commercial mortgage	Commercial mortgage	1,131,959		1,124,911		Commercial mortgage	1,166,175		1,158,203
Consumer	Consumer	527,100		569,516		Consumer	476,591		479,580

Gross loans and leases		5,018,126		4,446,695
Gross loans						Gross loans	5,156,741		4,972,004
Net deferred (fees) costs	Net deferred (fees) costs	(14,688)		2,845		Net deferred (fees) costs	(18,892)		(7,891)
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	5,137,849		4,964,113
Allowance for credit losses	Allowance for credit losses	(67,339)		(47,971)		Allowance for credit losses	(81,553)		(83,269)
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	$	5,056,296	$	4,880,844

~~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. ~~From April 3, 2020,~~The Company saw tremendous interest in the ~~date the~~PPP.The SBA began accepting submissions for the initial round of PPP loans ~~through~~on April 3, 2020. In April 2020, the Paycheck Protection Program and Health Care Enhancement Act added an additional round of funding for the PPP. In June ~~30,~~2020, the Paycheck Protection Program Flexibility Act of 2020 was enacted, which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Through the end of the second round in August 2020, the Company ~~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~~

In December 2020, the Consolidated Appropriations Act, 2021 was passed which among other things, included a third round of funding and a new simplified forgiveness procedure for PPP loans ~~paid-off shortly after funding resulting~~of $150,000 or less. During the first quarter of 2021, the Company funded over 3,600 loans totaling over $292 million in the third round, earning additional gross processing fees of over $15 million.

The Company developed a PPP forgiveness portal and with assistance from a third party vendor has assisted its customers with applying for forgiveness from the SBA. Since the start of the SBA forgiveness, we have received forgiveness payments totaling over $233 million. A total outstanding balance of $618.1 million and net deferred fees of $20.3 million remain as of ~~June 30, 2020 of $544 million. Certain PPP loans approved by the SBA may be cancelled or withdrawn prior to closing and funding.~~March 31, 2021. Although the Company believes that the majority of ~~these~~the remaining 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 did 0t transfer any loans to the held-for-sale category during the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020.

The Company did 0t sell any loans originally held for investment during the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020.

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

2220

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

~~(dollars in thousands)~~

~~Consumer - Unsecured~~

~~Three Months Ended June 30, 2020~~

~~Purchases:~~

~~Outstanding balance~~

~~11,359~~

~~Purchase premium (discount)~~

~~(503)~~

~~Purchase price~~

~~10,856~~

~~Six Months Ended June 30, 2020~~

~~Purchases:~~

~~Outstanding balance~~

~~34,312~~

~~Purchase premium (discount)~~

~~(1,116)~~

~~Purchase price~~

~~33,196~~

~~Three Months Ended June 30, 2019~~

~~Purchases:~~

~~Outstanding balance~~

~~31,041~~

~~Purchase premium (discount)~~

—

~~Purchase price~~

~~31,041~~

~~Six Months Ended June 30, 2019~~

~~Purchases:~~

~~Outstanding balance~~

~~49,327~~

~~Purchase premium (discount)~~

—

~~Purchase price~~

~~49,327~~

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


(dollars in thousands)	U.S. Mainland Consumer - Unsecured		U.S. Mainland Consumer - Automobile		Total
Three Months Ended March 31, 2021
Purchases:
Outstanding balance	$	22,534	$	12,990	$	35,524
Purchase premium (discount)	(131)		666		535
Purchase price	$	22,403	$	13,656	$	36,059







Three Months Ended March 31, 2020
Purchases:
Outstanding balance	$	22,953	$	0	$	22,953
Purchase premium (discount)	(613)		0		(613)
Purchase price	$	22,340	$	0	$	22,340







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 30,~~March 31, 2021 and December 31, 2020:


(dollars in thousands)	Secured by 1-4 Family Residential Properties		Secured by Nonfarm Nonresidential Properties		Secured by Real Estate and Business Assets		Total		Allocated ACL
March 31, 2021
Commercial, financial and agricultural	$	0	$	0	$	636	$	636	$	160
Real estate:

Residential mortgage	10,141		0		0		10,141		0
Home equity	439		0		0		439		0
Commercial mortgage	0		584		0		584		0


Total	$	10,580	$	584	$	636	$	11,800	$	160


(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
December 31, 2020
Commercial, financial and agricultural	$	0	$	0	$	676	$	676	$	209
Real estate:

Residential mortgage	9,833		0		0		9,833		0
Home equity	524		0		0		524		0
Commercial mortgage	0		626		0		626		0


Total	$	10,357	$	626	$	676	$	11,659	$	209

(dollars in thousands) Secured by
1-4 Family
Residential
Properties Secured by
Nonfarm
Nonresidential
Properties Secured by
Real Estate
and Business
Assets Total Allocated
ACL
June 30, 2020
Commercial, financial and agricultural $ — $ — $ 736 $ 736 $ 223
Real estate:
Residential mortgage 8,504 — — 8,504 —
Home equity 538 — — 538 —
Commercial mortgage — 711 — 711 —
Total $ 9,042 $ 711 $ 736 $ 10,489 $ 223

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

December 31, 2019
(dollars in thousands) Unpaid
Principal
Balance Recorded
Investment ACL
Allocated
Impaired loans:
Commercial, financial and agricultural $ 246 $ 135 $ —
Real estate:
Residential mortgage 7,230 6,516 —
Home equity 92 92 —
Commercial mortgage 1,839 1,839 —
Total 9,407 8,582 —
Impaired loans with an ACL recorded:
Commercial, financial and agricultural 467 467 218
Consumer 17 17 17
Total 484 484 235
Total impaired loans $ 9,891 $ 9,066 $ 235

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

Three Months Ended Six Months Ended
June 30, 2019 June 30, 2019
(dollars in thousands) Average
Recorded
Investment Interest
Income
Recognized Average
Recorded
Investment Interest
Income
Recognized
Commercial, financial and agricultural $ 185 $ 2 $ 199 $ 5
Real estate:
Construction 1,434 32 1,890 62
Residential mortgage 8,583 607 9,289 713
Home equity 254 13 393 13
Commercial mortgage 2,138 23 2,222 46
Total $ 12,594 $ 677 $ 13,993 $ 839

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

Foreclosure Proceedings

The Company had ~~$0.9 million and $0.6~~$1.6 million of residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure at ~~June 30, 2020~~both March 31, 2021 and December 31, ~~2019, respectively.~~2020.

The Company did ~~not~~0t foreclose on any loans during the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020.

The Company did 0t sell any foreclosed properties during the three months ended March 31, 2021 and 2020.

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 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020. The following tables also present the amortized cost of loans on nonaccrual status for which there was no related ACL under ASC 326 as of ~~June 30, 2020~~March 31, 2021 and ~~under previous GAAP as of~~ December 31, ~~2019.~~

(dollars in thousands) Accruing
Loans
30 - 59 Days
Past Due Accruing
Loans
60 - 89 Days
Past Due Accruing
Loans
Greater
Than
90 Days
Past Due Nonaccrual
Loans Total
Past Due
and
Nonaccrual Loans and
Leases
Not
Past Due Total Nonaccrual
Loans
With
No ACL
June 30, 2020
Commercial, financial and agricultural - SBA PPP $ — $ — $ — $ — $ — $ 526,408 $ 526,408 $ —
Commercial, financial and agricultural - Other 979 176 — 934 2,089 545,769 547,858 —
Real estate:
Construction — — — — — 103,518 103,518 —
Residential mortgage — 1,375 726 3,215 5,316 1,652,242 1,657,558 3,215
Home equity 366 — — 538 904 510,058 510,962 538
Commercial mortgage — — — — — 1,130,169 1,130,169 —
Consumer 1,673 964 444 54 3,135 523,830 526,965 —
Total $ 3,018 $ 2,515 $ 1,170 $ 4,741 $ 11,444 $ 4,991,994 $ 5,003,438 $ 3,753
2020.


(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
December 31, 2019
Commercial, financial and agricultural		$	476	$	865	$	—	$	467	$	1,808	$	568,496	$	570,304	$	—
March 31, 2021																		March 31, 2021
Commercial, financial and agricultural:																		Commercial, financial and agricultural:
SBA PPP																		SBA PPP	$	0	$	0	$	0	$	0	$	0	$	597,819	$	597,819	$	0
Other																		Other	279		54		0		1,412		1,745		512,444		514,189		0
Real estate:	Real estate:																	Real estate:
Construction	Construction	643		—		—		—		643		95,211		95,854		—		Construction	0		0		0		0		0		137,976		137,976		0
Residential mortgage	Residential mortgage	1,830		589		724		979		4,122		1,595,679		1,599,801		979		Residential mortgage	2,122		272		4,522		4,553		11,469		1,676,044		1,687,513		4,553
Home equity	Home equity	759		207		—		92		1,058		489,676		490,734		92		Home equity	0		135		0		439		574		558,940		559,514		439
Commercial mortgage	Commercial mortgage	—		397		—		—		397		1,123,018		1,123,415		—		Commercial mortgage	0		0		0		0		0		1,164,338		1,164,338		0

Consumer	Consumer	3,223		943		286		17		4,469		564,963		569,432		—		Consumer	1,550		670		262		790		3,272		473,228		476,500		0

Total	Total	$	6,931	$	3,001	$	1,010	$	1,555	$	12,497	$	4,437,043	$	4,449,540	$	1,071	Total	$	3,951	$	1,131	$	4,784	$	7,194	$	17,060	$	5,120,789	$	5,137,849	$	4,992


(dollars in thousands)	Accruing Loans 30 - 59 Days Past Due		Accruing Loans 60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due and Nonaccrual		Loans and Leases Not Past Due		Total		Nonaccrual Loans With No ACL
December 31, 2020
Commercial, financial and agricultural:
SBA PPP	$	0	$	0	$	0	$	0	$	0	$	416,375	$	416,375	$	0
Other	613		350		0		1,461		2,424		542,667		545,091		0
Real estate:
Construction	0		0		0		0		0		125,407		125,407		0
Residential mortgage	2,832		689		567		4,115		8,203		1,682,009		1,690,212		4,115
Home equity	273		3		0		524		800		550,466		551,266		524
Commercial mortgage	0		0		0		0		0		1,156,328		1,156,328		0


Consumer	2,725		906		240		92		3,963		475,471		479,434		0

Total	$	6,443	$	1,948	$	807	$	6,192	$	15,390	$	4,948,723	$	4,964,113	$	4,639

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

2522

Troubled Debt Restructurings

Troubled debt restructurings ("TDRs") included in nonperforming assets at ~~June 30, 2020~~March 31, 2021 consisted of 12 Hawaii residential mortgage loans with a principal balance of $0.2 million and 1 Hawaii commercial, financial and agriculturalloan with a principal balance of ~~$0.3~~$0.6 million. There were $7.5 million of TDRs still accruing interest at ~~June 30, 2020, NaN~~March 31, 2021, of which ~~were~~1 loan totaling $0.1 million was more than 90 days delinquent. At December 31, ~~2019,~~2020, there were ~~$7.5~~$7.8 million of TDRs still accruing interest, ~~NaN~~ of which ~~were~~1 loan totaling $0.7 million was more than 90 days delinquent.

The Company offers various types of concessions when modifying a loan. Concessions made to the original contractual terms of the loan typically consists of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. In these cases, the principal balance on the TDR had matured and/or was in default at the time of restructure, and there were no commitments to lend additional funds to the borrower during the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020.

As discussed in Note 1 to these financial statements, Section 4013 of CARES Act and the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" provided banks an ~~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 ~~identified 9 consumer~~did not identify any loans ~~totaling $0.1 million~~in the first quarter of 2021 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~~$39.5 million and $119.3 million resulting from the COVID-19 pandemic that were not classified as a TDR at ~~June 30,~~March 31, 2021 and December 31, 2020.The following table sets forth loans on active payment forbearance or deferral as of March 31, 2021:


	Loans on Active Forbearance or Deferral
(dollars in thousands)	Loan Count	Balance		Accrued Interest Receivable		Total Loans		% of Asset Class		Total Loans, Excl. PPP		% of Asset Class, Excl. PPP
Commercial, financial and agricultural	0	$	0	$	0	$	1,112,008	0	%	$	514,189	0	%
Real estate:
Construction	0	0		0		137,976		0	%	137,976		0	%
Residential mortgage	88	38,571		984		1,687,513		2.3	%	1,687,513		2.3	%
Home equity	0	0		0		559,514		0	%	559,514		0	%
Commercial mortgage	0	0		0		1,164,338		0	%	1,164,338		0	%
Consumer	83	928		0		476,500		0.2	%	476,500		0.2	%

Total loans	171	$	39,499	$	984	$	5,137,849	0.8	%	$	4,540,030	0.9	%

The following table presents by class, information related to loans modified in a TDR during the three ~~and six~~ months ended ~~June 30, 2020:~~March 31, 2021:

(dollars in thousands) Number of
Contracts Recorded
Investment
(as of Period End) Increase in the
ACL
Three Months Ended June 30, 2020
Real estate: Commercial mortgage 1 $ 285 $ —
Consumer 9 145 —
Total 10 $ 430 $ —
Six Months Ended June 30, 2020
Real estate: Commercial mortgage 1 $ 285 $ —
Consumer 9 145
Total 10 $ 430 $ —


(dollars in thousands)	Number of Contracts	Recorded Investment (as of Period End)		Increase in the ACL
Three Months Ended March 31, 2021
Commercial, financial and agricultural - Other	1	$	560	$	0


Total	1	$	560	$	0

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

NaN loans were modified as a TDR within the previous twelve months that subsequently defaulted during the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020.

Credit Quality Indicators

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

Special Mention. Loans ~~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.

2724

The following table presents the amortized cost basis of the Company's loans by class, credit quality indicator and origination year as of ~~June 30,~~March 31, 2021 and 2020. Revolving loans converted to term as of and during the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 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)	2021		2020		2019		2018		2017		Prior		Amortized Cost of Revolving Loans		Total
March 31, 2021																		March 31, 2021
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	$	278,212	$	319,607	$	0	$	0	$	0	$	0	$	0	$	597,819

Subtotal																		Subtotal	278,212		319,607		0		0		0		0		0		597,819
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	26,676		75,241		53,756		61,131		39,649		124,952		74,084		455,489
Special Mention	Special Mention	2,740		8,796		5,490		15,034		550		9,632		1,520		43,762		Special Mention	978		6,823		12,354		2,904		20,107		8,409		1,001		52,576
Substandard	Substandard	—		7,362		595		1,220		2,407		1,842		—		13,426		Substandard	0		262		820		1,061		951		3,030		0		6,124

Subtotal	Subtotal	76,303		86,210		70,732		70,181		49,531		111,177		83,724		547,858		Subtotal	27,654		82,326		66,930		65,096		60,707		136,391		75,085		514,189
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	4,854		29,053		34,004		33,818		8,143		20,865		4,070		134,807
Special Mention																		Special Mention	0		0		0		3,169		0		0		0		3,169

Subtotal																		Subtotal	4,854		29,053		34,004		36,987		8,143		20,865		4,070		137,976
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	148,010		534,754		235,514		113,088		120,950		525,067		0		1,677,383
Special Mention	Special Mention	—		—		—		1,437		153		1,145		—		2,735		Special Mention	0		991		0		0		0		0		0		991
Substandard	Substandard	—		—		545		895		888		1,688		—		4,016		Substandard	0		1,218		393		805		2,079		4,644		0		9,139

Subtotal	Subtotal	252,833		335,607		163,681		184,035		211,626		509,776		—		1,657,558		Subtotal	148,010		536,963		235,907		113,893		123,029		529,711		0		1,687,513
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	5,288		16,899		13,330		13,820		716		5,693		502,628		558,374
Special Mention	Special Mention	—		—		—		—		—		—		210		210		Special Mention	0		0		0		0		0		0		701		701
Substandard	Substandard	—		—		—		—		206		332		—		538		Substandard	0		0		0		0		0		439		0		439

Subtotal	Subtotal	9,200		18,464		19,080		457		504		5,255		458,002		510,962		Subtotal	5,288		16,899		13,330		13,820		716		6,132		503,329		559,514
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	17,839		134,944		144,012		124,952		163,055		455,960		16,029		1,056,791
Special Mention	Special Mention	—		2,602		18,508		12,718		10,369		24,984		—		69,181		Special Mention	0		0		2,018		30,564		4,742		33,038		0		70,362
Substandard	Substandard	—		4,593		—		—		4,513		18,964		—		28,070		Substandard	0		0		1,788		18,964		1,873		14,560		0		37,185

Subtotal	Subtotal	42,505		156,820		173,608		184,231		128,367		427,275		17,363		1,130,169		Subtotal	17,839		134,944		147,818		174,480		169,670		503,558		16,029		1,164,338
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	36,826		100,204		126,940		70,102		38,443		33,193		69,739		475,447

Substandard	Substandard	11		27		14		48		4		256		—		360		Substandard	0		166		441		267		87		65		0		1,026
Loss	Loss	—		—		—		79		45		15		—		139		Loss	0		0		0		0		16		11		0		27
Subtotal	Subtotal	61,801		136,983		73,822		57,749		25,671		99,718		71,221		526,965		Subtotal	36,826		100,370		127,381		70,369		38,546		33,269		69,739		476,500
Total	Total	$	981,358	$	749,110	$	547,015	$	503,817	$	417,938	$	1,173,890	$	630,310	$	5,003,438	Total	$	518,683	$	1,220,162	$	625,370	$	474,645	$	400,811	$	1,229,926	$	668,252	$	5,137,849


	Amortized Cost of Term Loans by Origination Year
(dollars in thousands)	2020		2019		2018		2017		2016		Prior		Amortized Cost of Revolving Loans		Total
December 31, 2020
Commercial, financial and agricultural - SBA PPP:
Risk Rating
Pass	$	416,375	$	0	$	0	$	0	$	0	$	0	$	0	$	416,375



Subtotal	416,375		0		0		0		0		0		0		416,375
Commercial, financial and agricultural - Other:
Risk Rating
Pass	$	86,456	$	55,660	$	61,314	$	47,672	$	39,337	$	98,136	$	82,465	$	471,040
Special Mention	9,690		16,120		6,293		26,109		1,556		6,989		420		67,177
Substandard	200		839		1,043		1,045		2,570		1,177		0		6,874

Subtotal	96,346		72,619		68,650		74,826		43,463		106,302		82,885		545,091
Construction:
Risk Rating
Pass	22,491		29,518		36,790		9,365		2,163		19,138		3,099		122,564
Special Mention	0		0		2,843		0		0		0		0		2,843


Subtotal	22,491		29,518		39,633		9,365		2,163		19,138		3,099		125,407
Residential mortgage:
Risk Rating
Pass	556,479		276,645		127,490		136,307		180,782		406,020		0		1,683,723
Special Mention	997		0		0		597		142		0		0		1,736
Substandard	0		0		537		785		1,381		2,050		0		4,753

Subtotal	557,476		276,645		128,027		137,689		182,305		408,070		0		1,690,212
Home equity:
Risk Rating
Pass	17,582		15,851		15,567		679		1,023		4,592		494,741		550,035
Special Mention	0		0		0		0		0		0		707		707
Substandard	0		0		0		0		200		324		0		524

Subtotal	17,582		15,851		15,567		679		1,223		4,916		495,448		551,266
Commercial mortgage:
Risk Rating
Pass	130,448		144,244		123,519		166,618		104,381		363,837		16,200		1,049,247
Special Mention	0		2,021		31,647		2,919		13,546		19,653		—		69,786
Substandard	0		1,791		19,000		1,934		0		14,570		0		37,295

Subtotal	130,448		148,056		174,166		171,471		117,927		398,060		16,200		1,156,328
Consumer:
Risk Rating
Pass	112,955		147,940		78,486		44,571		17,445		4,032		73,423		478,852
Special Mention	0		0		0		0		0		0		250		250
Substandard	0		138		102		22		0		22		0		284
Loss	0		16		0		26		2		4		0		48
Subtotal	112,955		148,094		78,588		44,619		17,447		4,058		73,673		479,434
Total	$	1,353,673	$	690,783	$	504,631	$	438,649	$	364,528	$	940,544	$	671,305	$	4,964,113

The following tables present the Company's loans by class and credit quality indicator as of March 31, 2021 and December 31, 2020:


(dollars in thousands)	Pass		Special Mention		Substandard		Loss		Subtotal		Net Deferred Costs (Income)		Total
March 31, 2021
Commercial, financial and agricultural: SBA PPP	$	618,104	$	0	$	0	$	0	$	618,104	$	(20,285)	$	597,819
Commercial, financial and agricultural: Other	455,603		52,576		6,124		0		514,303		(114)		514,189
Real estate:
Construction	135,115		3,169		0		0		138,284		(308)		137,976
Residential mortgage	1,674,806		991		9,139		0		1,684,936		2,577		1,687,513
Home equity	557,208		701		439		0		558,348		1,166		559,514
Commercial mortgage	1,058,628		70,362		37,185		0		1,166,175		(1,837)		1,164,338


Consumer	475,538		0		1,026		27		476,591		(91)		476,500

Total	$	4,975,002	$	127,799	$	53,913	$	27	$	5,156,741	$	(18,892)	$	5,137,849


(dollars in thousands)	Pass		Special Mention		Substandard		Loss		Subtotal		Net Deferred Costs (Income)		Total
December 31, 2020
Commercial, financial and agricultural: SBA PPP	$	425,993	$	0	$	0	$	0	$	425,993	$	(9,618)	$	416,375
Commercial, financial and agricultural: Other	471,085		67,177		6,874		0		545,136		(45)		545,091
Real estate:
Construction	122,782		2,843		0		0		125,625		(218)		125,407
Residential mortgage	1,680,762		1,736		4,753		0		1,687,251		2,961		1,690,212
Home equity	548,985		707		524		0		550,216		1,050		551,266
Commercial mortgage	1,051,122		69,786		37,295		0		1,158,203		(1,875)		1,156,328


Consumer	478,998		250		284		48		479,580		(146)		479,434

Total	$	4,779,727	$	142,499	$	49,730	$	48	$	4,972,004	$	(7,891)	$	4,964,113

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 months ended March 31, 2021 and March 31, 2020:


	Commercial, Financial and Agricultural				Real Estate
(dollars in thousands)	SBA PPP		Other		Construction		Residential Mortgage		Home Equity		Commercial Mortgage		Consumer		Total
Three Months Ended March 31, 2021


Beginning balance	304		18,717		4,277		16,484		5,449		22,163		15,875		83,269
Provision for credit losses on loans	185		(2,733)		770		(1,233)		(207)		563		1,681		(974)

	489		15,984		5,047		15,251		5,242		22,726		17,556		82,295
Charge-offs	0		609		0		0		0		0		1,098		1,707
Recoveries	0		89		0		106		9		8		753		965
Net charge-offs (recoveries)	0		520		0		(106)		(9)		(8)		345		742
Ending balance	$	489	$	15,464	$	5,047	$	15,357	$	5,251	$	22,734	$	17,211	$	81,553



Three Months Ended March 31, 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
Beginning balance	0		7,509		2,271		13,935		2,592		13,737		11,493		51,537
Provision for credit losses on loans	0		1,231		655		(935)		(314)		5,779		2,913		9,329
	0		8,740		2,926		13,000		2,278		19,516		14,406		60,866
Charge-offs	0		437		0		0		0		0		2,217		2,654
Recoveries	0		342		131		181		31		2		746		1,433
Net charge-offs (recoveries)	0		95		(131)		(181)		(31)		(2)		1,471		1,221
Ending balance	$	0	$	8,645	$	3,057	$	13,181	$	2,309	$	19,518	$	12,935	$	59,645

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

(dollars in thousands) Pass Special
Mention Substandard Loss Subtotal Net
Deferred
Costs
(Income) Total
December 31, 2019
Commercial, financial and agricultural $ 523,342 $ 20,677 $ 26,070 $ — $ 570,089 $ 215 $ 570,304
Real estate:
Construction 96,139 — — — 96,139 (285) 95,854
Residential mortgage 1,593,072 840 1,889 — 1,595,801 4,000 1,599,801
Home equity 490,147 — 92 — 490,239 495 490,734
Commercial mortgage 1,094,364 17,440 13,107 — 1,124,911 (1,496) 1,123,415
Consumer 569,212 — 193 111 569,516 (84) 569,432
Total $ 4,366,276 $ 38,957 $ 41,351 $ 111 $ 4,446,695 $ 2,845 $ 4,449,540

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

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

Commercial, Financial and Agricultural Real Estate
(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 — — — — — — — —
Beginning balance — 8,645 3,057 13,181 2,309 19,518 12,935 59,645
Provision for credit losses 388 7,660 217 1,876 1,342 (3,371) 2,528 10,640
388 16,305 3,274 15,057 3,651 16,147 15,463 70,285
Charge-offs — 1,103 — 52 — — 2,626 3,781
Recoveries — 305 — 20 — 1 509 835
Net charge-offs (recoveries) — 798 — 32 — (1) 2,117 2,946
Ending balance $ 388 $ 15,507 $ 3,274 $ 15,025 $ 3,651 $ 16,148 $ 13,346 $ 67,339
Three Months Ended June 30, 2019
Beginning balance $ — $ 7,847 $ 1,299 $ 12,851 $ 4,278 $ 12,036 $ 8,956 $ 47,267
Provision for credit losses — 786 (578) 144 26 (393) 1,419 1,404
— 8,633 721 12,995 4,304 11,643 10,375 48,671
Charge-offs — 839 — — — — 1,459 2,298
Recoveries — 315 592 372 9 25 581 1,894
Net charge-offs (recoveries) — 524 (592) (372) (9) (25) 878 404
Ending balance $ — $ 8,109 $ 1,313 $ 13,367 $ 4,313 $ 11,668 $ 9,497 $ 48,267

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

The following table presents the activity in the reserve for off-balance sheet credit exposures, included in other liabilities, ~~under ASC 326~~ during the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~under previous GAAP during the three and six months ended June 30, 2019.~~March 31, 2020.


(dollars in thousands)
Three Months Ended ~~June 30, 2020~~March 31, 2021


Beginning balance	$	~~3,810~~4,884
~~Provision for off-balance sheet credit exposures~~	~~573~~
~~Ending balance~~	$	~~4,383~~

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


Provision for off-balance sheet credit exposures	~~488~~153
Ending balance	$	~~1,897~~5,037

~~Six~~Three Months Ended ~~June 30,~~March 31, 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~~1,798
Ending balance	$	~~4,383~~3,810

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


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

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

~~Our~~In the three months ended March 31, 2021, our provision for credit losses was a credit of $0.8 million, which consisted of a credit to the provision for credit losses on loans ~~was $10.6~~of $1.0 million and ~~$20.0~~a $0.2 million inprovision for credit losses on off-balance sheet credit exposures. In the three ~~and six~~ months ended ~~June 30,~~March 31, 2020, ~~under ASC 326, compared to $1.4~~our provision for credit loss was $11.1 million, which consisted of a provision for credit losses on loans of $9.3 million and ~~$2.7~~a $1.8 million ~~in the three and six months ended June 30, 2019 under previous GAAP.~~provision for credit losses on off-balance sheet credit exposures.

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)	March 31, 2021		December 31, 2020
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	$	27,683	$	28,090
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	203		277
Other	Other	54		54		Other	2,054		54
Total	Total	$	16,428	$	17,115	Total	$	31,487	$	29,968

The Company invests in low-income housing tax credit ("LIHTC") and other partnerships. As of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Company had ~~$9.3~~$14.4 million and ~~$11.5~~$17.2 million, respectively, in unfunded commitments related to the LIHTC partnerships and $2.0 million and none, respectively, related to other partnerships. The expected payments for the unfunded commitments as of ~~June 30, 2020~~March 31, 2021 for the remainder of fiscal year ~~2020,~~2021, 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

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


(dollars in thousands)
Year Ending December 31,	LIHTC partnerships		Other partnerships		Total
2021 (remainder)	$	8,383	$	2,000	$	10,383
2022	5,980		0		5,980
2023	10		0		10
2024	26		0		26
2025	6		0		6
2026	6		0		6
Thereafter	37		0		37
Total unfunded commitments	$	14,448	$	2,000	$	16,448

The following table presents amortization and tax credits recognized associated with our investments in LIHTC partnerships for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~June 30, 2019:~~March 31, 2020:


(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 March 31, 2021		Three Months Ended March 31, 2020
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	$	407	$	348
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	474		400

3129

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~~2020

~~15,596~~14,718

Additions

~~742~~174

Amortization

~~(1,072)~~(1,547)

Balance, ~~June 30, 2019~~March 31, 2020

~~15,266~~13,345

Balance, January 1, ~~2020~~2021

~~14,718~~11,865

Additions

~~1,270~~461

Amortization

~~(3,217)~~(1,232)

Balance, ~~June 30, 2020~~March 31, 2021

~~12,771~~11,094

Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans and totaled ~~$1.1 million and $1.3~~$0.5 million for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 compared to ~~$0.5 million and $0.7~~$0.2 million for the three ~~and six~~ months ended ~~June 30, 2019.~~March 31, 2020.

Amortization of mortgage servicing rights totaled ~~$1.7 million and $3.2~~$1.2 million for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 compared to ~~$0.6 million and $1.1~~$1.5 million for the three ~~and six~~ months ended ~~June 30, 2019.~~March 31, 2020.

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			Three Months Ended			Three Months Ended
(dollars in thousands)	(dollars in thousands)	June 30, 2020		June 30, 2019		(dollars in thousands)	March 31, 2021			March 31, 2020
Fair market value, beginning of period	Fair market value, beginning of period	$	15,820	$	17,696	Fair market value, beginning of period	$	12,003		$	15,820
Fair market value, end of period	Fair market value, end of period	13,060		15,554		Fair market value, end of period	11,673			13,525

Weighted average discount rate						Weighted average discount rate	9.6		%	9.5		%
Weighted average prepayment speed assumption						Weighted average prepayment speed assumption	17.5		%	16.1		%

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

⁽¹⁾ ~~Represents annualized 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											March 31, 2021				December 31, 2020
(dollars in thousands)	(dollars in thousands)	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Gross Carrying Value		Accumulated Amortization		Net Carrying Value		(dollars in thousands)	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Gross Carrying Value		Accumulated Amortization		Net Carrying Value

Mortgage servicing rights	Mortgage servicing rights	$	68,865	$	(56,094)	$	12,771	$	67,595	$	(52,877)	$	14,718	Mortgage servicing rights	$	71,370	$	(60,276)	$	11,094	$	70,909	$	(59,044)	$	11,865

3230

Based on the mortgage servicing rights held as of ~~June 30, 2020,~~March 31, 2021, estimated amortization expense for the remainder of fiscal year ~~2020,~~2021, the next five succeeding fiscal years and all years thereafter are as ~~follows (dollars in thousands):~~follows:


(dollars in thousands)				(dollars in thousands)
Year Ending December 31,	Year Ending December 31,			Year Ending December 31,
2020 (remainder)		$	2,583
2021		4,359
2021 (remainder)				2021 (remainder)	$	3,642
2022	2022	3,538		2022	3,584
2023	2023	2,291		2023	2,918
2024	2024	—		2024	950
2025	2025	—		2025	0
2026				2026	0
Thereafter	Thereafter	—		Thereafter	0
Total	Total	$	12,771	Total	$	11,094

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 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, 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 30, 2020,~~March 31, 2021, we were a party to interest rate lock and forward sale commitments on ~~$0.4~~$1.9 million and ~~$10.9~~$7.1 million of mortgage loans, respectively.

Risk Participation Agreements

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

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

Derivatives Financial Instruments Not Designated as Hedging Instruments Asset Derivatives Liability Derivatives
Fair Value at Fair Value at
(dollars in thousands) Balance Sheet Location June 30,
2020 December 31,
2019 June 30,
2020 December 31,
2019
Interest rate lock and forward sale commitments Other assets / other liabilities $ 9 $ 8 $ 79 $ 28

~~Risk Participation Agreement~~

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

Derivatives Financial Instruments Not Designated as Hedging Instruments

Asset Derivatives

Liability Derivatives

Fair Value at

(dollars in thousands)

Balance Sheet Location

March 31,
2021

December 31,
2020

March 31,
2021

December 31,
2020

Interest rate lock and forward sale commitments and risk participation agreements

Other assets / other liabilities

163

3331

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

Derivatives Financial Instruments
Not Designated as Hedging Instruments

Location of Gain (Loss)
Recognized in
Earnings on Derivatives

Amount of Gain (Loss)
Recognized in
Earnings on Derivatives

(dollars in thousands)

Three Months Ended ~~June 30, 2020~~March 31, 2021

Interest rate lock and forward sale commitments

Mortgage banking income

~~(149)~~180

Loans held for sale

Other income

(1)

Risk participation agreements

Other service charges and fees

Three Months Ended ~~June 30, 2019~~

~~Interest rate lock and forward sale commitments~~

~~Mortgage banking income~~

~~(18)~~

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

Interest rate lock and forward sale commitments

Mortgage banking income

~~(50)~~99

Risk participation ~~agreement~~agreements

Other service charges and fees

1,288

~~Six Months Ended June 30, 2019~~

~~Interest rate lock and forward sale commitments~~

~~Mortgage banking income~~

9. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Federal Home Loan Bank Advances and Other Borrowings

The bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB") and maintained a ~~$1.97~~$1.80 billion line of credit as of ~~June 30, 2020,~~March 31, 2021, compared to ~~$1.84~~$1.81 billion at December 31, ~~2019.~~2020. At ~~June 30, 2020, $1.67~~March 31, 2021, $1.56 billion was undrawn under this arrangement, compared to ~~$1.57~~$1.52 billion at December 31, ~~2019.~~2020. There were 0no short-term borrowings under this arrangement at ~~June 30, 2020,~~March 31, 2021, compared to ~~$150.0~~$22.0 million at December 31, ~~2019.~~2020. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled ~~$248.5~~$237.1 million at ~~June 30, 2020,~~March 31, 2021, compared to ~~$78.9~~$268.0 million at December 31, ~~2019. Long-term~~2020. There were no long-term borrowings under this arrangement ~~totaled $50.0 million~~ at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020. FHLB advances and standby letters of credit available at ~~June 30, 2020~~March 31, 2021 were secured by certain real estate loans with a carrying value of ~~$2.66~~$2.72 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB.

At ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, our bank had additional unused borrowings available at the Federal Reserve discount window of ~~$54.6~~$65.9 million and ~~$65.3~~$64.5 million, respectively. As of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, certain commercial and commercial real estate loans with a carrying value totaling ~~$126.7~~$133.5 million and ~~$126.1~~$136.9 million, respectively, were pledged as collateral on our line of credit with the Federal Reserve discount window. The Federal Reserve does not have the right to sell or repledge these loans.

To bolster the effectiveness of the SBA's PPP, the Federal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The ~~PPP provides loans to small businesses so that they can keep their workers on the payroll. The~~ Paycheck Protection Program Liquidity Facility ("PPPLF") will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. At ~~June 30, 2020, PPP loans pledged to the Federal Reserve Bank totaled $65.9 million and~~March 31, 2021, 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 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Company had the following junior subordinated debentures outstanding, which is recorded in long-term debt on the Company's consolidated balance sheets:

(dollars in thousands)

~~June 30, 2020~~March 31, 2021

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~~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

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.

Subordinated Notes

As of March 31, 2021, the Company had the following subordinated notes outstanding:


(Dollars in thousands)	March 31, 2021
Name	Amount of Subordinated Notes		Interest Rate
October 2020 Private Placement	$	55,000	4.75% for the first five years. Resets quarterly thereafter to the then current three-month SOFR.

On October 20, 2020, the Company completed a $55.0 million private placement of ten-year fixed-to-floating rate subordinated notes, which will be used to support regulatory capital ratios and for general corporate purposes. The Company exchanged the privately placed notes for registered notes with the same terms and in the same aggregate principal amount at the end of the fourth quarter of 2020. The Notes bear a fixed interest rate of 4.75% for the first five years and will reset quarterly thereafter for the remaining five years to the then current three-month Secured Overnight Financing Rate ("SOFR"), as published by the Federal Reserve Bank of New York, plus 456 basis points.

The subordinated notes may be included in Tier 2 capital, with certain limitations applicable, under current regulatory guidelines and interpretations. The subordinated notes had a carrying value of $53.9 million, net of unamortized debt issuance costs of $1.1 million, at March 31, 2021.

10. REVENUE FROM CONTRACTS WITH CUSTOMERS

The following presents the Company's other operating income, segregated by revenue streams that are in-scope and out-of-scope of ASC 606, "Revenue from Contracts with Customers" for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	2020		2019		2020		2019		(dollars in thousands)	2021		2020
Other operating income:	Other operating income:									Other operating income:
In-scope of ASC 606	In-scope of ASC 606									In-scope of ASC 606
Mortgage banking income	Mortgage banking income	$	189	$	107	$	418	$	256	Mortgage banking income	$	838	$	229
Service charges on deposit accounts	Service charges on deposit accounts	1,149		2,041		3,199		4,122		Service charges on deposit accounts	1,478		2,050
Other service charges and fees	Other service charges and fees	2,589		3,221		5,585		5,815		Other service charges and fees	3,178		2,996
Income on fiduciary activities	Income on fiduciary activities	1,270		1,129		2,567		2,094		Income on fiduciary activities	1,231		1,297

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

In-scope other operating income	In-scope other operating income	5,191		6,498		11,763		12,287		In-scope other operating income	6,725		6,572
Out-of-scope other operating income	Out-of-scope other operating income	5,501		3,596		7,815		9,480		Out-of-scope other operating income	3,986		2,314
Total other operating income	Total other operating income	$	10,692	$	10,094	$	19,578	$	21,767	Total other operating income	$	10,711	$	8,886

11. SHARE-BASED COMPENSATION

Restricted Stock Units

The table below presents the activity of restricted stock units for the ~~six~~three months ended ~~June 30, 2020:~~March 31, 2021:


		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	532,374	$	22.49
Changes during the period:	Changes during the period:				Changes during the period:
Granted	Granted	321,722	18.11		Granted	210,566	21.67
Vested	Vested	(105,553)	30.24		Vested	(53,112)	28.97
Forfeited	Forfeited	(15,631)	26.38		Forfeited	(4,757)	16.43
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	685,071	21.78

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.

3634

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 March 31,
(dollars in thousands)	(dollars in thousands)	2020			2019			2020			2019			(dollars in thousands)	2021			2020
Lease cost:	Lease cost:													Lease cost:
Operating lease cost	Operating lease cost	$	1,653		$	1,628		$	3,306		$	3,256		Operating lease cost	$	1,571		$	1,653
Variable lease cost	Variable lease cost	688			604			1,366			1,251			Variable lease cost	720			678
Less: sublease income	Less: sublease income	(3)			(11)			(15)			(22)			Less: sublease income	0			(12)
Total lease cost	Total lease cost	$	2,338		$	2,221		$	4,657		$	4,485		Total lease cost	$	2,291		$	2,319

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	$	(1,599)		$	(1,594)
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	11.78 years			13.36 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	3.89		%	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,~~2021, 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)		$	3,027	$	968	$	2,059
2021		5,907		1,808		4,099
2021 (remainder)								2021 (remainder)	$	4,809	$	1,285	$	3,524
2022	2022	5,472		1,659		3,813		2022	5,954		1,560		4,394
2023	2023	5,175		1,519		3,656		2023	5,396		1,405		3,991
2024	2024	4,947		1,385		3,562		2024	5,091		1,262		3,829
2025	2025	4,634		1,247		3,387		2025	4,795		1,117		3,678
2026								2026	4,551		978		3,573
Thereafter	Thereafter	36,285		6,421		29,864		Thereafter	27,536		4,492		23,044
Total	Total	$	65,447	$	15,007	$	50,440	Total	$	58,132	$	12,099	$	46,033

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 March 31,
(dollars in thousands)	(dollars in thousands)	2020		2019		2020		2019		(dollars in thousands)	2021		2020
Total rental income recognized	Total rental income recognized	$	534	$	519	$	1,067	$	1,054	Total rental income recognized	$	520	$	533

3735

Based on the Company's leases as lessor as of ~~June 30, 2020,~~March 31, 2021, estimated lease payments for the remainder of fiscal year ~~2020,~~2021, the next five succeeding fiscal years and all years thereafter are as ~~follows (dollars in thousands):~~follows:


(dollars in thousands)				(dollars in thousands)
Year Ending December 31,	Year Ending December 31,			Year Ending December 31,
2020 (remainder)		$	1,117
2021		2,245
2021 (remainder)				2021 (remainder)	$	2,046
2022	2022	1,662		2022	1,575
2023	2023	578		2023	582
2024	2024	109		2024	222
2025	2025	72		2025	119
2026				2026	72
Thereafter	Thereafter	190		Thereafter	106
Total	Total	$	5,973	Total	$	4,722

13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the components of other comprehensive income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 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 March 31, 2021								Three Months Ended March 31, 2021
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	$	(23,619)	$	(6,318)	$	(17,301)
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	0		0		0
Net unrealized gains on investment securities		8,570		2,295		6,275
Net unrealized losses on investment securities								Net unrealized losses on investment securities	(23,619)		(6,318)		(17,301)

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	246		66		180
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		3		1		2

Defined benefit plans, net	Defined benefit plans, net	276		72		204		Defined benefit plans, net	251		67		184

Other comprehensive income		$	8,846	$	2,367	$	6,479
Other comprehensive loss								Other comprehensive loss	$	(23,368)	$	(6,251)	$	(17,117)


(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 March 31, 2020								Three Months Ended March 31, 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	$	16,620	$	4,455	$	12,165	Net unrealized gains arising during the period	$	13,858	$	3,711	$	10,147
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	0		0		0
Net unrealized gains on investment securities	Net unrealized gains on investment securities	16,620		4,455		12,165		Net unrealized gains on investment securities	13,858		3,711		10,147

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
Amortization of net actuarial loss	Amortization of net actuarial loss	264		22		242		Amortization of net actuarial loss	268		72		196
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	4		1		3		Amortization of prior service cost	4		1		3

Defined benefit plans, net	Defined benefit plans, net	272		24		248		Defined benefit plans, net	704		188		516

Other comprehensive income	Other comprehensive income	$	16,892	$	4,479	$	12,413	Other comprehensive income	$	14,562	$	3,899	$	10,663

(dollars in thousands) Before Tax Tax Effect Net of Tax
Six Months Ended June 30, 2020
Net unrealized gains on investment securities:
Net unrealized gains arising during the period $ 22,428 $ 6,006 $ 16,422
Less: Reclassification adjustments from AOCI realized in net income — — —
Net unrealized gains on investment securities 22,428 6,006 16,422
Defined benefit plans:
Net actuarial gains arising during the period 427 114 313
Amortization of net actuarial loss 537 142 395
Amortization of net transition obligation 9 2 7
Amortization of prior service cost 7 2 5
Defined benefit plans, net 980 260 720
Other comprehensive income $ 23,408 $ 6,266 $ 17,142

(dollars in thousands) Before Tax Tax Effect Net of Tax
Six Months Ended June 30, 2019
Net unrealized gains on investment securities:
Net unrealized gains arising during the period $ 31,644 $ 8,483 $ 23,161
Less: Reclassification adjustments from AOCI realized in net income — — —
Net unrealized gains on investment securities 31,644 8,483 23,161
Defined benefit plans:
Amortization of net actuarial loss 527 51 476
Amortization of net transition obligation 9 2 7
Amortization of prior service cost 9 2 7
Defined benefit plans, net 545 55 490
Other comprehensive income $ 32,189 $ 8,538 $ 23,651

The following tables present the changes in each component of AOCI, net of tax, for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~

(dollars in thousands) Investment
Securities Defined
Benefit
Plans AOCI
Three Months Ended June 30, 2020
Balance at beginning of period $ 24,972 $ (5,900) $ 19,072
Other comprehensive income before reclassifications 6,275 — 6,275
Reclassification adjustments from AOCI — 204 204
Total other comprehensive income 6,275 204 6,479
Balance at end of period $ 31,247 $ (5,696) $ 25,551
2020:


(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 March 31, 2021								Three Months Ended March 31, 2021
Balance at beginning of period	Balance at beginning of period	$	(1,747)	$	(6,208)	$	(7,955)	Balance at beginning of period	$	26,651	$	(6,523)	$	20,128

Other comprehensive loss before reclassifications		12,165		—		12,165
Other comprehensive income (loss) before reclassifications								Other comprehensive income (loss) before reclassifications	(17,301)		0		(17,301)
Reclassification adjustments from AOCI	Reclassification adjustments from AOCI	—		248		248		Reclassification adjustments from AOCI	0		184		184
Total other comprehensive income		12,165		248		12,413
Total other comprehensive income (loss)								Total other comprehensive income (loss)	(17,301)		184		(17,117)

Balance at end of period	Balance at end of period	$	10,418	$	(5,960)	$	4,458	Balance at end of period	$	9,350	$	(6,339)	$	3,011


(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
Three Months Ended March 31, 2020								Three Months Ended March 31, 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	10,147		313		10,460
Reclassification adjustments from AOCI	Reclassification adjustments from AOCI	—		407		407		Reclassification adjustments from AOCI	0		203		203
Total other comprehensive income	Total other comprehensive income	16,422		720		17,142		Total other comprehensive income	10,147		516		10,663

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

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

The following table presents the amounts reclassified out of each component of AOCI for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~

Amount Reclassified from AOCI Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI Components Three months ended June 30,
(dollars in thousands) 2020 2019
Defined benefit retirement and supplemental executive retirement plan items:
Amortization of net actuarial loss $ (269) $ (264) Salaries and employee benefits
Amortization of net transition obligation (4) (4) Salaries and employee benefits
Amortization of prior service cost (3) (4) Salaries and employee benefits
Total before tax (276) (272)
Tax effect 72 24 Income tax benefit (expense)
Net of tax $ (204) $ (248)
Total reclassification adjustments from AOCI for the period, net of tax $ (204) $ (248)
2020:


		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	Three months ended March 31,					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				2021			2020			Affected Line Item in the Statement Where Net Income is Presented

Defined benefit retirement and supplemental executive retirement plan items:	Defined benefit retirement and supplemental executive retirement plan items:								Defined benefit retirement and supplemental executive retirement plan items:
Amortization of net actuarial loss	Amortization of net actuarial loss	$	(537)	$	(527)	Salaries and employee benefits			Amortization of net actuarial loss	$	(246)			$	(268)			Other operating expense - other
Amortization of net transition obligation	Amortization of net transition obligation	(9)		(9)		Salaries and employee benefits	Amortization of net transition obligation	(5)				(5)				Other operating expense - other
Amortization of prior service cost	Amortization of prior service cost	(7)		(9)		Salaries and employee benefits	Amortization of prior service cost	0				(4)				Other operating expense - other
Settlement		—		—		Salaries and employee benefits

Total before tax	Total before tax	(553)		(545)			Total before tax	(251)				(277)
Tax effect	Tax effect	146		55		Income tax benefit (expense)	Tax effect	67				74				Income tax benefit (expense)
Net of tax	Net of tax	$	(407)	$	(490)		Net of tax	$	(184)			$	(203)

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	$	(184)			$	(203)

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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 March 31,
(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)	2021		2020
Net income	Net income	$	9,917	$	13,534	$	18,243	$	29,571	Net income	$	18,038	$	8,326

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	28,108,648		28,126,400
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	204,366		151,353
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	28,313,014		28,277,753

Basic earnings per common share	Basic earnings per common share	$	0.35	$	0.47	$	0.65	$	1.03	Basic earnings per common share	$	0.64	$	0.30
Diluted earnings per common share	Diluted earnings per common share	$	0.35	$	0.47	$	0.65	$	1.03	Diluted earnings per common share	$	0.64	$	0.29

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

15. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

Disclosures about Fair Value of Financial Instruments

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

Short-Term Financial Instruments

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

Investment Securities

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

Loans

Fair values of loans are estimated based on discounted cash flows of portfolios of loans with similar financial characteristics including the type of loan, interest terms and repayment history. Fair values are calculated by discounting scheduled cash flows through estimated maturities using estimated market discount rates. Estimated market discount rates are reflective of credit and interest rate risks inherent in the Company's various loan types and are derived from available market information, as well as specific borrower information. As of ~~June 30, 2020,~~March 31, 2021, the weighted average discount rate used in the valuation of loans was ~~5.15%~~5.06%. 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.

4238

Deposit Liabilities

The fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits and interest-bearing demand and savings accounts, are equal to the amount payable on demand. The fair value of time deposits is estimated using discounted cash flow analyses. As of ~~June 30, 2020,~~March 31, 2021, the weighted average discount rate used in the valuation of time deposits was ~~0.47%~~0.29%. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Long-Term Debt

The fair value of our long-term debt is estimated by discounting scheduled cash flows over the contractual borrowing period at the estimated market rate for similar borrowing arrangements. As of ~~June 30, 2020,~~March 31, 2021, the weighted average discount rate used in the valuation of long-term debt was ~~1.93%~~5.95%.

Derivatives

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

Off-Balance Sheet Financial Instruments

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

Limitations

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

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of future business and the value of assets and liabilities that are not considered financial instruments. For example,

significant assets and liabilities that are not considered financial assets or liabilities include deferred tax assets, premises and equipment and intangible assets.


						Fair Value Measurement Using															Fair Value Measurement Using
(dollars in thousands)	(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
March 31, 2021												March 31, 2021
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	$	93,358	$	93,358	$	93,358	$	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	166,533		166,533		166,533		0		0
Investment securities	Investment securities	1,169,803		1,169,803		1,209		1,156,923		11,671		Investment securities	1,217,776		1,217,776		1,435		1,206,745		9,596
Loans held for sale	Loans held for sale	10,443		10,443		—		10,443		—		Loans held for sale	5,234		5,234		0		5,234		0
Net loans and leases		4,936,099		4,795,025		—		—		4,795,025
Net loans												Net loans	5,056,296		4,931,010		0		0		4,931,010

Accrued interest receivable	Accrued interest receivable	19,590		19,590		19,590		—		—		Accrued interest receivable	19,440		19,440		19,440		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	2,070,428		2,070,428		2,070,428		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	3,241,942		3,241,942		3,241,942		0		0
Time	Time	930,446		932,077		—		—		932,077		Time	896,580		896,753		0		0		896,753
Short-term borrowings		—		—		—		—		—

Long-term debt	Long-term debt	167,491		156,386		—		—		156,386		Long-term debt	105,436		90,479		0		0		90,479
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)	2,023		2,023		2,023		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
March 31, 2021														March 31, 2021
Derivatives:	Derivatives:													Derivatives:
Interest rate lock commitments	Interest rate lock commitments	$	410	$	9	$	9	$	—	$	9	$	—	Interest rate lock commitments	$	1,881	$	84	$	84	$	0	$	84	$	0
Forward sale commitments	Forward sale commitments	10,879		(79)		(79)		—		(79)		—		Forward sale commitments	7,136		(1)		(1)		0		(1)		0
Risk participation agreement														Risk participation agreement	37,704		(17)		(17)		0		0		(17)

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	1,292,373		0		1,570		0		1,570		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	11,306		0		170		0		170		0
Risk participation agreement		28,800		49		49		—		—		49

4440


						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, 2020												December 31, 2020
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	$	97,546	$	97,546	$	97,546	$	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	6,521		6,521		6,521		0		0
Investment securities	Investment securities	1,128,110		1,128,110		1,127		1,115,728		11,255		Investment securities	1,183,960		1,183,960		1,351		1,170,283		12,326
Loans held for sale	Loans held for sale	9,083		9,083		—		9,083		—		Loans held for sale	16,687		16,687		0		16,687		0
Net loans and leases		4,401,569		4,392,477		—		—		4,392,477
Net loans												Net loans	4,880,844		4,795,776		0		0		4,795,776

Accrued interest receivable	Accrued interest receivable	16,500		16,500		16,500		—		—		Accrued interest receivable	20,224		20,224		20,224		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	1,790,269		1,790,269		1,790,269		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	3,106,931		3,106,931		3,106,931		0		0
Time	Time	1,026,453		1,023,362		—		—		1,023,362		Time	898,918		899,562		0		0		899,562
Short-term borrowings	Short-term borrowings	150,000		150,000		—		150,000		—		Short-term borrowings	22,000		22,000		0		22,000		0
Long-term debt	Long-term debt	101,547		97,827		—		97,827		—		Long-term debt	105,385		92,488		0		0		92,488
Accrued interest payable (included in other liabilities)	Accrued interest payable (included in other liabilities)	4,288		4,288		4,288		—		—		Accrued interest payable (included in other liabilities)	1,727		1,727		1,727		0		0


								Fair Value Measurement Using																	Fair Value Measurement Using
(dollars in thousands)	(dollars in thousands)	Notional Amount		Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(dollars in thousands)	Notional Amount		Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2019
December 31, 2020														December 31, 2020
Derivatives:	Derivatives:													Derivatives:
Interest rate lock commitments	Interest rate lock commitments	$	625	$	8	$	8	$	—	$	8	$	—	Interest rate lock commitments	$	714	$	18	$	18	$	0	$	18	$	0
Forward sale commitments	Forward sale commitments	8,968		(28)		(28)		—		(28)		—		Forward sale commitments	16,603		(115)		(115)		0		(115)		0
Risk participation agreements														Risk participation agreements	37,762		(48)		(48)		0		0		(48)

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	1,176,065		0		1,313		0		1,313		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	10,544		0		158		0		158		0

Fair Value Measurements

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

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

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

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

4541

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

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

~~There was 1 transfer into Level 3 of the fair value hierarchy for long-term debt during the three and six months ended June 30, 2020.~~ There were 0 transfers of financial assets and liabilities into or out of Level 3 of the fair value hierarchy during the three ~~and six~~ months ended ~~June 30, 2020.~~March 31, 2021.

The following tables present the fair value of assets and liabilities measured on a recurring basis as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


				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
March 31, 2021										March 31, 2021
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	$	166,345	$	0	$	157,654	$	8,691
Corporate securities	Corporate securities	29,752		—		29,752		—		Corporate securities	46,167		0		46,167		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	41,177		0		41,177		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	815,266		0		815,266		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	85,879		0		85,879		0
Residential - Non-government agencies	Residential - Non-government agencies	32,086		—		32,086		—		Residential - Non-government agencies	18,800		0		17,895		905
Commercial - Non-government agencies	Commercial - Non-government agencies	133,792		—		133,792		—		Commercial - Non-government agencies	42,707		0		42,707		0

Total available-for-sale securities	Total available-for-sale securities	1,168,594		—		1,156,923		11,671		Total available-for-sale securities	1,216,341		0		1,206,745		9,596

Equity securities	Equity securities	1,209		1,209		—		—		Equity securities	1,435		1,435		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	66		0		83		(17)
Total	Total	$	1,169,733	$	1,209	$	1,156,853	$	11,671	Total	$	1,217,842	$	1,435	$	1,206,828	$	9,579

4642


				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, 2020										December 31, 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	$	122,018	$	—	$	110,763	$	11,255	States and political subdivisions	$	168,766	$	0	$	157,429	$	11,337
Corporate securities	Corporate securities	30,529		—		30,529		—		Corporate securities	48,008		0		48,008		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	33,145		0		33,145		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	778,826		0		778,826		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	87,469		0		87,469		0
Residential - Non-government agencies	Residential - Non-government agencies	37,191		—		37,191		—		Residential - Non-government agencies	23,423		0		22,434		989
Commercial - Non-government agencies	Commercial - Non-government agencies	137,817		—		137,817		—		Commercial - Non-government agencies	42,972		0		42,972		0

Total available-for-sale securities	Total available-for-sale securities	1,126,983		—		1,115,728		11,255		Total available-for-sale securities	1,182,609		0		1,170,283		12,326

Equity securities	Equity securities	1,127		1,127		—		—		Equity securities	1,351		1,351		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	(145)		0		(97)		(48)
Total	Total	$	1,128,090	$	1,127	$	1,115,708	$	11,255	Total	$	1,183,815	$	1,351	$	1,170,186	$	12,278

For the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 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, 2020	$	11,337	$	989	$	12,326
Principal payments received	(1,973)		(5)		(1,978)
Unrealized net loss included in other comprehensive income	(673)		(79)		(752)

Balance at March 31, 2021	$	8,691	$	905	$	9,596

Balance at December 31, 2019	$	11,255	$	0	$	11,255
Principal payments received	(109)		0		(109)
Unrealized net gain included in other comprehensive income	426		0		426

Balance at March 31, 2020	$	11,572	$	0	$	11,572

Within the states and political subdivisions available-for-sale debt securities category, the Company holds 43 mortgage revenue bonds issued by the City & County of Honolulu with an aggregate fair value of ~~$11.7~~$8.7 million and ~~$11.4~~$11.6 million at ~~June 30,~~March 31, 2021 and March 31, 2020, ~~and June 30, 2019,~~ respectively. Within the other MBS non-agency category, the Company holds 2 mortgage backed bonds issued by Habitat for Humanity with a fair value of $0.9 million at March 31, 2021. The Company estimates the aggregate fair value of ~~its mortgage revenue bonds~~$9.6 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 30, 2020,~~March 31, 2021, the weighted average discount rate utilized was ~~2.82%~~3.38% compared to ~~4.27%~~3.25% at ~~June 30, 2019~~March 31, 2020 and ~~4.08%~~2.83% at December 31, ~~2019,~~2020, which was derived by incorporating a credit spread over the FHLB Fixed-Rate Advance curve. Significant increases (decreases) in the weighted average discount rate could result in a significantly lower (higher) fair value measurement.

4743

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 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


				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
March 31, 2021										March 31, 2021

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

December 31, 2019
December 31, 2020										December 31, 2020

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

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

16. LEGAL PROCEEDINGS

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

~~17. SUBSEQUENT EVENTS~~

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

4844

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 3531 branches ~~nine of which were temporarily closed to protect the health~~ and ~~well-being of the Company's employees and customers from the novel coronavirus pandemic ("COVID-19"), and 76~~69 ATMs located throughout the state of Hawaii as of ~~June 30, 2020. In July 2020, the Company re-opened two additional branches.~~ March 31, 2021.

The bank offers a broad range of products and services including accepting ~~time, savings,~~demand, money market, savings and ~~demand~~time 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~~2020 filed with the U.S. Securities and Exchange Commission (the "SEC") on February ~~25, 2020,~~23, 2021, including the

“Risk Factors” set forth therein.

Critical Accounting Policies and Use of Estimates

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

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

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

On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which created material changes to the Company’s existing critical accounting policy that existed at December 31, 2019. ~~Effective January 1, 2020 through June 30, 2020, the~~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 on loans 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 30, 2020~~March 31, 2021 was ~~$9.9~~$18.0 million, or ~~$0.35~~$0.64 per diluted share, compared to net income of ~~$13.5~~$8.3 million, or ~~$0.47~~$0.29 per diluted share for the three months ended ~~June 30, 2019. Net income for~~March 31, 2020.

During the ~~six~~three months ended ~~June 30, 2020 was $18.2 million, or $0.65 per diluted share, compared~~March 31, 2021, the Company recorded a credit to ~~net income of $29.6 million, or $1.03 per diluted share for~~ the ~~six months ended June 30, 2019. Earnings continue to be impacted by higher~~ provision for credit ~~loss expense due~~losses, which includes the provisions for credit losses on loans and off-balance sheet credit exposures, of $0.8 million, compared to ~~deteriorating economic conditions brought on by~~a provision of $11.1 million during the ~~current COVID-19 pandemic.~~three months ended March 31, 2020.

Excluding the provision for credit losses and income tax expense, the Company's pre-tax, pre-provision income for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 was ~~$26.5~~$22.7 million, ~~and $49.8 million, respectively,~~ compared to ~~$23.8 million and $51.3~~$22.3 million for the three ~~and six~~ months ended ~~June 30, 2019, respectively.~~March 31, 2020.

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

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


		Three Months Ended June 30,									Six Months Ended June 30,							Three Months Ended March 31,
		2020			2019			2020			2019				2021			2020
Return on average assets	Return on average assets	0.61		%	0.92		%	0.58		%	1.01		%	Return on average assets	1.07		%	0.55		%
Return on average shareholders’ equity	Return on average shareholders’ equity	7.34			10.73			6.77			11.84			Return on average shareholders’ equity	13.07			6.21

Basic earnings per common share	Basic earnings per common share	$	0.35		$	0.47		$	0.65		$	1.03		Basic earnings per common share	$	0.64		$	0.30
Diluted earnings per common share	Diluted earnings per common share	0.35			0.47			0.65			1.03			Diluted earnings per common share	0.64			0.29

COVID-19 Pandemic

The ongoing novel coronavirus pandemic ("COVID-19") has caused significant disruption in the local, national and global economies and financial markets. The pandemic has resulted in temporary and permanent closures of many businesses and the institution of social distancing 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 March 2021 meeting, the FRB elected to hold the target federal funds rate at 0% to 0.25% and officials expect it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with their assessments of maximum employment and inflation has risen to 2.00% and is on track to moderately exceed 2.00% for some time.

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

In December 2020, Congress passed another $900 billion aid package, or the Consolidated Appropriations Act, 2021, which

extends certain relief provisions under the CARES Act.

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

Hawaii's economy continues to be significantly impacted by COVID-19. 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~~nineteen supplemental emergency ~~proclamations:~~proclamations which includes travel restrictions and other measures.

•~~on March 16, 2020,~~As a ~~Supplementary Proclamation suspending certain laws hindering State~~result of these restrictions and ~~county responses to COVID-19;~~

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

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

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

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

•on April 25, 2020, a Sixth Supplementary Proclamation, which extended the Stay-at-Home order, the 14-day mandatory quarantine for all travelers arriving in the state of Hawaii and the eviction moratorium through May 31, 2020 and amended and restated all prior proclamations and executive orders related to the COVID-19 emergency;

•on May 5, 2020, a Seventh Supplementary Proclamation, which authorizes the first group of businesses to re-open since the COVID-19 pandemic forced the temporary closure of non-essential businesses across the state and allows residents to leave their homes to patronize certain businesses and activities under the new “Safer-at-Home” order;

•on May 29, 2020, an Eighth Supplementary Proclamation, which extended the mandatory 14-day quarantine for all travelers arriving in the state of Hawaii and the eviction moratorium through June 30, 2020;

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

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

has been relatively contained. The infection rate in the State of Hawaii ~~continues to remain very low.~~is one of the lowest per capita in the country at 1,816 cases per 100,000 population. As of ~~July 24, 2020,~~April 23, 2021 the Centers for Disease Control and Prevention reported there were ~~1,549~~31,802 cases (7-day moving average of 75.3 new infections) and 26478 COVID-19-related deaths in Hawaii. ~~Of those cases, 10% have required hospitalization, and 1,449 (94%) were residents~~Over 30% of ~~Hawaii.~~Hawaii's population has been fully vaccinated, which is the 8th highest in the nation.

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 13certain branch ~~locations and will keep 22 branches open and fully operational.~~locations. 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 continues to prudently manage through the pandemic and has put in place preventative measures including face masks, plexiglass shields, social distancing, enhanced cleaning and remote work for the majority of non-branch employees. 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.

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

In July 2020, the Board of Directors of the Company approved a plan to consolidate four branches on the island of Oahu ~~later this year.~~in 2020. Three of the branches ~~are~~were in-store branches on Oahu, which ~~have been~~were temporarily closed since March 2020 due to the COVID-19 pandemic, and ~~are expected to close~~were permanently 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 iswas a full-service branch ~~and is expected to close~~on Oahu that was closed 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~~was migrated to our digital ~~channels. We also have~~channels or other neighboring branches. The Company incurred $0.3 million in pre-tax expenses related to the consolidation of the three in-store branches during the third quarter of 2020 and an additional $1.3 million in ~~close proximity that are available for customer full-service needs.~~pre-tax expenses related to the consolidation of the fourth branch during the fourth quarter of 2020. The Company anticipates annual expense savings of approximately $1.8 million related to the consolidation of the four branches.

As of March 31, 2021, the Company has re-opened all of its branches that were temporarily closed. The Company ~~expects to incur total pre-tax expenses related to~~is implementing a gradual, phased-in return-to-office plan that includes a portion of the ~~consolidation of approximately $0.3 million and $1.4 million during the third and fourth quarters of 2020, respectively.~~workforce continuing with flexible, remote work schedules.

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~~10-day self quarantine has resulted in a significant decline in tourism to the state of ~~Hawaii, with daily visitors to Hawaii down 99% during the month of May, compared to the same year-ago period.~~ ~~Hawaii's unemployment rate has gone from one of the best in the nation to one of the worst at approximately 13.9% during the month of June.~~Hawaii. As a result, many customers and businesses across the state have been significantly impacted by the COVID-19 ~~pandemic which~~pandemic. However the state is making progress towards economic recovery. Visitor arrivals have recently been approaching 20,000 per day in April 2021, or nearly two-thirds of pre-pandemic levels. While still elevated, Hawaii's unemployment rate of 9.0% during the month of March 2021 is significantly down from its peak of 21.9% in April and May of last year. Should the process stall or economic conditions in the state of Hawaii worsen, it 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~~have impaired and ~~will~~could 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.~~businesses when government stimulus payments taper off. Similarly, because of changing economic and market conditions affecting issuers, we ~~may~~could 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.

~~The Company’s interest income could also be reduced due to COVID-19.~~ Through guidance from regulatory agencies, the Company ishas prudently ~~working~~worked with its borrowers impacted by COVID-19 to defer payments, interest, and fees. ~~As of June 30, 2020,~~The Company is currently working on returning borrowers to payment as the ~~Company executed loan~~economy begins to recover. Loans on active payment forbearance or deferrals granted to borrowers impacted by the COVID-19 pandemic declined significantly from $120.2 million or, 2.4% of ~~principal and interest~~the total loan portfolio (or 2.6% excluding PPP loans) as of December 31, 2020, to $39.5 million, or ~~principal only on~~0.8% of the ~~following outstanding~~total loan ~~balances:~~ 

Loan Accrued % of Total % of Total
Count Balance Interest Loans Loans, excl. PPP
Commercial, financial and agricultural 678 $ 116,382 $ 962 10.8 % 21.2 %
Real estate:
Construction 7 6,601 25 6.4 % 6.4 %
Residential mortgage 355 176,645 1,547 10.7 % 10.7 %
Home equity — — — — % — %
Commercial mortgage 98 202,447 1,262 17.9 % 17.9 %
Consumer 3,829 65,785 876 12.5 % 12.5 %
Total loans 4,967 $ 567,860 $ 4,672 11.3 % 12.7 %
portfolio (or 0.9% excluding PPP loans), as of March 31, 2021, as many borrowers resumed payments.

The ~~Company is continuing~~following table sets forth loans to ~~grant~~borrowers impacted by COVID-19 on active payment forbearance or ~~extend loan~~deferral and the percentage of loans on active payment ~~deferrals in the third quarter~~forbearance or deferral to total loans and ~~therefore expects that the accrued~~total loans, excluding PPP loans, as of March 31, 2021:


	Loans on Active Forbearance or Deferral
(dollars in thousands)	Loan Count	Balance		Accrued Interest Receivable		Total Loans		% of Asset Class		Total Loans, Excl. PPP		% of Asset Class, Excl. PPP
Commercial, financial and agricultural	—	$	—	$	—	$	1,112,008	—	%	$	514,189	—	%
Real estate:
Construction	—	—		—		137,976		—	%	137,976		—	%
Residential mortgage	88	38,571		984		1,687,513		2.3	%	1,687,513		2.3	%
Home equity	—	—		—		559,514		—	%	559,514		—	%
Commercial mortgage	—	—		—		1,164,338		—	%	1,164,338		—	%
Consumer	83	928		—		476,500		0.2	%	476,500		0.2	%

Total loans	171	$	39,499	$	984	$	5,137,849	0.8	%	$	4,540,030	0.9	%

The Company’s interest ~~receivable balance on the deferred loans will continue~~income could also be reduced due to ~~increase.~~ COVID-19. 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. This reserve balance has remained unchanged through March 31, 2021. 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. To protect against this possibility, the Company issued $55.0 million in subordinated debt in October 2020, which is classified as tier 2 capital for regulatory purposes, and downstreamed $46.8 million to the bank.

The Company relies on cash on hand as well as dividends from its subsidiary bank to service its debt. If the Company’s capital deteriorates such that its subsidiary bank is unable to pay dividends to it for an extended period of time or the bank is otherwise restricted in its ability to pay dividends to the Company, the Company may not be able to service its debt or pay dividends to its shareholders.

The Company’s liquidity ~~will be~~was 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~~was reduced due to the deferrals which are being granted ~~for 3 to 6 months.~~in three month deferral periods, as needed. Requests for loan payment deferrals ~~rose~~continued to decline significantly in the ~~second~~first quarter of ~~2020.~~2021. While ~~some~~a significant number of loan payment deferrals ~~will end~~ended in the ~~third~~first quarter of ~~2020,~~2021, we ~~anticipate~~assisted some borrowers ~~will be requesting second deferrals.~~with additional deferrals as needed. Additionally, liquidity could be adversely impacted if customers withdraw significant deposit balances due to COVID-19 concerns. During 2020 and the first quarter of 2021, we experienced the reverse where there was a significant inflow of deposits due to government stimulus and general market uncertainty. However this may not continue.

In the case of loans serviced by the Company for certain third parties, including those under the Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corp. ("FHLMC") programs, the Company is required to advance to the owners the payment of principal and interest on a scheduled basis for 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~~causes 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~~as a result of the ~~time being until~~uncertainty posed by the pandemic. In January 2021, our Board of Directors approved a new authorization to repurchase up to $25 million in common stock. We can provide no assurance on how many shares we ~~know more about the extent the pandemic will have on the economy and our business.~~may repurchase, if any, under this 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 which could ~~be difficult during COVID-19. This may~~ lead to credit impairments and asset write-downs. Thus far, the Hawaii real estate market continues to be extremely strong and real estate collateral values have remained relatively stable, but we cannot provide any assurance as to future levels of stability.

Processes, controls and business continuity plan

The Company's Business Continuity Plan includes a Pandemic Preparedness Plan which it successfully activated in early March 2020. The Company’s remote workforce plan has been rolled out with an overall smooth transition. The Company already had Virtual Private Network ("VPN") technology capability, and during the first quarter of 2020, expanded VPN access to over

70% of its employees. In addition to VPN, the Company believes it is well-setup with the latest technologies that enable our operations to continue efficiently. The Company is using collaboration tools and several other cloud-based software programs. For its customers, during the third quarter of 2020 the Company ~~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~~developing a gradual, phased-in return-to-office plan that includes a portion of the workforce continuing with flexible, remote work schedules. ~~Due to the recent uptick in COVID-19 cases in Hawaii and nationwide, the return-to-office plan may be delayed as a precautionary measure.~~ The Company may incur additional ~~cost~~costs 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. As an essential service provider, the COVID-19 vaccine became available to our employees in March 2021. Many of the Company's employees are fully vaccinated at this point.

Lending operations and accommodations to borrowers

To support its customers during this difficult time, the Company ~~has~~ moved quickly to put in place a number of COVID-19 relief programs for its consumer and business customers affected by the pandemic. For its customers, the Company ~~is offering~~offered 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, 2020, the Company funded over 7,200 PPP loans totaling over $550 million and received gross processing fees of over $21 million. Certain PPP loans paid-off shortly after funding resulting in a total balance as of June 30, 2020 of $543.7 million. ~~The Company has~~ developed a PPP forgiveness portal and is beginning the process of assisting our customers with applying for forgiveness from the SBA. The Company plans to engage a third party to assist with this process. ~~Although the Company~~

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

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

The SBA began accepting submissions for the initial round of PPP loans on April 3, 2020. In April 2020, the Paycheck Protection Program and Health Care Enhancement Act added an additional round of funding for the PPP. In June 2020, the Paycheck Protection Program Flexibility Act of 2020 was enacted, which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Through the end of the second round in August 2020, the Company funded over 7,200 PPP loans totaling over $558 million and received gross processing fees of over $21 million.

In December 2020, the Consolidated Appropriations Act, 2021 was passed which among other things, included a third round of funding and a new simplified forgiveness procedure for PPP loans of $150,000 or less. During the first quarter of 2021, the Company funded over 3,600 loans totaling over $292 million in the third round, earning additional gross processing fees of over $15 million.

In September 2020, the Company became aware 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 also 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 March 31, 2021.

The Company is staying in close contact with its customers and has increased its client outreach efforts. ~~The Company’s commercial loan officers are calling their key clients as frequently as daily.~~ The Company is monitoring its client’s financial health during this challenging time and is providing guidance to help them through the

pandemic. Further, the Company believes it is prudently making loan modifications for certain borrowers to allow deferral of loan principal and/or interest for a ~~short-term~~limited-term period.

The Company ~~is providing 3-month~~provided initial 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~~Both residential mortgage and consumer customers were granted extensions to their forbearance or deferral, if needed.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 30, 2020,~~March 31, 2021, the Company had loan payment forbearance or deferrals on outstanding balances of ~~$567.9~~$39.5 million, or ~~11.3%~~0.8% of total loans ~~(and 12.7%~~(or 0.9% of total loans, excluding PPP loans). Of this amount, $38.3 million were on extended payment forbearance or deferrals as of March 31, 2021.

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 ~~identified nine consumer~~did not identify any new loans ~~totaling $0.1 million~~during the first quarter of 2021 that were modified ~~during the quarter~~ and did not meet the criteria under Section 4013 of the CARES Act or the interagency guidance. ~~As a result, these loans are included in TDRs as of June 30, 2020.~~

Collectibility of the accrued interest on deferred loans is ~~uncertain and~~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. This reserve remained unchanged through March 31, 2021. 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~~limited new or extended loan deferrals ~~will continue through~~in the ~~third~~second quarter of ~~2020.~~2021 as the Hawaii economic recovery progresses.

As part of the CARES Act, the Section 1112 debt relief program authorized the SBA to pay, for a 6-month period, the principal, interest, and associated fees that borrowers owed on covered 7(a) loans, 504 loans, and Microloans reported in regular servicing status (excluding PPP loans). Under Section 325 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) enacted December 29, 2020, Section 1112 was amended and authorized a second round of payments covering the principal, interest, and associated fees that borrowers owed on covered loans for a 3-month period beginning with payments due February 1, 2021, followed by an additional payment for a 2-month period for borrowers with an assigned North American Industry Classification System code beginning with 61, 71, 72, 213, 315, 448, 451, 481, 485, 487, 511, 512, 515, 532, or 812. As of March 31, 2021, the Company had $10.9 million in SBA loans. During the three months ended March 31, 2021, the Company received $0.5 million in loan payments from the SBA.

Credit

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

The ~~Company has identified primary industries~~disruptions in ~~which we lend to that will likely experience impact~~the economy resulting from the COVID-19 pandemic have impaired and could continue to ~~include accommodation~~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 ~~food-service, retail trade, wholesale trade, manufacturing~~declining collateral values. As a result, the COVID-19 pandemic could result in the recognition of credit losses in our loan portfolios and ~~healthcare. Many~~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 ~~loans~~securities we hold as well as reductions 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.~~comprehensive income.

In ~~the final week of~~ March 2020, 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.~~remainder of 2020. The Company proactively worked with many of its customers in providing loan payment deferrals, as well as assisted in the application and approval of PPP loans.

The volume of loan payment deferrals granted peaked in May 2020 at approximately $605 million in total loan balances, and has since declined to ~~$567.9~~$39.5 million, or ~~11.3%~~0.8% of total loans ~~(and 12.7%~~(or 0.9% of total loans, excluding PPP loans), at ~~June 30, 2020. We continue to support our consumer and residential customers with~~March 31, 2021. The Company is providing alternative payment plans on a ~~second 90-day loan~~limited basis following the end of the payment deferral ~~or forbearance, as needed.~~periods. Our consumer loan payment deferrals totaled ~~$65.8~~$0.9 million ~~and~~at March 31, 2021, compared to $2.3 million at December 31, 2020. Our residential ~~loan~~mortgage loans on active payment ~~forbearances~~forbearance totaled ~~$176.6 million.~~$38.6 million at March 31, 2021, compared to $70.4 million at December 31, 2020. The majority of the residential mortgage ~~forbearances~~loans in forbearance were ~~still~~ in ~~their initial~~an extended 90-day forbearance

period at ~~June 30, 2020; however, some~~March 31, 2021. Most borrowers are beginning to resume payments with the total count dropping from a peak of 467 at May 31, 2020 to ~~350~~88 at ~~June 30, 2020.~~

~~In our~~March 31, 2021. There were no commercial, commercial real estate and construction loan portfolios, ~~we provided loan~~loans on active payment ~~deferrals of approximately $326~~deferral at March 31, 2021, compared to $47.5 million in total loan balances. The highest amount was in the real estate and rental and leasing category of approximately $169 million which comprised of 132 loans. We have not begun a second round of loan payment deferrals yet, but expect to do so although at ~~a lower volume and on a case-by-case basis.~~December 31, 2020.

~~Through~~In the first quarter of 2021, we continued our stepped-up credit assessment and monitoring as well as our outreach to our ~~customers, we saw our Special Mention~~customers. Criticized loans ~~increase~~declined by ~~approximately $7~~$10.5 million ~~sequential~~from the previous quarter to ~~$115.9 million. The largest exposure is in~~$181.7 million, or 4.0% of the ~~real estate and rental and leasing category which totaled approximately $59~~total loan portfolio excluding PPP loans. Special mention loans declined by $14.7 million to $127.8 million, or 2.8% of the total loan portfolio excluding PPP loans. Classified loans increased by $4.2 million to $53.9 million, or 1.2% of the total loan ~~portfolio.~~portfolio excluding PPP loans. The ~~loans in this category~~loan improvements 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 27% of special mention balances and 8% 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%~~78% of our total loan portfolio, net of PPP loans. Overall, the Company's loan portfolio remains well diversified.

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

Material Trends

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

Following the solid performances of our leading economic indicators in 2019, Hawaii's economy was greatly impacted by the COVID-19 pandemic in 2020. Hawaii's visitor industry continues to be significantly impacted by the COVID-19 pandemic, however the state is making progress towards economic recovery. Beginning October 15, 2020, passengers arriving from out-of-state and traveling inter-county could bypass the mandatory 14-day self-quarantine with a valid negative COVID-19 Nucleic Acid Amplification Test ("NAAT") test result from a Trusted Testing and Travel Partner through the state’s Safe Travels program. Effective November 24, all trans-Pacific travelers participating in the pre-travel testing program were required to have a negative test result before their departure to Hawaii, ~~tourism started~~and test results would no longer be accepted once a traveler arrived in Hawaii. On December 10, 2020, the ~~year strong~~mandatory quarantine was reduced from 14 to 10 days in accordance with ~~solid growth~~the U.S. Centers for Disease Control and Prevention’s ("CDC") guidelines.

On December 2, 2020, Kauai County temporarily suspended its participation in ~~visitor arrivals and spending~~the state’s Safe Travels program making it mandatory for all travelers to Kauai to quarantine upon arrival. Kauai rejoined the program on April 5, 2021.

According to preliminary statistics from the Hawaii Tourism Authority ("HTA"), the average daily census showed that there were 90,776 visitors in Hawaii on any given day in February 2021, compared to 250,052 visitors per day in February 2020. In the first two months of 2021, approximately 407,000 total visitors arrived in the state compared to 1.7 million total visitors in the first two months of 2020. ~~However,~~This was a decrease of 75.9% from the ~~COVID-19 outbreak has impacted Hawaii’s tourism significantly since late February. Total visitor arrivals~~year-ago period. The HTA also reported that total spending by visitors decreased to $769 million in the ~~five~~first two months ~~ended May 31, 2020, which includes an additional day associated with leap year, decreased 49.5%~~of 2021, a decrease of 75.8%, 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, total visitors were down approximately 99% from~~$3.17 billion in the same year-ago period.

~~A few airlines have announced temporary suspension~~According to projections provided by the Hawaii Department of ~~flights~~Business Economic Development and Tourism ("DBEDT") in early March 2021, total visitor arrivals are expected to ~~international destinations. Many hotels throughout~~increase to approximately 5.5 million visitors in 2021, an increase of 102.9% from the ~~state remain temporarily closed. Many shopping centers~~2020 level. Visitor arrivals are ~~still on reduced hours. However, some restaurants~~projected to increase to 8.3 million in 2022, 9.2 million in 2023, and ~~bars are now open for indoor service, take-out, curbside pick-up and delivery.~~9.8 million in 2024. Visitor spending is expected to increase to approximately $9.76 billion in 2021.

~~The full~~Recent statistics provided by DBEDT indicate the tourism industry may be rebounding quicker than initially expected with visitor arrivals approaching 20,000 per day in April 2021, or ~~partial shutdown~~nearly two-thirds of pre-pandemic levels. We believe tourism ~~restaurant, and retail industries has significantly impacted employment~~gains will further increase in the ~~state.~~second half of 2021 after vaccinations increase and travel restrictions loosen.

Hawaii's unemployment rate went from one of the lowest in the nation to one of the highest. The ~~Hawai‘i State~~ Department of Labor &and Industrial Relations ~~("DLIR") announced~~reported that ~~the~~Hawaii's seasonally adjusted unemployment rate for June was 13.9% compared to the revised rate of 23.5% in May. The significant decrease may be due to PPP funds and other government stimulus programs. There is potential for an increase in the unemployment rate in future months. Statewide, 527,600 were employed and 85,200 unemployed in June for a total seasonally adjusted labor force of 612,800. Nationally, the seasonally adjustedannual unemployment rate was ~~11.1%~~9.0% in ~~June, down from 13.3 percent~~the month of March 2021. The unemployment rate of 9.0% in ~~May.~~March 2021 ranked highest in the nation, above the national seasonally adjusted

unemployment rate of 6.0% but has significantly improved compared to a high of 21.9% in the months of April and May 2020. DBEDT projects Hawaii's seasonally adjusted annual unemployment rate to be around 8.2% in 2021.

Oahu home sales started the year strong with healthy year-over-year increases in closed sales of single-family homes and condominiums during the first quarter, however as expected slowed during the second quarter due to the challenges presented by COVID-19. According to the latest data available from the Honolulu Board of Realtors, ~~Oahu unit~~ sales ~~volume decreased by 4.8% for~~of Oahu single-family homes and ~~22.0% for~~ condominiums ~~for~~in March 2021 saw significant double-digit growth of 19.1% and 52.7%, respectively, compared to pre-pandemic activity last March. In the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, sale of single family homes and condominiums are up 11.9% and 32.5%, respectively. For the third consecutive month, the median price for a single-family home set a new record of $950,000, representing a 17.3% year-over-year increase and a 3.5% increase over February’s record of $917,500. The median price for a condominium increased by 3.7% to $451,000, compared to ~~the same time period last year. For the six months ended June 30, 2020, the median sales price for single-family homes on Oahu was $785,000, representing a 1.3% increase from $775,000~~$435,000 in the same prior year period. The median sales price for condominiums on Oahu for the six months ended June 30, 2020 was $427,750, representing an increase of 2.1% from $419,000 in the same prior year period.March 2020.

RISE2020

Commencing in the second quarter of 2019, the Company launched RISE2020, a multifaceted initiative intended to enhance customer experience, drive stronger long-term growth and profitability, improve shareholder returns and lower our efficiency ratio. RISE2020 includes initiatives in the following key areas of opportunity: Digital Banking, Revenue Enhancements, Branch Transformation and Operational Excellence. RISE2020 is intended to provide Central Pacific Bank with ~~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. TheAfter 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. The~~was completed in the fourth quarter of 2020. Despite several challenges resulting from the impact of the COVID-19 pandemic, the Company ~~continues to see a decline in~~completed its RISE2020 initiative culminating with the grand opening of the fully renovated Central Pacific Plaza headquarters building and flagship main branch, ~~transaction activity and its digital initiatives have been well-timed to meet the changing needs of its customers~~ and the ~~community.~~launch of a new brand design in early January 2021.

Results of Operations

Net Interest Income

Net interest income, when annualized and expressed as a percentage of average interest earning assets, is referred to as "net interest margin." Interest income, which includes loan fees and resultant yield information, is expressed on a taxable equivalent basis using a federal statutory tax rate of 21% for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020. A comparison of net interest income on a taxable-equivalent basis ("net interest income") for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 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.

5753


(dollars in thousands)	(dollars in thousands)	Three Months Ended June 30,																																																									(dollars in thousands)	Three Months Ended March 31,
				2020															2019																Variance																		(dollars in thousands)		2021									2020	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	$		43,442		0.10		%			10				$	11,082		1.29		%			36				$	32,360		(1.19)			%			(26)
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)	1,081,271			1.90				5,124				1,027,695				2.64				6,774				53,576				(0.74)				(1,650)
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)	93,665			2.78				651				105,330				3.21				845				(11,665)				(0.43)				(194)
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	1,174,936			1.97				5,775				1,133,025				2.69				7,619				41,911				(0.72)				(1,844)
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)	5,079,874			3.66				46,074				4,462,347				4.16				46,204				617,527				(0.50)				(130)
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	7,534			3.13				59				14,589				3.61				132				(7,055)				(0.48)				(73)
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	6,305,786			3.32				51,918				5,621,043				3.85				53,991				684,743				(0.53)				(2,073)
Noninterest-earning assets	Noninterest-earning assets	394,768									370,488									24,280								Noninterest-earning assets	433,039											386,194												46,845
Total assets	Total assets	$	6,468,129								$	5,856,465								$	611,664							Total assets	$	6,738,825										$	6,007,237											$	731,588

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	$	1,186,963		0.03	%			86				$	1,013,795			0.07	%			176				$	173,168			(0.04)	%			(90)
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	1,972,800			0.06				274				1,651,751				0.27				1,118				321,049				(0.21)				(844)
Time deposits under $100,000		161,874			0.65			261			173,556			0.70			305			(11,682)			(0.05)			(44)
Time deposits $100,000 and over		807,276			0.93			1,863			907,330			2.02			4,562			(100,054)			(1.09)			(2,699)
Time deposits up to $250,000																												Time deposits up to $250,000	236,828			0.41				241				266,549				0.89				591				(29,721)				(0.48)				(350)
Time deposits over $250,000																												Time deposits over $250,000	657,004			0.21				347				743,877				1.45				2,677				(86,873)				(1.24)				(2,330)
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	4,053,595			0.09				948				3,675,972				0.50				4,562				377,623				(0.41)				(3,614)
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	2,456			0.30				2				139,813				1.46				508				(137,357)				(1.16)				(506)
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	105,402			3.95				1,027				101,547				3.62				914				3,855				0.33				113
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	4,161,453			0.19				1,977				3,917,332				0.61				5,984				244,121				(0.42)				(4,007)
Noninterest-bearing deposits	Noninterest-bearing deposits	1,731,939									1,357,056									374,883								Noninterest-bearing deposits	1,905,147											1,445,724												459,423
Other liabilities	Other liabilities	112,687									97,041									15,646								Other liabilities	120,247											107,458												12,789
Total liabilities	Total liabilities	5,927,325									5,351,716									575,609								Total liabilities	6,186,847											5,470,514												716,333
Shareholders’ equity	Shareholders’ equity	540,802									504,749									36,053								Shareholders’ equity	551,976											536,721												15,255
Non-controlling interest	Non-controlling interest	2									—									2								Non-controlling interest	2											2												—
Total equity	Total equity	540,804									504,749									36,055								Total equity	551,978											536,723												15,255
Total liabilities and equity	Total liabilities and equity	$	6,468,129								$	5,856,465								$	611,664							Total liabilities and equity	$	6,738,825										$	6,007,237											$	731,588

Net interest income	Net interest income							$	49,418								$	45,594								$	3,824	Net interest income								$	49,941											$	48,007											$	1,934

Interest rate spread	Interest rate spread				3.15	%								3.07	%								0.08	%				Interest rate spread				3.13	%											3.24	%											(0.11)	%

Net interest margin	Net interest margin				3.26	%								3.33	%								(0.07)	%				Net interest margin				3.19	%											3.43	%											(0.24)	%

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

5854

(dollars in thousands) Six Months Ended June 30,
2020 2019 Variance
Average
Balance Average
Yield/
Rate Interest
Income/
Expense Average
Balance Average
Yield/
Rate Interest
Income/
Expense Average
Balance Average
Yield/
Rate Interest
Income/
Expense
Assets
Interest earning assets:
Interest-bearing deposits in other banks $ 13,430 0.59 % 39 $ 9,682 2.38 % 114 $ 3,748 (1.79) % (75)
Investment securities, excluding ACL:
Taxable investment securities (1) 1,035,068 2.53 13,101 1,174,596 2.69 15,822 (139,528) (0.16) (2,721)
Tax-exempt investment securities (1) 102,907 3.12 1,604 147,899 2.88 2,127 (44,992) 0.24 (523)
Total investment securities 1,137,975 2.58 14,705 1,322,495 2.71 17,949 (184,520) (0.13) (3,244)
Loans, including loans held for sale (2) 4,682,626 3.95 92,119 4,127,917 4.35 89,308 554,709 (0.40) 2,811
Federal Home Loan Bank stock 13,171 3.61 238 15,143 4.26 322 (1,972) (0.65) (84)
Total interest earning assets 5,847,202 3.67 107,101 5,475,237 3.95 107,693 371,965 (0.28) (592)
Noninterest-earning assets 390,390 358,089 32,301
Total assets $ 6,237,592 $ 5,833,326 $ 404,266
Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 1,035,340 0.06 % 290 $ 956,783 0.08 % 391 $ 78,557 (0.02) % (101)
Savings and money market deposits 1,754,186 0.19 1,685 1,525,425 0.30 2,298 228,761 (0.11) (613)
Time deposits under $100,000 163,074 0.67 546 174,683 0.68 592 (11,609) (0.01) (46)
Time deposits $100,000 and over 826,714 1.18 4,846 944,796 2.00 9,367 (118,082) (0.82) (4,521)
Total interest-bearing deposits 3,779,314 0.39 7,367 3,601,687 0.71 12,648 177,627 (0.32) (5,281)
Short-term borrowings 101,459 1.15 582 156,550 2.60 2,016 (55,091) (1.45) (1,434)
Long-term debt 119,243 2.91 1,726 101,547 4.15 2,091 17,696 (1.24) (365)
Total interest-bearing liabilities 4,000,016 0.49 9,675 3,859,784 0.88 16,755 140,232 (0.39) (7,080)
Noninterest-bearing deposits 1,588,742 1,376,437 212,305
Other liabilities 110,070 97,385 12,685
Total liabilities 5,698,828 5,333,606 365,222
Shareholders’ equity 538,762 499,720 39,042
Non-controlling interest 2 — 2
Total equity 538,764 499,720 39,044
Total liabilities and equity $ 6,237,592 $ 5,833,326 $ 404,266
Net interest income $ 97,426 $ 90,938 $ 6,488
Interest rate spread 3.18 % 3.07 % 0.11 %
Net interest margin 3.34 % 3.33 % 0.01 %
(1) At amortized cost.
(2) Includes nonaccrual loans.


	2021 Compared to 2020
	Increase (Decrease) Due to Change In:
(dollars in thousands)	Volume		Rate		Net Change

Interest earning assets:
Interest-bearing deposits in other banks	$	104	$	(130)	$	(26)
Investment securities, excluding ACL:
Taxable (1)	353		(2,003)		(1,650)
Tax-exempt (1)	(94)		(100)		(194)
Total investment securities	259		(2,103)		(1,844)
Loans, including loans held for sale (2)	6,320		(6,450)		(130)
Federal Home Loan Bank stock	(64)		(9)		(73)
Total interest earning assets	6,619		(8,692)		(2,073)




Interest-bearing liabilities:
Interest-bearing demand deposits	30		(120)		(90)
Savings and money market deposits	213		(1,057)		(844)
Time deposits up to $250,000	(66)		(284)		(350)
Time deposits over $250,000	(312)		(2,018)		(2,330)
Total interest-bearing deposits	(135)		(3,479)		(3,614)

Short-term borrowings	(499)		(7)		(506)
Long-term debt	32		81		113
Total interest-bearing liabilities	(602)		(3,405)		(4,007)

Net interest income	$	7,221	$	(5,287)	$	1,934

Net interest income (expressed on a taxable-equivalent basis) was ~~$49.4~~$49.9 million for the three months ended ~~June 30, 2020,~~March 31, 2021, representing an increase of ~~8.4%~~4.0% from ~~$45.6~~$48.0 million in the three months ended June 30, 2019. Net interest income (expressed on a taxable-equivalent basis) was $97.4 million for the six months ended June 30, 2020, representing an increase of 7.1% from $90.9 million in the six months ended June 30, 2019.March 31, 2020. The increase in the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 was primarily due to ~~loan growth, attributable to~~ loans originated and forgiven 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 months ended ~~June 30, 2020~~March 31, 2021 included ~~$2.5~~$5.2 million in PPP net interest income and net loan fees, which are accreted into income over the term of the loans and accelerated when the loans are forgiven or paid-off. During the three months ended March 31, 2021, approximately $100.6 million in PPP loans were forgiven which resulted in the immediate recognition of $2.4 million in net loan fees. The

decreases in yields earned on interest-earning assets and rates paid on interest-bearing liabilities were primarily attributable to the ~~five~~historically low interest rate ~~cuts by~~environment during the ~~Federal Reserve from August 2019 through March 2020.~~pandemic environment. During the three months ended ~~June 30, 2020,~~March 31, 2021, the Company had an average PPP loan balance of ~~$379.9~~$526.8 million, which earned approximately ~~2.61%~~3.99% 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, 2020,~~first quarter of 2021, representing a decrease of ~~2.2%~~3.8% from ~~$54.3~~$54.0 million in the ~~three months ended June 30, 2019.~~year-ago quarter. The 6150 bp decrease in the average yields earned on loans during the ~~three months ended June 30, 2020,~~first quarter of 2021, compared to the ~~three months ended June 30, 2019,~~year-ago quarter, decreased interest income by approximately ~~$5.5~~$6.5 million. In addition, ~~run-off of~~ the ~~investment securities portfolio of $147.5 million, combined with the 18~~72 bp decline in yields earned on investment securities during the ~~three months ended June 30, 2020,~~first quarter of 2021, compared to the ~~three months ended June 30, 2019,~~year-ago quarter, decreased interest income by approximately ~~$1.5~~$2.1 million. Also contributing to these decreases was an additional day in the year-ago quarter. These decreases were partially offset by a ~~$731.3~~$617.5 million increase in average loans during the first quarter of 2021, compared to the ~~three months ended June 30, 2019,~~year-ago quarter, accounting for an increase of approximately ~~$5.8~~$6.3 million in interest income during the ~~three months ended June 30, 2020.~~first quarter of 2021. The significant increase in average loans was primarily attributable to the aforementioned PPP loans.

Taxable-equivalent interest income was $107.1 million for the six months ended June 30, 2020, representing a decrease of 0.5% from $107.7 million in the six months ended June 30, 2019. The 40 bp decrease in the average yields earned on loans during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, decreased interest income by approximately $9.8 million. In addition, run-off of the investment securities portfolio of $184.5 million, combined with the 13 bp decline in yields earned on investment securities during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, decreased interest income by approximately $3.2 million. These decreases were partially offset by a $554.7 million increase in average loans compared to the six months ended June 30, 2019, accounting for an increase of approximately $12.6 million in interest income during the six months ended June 30, 2020.

Interest Expense

Interest expense for the ~~three months ended June 30, 2020~~first quarter of 2021 was ~~$3.7~~$2.0 million, representing a decrease of ~~57.7%~~67.0% from ~~$8.7~~$6.0 million in the ~~three months ended June 30, 2019.~~year-ago quarter. The decrease was primarily attributable to declines in rates paid on deposits, combined with improved deposit composition as noninterest-bearing deposits and lower-cost interest -bearing demand and savings and money market deposits

increased significantly from the year-ago quarter. Rates paid on savings and money market deposits and time deposits ~~$100,000 and~~ over ~~short-term borrowings and long-term debt of 26 bp, 109 bp, 209~~$250,000 declined by 21 bp and ~~169~~124 bp, respectively, which decreased interest expense by approximately ~~$1.2 million, $2.2 million, $0.3~~$1.1 million and ~~$0.6~~$2.0 million, respectively. In addition, average time deposits ~~$100,000 and~~ over $250,000 and short-term borrowings declined by ~~$100.1~~$86.9 million and ~~$112.2~~$137.4 million resulting in a decrease in interest expense of approximately ~~$0.5~~$0.3 million and ~~$0.7~~$0.5 million, respectively. Time deposits ~~$100,000 and~~ over $250,000 primarily consists of public funds which may be opportunistic sources of funding, but fluctuate more directly with changes in the Federal Funds rate.

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

Net Interest Margin

Our net interest margin of ~~3.26%~~3.19% for the ~~three months ended June 30, 2020~~first quarter of 2021 decreased by 724 bp from ~~3.33%~~3.43% in the ~~three months ended June 30, 2019.~~year-ago quarter.

The decline in net interest margin for the ~~three months ended June 30, 2020~~first quarter of 2021 compared to the year-ago quarter is primarily due to lower ~~yielding PPP loans and lower~~ yields earned on average loans and investment securities of 50 bp and 72 bp, respectively, partially offset by lower rates paid on interest-bearing liabilities of 42 bp, primarily attributable to the ~~five~~historically low interest rate ~~cuts by the Federal Reserve from August 2019 through March 2020.~~

~~Our net interest margin of 3.34% for the six months ended June 30, 2020 increased by 1 bp from 3.33%~~environment we are currently operating in ~~the six months ended June 30, 2019.~~

~~The average rates paid on our interest-bearing liabilities, which declined by 39 bp in the six months ended June 30, 2020, compared~~due to the same prior year period, outpaced the decline in average yields earned on our interest-earning assets, which declined by 28 bp in the six months ended June 30, 2020, compared to the same prior year period.pandemic environment.

Provision for Credit Losses

~~Our~~In the three months ended March 31, 2021, our provision for credit losses was a credit of $0.8 million, which consisted of a credit to the provision for credit losses on loans ~~under ASC 326 was $10.6~~of $1.0 million and ~~$20.0~~a $0.2 million ~~during~~provision for credit losses on off-balance sheet credit exposures. In the three ~~and six~~ months ended ~~June 30,~~March 31, 2020, ~~respectively, compared to an expense~~our provision for credit loss was $11.1 million, which consisted of ~~$1.4 million and $2.7 million in the three and six months ended June 30, 2019, respectively, under previous GAAP.~~

~~In addition, we recorded~~ a provision for credit losses on loans of $9.3 million and a $1.8 million provision for credit losses on off-balance sheet credit ~~exposures of $0.6 million and $2.4 million, included in other operating expense, during the three and six months ended June 30, 2020, respectively, compared to a~~exposures. The provision ~~of $0.5 million and $0.7 million in the three and six months ended June 30, 2019, respectively, under previous GAAP. The increases in the provisions~~ for credit losses ~~and off-balance sheet credit exposures from~~in the year-ago ~~periods were~~quarter was primarily due to adverse economic conditions brought on by the COVID-19 ~~pandemic.~~pandemic, while the credit to the provision for credit losses in the current quarter was primarily due to improved economic forecasts.

We did not record a provision for credit losses on investment securities ~~under ASC 326~~and we did not record a provision for credit losses on accrued interest receivable during the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and three months ended March 31, 2020.

Our net charge-offs were ~~$2.9~~$0.7 million during the ~~three months ended June 30, 2020,~~first quarter of 2021, compared to net charge-offs of ~~$0.4~~$1.2 million in the ~~three 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 30, 2019.~~year-ago quarter.

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)	March 31, 2021		March 31, 2020		$ 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	$	2,970	$	337	$	2,633	781.3	%
Service charges on deposit accounts	Service charges on deposit accounts	1,149		2,041		(892)		-43.7	%		Service charges on deposit accounts	1,478		2,050		(572)		-27.9	%
Other service charges and fees	Other service charges and fees	2,916		3,909		(993)		-25.4	%		Other service charges and fees	3,790		4,897		(1,107)		-22.6	%
Income from fiduciary activities	Income from fiduciary activities	1,270		1,129		141		12.5	%		Income from fiduciary activities	1,231		1,297		(66)		-5.1	%

Income from bank-owned life insurance											Income from bank-owned life insurance	797		(19)		816		-4,294.7	%

Other:											Other:
Equity in earnings of unconsolidated subsidiaries	Equity in earnings of unconsolidated subsidiaries	104		71		33		46.5	%		Equity in earnings of unconsolidated subsidiaries	107		26		81		311.5	%

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

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

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	35		23		12		52.2	%
Other recoveries	Other recoveries	26		26		—		—	%		Other recoveries	28		40		(12)		-30.0	%

Commissions on sale of checks	Commissions on sale of checks	56		79		(23)		-29.1	%		Commissions on sale of checks	77		81		(4)		-4.9	%
Gain on sale of MasterCard stock		—		—		—		N.M.		*

Other	Other	150		132		18		13.6	%		Other	198		154		44		28.6	%
Total other operating income	Total other operating income	$	10,692	$	10,094	$	598	5.9	%		Total other operating income	$	10,711	$	8,886	$	1,825	20.5	%

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

For the ~~three months ended June 30, 2020,~~first quarter of 2021, total other operating income of $10.7 million increased by ~~$0.6~~$1.8 million, or ~~5.9%~~20.5%, from ~~$10.1~~$8.9 million in the year-ago quarter. The increase from the year-ago quarter was primarily due to higher mortgage banking income of ~~$1.9~~$2.6 million and higher income from bank-owned life insurance of ~~$0.5~~$0.8 million in the ~~current quarter.~~first quarter of 2021. 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~~$1.7 million (included in mortgage banking income)~~, which was partially offset by~~ and higher ~~amortization~~loan placement fees of ~~mortgage servicing rights of $1.1~~$0.6 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 first quarter of 2021. These increases were partially offset by lower other service charges and fees of ~~$1.0~~$1.1 million and lower service charges on deposit accounts of ~~$0.9~~$0.6 million ~~as certain service charges were suspended during~~resulting from lower transactional activity in the first quarter ~~to support our customers through the pandemic. In addition, there was less transactional activity~~of 2021 due to the pandemic.

Six Months Ended
(dollars in thousands) June 30, 2020 June 30, 2019 $ Change % Change
Other operating income:
Mortgage banking income $ 3,903 $ 3,281 $ 622 19.0 %
Service charges on deposit accounts 3,199 4,122 (923) -22.4 %
Other service charges and fees 7,813 7,124 689 9.7 %
Income from fiduciary activities 2,567 2,094 473 22.6 %
Equity in earnings of unconsolidated subsidiaries 130 79 51 64.6 %
Investment securities gains — — — N.M. *
Income from bank-owned life insurance 1,405 1,866 (461) -24.7 %
Net loss on sales of foreclosed assets (6) — (6) N.M. *
Other:
Income recovered on nonaccrual loans previously charged-off 60 167 (107) -64.1 %
Other recoveries 66 52 14 26.9 %
Commissions on sale of checks 137 159 (22) -13.8 %
Gain on sale of MasterCard stock — 2,555 (2,555) -100.0 %
Other 304 268 36 13.4 %
Total other operating income $ 19,578 $ 21,767 $ (2,189) -10.1 %
* Not meaningful ("N.M.")

For the six months ended June 30, 2020, total other operating income of $19.6 million decreased by $2.2 million, or 10.1%, from $21.8 million in the six months ended June 30, 2019. The decrease from the year-ago period was primarily due to a $2.6 million gain on sale of MasterCard stock recognized in the year-ago period, combined with lower service charges on deposit accounts of $0.9 million and lower income from bank-owned life insurance of $0.5 million. As previously noted, certain service charges have been suspended to support our customers through the pandemic and there has been less transactional activity due to the pandemic resulting in lower service charges on deposit accounts. The lower income from bank-owned life insurance was primarily due to volatility in the equity markets. These decreases were partially offset by higher other service charges and fees of $0.7 million, higher mortgage banking income of $0.6 million and higher income from fiduciary activities of $0.5 million. The higher other charges and fees was primarily due to $1.3 million in income related to an interest rate swap 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)	March 31, 2021		March 31, 2020		$ 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	$	19,827	$	20,054	$	(227)	-1.1	%
Net occupancy	Net occupancy	3,645		3,525		120		3.4	%	Net occupancy	3,764		3,672		92		2.5	%
Equipment	Equipment	1,043		1,138		(95)		-8.3	%	Equipment	1,000		1,097		(97)		-8.8	%

Communication expense	Communication expense	774		903		(129)		-14.3	%	Communication expense	769		837		(68)		-8.1	%
Legal and professional services	Legal and professional services	2,238		1,728		510		29.5	%	Legal and professional services	2,377		2,028		349		17.2	%
Computer software expense	Computer software expense	3,035		2,560		475		18.6	%	Computer software expense	3,783		2,943		840		28.5	%
Advertising expense	Advertising expense	923		712		211		29.6	%	Advertising expense	1,658		1,092		566		51.8	%
Foreclosed asset expense		—		49		(49)		-100.0	%

Other:	Other:									Other:
Pension and SERP expense										Pension and SERP expense	247		293		(46)		-15.7	%
Foreclosed asset expense										Foreclosed asset expense	3		67		(64)		-95.5	%
Charitable contributions	Charitable contributions	10		175		(165)		-94.3	%	Charitable contributions	21		187		(166)		-88.8	%
FDIC insurance assessment	FDIC insurance assessment	475		362		113		31.2	%	FDIC insurance assessment	440		—		440		N.M.
Miscellaneous loan expenses	Miscellaneous loan expenses	399		317		82		25.9	%	Miscellaneous loan expenses	370		300		70		23.3	%
ATM and debit card expenses	ATM and debit card expenses	584		620		(36)		-5.8	%	ATM and debit card expenses	665		634		31		4.9	%

Armored car expenses	Armored car expenses	229		211		18		8.5	%	Armored car expenses	192		294		(102)		-34.7	%
Entertainment and promotions	Entertainment and promotions	165		1,023		(858)		-83.9	%	Entertainment and promotions	199		280		(81)		-28.9	%
Stationery and supplies	Stationery and supplies	220		279		(59)		-21.1	%	Stationery and supplies	213		248		(35)		-14.1	%
Directors’ fees and expenses	Directors’ fees and expenses	196		238		(42)		-17.6	%	Directors’ fees and expenses	217		241		(24)		-10.0	%
Directors' deferred compensation plan expense	Directors' deferred compensation plan expense	103		133		(30)		-22.6	%	Directors' deferred compensation plan expense	902		(1,483)		2,385		-160.8	%
Provision for residential mortgage loan repurchase losses		—		(403)		403		-100.0
Provision for off-balance sheet credit exposures		573		487		86		17.7	%

Loss on disposal of fixed assets										Loss on disposal of fixed assets	32		—		32		N.M.
Other	Other	1,193		1,487		(294)		-19.8	%	Other	1,167		1,658		(491)		-29.6	%
Total other operating expense	Total other operating expense	$	36,427	$	36,107	$	320	0.9	%	Total other operating expense	$	37,846	$	34,442	$	3,404	9.9	%

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, 2020,~~first quarter of 2021, total other operating expense was ~~$36.4~~$37.8 million and increased by ~~$0.3~~$3.4 million, or ~~0.9%~~9.9%, from ~~$36.1~~$34.4 million in the year-ago quarter. The increase was primarily due to higher ~~legal and professional services of $0.5 million, higher computer software~~directors' deferred compensation plan expense of ~~$0.5~~$2.4 million, and higher advertising expense of $0.2 million. The higher expenses are primarily attributable to expenses related to our RISE2020 initiative and were partially offset by lower entertainment and promotions of $0.9 million and a provision for residential mortgage loan repurchase losses of $0.4 million recorded in the year-ago quarter, compared to none in the current quarter. The lower entertainment and promotions expense was primarily attributable to higher expenses in the year-ago quarter related to a core deposit gathering campaign.

Six Months Ended
(dollars in thousands) June 30, 2020 June 30, 2019 $ Change % Change
Other operating expense:
Salaries and employee benefits $ 40,969 $ 40,452 $ 517 1.3 %
Net occupancy 7,317 6,983 334 4.8 %
Equipment 2,140 2,144 (4) -0.2 %
Communication expense 1,611 1,637 (26) -1.6 %
Legal and professional services 4,266 3,298 968 29.4 %
Computer software expense 5,978 5,157 821 15.9 %
Advertising expense 2,015 1,423 592 41.6 %
Foreclosed asset expense 67 208 (141) -67.8 %
Other:
Charitable contributions 197 329 (132) -40.1 %
FDIC insurance assessment 475 863 (388) -45.0 %
Miscellaneous loan expenses 699 611 88 14.4 %
ATM and debit card expenses 1,218 1,270 (52) -4.1 %
Armored car expenses 523 409 114 27.9 %
Entertainment and promotions 445 1,253 (808) -64.5 %
Stationery and supplies 468 504 (36) -7.1 %
Directors’ fees and expenses 437 480 (43) -9.0 %
Directors’ deferred compensation plan expense (1,380) 568 (1,948) -343.0 %
Provision for residential mortgage loan repurchase losses — (403) 403 -100.0
Provision for off-balance sheet credit exposures 2,371 654 1,717 262.5 %
Other 2,851 2,615 236 9.0 %
Total other operating expense $ 72,667 $ 70,455 $ 2,212 3.1 %

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

Efficiency Ratio

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

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 March 31,
(dollars in thousands)		2021			2020
Total other operating expense		$	37,846		$	34,442

Net interest income		$	49,804		$	47,830
Total other operating income		10,711			8,886
Total revenue before provision for credit losses		$	60,515		$	56,716

Efficiency ratio		62.54		%	60.73		%

Our efficiency ratio ~~improved~~increased to ~~60.76%~~62.54% in the ~~three months ended June 30, 2020,~~first quarter of 2021, compared to ~~65.09%~~60.73% in the year-ago quarter. The efficiency ratio in the ~~current~~first quarter of 2021 was ~~positively~~negatively impacted by the aforementioned higher other operating expense, offset by increases in net interest income ~~during the quarter attributable to the PPP loans~~ and lower rates paid on average interest-bearing liabilities. Our efficiency ratio improved slightly to 62.29% in the six months ended June 30, 2020, compared to 62.76% in the six months ended June 30, 2019.other operating income.

Income Taxes

The Company recorded income tax expense of ~~$3.0 million and $5.8~~$5.5 million for the three ~~and six~~ months ended ~~June 30, 2020, respectively,~~March 31, 2021, compared to ~~$4.4 million and $9.5~~$2.8 million in the three ~~and six~~ months ended ~~June 30, 2019, respectively.~~March 31, 2020. The effective tax rate for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 was ~~23.03% and 24.09%~~23.21%, ~~respectively,~~ compared to ~~24.65% and 24.40%~~25.31% in the three ~~and six~~ months ended ~~June 30, 2019.~~March 31, 2020.

The valuation allowance on our net deferred tax assets ("DTA") totaled $3.4 million at ~~June 30, 2020~~March 31, 2021 and $3.4 million at December 31, ~~2019,~~2020, of which $3.2 million and $3.2 million, respectively, related to our DTA from net apportioned net operating loss ("NOL") carryforwards for California state income tax purposes as we do not expect to generate sufficient income in California to utilize the DTA. The remaining valuation allowance of $0.2 million and $0.2 million as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 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~~$33.1 million at ~~June 30, 2020,~~March 31, 2021, compared to a net DTA of ~~$16.5~~$26.4 million as of December 31, ~~2019,~~2020, and is included in other assets on our consolidated balance sheets.

Financial Condition

Total assets at ~~June 30, 2020~~March 31, 2021 of ~~$6.63~~$6.98 billion increased by ~~$620.3~~$384.7 million from ~~$6.01~~$6.59 billion at December 31, ~~2019.~~2020.

Investment Securities

Investment securities of ~~$1.17~~$1.22 billion at ~~June 30, 2020~~March 31, 2021 increased by ~~$41.7~~$33.8 million, or ~~3.7%~~2.9%, from December 31, ~~2019.~~2020. The increase reflects ~~$147.4~~$139.8 million in net purchases, ~~combined with~~partially offset by a ~~$22.4~~$23.6 million ~~increase~~decrease in the market valuation on the available-for-sale portfolio ~~partially offset by $128.0~~and $82.4 million in principal runoff.

6658

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)	March 31, 2021		December 31, 2020		$ 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	$	548,880	$	375,879	$	173,001	46.0	%
Other	Other	431,887		454,582		(22,695)		(5.0)		Other	399,154		426,670		(27,516)		(6.4)
Real estate:	Real estate:									Real estate:
Construction	Construction	103,518		95,854		7,664		8.0		Construction	137,976		125,407		12,569		10.0
Residential mortgage	Residential mortgage	1,657,558		1,599,801		57,757		3.6		Residential mortgage	1,687,513		1,690,212		(2,699)		(0.2)
Home equity	Home equity	510,962		490,734		20,228		4.1		Home equity	559,514		551,266		8,248		1.5
Commercial mortgage	Commercial mortgage	912,422		909,798		2,624		0.3		Commercial mortgage	911,216		898,055		13,161		1.5
Consumer	Consumer	350,414		373,451		(23,037)		(6.2)		Consumer	319,032		332,430		(13,398)		(4.0)
Leases	Leases	—		—		—		—		Leases	—		—		—		—
Total loans	Total loans	4,450,588		3,924,220		526,368		13.4		Total loans	4,563,285		4,399,919		163,366		3.7
Allowance for credit losses ("ACL")	Allowance for credit losses ("ACL")	(59,765)		(42,592)		(17,173)		40.3		Allowance for credit losses ("ACL")	(70,961)		(73,152)		2,191		(3.0)
Loans, net of ACL	Loans, net of ACL	$	4,390,823	$	3,881,628	$	509,195	13.1		Loans, net of ACL	$	4,492,324	$	4,326,767	$	165,557	3.8

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	$	48,939	$	40,496	$	8,443	20.8	%
Other	Other	115,971		115,722		249		0.2		Other	115,035		118,421		(3,386)		(2.9)
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	253,122		258,273		(5,151)		(2.0)
Consumer	Consumer	176,551		195,981		(19,430)		(9.9)		Consumer	157,468		147,004		10,464		7.1
Leases	Leases	—		—		—		—		Leases	—		—		—		—
Total loans	Total loans	552,850		525,320		27,530		5.2		Total loans	574,564		564,194		10,370		1.8
ACL	ACL	(7,574)		(5,379)		(2,195)		40.8		ACL	(10,592)		(10,117)		(475)		4.7
Loans, net of ACL	Loans, net of ACL	$	545,276	$	519,941	$	25,335	4.9		Loans, net of ACL	$	563,972	$	554,077	$	9,895	1.8

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	$	597,819	$	416,375	$	181,444	43.6	%
Other	Other	547,858		570,304		(22,446)		(3.9)		Other	514,189		545,091		(30,902)		(5.7)
Real estate:	Real estate:									Real estate:
Construction	Construction	103,518		95,854		7,664		8.0		Construction	137,976		125,407		12,569		10.0
Residential mortgage	Residential mortgage	1,657,558		1,599,801		57,757		3.6		Residential mortgage	1,687,513		1,690,212		(2,699)		(0.2)
Home equity	Home equity	510,962		490,734		20,228		4.1		Home equity	559,514		551,266		8,248		1.5
Commercial mortgage	Commercial mortgage	1,130,169		1,123,415		6,754		0.6		Commercial mortgage	1,164,338		1,156,328		8,010		0.7
Consumer	Consumer	526,965		569,432		(42,467)		(7.5)		Consumer	476,500		479,434		(2,934)		(0.6)
Leases	Leases	—		—		—		—		Leases	—		—		—		—
Total loans	Total loans	5,003,438		4,449,540		553,898		12.4		Total loans	5,137,849		4,964,113		173,736		3.5
ACL	ACL	(67,339)		(47,971)		(19,368)		40.4		ACL	(81,553)		(83,269)		1,716		(2.1)
Loans, net of ACL	Loans, net of ACL	$	4,936,099	$	4,401,569	$	534,530	12.1		Loans, net of ACL	$	5,056,296	$	4,880,844	$	175,452	3.6

Loans, net of deferred costs, of ~~$5.00~~$5.14 billion at ~~June 30, 2020~~March 31, 2021 increased by ~~$553.9~~$173.7 million, or ~~12.4%~~3.5%, from December 31, ~~2019.~~2020. The increase reflects net increases in the following loan portfolios: SBA Paycheck Protection Program loans of ~~$526.4~~$181.4 million, ~~residential mortgage~~construction of ~~$57.8~~$12.6 million, home equity of ~~$20.2 million, construction of $7.7~~$8.2 million and commercial mortgage of $8.0 million. These increases were

6759

~~$6.8 million. These increases were~~ partially offset by net decreases in the ~~consumer and~~following loan portfolios: other commercial ~~portfolios~~ of ~~$42.5~~$30.9 million, consumer of $2.9 million, and ~~$22.4 million, respectively.~~residential mortgage of $2.7 million.

The Hawaii loan portfolio increased by ~~$526.4~~$163.4 million, or ~~13.4%~~3.7%, from December 31, ~~2019.~~2020. The increase reflects net increases in the following loan portfolios: SBA Paycheck Protection Program loans of ~~$483.8~~$173.0 million, ~~residential~~commercial mortgage of ~~$57.8~~$13.2 million, construction of $12.6 million, and home equity of ~~$20.2 million, construction of $7.7 million and commercial mortgage of $2.6 million,~~$8.2 million.These increases were partially offset by net decreases in the ~~consumer and~~ other commercial and consumer portfolios of ~~$23.0~~$27.5 million and ~~$22.7~~$13.4 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~~$10.4 million, or ~~5.2%~~1.8% from December 31, ~~2019.~~2020. The net increase was primarily attributable to net increases in the consumer and SBA Paycheck Protection Program ~~and commercial mortgage~~ loan portfolios of ~~$42.6~~$10.5 million and ~~$4.1~~$8.4 million, respectively, partially offset by a net decrease in the ~~consumer~~commercial mortgage and other commercial loan portfolios of $5.2 million and $3.4 million, respectively. Refer to Note 4 - Loans and Credit Quality in the accompanying notes to the consolidated financial statements in this report for information on U.S. Mainland loan portfolio ~~of $19.4 million.~~

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

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

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

6860

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

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


(dollars in thousands)	(dollars in thousands)	June 30, 2020			December 31, 2019			$ Change		% Change		(dollars in thousands)	March 31, 2021			December 31, 2020			$ Change		% Change
Nonperforming Assets ("NPAs") [1]	Nonperforming Assets ("NPAs") [1]											Nonperforming Assets ("NPAs") [1]
Nonaccrual loans:	Nonaccrual loans:											Nonaccrual loans:
Commercial, financial and agricultural		$	934		$	467		$	467	100.0	%
Commercial, financial and agricultural - Other												Commercial, financial and agricultural - Other	$	1,412		$	1,461		$	(49)	(3.4)	%
Real estate:	Real estate:											Real estate:

Residential mortgage	Residential mortgage	3,215			979			2,236		228.4		Residential mortgage	4,553			4,115			438		10.6
Home equity	Home equity	538			92			446		484.8		Home equity	439			524			(85)		(16.2)

Consumer	Consumer	54			17			37		217.6		Consumer	790			92			698		758.7

Total nonaccrual loans	Total nonaccrual loans	4,741			1,555			3,186		204.9		Total nonaccrual loans	7,194			6,192			1,002		16.2

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

Real estate:	Real estate:											Real estate:

Residential mortgage												Residential mortgage	—			—			—		—

Home equity		—			164			(164)		(100.0)

Total OREO	Total OREO	—			164			(164)		(100.0)		Total OREO	—			—			—		—
Total nonperforming assets	Total nonperforming assets	4,741			1,719			3,022		175.8		Total nonperforming assets	7,194			6,192			1,002		16.2

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

Real estate:	Real estate:											Real estate:

Residential mortgage	Residential mortgage	726			724			2		0.3		Residential mortgage	4,522			567			3,955		697.5

Consumer	Consumer	444			286			158		55.2		Consumer	262			240			22		9.2

Total accruing loans delinquent for 90 days or more	Total accruing loans delinquent for 90 days or more	1,170			1,010			160		15.8		Total accruing loans delinquent for 90 days or more	4,784			807			3,977		492.8

Restructured Loans Still Accruing Interest [1]	Restructured Loans Still Accruing Interest [1]											Restructured Loans Still Accruing Interest [1]
Commercial, financial and agricultural		172			135			37		27.4
Commercial, financial and agricultural - Other												Commercial, financial and agricultural - Other	63			100			(37)		(37.0)
Real estate:	Real estate:											Real estate:

Residential mortgage	Residential mortgage	5,290			5,502			(212)		(3.9)		Residential mortgage	5,473			5,718			(245)		(4.3)

Commercial mortgage	Commercial mortgage	1,888			1,839			49		2.7		Commercial mortgage	1,698			1,761			(63)		(3.6)
Consumer	Consumer	145			—			145		—		Consumer	198			207			(9)		(4.3)

Total restructured loans still accruing interest	Total restructured loans still accruing interest	7,495			7,476			19		0.3		Total restructured loans still accruing interest	7,432			7,786			(354)		(4.5)

Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest	Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest	$	13,406		$	10,205		$	3,201	31.4		Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest	$	19,410		$	14,785		$	4,625	31.3

Ratio of nonaccrual loans to total loans	Ratio of nonaccrual loans to total loans	0.09		%	0.03		%			0.06	%	Ratio of nonaccrual loans to total loans	0.14		%	0.12		%			0.02	%
Ratio of NPAs to total loans and OREO	Ratio of NPAs to total loans and OREO	0.09		%	0.04		%			0.05	%	Ratio of NPAs to total loans and OREO	0.14		%	0.12		%			0.02	%
Ratio of NPAs and accruing loans delinquent for 90 days or more to total loans and OREO	Ratio of NPAs and accruing loans delinquent for 90 days or more to total loans and OREO	0.12		%	0.06		%			0.06	%	Ratio of NPAs and accruing loans delinquent for 90 days or more to total loans and OREO	0.23		%	0.14		%			0.09	%
Ratio of NPAs, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO	Ratio of NPAs, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO	0.27		%	0.23		%			0.04	%	Ratio of NPAs, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO	0.38		%	0.30		%			0.08	%
Ratio of classified assets and OREO to tier 1 capital and ACL	Ratio of classified assets and OREO to tier 1 capital and ACL	7.28		%	6.75		%			0.53	%	Ratio of classified assets and OREO to tier 1 capital and ACL	7.98		%	7.49		%			0.49	%

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

6961

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~~2020	$	~~1,719~~6,192
Additions	~~3,827~~2,257
Reductions:
Payments	~~(427)~~(292)
Return to accrual status	~~(123)~~(99)
Sales of NPAs	~~(94)~~—
Net charge-offs, valuation and other adjustments	~~(161)~~(864)
Total reductions	~~(805)~~(1,255)
Net increase	~~3,022~~1,002
Balance at ~~June 30, 2020~~March 31, 2021	$	~~4,741~~7,194

Nonperforming assets, which includes nonaccrual loans and other real estate owned, totaled ~~$4.7~~$7.2 million at ~~June 30, 2020,~~March 31, 2021, compared to ~~$1.7~~$6.2 million at December 31, ~~2019.~~2020. There were no nonperforming loans classified as held for sale at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020. The increase in nonperforming assets from December 31, ~~2019~~2020 was primarily attributable to additions to nonaccrual loans totaling ~~$3.8~~$2.3 million, offset by ~~$0.4 million in repayments of nonaccrual loans, $0.2~~$0.9 million in net charge-offs, valuation and other adjustments, $0.3 million in repayments of nonaccrual loans, and $0.1 million in loans returned to accrual ~~status, and the sale of a foreclosed asset of $0.1 million.~~status.

Troubled debt restructurings ("TDRs") included in nonperforming assets at ~~June 30, 2020~~March 31, 2021 consisted of ~~one~~ two Hawaii residential mortgage ~~loan~~ loans with a combined principal balance of ~~$0.3~~$0.2 million. There were $7.5 million of TDRs still accruing interest at ~~June 30, 2020, none~~March 31, 2021, of which ~~were~~one loan totaling $0.1 million was more than 90 days delinquent. At December 31, ~~2019,~~2020, there were ~~$7.5~~$7.8 million of TDRs still accruing interest, ~~none~~ of which ~~were~~one loan totaling $0.7 million was 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~~$39.5 million, or ~~11.3%~~0.8% of total loans ~~(and 12.7%~~(or 0.9% of total loans, excluding PPP loans), as of ~~June 30,~~March 31, 2021, compared to $120.2 million, or 2.4% of the total loan portfolio (or 2.6% excluding PPP loans) as of December 31, 2020.

The Company's ratio of classified assets and other real estate owned to tier 1 capital and the ACL increased from ~~6.75%~~7.49% at December 31, ~~2019~~2020 to ~~7.28%~~7.98% at ~~June 30, 2020.~~

March 31, 2021.

7062

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 March 31,
(dollars in thousands)	(dollars in thousands)	2020			2019			2020			2019			(dollars in thousands)	2021			2020
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	$	83,269		$	47,971
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	83,269			51,537

Provision for credit losses		10,640			1,404			19,969			2,687
Provision for credit losses on loans [1] [2]														Provision for credit losses on loans [1] [2]	(974)			9,329

Charge-offs:	Charge-offs:													Charge-offs:
Commercial, financial and agricultural		1,103			839			1,540			1,302
Real estate:
Commercial, financial and agricultural - Other														Commercial, financial and agricultural - Other	609			437

Residential mortgage		52			—			52			—

Consumer	Consumer	2,626			1,459			4,843			3,710			Consumer	1,098			2,217

Total charge-offs	Total charge-offs	3,781			2,298			6,435			5,012			Total charge-offs	1,707			2,654

Recoveries:	Recoveries:													Recoveries:
Commercial, financial and agricultural		305			315			647			548
Commercial, financial and agricultural - Other														Commercial, financial and agricultural - Other	89			342
Real estate:	Real estate:													Real estate:
Construction	Construction	—			592			131			598			Construction	—			131
Residential mortgage	Residential mortgage	20			372			201			394			Residential mortgage	106			181
Home equity	Home equity	—			9			31			18			Home equity	9			31
Commercial mortgage	Commercial mortgage	1			25			3			25			Commercial mortgage	8			2

Consumer	Consumer	509			581			1,255			1,093			Consumer	753			746

Total recoveries	Total recoveries	835			1,894			2,268			2,676			Total recoveries	965			1,433

Net charge-offs	Net charge-offs	2,946			404			4,167			2,336			Net charge-offs	742			1,221

Balance at end of period	Balance at end of period	$	67,339		$	48,267		$	67,339		$	48,267		Balance at end of period	$	81,553		$	59,645

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	1.59		%	1.32		%
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	1.80		%	1.32		%
ACL as a percentage of nonaccrual loans														ACL as a percentage of nonaccrual loans	1133.63		%	1681.56		%
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	0.06		%	0.11		%

[1] The Company has 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 and is adjusted through an offset to provision for credit losses. The provision for credit losses on loans presented in this table excludes the provision for credit losses on accrued interest receivable.														[1] The Company has 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 and is adjusted through an offset to provision for credit losses. The provision for credit losses on loans presented in this table excludes the provision for credit losses on accrued interest receivable.
[2] As of January 1, 2021, the provision for credit losses on off-balance sheet credit exposures (previously included in other operating expense) is included in the provision for credit losses line on the consolidated statements of income. The allowance for off-balance sheet credit exposures continues to be included in other liabilities. For roll-forward purposes, in this table we exclude the provision for credit losses on off-balance sheet credit exposures.														[2] As of January 1, 2021, the provision for credit losses on off-balance sheet credit exposures (previously included in other operating expense) is included in the provision for credit losses line on the consolidated statements of income. The allowance for off-balance sheet credit exposures continues to be included in other liabilities. For roll-forward purposes, in this table we exclude the provision for credit losses on off-balance sheet credit exposures.

Our ACL at ~~June 30, 2020~~March 31, 2021 totaled ~~$67.3~~$81.6 million compared to ~~$48.0~~$83.3 million at December 31, ~~2019.~~2020.

On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. The Company recorded increases of $3.6 million to the ACL for loans and $0.7 million to the reserve for off-balance sheet credit exposures, included in other liabilities, offset by a net decrease to 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 30, 2020,~~March 31, 2021, we recorded a credit to the provision for credit losses on loans of ~~$10.6~~$1.0 million and net charge-offs of ~~$2.9 million. During the six months ended June 30, 2020, we recorded a provision for credit losses on loans of $20.0 million and net charge-offs of $4.2~~$0.7 million. The ~~provisions reflect~~credit to the ~~incorporation of estimated life-of-loan losses under ASC 326 and~~provision is driven by improved economic forecasts ~~that anticipate deterioration due to~~under the current COVID-19 pandemic.

Our ACL as a percentage of total loans ~~increased~~decreased from ~~1.08%~~1.68% at December 31, ~~2019~~2020 to ~~1.35%~~1.59% at ~~June 30, 2020.~~March 31, 2021. Excluding the PPP loan portfolio, which is guaranteed by the SBA, our ACL as a percentage of total loans was ~~1.50%. The increase in our ACL as a percentage of total loans reflects the adoption of ASU 2016-13.~~1.80% at March 31, 2021, compared to 1.83% at December 31, 2020. Our ACL as a percentage of ~~nonperforming assets~~nonaccrual loans decreased from ~~2,791%~~1344.78% at December 31, ~~2019~~2020 to ~~1,420%~~1133.63% at ~~June 30, 2020.~~March 31, 2021.

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

Federal Home Loan Bank Stock

The bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB"). FHLB stock of ~~$9.2~~$8.2 million at ~~June 30, 2020~~March 31, 2021 decreased by ~~$5.8~~$0.1 million, or ~~38.4%~~1.0%, from the FHLB stock balance at December 31, ~~2019.~~2020. FHLB stock has an activity-based stock requirement, thus as borrowings decline, so will our holdings of FHLB stock. ~~There is~~We have a minimum requirement of ~~$7.0~~$7.9 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)	March 31, 2021		December 31, 2020		$ Change		% Change
Noninterest-bearing demand deposits	Noninterest-bearing demand deposits	$	1,851,012	$	1,450,532	$	400,480	27.6	%	Noninterest-bearing demand deposits	$	2,070,428	$	1,790,269	$	280,159	15.6	%
Interest-bearing demand deposits	Interest-bearing demand deposits	1,067,483		1,043,010		24,473		2.3		Interest-bearing demand deposits	1,237,574		1,174,888		62,686		5.3
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	2,004,368		1,932,043		72,325		3.7
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	145,497		149,063		(3,566)		(2.4)
Time deposits $100,000 to $250,000										Time deposits $100,000 to $250,000	88,814		90,149		(1,335)		(1.5)	%
Core deposits	Core deposits	5,023,978		4,259,325		764,653		18.0		Core deposits	5,546,681		5,136,412		410,269		8.0

Government time deposits	Government time deposits	509,927		533,088		(23,161)		(4.3)		Government time deposits	500,194		500,344		(150)		—
Other time deposits $100,000 to $250,000		96,633		107,550		(10,917)		(10.2)

Other time deposits greater than $250,000	Other time deposits greater than $250,000	164,147		220,060		(55,913)		(25.4)		Other time deposits greater than $250,000	162,075		159,362		2,713		1.7
Total time deposits $100,000 and greater		770,707		860,698		(89,991)		(10.5)
Total time deposits greater than $250,000										Total time deposits greater than $250,000	662,269		659,706		2,563		0.4

Total deposits	Total deposits	$	5,794,685	$	5,120,023	$	674,662	13.2		Total deposits	$	6,208,950	$	5,796,118	$	412,832	7.1

[1] As of January 1, 2021, other time deposits $100,000 to $250,000 have been included in core deposits. Prior period amounts have been reclassified to conform to current period presentation.										[1] As of January 1, 2021, other time deposits $100,000 to $250,000 have been included in core deposits. Prior period amounts have been reclassified to conform to current period presentation.

Total deposits of ~~$5.79~~$6.21 billion at ~~June 30, 2020~~March 31, 2021 increased by ~~$674.7~~$412.8 million, or 7.1%, from total deposits of ~~$5.12~~$5.80 billion at December 31, ~~2019.~~2020. Net increases in noninterest-bearing demand deposits of ~~$400.5~~$280.2 million, savings and money market deposits of ~~$345.7~~$72.3 million, ~~and~~ interest-bearing demand deposits of ~~$24.5~~$62.7 million, and other time deposits greater than $250,000 of $2.7 million were partially offset by net decreases in ~~other~~ time deposits ~~greater~~less than ~~$250,000~~$100,000 of ~~$55.9~~$3.6 million, ~~government time deposits of $23.2 million, other~~ time deposits $100,000 to $250,000 of ~~$10.9~~$1.3 million, and government time deposits ~~less than $100,000~~ of ~~$6.0~~$0.2 million.

Core deposits, which we define as demand deposits, savings and money market deposits, and time deposits ~~less than $100,000,~~up to $250,000, totaled ~~$5.02~~$5.55 billion at ~~June 30, 2020~~March 31, 2021 and increased by ~~$764.7~~$410.3 million, or ~~18.0%~~8.0%, from December 31, ~~2019.~~2020. The deposit of PPP funds and other government stimulus into both new and existing deposit accounts largely contributed to the increase in core deposits. ~~In addition, off-balance sheet investment funds from several large clients were brought back into deposit accounts.~~ The addition of PPP funds may be temporary as the PPP monies are spent by the businesses in accordance with the program. Going forward the Company is focused on expanding banking relationships with the new businesses we assisted with PPP. Core deposits as a percentage of total deposits was ~~86.7%~~89.3% at ~~June 30, 2020,~~March 31, 2021, compared to ~~83.2%~~88.6% at December 31, ~~2019.~~2020.

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~~$542.9 million at ~~June 30, 2020,~~March 31, 2021, compared to ~~$528.5~~$546.7 million at December 31, ~~2019.~~2020. The change in total shareholders' equity was primarily attributable to ~~net income of $18.2 million and~~ other comprehensive ~~income~~loss of $17.1 ~~million, partially offset by the repurchase of 206,802 shares of common stock under our repurchase program, at a cost of $4.7~~ million and cash dividends declared of ~~$13.0~~$6.5 million, partially offset by net income of $18.0 million in the ~~six~~three months ended ~~June 30, 2020. During~~March 31, 2021. In the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, we ~~repurchased approximately 0.7%~~did not repurchase any shares of our common ~~stock outstanding as of December 31, 2019.~~stock.

Our total shareholders' equity to total assets ratio was ~~8.21%~~7.78% at ~~June 30, 2020,~~March 31, 2021, compared to ~~8.79%~~8.29% at December 31, ~~2019.~~2020. The decline in our total shareholders' equity to total assets ratio was primarily due to the significant increase in the total assets denominator attributable to ~~$526.4~~$597.8 million in PPP loans, net of deferred fees and costs. Our book value per share was ~~$19.33~~$19.19 and ~~$18.68~~$19.40 at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively.

Holding Company Capital Resources

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

CPF relies on the bank to pay dividends to fund its obligations. As of ~~June 30, 2020,~~March 31, 2021, on a stand-alone basis, CPF had an available cash balance of approximately ~~$8.4~~$11.8 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 30, 2020,~~March 31, 2021, the bank had Statutory Retained Earnings of ~~$68.4~~$94.8 million. Provisions of federal law also impact the ability of the bank to pay dividends to the Company. On ~~July 28, 2020,~~April 27, 2021, the Company's Board of Directors declared a cash dividend of ~~$0.23~~$0.24 per share on the Company's outstanding common stock, which ~~remained unchanged~~increased by 4.3% from the $0.23 per share a year-ago.

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

In the year ended December 31, ~~2019,~~2020, the Company repurchased ~~797,003~~206,802 shares of common stock, at a cost of ~~$22.8~~$4.7 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~~replaced and ~~supersedes~~superseded in its entirety the share repurchase program previously approved by the Company's Board of Directors, which had ~~$19.8~~$26.6 million in remaining repurchase authority. The Company's Repurchase Plan iswas subject to a one year expiration. In the first quarter of 2020, the Company repurchased 206,802 shares of common stock, at a cost of $4.7 million, under the Company's repurchase plan. In March 2020, the Company temporarily suspended the Repurchase Plan due to uncertainty during the current COVID-19 pandemic.

~~In the six months ended June 30, 2020, a total of 206,802 shares of common stock, at a cost of $4.7 million, were repurchased under~~On January 26, 2021, the Company's ~~stock~~Board of Directors approved a new share repurchase ~~plans. As~~authorization of ~~June 30, 2020, $26.6~~up to $25 million ~~remained available for~~of its common stock. The Company did not repurchase ~~under~~any shares during the ~~Company's Repurchase Plan.~~first quarter of 2021. 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 30, 2020,~~March 31, 2021, we have two remaining statutory trusts, CPB Capital Trust IV ("Trust IV") and CPB Statutory Trust V ("Trust V"), which issued a total of $50.0 million in floating rate trust preferred securities. The trust preferred securities, the underlying floating rate junior subordinated debentures that are the assets of Trusts IV and V, and the common securities issued by Trusts IV and V are redeemable in whole or in part on any interest payment date on or after December 15, 2009 for Trust IV and V, or at any time in whole but not in part within 90 days following the occurrence of certain events. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from

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

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

Subordinated Notes

On October 20, 2020, the Company completed a $55 million private placement of ten-year fixed-to-floating rate subordinated notes, which will be used to support regulatory capital ratios and for general corporate purposes. The Company exchanged the privately placed notes for registered notes with the same terms and in the same aggregate principal amount at the end of the fourth quarter of 2020. The notes bear a fixed interest rate of 4.75% for the first five years and will reset quarterly thereafter for the remaining five years to the then current three-month Secured Overnight Financing Rate, as published by the Federal Reserve Bank of New York, plus 456 basis points. The subordinated notes had a carrying value of $53.9 million, net of unamortized debt issuance costs of $1.1 million, at March 31, 2021.

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

guidelines and interpretations.

Regulatory Capital Ratios

General capital adequacy regulations adopted by the FRB and FDIC require an institution to maintain minimum leverage capital, Tier 1 risk-based capital, total risk-based capital, and common equity Tier 1 ("CET1") capital ratios. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. For a further discussion of the effect of forthcoming changes in required regulatory capital ratios, see the discussion in the "Business — Supervision and Regulation" sections of our ~~2019~~2020 Form 10-K.

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

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

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

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

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

~~As of June 30, 2020, the~~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 30, 2020~~March 31, 2021 were above the levels required for a "well capitalized" regulatory designation.

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


		Actual						Minimum Required for Capital Adequacy Purposes							Minimum Required to be Well Capitalized							Actual				Minimum Required for Capital Adequacy Purposes		Minimum Required to be Well Capitalized
(dollars in thousands)	(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		(dollars in thousands)		Amount		Ratio		Amount		Ratio		Amount		Ratio
Company	Company													Company
At June 30, 2020:
At March 31, 2021:														At March 31, 2021:
Leverage capital	Leverage capital	$	571,976	8.9	%	$	256,307	4.0	%			N/A		Leverage capital		$	594,655	8.9	%	$	268,903	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		594,655		13.1		273,274		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		699,899		15.4		364,366		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		544,655		12.0		204,956		4.5				N/A

At December 31, 2019:
At December 31, 2020:														At December 31, 2020:
Leverage capital	Leverage capital	$	568,529	9.5	%	$	238,630	4.0	%			N/A		Leverage capital		$	581,358	8.8	%	$	263,979	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		581,358		12.9		271,027		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		686,130		15.2		361,370		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		531,358		11.8		203,270		4.5				N/A

Central Pacific Bank	Central Pacific Bank													Central Pacific Bank
At June 30, 2020:
At March 31, 2021:														At March 31, 2021:
Leverage capital	Leverage capital	$	559,461	8.7	%	$	256,118	4.0	%	$	320,147	5.0	%	Leverage capital		$	632,702	9.4	%	$	268,714	4.0	%	$	335,892	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		632,702		13.9		272,862		6.0		363,816		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		682,847		15.0		363,816		8.0		454,770		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		632,702		13.9		204,647		4.5		295,601		6.5

At December 31, 2019:
At December 31, 2020:														At December 31, 2020:
Leverage capital	Leverage capital	$	556,077	9.3	%	$	238,342	4.0	%	$	297,928	5.0	%	Leverage capital		$	620,372	9.4	%	$	263,735	4.0	%	$	329,668	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		620,372		13.7		270,821		6.0		361,094		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		670,087		14.9		361,094		8.0		451,368		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		620,372		13.7		203,115		4.5		293,389		6.5

Asset/Liability Management and Interest Rate Risk

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

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

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

The following reflects our net interest income sensitivity analysis as of ~~June 30, 2020.~~March 31, 2021. Net interest income is estimated assuming no balance sheet growth under a flat interest rate scenario. The net interest income sensitivity is measured as the

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~~4.28	%
-100 bp	~~(0.43)~~(5.11)	%

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~~$1.80 billion line of credit with the FHLB as of ~~June 30, 2020,~~March 31, 2021, compared to ~~$1.84~~$1.81 billion at December 31, ~~2019.~~2020. There were no short-term borrowings under this arrangement at ~~June 30, 2020,~~March 31, 2021, compared to ~~$150.0~~$22.0 million at December 31, ~~2019.~~2020. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled ~~$248.5~~$237.1 million at ~~June 30, 2020,~~March 31, 2021, compared to ~~$78.9~~$268.0 million at December 31, ~~2019. Long-term~~2020. There were no long-term borrowings under this arrangement ~~totaled $50.0 million~~ at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020. FHLB advances and standby letters of credit available at ~~June 30, 2020~~March 31, 2021 were secured by certain real estate loans with a carrying value of ~~$2.66~~$2.72 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB. At ~~June 30, 2020, $1.67~~March 31, 2021, $1.56 billion was undrawn under this arrangement, compared to ~~$1.57~~$1.52 billion at December 31, ~~2019.~~2020.

To bolster the effectiveness of the PPP, the Federal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The ~~PPP provides loans to small businesses so that they can keep their workers on the payroll. The~~ Paycheck Protection Program Liquidity Facility ("PPPLF") will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. At ~~June 30, 2020,~~March 31, 2021, 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.~~2020. There have been no material changes in our contractual obligations since December 31, ~~2019.~~2020.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

The primary analytical tool we use to measure and manage our interest rate risk is a simulation model that projects changes in net interest income ("NII") as market interest rates change. Our ALCO policy requires that simulated changes in NII should be within certain specified ranges, or steps must be taken to reduce interest rate risk. The results of the model indicate that the mix of rate-sensitive assets and liabilities at ~~June 30, 2020~~March 31, 2021 would not result in a fluctuation of NII that would exceed the established policy limits.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

~~On January 1, 2020,~~As of the ~~Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement~~end of ~~Credit Losses on Financial Instruments,” which replaces~~ the incurred loss methodology (Allowance for Loan and Leases Losses or "ALLL") with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The Company designed new controls and modified existing controls as part of its adoption. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data. There wereperiod covered by this report, there have been no ~~other~~ changes in the Company’s internal control over financial reporting (as defined in Rule 13a15(f) and 15d-15(f) of the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

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

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

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

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

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

Issuer Purchases of Equity Securities

Directors.

In March 2020, the Company temporarily suspended the Repurchase Plan due to uncertainty during the current COVID-19 pandemic. As a result, the Company did not repurchase any shares of common stock under the Company's Repurchase Plan during the ~~three months ended June 30,~~remainder of 2020.

On January 26, 2021, the Company's Board of Directors approved a new share repurchase authorization of up to $25 million of its common stock. As of ~~June 30, 2020, a total of $26.6~~March 31, 2021, $25.0 million remained available for repurchase ~~under~~as the ~~Company's Repurchase Plan.~~Company did not repurchase any shares during the first quarter of 2021. We cannot provide any assurance as to when or if we will recommence our ~~Repurchase Plan.~~share repurchase program.


	Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Shares Purchased as Part of Publicly Announced Programs	Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program
~~April 1-30, 2020~~January 1-31, 2021	—	$	—	—	$	25,000,000
February 1-28, 2021	—	—		$—	~~26,600,028~~25,000,000
~~May~~March 1-31, ~~2020~~2021	—	—		—	~~26,600,028~~25,000,000
~~June 1-30, 2020~~	—	—		—	~~26,600,028~~
Total	—	$	—	—	~~26,600,028~~25,000,000

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Item 6. Exhibits


Exhibit No.						Document

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

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

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

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

101.INS						XBRL Instance Document*

101.SCH						XBRL Taxonomy Extension Schema Document*

101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB						XBRL Taxonomy Extension Label Linkbase Document*

101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document*

101.DEF						XBRL Taxonomy Extension Definition Linkbase Document*

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


*						Filed herewith.

**						Furnished herewith.

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SIGNATURES

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


		CENTRAL PACIFIC FINANCIAL CORP.
		(Registrant)


Date:	~~July 29, 2020~~April 28, 2021	/s/ Paul K. Yonamine
		Paul K. Yonamine
		Chairman and Chief Executive Officer

Date:	~~July 29, 2020~~April 28, 2021	/s/ David S. Morimoto
		David S. Morimoto
		Executive Vice President and Chief Financial Officer

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	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


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

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

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





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


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


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

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


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


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

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