Companies: 10,761     total market cap: $129.805 T
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Central Pacific Financial
CPF
#6191
Rank
$0.84 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$31.49
Share price
-0.16%
Change (1 day)
18.65%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Central Pacific Financial
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2019 Q2

Central Pacific Financial - 10-Q quarterly report FY2019 Q2


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See Note 2 to the consolidated financial statements for additional 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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, 2019
 
or

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

CENTRAL PACIFIC FINANCIAL CORP.
(Exact name of registrant as specified in its charter) 
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 31, 2019 was 28,556,677 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, 2019 and December 31, 2018
4
 
 
 
 
Consolidated Statements of Income - Three months and six months ended June 30, 2019 and 2018
5
 
 
 
 
Consolidated Statements of Comprehensive Income - Three months and six months ended June 30, 2019 and 2018
6
 
 
 
 
Consolidated Statements of Changes in Equity - Three months and six months ended June 30, 2019 and 2018
7
 
 
 
 
Consolidated Statements of Cash Flows - Three months and six months ended June 30, 2019 and 2018
8
 
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
9
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
42
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
62
 
 
 
Item 4.
Controls and Procedures
62
 
 
 
Part II.
Other Information
63
 
 
 
Item 1A.
Risk Factors
63
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
63
 
 
 
Item 6.
Exhibits
64
 
 
 
Signatures
 
65


2
 

PART I.   FINANCIAL INFORMATION
 
Forward-Looking Statements and Factors that Could Affect Future Results
 
This document may contain forward-looking statements concerning: projections of revenues, expenses, income or loss, earnings or loss per share, capital expenditures, the payment or nonpayment of dividends, capital position, net interest margin or other financial items; statements of plans, objectives and expectations of Central Pacific Financial Corp. or its management or Board of Directors, including those relating to business plans, use of capital resources, products or services and regulatory developments and regulatory actions; statements of future economic performance including anticipated performance results from our RISE2020 initiative; or any statements of the assumptions underlying or relating to any of the foregoing. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts, and may include the words "believes," "plans," "anticipates," "expects," "intends," "forecasts," "hopes," "targeting," "continue," "remain," "will," "should," "estimates," "may" or words of similar meaning.

While we believe that our forward-looking statements and the assumptions underlying them are reasonably based, such statements and assumptions are by their nature subject to risks and uncertainties, and thus could later prove to be inaccurate or incorrect. Accordingly, actual results could differ materially from those statements or projections for a variety of reasons, including, but not limited to: adverse changes in the financial performance and/or condition of our borrowers and, as a result, increased loan delinquency rates, deterioration in asset quality, and losses in our loan portfolio; 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 and earthquakes) on the Company's business and operations and on tourism, the military, and other major industries operating within the Hawaii market and any other markets in which the Company does business; deterioration or malaise in domestic economic conditions, including any destabilization in the financial industry and deterioration of the real estate market, as well as the impact of declining levels of consumer and business confidence in the state of the economy in general and in financial institutions in particular; changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, changes in capital standards, other regulatory reform, including but not limited to regulations promulgated by the Consumer Financial Protection Bureau, government-sponsored enterprise reform, and any related rules and regulations on our business operations and competitiveness; the costs and effects of legal and regulatory developments, including the resolution of legal proceedings or regulatory or other governmental inquiries and proceedings and the resolution thereof, the results of regulatory examinations or reviews and the effect of, and our ability to comply with, any regulatory orders or actions we are or may become subject to; ability to successfully implement our initiatives to lower our efficiency ratio; the effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, securities market and monetary fluctuations, including the anticipated replacement of the London Interbank Offered Rate 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; changes in consumer spending, borrowings and savings habits; failure to maintain effective internal control over financial reporting or disclosure controls and procedures; the ability to address any material weakness 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 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. 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.


3
 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands)
June 30,
2019
 
December 31,
2018
Assets
 

 
 

Cash and due from banks
$
83,534

 
$
80,569

Interest-bearing deposits in other banks
15,173

 
21,617

Investment securities:
 
 
 
Available-for-sale debt securities, at fair value
1,254,743

 
1,205,478

Held-to-maturity debt securities, at amortized cost; fair value of: none at June 30, 2019 and $144,272 at December 31, 2018
—

 
148,508

Equity securities, at fair value
1,034

 
826

Total investment securities
1,255,777

 
1,354,812

 
 
 
 
Loans held for sale
6,848

 
6,647

 
 
 
 
Loans and leases
4,247,113

 
4,078,366

Allowance for loan and lease losses
(48,267
)
 
(47,916
)
Net loans and leases
4,198,846

 
4,030,450

 
 
 
 
Premises and equipment, net
43,600

 
45,285

Accrued interest receivable
17,260

 
17,000

Investment in unconsolidated subsidiaries
17,247

 
14,008

Other real estate owned
276

 
414

Mortgage servicing rights
15,266

 
15,596

Bank-owned life insurance
158,294

 
157,440

Federal Home Loan Bank stock
17,824

 
16,645

Right of use lease asset
53,678

 
—

Other assets
36,383

 
46,543

Total assets
$
5,920,006

 
$
5,807,026

 
 
 
 
Liabilities
 

 
 

Deposits:
 

 
 

Noninterest-bearing demand
$
1,351,190

 
$
1,436,967

Interest-bearing demand
1,002,706

 
954,011

Savings and money market
1,573,805

 
1,448,257

Time
1,049,148

 
1,107,255

Total deposits
4,976,849

 
4,946,490

 
 
 
 
Short-term borrowings
221,000

 
197,000

Long-term debt
101,547

 
122,166

Lease liability
53,829

 
—

Other liabilities
51,086

 
49,645

Total liabilities
5,404,311

 
5,315,301

 
 
 
 
Shareholders' Equity
 

 
 

Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding: none at June 30, 2019 and December 31, 2018
—

 
—

Common stock, no par value, authorized 185,000,000 shares; issued and outstanding: 28,567,777 at June 30, 2019 and 28,967,715 at December 31, 2018
456,293

 
470,660

Additional paid-in capital
89,724

 
88,876

Accumulated deficit
(34,780
)
 
(51,718
)
Accumulated other comprehensive income (loss)
4,458

 
(16,093
)
Total shareholders' equity
515,695

 
491,725

Total liabilities and shareholders' equity
$
5,920,006

 
$
5,807,026

See accompanying notes to consolidated financial statements.

4
 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollars in thousands, except per share data)
2019
 
2018
 
2019
 
2018
Interest income:
 

 
 

 
 

 
 

Interest and fees on loans and leases
$
45,540

 
$
38,699

 
$
89,308

 
$
76,089

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable interest
7,530

 
8,717

 
15,790

 
17,560

Tax-exempt interest
814

 
933

 
1,680

 
1,866

Dividends
14

 
3

 
32

 
18

Interest on deposits in other banks
46

 
117

 
114

 
201

Dividends on Federal Home Loan Bank stock
161

 
40

 
322

 
85

Total interest income
54,105

 
48,509

 
107,246

 
95,819

Interest expense:
 

 
 

 
 

 
 

Interest on deposits:
 

 
 

 
 

 
 

Demand
199

 
193

 
391

 
373

Savings and money market
1,507

 
459

 
2,298

 
828

Time
4,867

 
4,034

 
9,959

 
7,459

Interest on short-term borrowings
1,123

 
48

 
2,016

 
91

Interest on long-term debt
1,031

 
1,103

 
2,091

 
2,074

Total interest expense
8,727

 
5,837

 
16,755

 
10,825

Net interest income
45,378

 
42,672

 
90,491

 
84,994

Provision (credit) for loan and lease losses
1,404

 
532

 
2,687

 
321

Net interest income after provision (credit) for loan and lease losses
43,974

 
42,140

 
87,804

 
84,673

Other operating income:
 

 
 

 
 

 
 

Mortgage banking income
1,601

 
1,775

 
3,025

 
3,622

Service charges on deposit accounts
2,041

 
1,977

 
4,122

 
3,980

Other service charges and fees
3,691

 
3,377

 
6,755

 
6,411

Income from fiduciary activities
1,129

 
1,017

 
2,094

 
1,973

Equity in earnings of unconsolidated subsidiaries
71

 
37

 
79

 
80

Fees on foreign exchange
218

 
277

 
369

 
488

Income from bank-owned life insurance
914

 
501

 
1,866

 
819

Loan placement fees
107

 
220

 
256

 
417

Other
322

 
449

 
3,201

 
794

Total other operating income
10,094

 
9,630

 
21,767

 
18,584

Other operating expense:
 

 
 

 
 

 
 

Salaries and employee benefits
20,563

 
18,783

 
40,452

 
37,288

Net occupancy
3,525

 
3,360

 
6,983

 
6,626

Equipment
1,138

 
1,044

 
2,144

 
2,112

Amortization of core deposit premium
—

 
668

 
—

 
1,337

Communication expense
903

 
746

 
1,637

 
1,644

Legal and professional services
1,728

 
1,769

 
3,298

 
3,590

Computer software expense
2,560

 
2,305

 
5,157

 
4,572

Advertising expense
712

 
617

 
1,423

 
1,229

Foreclosed asset expense
49

 
31

 
208

 
325

Other
4,929

 
4,288

 
9,153

 
8,292

Total other operating expense
36,107

 
33,611

 
70,455

 
67,015

Income before income taxes
17,961

 
18,159

 
39,116

 
36,242

Income tax expense
4,427

 
3,935

 
9,545

 
7,741

Net income
$
13,534

 
$
14,224

 
$
29,571

 
$
28,501

Per common share data:
 

 
 

 
 

 
 

Basic earnings per common share
$
0.47

 
$
0.48

 
$
1.03

 
$
0.96

Diluted earnings per common share
$
0.47

 
$
0.48

 
$
1.03

 
$
0.95

Cash dividends declared
$
0.23

 
$
0.21

 
$
0.44

 
$
0.40

Weighted average common shares outstanding used in computation:
 
 
 
 
 
 
 
Basic shares
28,546,564

 
29,510,175

 
28,651,852

 
29,658,051

Diluted shares
28,729,510

 
29,714,942

 
28,847,786

 
29,881,534

 See accompanying notes to consolidated financial statements.

5
 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollars in thousands)
 
2019
 
2018
 
2019
 
2018
Net income
 
$
13,534

 
$
14,224

 
$
29,571

 
$
28,501

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss) on investment securities
 
12,165

 
(3,669
)
 
23,161

 
(18,640
)
Defined benefit plans
 
248

 
150

 
490

 
406

Total other comprehensive income (loss), net of tax
 
12,413

 
(3,519
)
 
23,651

 
(18,234
)
Comprehensive income
 
$
25,947

 
$
10,705

 
$
53,222

 
$
10,267

 
See accompanying notes to consolidated financial statements.

6
 

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, 2018
28,967,715

 
$
—

 
$
470,660

 
$
88,876

 
$
(51,718
)
 
$
(16,093
)
 
$
—

 
$
491,725

Impact of the adoption of new accounting standards (1)
—

 
—

 
—

 
—

 
—

 
(3,100
)
 
—

 
(3,100
)
Adjusted balance at January 1, 2019
28,967,715

 
—

 
470,660

 
88,876

 
(51,718
)
 
(19,193
)
 
—

 
488,625

Net income
—

 
—

 
—

 
—

 
16,037

 
—

 
—

 
16,037

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
11,238

 
—

 
11,238

Cash dividends declared ($0.21 per share)
—

 
—

 
—

 
—

 
(6,052
)
 
—

 
—

 
(6,052
)
Common stock repurchased and retired and other related costs (277,000 shares)
(277,000
)
 
—

 
(7,708
)
 
—

 
—

 
—

 
—

 
(7,708
)
Share-based compensation expense
32,326

 
—

 
—

 
498

 
—

 
—

 
—

 
498

Balance at March 31, 2019
28,723,041

 
$
—

 
$
462,952

 
$
89,374

 
$
(41,733
)
 
$
(7,955
)
 
$
—

 
$
502,638

Net income
—

 
—

 
—

 
—

 
13,534

 
—

 
—

 
13,534

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
12,413

 
—

 
12,413

Cash dividends declared ($0.23 per share)
—

 
—

 
—

 
—

 
(6,581
)
 
—

 
—

 
(6,581
)
Common stock purchased by directors' deferred compensation plan (14,600 shares, net)
—

 
—

 
(416
)
 
—

 
—

 
—

 
—

 
(416
)
Common stock repurchased and retired and other related costs (213,700 shares)
(213,700
)
 
—

 
(6,243
)
 
—

 
—

 
—

 
—

 
(6,243
)
Share-based compensation expense
58,436

 
—

 
 
 
350

 
—

 
—

 
—

 
350

Balance at June 30, 2019
28,567,777

 
$
—

 
$
456,293

 
$
89,724

 
$
(34,780
)
 
$
4,458

 
$
—

 
$
515,695

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2017
30,024,222

 
$
—

 
$
503,988

 
$
86,098

 
$
(89,036
)
 
$
(1,039
)
 
$
24

 
$
500,035

Impact of the adoption of new accounting standards (2)
—

 
—

 
—

 
—

 
139

 
(139
)
 
—

 
—

Adjusted balance at January 1, 2018
30,024,222

 
—

 
503,988

 
86,098

 
(88,897
)
 
(1,178
)
 
24

 
500,035

Impact of the adoption of new accounting standards (3)
—

 
—

 
—

 
—

 
1,836

 
(1,836
)
 
—

 
—

Net income
—

 
—

 
—

 
—

 
14,277

 
—

 
—

 
14,277

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(14,715
)
 
—

 
(14,715
)
Cash dividends declared ($0.19 per share)
—

 
—

 
—

 
—

 
(5,670
)
 
—

 
—

 
(5,670
)
Common stock purchased by directors' deferred compensation plan (2,850 shares, net)
—

 
—

 
(83
)
 
—

 
—

 
—

 
—

 
(83
)
Common stock repurchased and retired and other related costs (344,362 shares)
(344,362
)
 
—

 
(10,111
)
 
—

 
—

 
—

 
—

 
(10,111
)
Share-based compensation
27,262

 
—

 
—

 
399

 
—

 
—

 
—

 
399

Distribution from variable interest entity
—

 
—

 
—

 
—

 
—

 
—

 
(24
)
 
(24
)
Balance at March 31, 2018
29,707,122

 
$
—

 
$
493,794

 
$
86,497

 
$
(78,454
)
 
$
(17,729
)
 
$
—

 
$
484,108

Net income
—

 
—

 
—

 
—

 
14,224

 
—

 
—

 
14,224

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
(3,519
)
 
—

 
(3,519
)
Cash dividends declared ($0.21 per share)
—

 
—

 
—

 
—

 
(6,205
)
 
—

 
—

 
(6,205
)
Common stock purchased by directors' deferred compensation plan (14,100 shares, net)
—

 
—

 
(421
)
 
—

 
—

 
—

 
—

 
(421
)
Common stock repurchased and retired and other related costs (269,885 shares)
(269,885
)
 
—

 
(7,971
)
 
—

 
—

 
—

 
—

 
(7,971
)
Share-based compensation
52,717

 
—

 
 
 
452

 
—

 
—

 
—

 
452

Balance at June 30, 2018
29,489,954

 
$
—

 
$
485,402

 
$
86,949

 
$
(70,435
)
 
$
(21,248
)
 
$
—

 
$
480,668

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

7
 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six Months Ended
June 30,
(dollars in thousands)
2019
 
2018
Cash flows from operating activities:
 

 
 

Net income
$
29,571

 
$
28,501

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 

Provision (credit) for loan and lease losses
2,687

 
321

Depreciation and amortization of premises and equipment
3,085

 
3,177

Non-cash lease expense
151

 
—

Cash flows from operating leases
(3,105
)
 
—

(Gain) loss on sale of other real estate, net of write-downs
138

 
250

Amortization of core deposit premium and mortgage servicing rights
1,072

 
2,231

Net amortization and accretion of premium/discounts on investment securities
4,644

 
5,769

Share-based compensation expense
848

 
851

Net gain on sales of residential mortgage loans
(1,586
)
 
(1,931
)
Proceeds from sales of loans held for sale
93,490

 
118,294

Originations of loans held for sale
(92,105
)
 
(109,123
)
Equity in earnings of unconsolidated subsidiaries
(79
)
 
(80
)
Distributions from unconsolidated subsidiaries
101

 
578

Net increase in cash surrender value of bank-owned life insurance
(854
)
 
(819
)
Deferred income taxes
8,501

 
7,575

Net tax benefits from share-based compensation
192

 
166

Net change in other assets and liabilities
(8,782
)
 
(5,501
)
Net cash provided by operating activities
37,969

 
50,259

Cash flows from investing activities:
 

 
 

Proceeds from maturities of and calls on investment securities available-for-sale
121,881

 
78,401

Purchases of investment securities available-for-sale
—

 
(85,313
)
Proceeds from maturities of and calls on investment securities held-to-maturity
—

 
33,319

Proceeds from sale of MasterCard stock
2,555

 
—

Net loan proceeds (originations)
(121,756
)
 
(92,539
)
Purchases of loan portfolios
(49,327
)
 
(20,608
)
Proceeds from sale of foreclosed loans/other real estate owned
—

 
46

Proceeds from bank-owned life insurance
—

 
167

Net purchases of premises and equipment
(1,400
)
 
(1,833
)
Net return of capital from unconsolidated subsidiaries
622

 
—

Net (purchases of) proceeds from redemption of FHLB stock
(1,179
)
 
(2,485
)
Net cash used in investing activities
(48,604
)
 
(90,845
)
Cash flows from financing activities:
 

 
 

Net increase in deposits
30,359

 
22,745

Repayments of long-term debt
(20,619
)
 
—

Net increase (decrease) in short-term borrowings
24,000

 
55,000

Cash dividends paid on common stock
(12,633
)
 
(11,875
)
Repurchases of common stock and other related costs
(13,951
)
 
(18,082
)
Net cash provided by financing activities
7,156

 
47,788

Net (decrease) increase in cash and cash equivalents
(3,479
)
 
7,202

Cash and cash equivalents at beginning of period
102,186

 
82,293

Cash and cash equivalents at end of period
$
98,707

 
$
89,495

 
 
 
 
Supplemental disclosure of cash flow information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
16,916

 
$
10,552

Income taxes
9,401

 
22

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

 
—

Net reclassification of loans to foreclosed loans/other real estate owned
—

 
40

Net transfer of investment securities held to maturity to available for sale
149,042

 
—

Right-of-use lease assets obtained in exchange for lease liabilities
55,887

 
—

 See accompanying notes to consolidated financial statements.

8
 

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, 2018. In the opinion of management, all adjustments necessary for a fair presentation have been made and include all normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.

Principles of Consolidation

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

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

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

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

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

Our investments in unconsolidated subsidiaries accounted for under the equity, proportional amortization and cost methods were $0.2 million, $15.5 million and $1.6 million, respectively, at June 30, 2019 and $0.2 million, $11.6 million and $2.2 million, respectively, at December 31, 2018. Our policy for determining impairment of these investments includes an evaluation of whether a loss in value of an investment is other than temporary. Evidence of a loss in value includes absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. We perform impairment tests whenever indicators of impairment are

9
 

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

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

Reclassifications

Certain prior year amounts in the consolidated financial statements and the notes thereto have been reclassified to conform to the fiscal 2019 presentation. Such reclassifications had no effect on the Company's reported net income or shareholders' equity.

2. RECENT ACCOUNTING PRONOUNCEMENTS
 
Accounting Standards Adopted in 2019

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU establishes a right-of-use ("ROU") model that requires a lessee to recognize a ROU lease asset and lease liability on the balance sheet for all leases with a term of longer than 12 months. The FASB has also made available several practical expedients to assist entities with the adoption of ASU 2016-02. Among other things, these practical expedients require no reassessment of whether existing contracts are or contain leases as well as no reassessment of lease classification for current leases. In July 2018, the FASB released ASU 2018-11, "Leases (Topic 842): Targeted Improvements," which adds an additional practical expedient that allows entities to elect not to recast comparative periods presented when transitioning to Topic 842. The Company elected to adopt the practical expedient allowed under ASU 2018-11. During the year ended December 31, 2018, the Company engaged a software vendor to assist in the implementation of ASU 2016-02. The Company adopted ASU 2016-02 effective January 1, 2019 using the modified retrospective approach and recorded a ROU lease asset and corresponding lease liability on the Company's consolidated balance sheet of $55.9 million for its operating leases where it is a lessee. There was no impact to the Company's financial statements for its leases where it is a lessor. As of June 30, 2019, the ROU lease asset and lease liability was $53.7 million and $53.8 million, respectively. See Note 12 - Leases for required disclosures on this new standard.

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

In August 2018, the FASB issued ASU 2018-15, "Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which requires an entity in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs should be presented in the same line item on the balance sheet as amounts prepaid for the hosted service, if any (generally as an “other asset”). The capitalized costs will be amortized over the term of the hosting arrangement, with the amortization expense being presented in the same income statement line item as the fees paid for the hosted service. ASU 2018-15 is effective for the Company's reporting period beginning January 1, 2020 and early adoption is permitted. The Company early adopted ASU 2018-15 during the second quarter of 2019. The adoption of the ASU did not have a material impact on our consolidated financial statements.


10
 

Impact of Other Recently Issued Accounting Pronouncements on Future Filings

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," and subsequent amendments to the guidance, ASU 2019-04 in April 2019 and ASU 2019-05 in May 2019. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s “incurred loss” guidance delays the recognition of credit losses on loans, leases, held-to-maturity debt securities, loan commitments, and financial guarantees, and instead provides for a current expected credit loss (“CECL”) approach to determine the allowance for credit losses. CECL requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. In addition, this guidance modifies the accounting treatment for other-than-temporary impairment for available-for-sale debt securities. Organizations will continue to use judgment to determine which loss estimation methods are appropriate for their circumstances. This guidance requires entities to record a cumulative effect adjustment to the consolidated balance sheet as of the beginning of the first reporting period in which the guidance is effective. However, an organization may elect to phase in the regulatory capital impact over a three-year transition period if adoption of the new standard results in a reduction of retained earnings. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with earlier adoption permitted. As such, the Company will implement CECL for the reporting period beginning January 1, 2020. The new guidance will require significant operational changes, particularly in existing processes, data collection and analysis.

The Company has formed a steering committee that is responsible for oversight of the Company’s implementation strategy for compliance with provisions of the new standard. The Company has also established a project management governance process to manage the implementation across affected disciplines. To date, the Company has established appropriate loan pools by segment and sub-segment, developed internal loss driver models, and has leveraged a third-party software solution to measure expected losses under CECL. As part of this process, the Company has also engaged an additional third party specializing in economic forecasting to enable it to incorporate reasonable and supportable forecasts in its process. Finally, the Company is developing internal controls around all applicable components, including data, calculations and implementation. Later in the year, the Company plans to generate and evaluate model scenarios under CECL in tandem with its current reserving processes for select interim reporting periods in 2019. While the Company is evaluating the full impact of adopting this new guidance, management expects that it will be significantly influenced by its own historical experience, the composition and quality of the Company’s loans, as well as economic condition expectations as of the date of adoption. The Company also anticipates significant changes to its reserve calculation processes and procedures and continues to evaluate the potential impact on our consolidated financial statements.

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

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


11
 

3. INVESTMENT SECURITIES
 
A summary of our investment portfolio is as follows:
 
(dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
June 30, 2019
 

 
 

 
 

 
 

Available-for-sale:
 

 
 

 
 

 
 

Debt securities:
 

 
 

 
 

 
 

States and political subdivisions
$
152,303

 
$
2,308

 
$
(107
)
 
$
154,504

Corporate securities
30,594

 
231

 
(28
)
 
30,797

U.S. Treasury obligations and direct obligations of U.S Government agencies
29,869

 
2

 
(256
)
 
29,615

Mortgage-backed securities:
 

 
 

 
 

 
 

Residential - U.S. Government-sponsored entities
758,008

 
3,309

 
(5,944
)
 
755,373

Commercial - U.S. Government agencies and sponsored entities
105,347

 
1,136

 
(129
)
 
106,354

Residential - Non-government agencies
39,429

 
1,088

 
—

 
40,517

Commercial - Non-government agencies
134,771

 
2,869

 
(57
)
 
137,583

Total available-for-sale securities
$
1,250,321

 
$
10,943

 
$
(6,521
)
 
$
1,254,743

 
 
 
 
 
 
 
 
Equity securities
$
872

 
$
162

 
$
—

 
$
1,034



(dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
December 31, 2018
 

 
 

 
 

 
 

Held-to-maturity:
 

 
 

 
 

 
 

Mortgage-backed securities:
 

 
 

 
 

 
 

Residential - U.S. Government-sponsored entities
$
83,436

 
$
19

 
$
(3,174
)
 
$
80,281

Commercial - U.S. Government-sponsored entities
65,072

 
—

 
(1,081
)
 
63,991

Total held-to-maturity securities
$
148,508

 
$
19

 
$
(4,255
)
 
$
144,272

 
 
 
 
 
 
 
 
Available-for-sale:
 

 
 

 
 

 
 

Debt securities:
 

 
 

 
 

 
 

States and political subdivisions
$
174,114

 
$
1,035

 
$
(1,475
)
 
$
173,674

Corporate securities
55,259

 
—

 
(410
)
 
54,849

U.S. Treasury obligations and direct obligations of U.S Government agencies
33,257

 
—

 
(683
)
 
32,574

Mortgage-backed securities:
 
 
 
 
 
 
 

Residential - U.S. Government-sponsored entities
736,175

 
369

 
(19,492
)
 
717,052

Commercial - U.S. Government agencies and sponsored entities
53,014

 
—

 
(1,531
)
 
51,483

Residential - Non-government agencies
41,245

 
337

 
(464
)
 
41,118

Commercial - Non-government agencies
134,867

 
1,013

 
(1,152
)
 
134,728

Total available-for-sale securities
$
1,227,931

 
$
2,754

 
$
(25,207
)
 
$
1,205,478

 
 
 
 
 
 
 
 
Equity securities
$
826

 
$
—

 
$
—

 
$
826




12
 

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

The amortized cost and estimated fair value of investment securities at June 30, 2019 by contractual maturity are shown below. Actual 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, 2019
(dollars in thousands)
Amortized Cost
 
Fair Value
Available-for-sale:
 

 
 

Due in one year or less
$
36,539

 
$
36,603

Due after one year through five years
82,075

 
82,723

Due after five years through ten years
49,903

 
50,805

Due after ten years
44,249

 
44,785

 
 
 
 
Mortgage-backed securities:
 
 
 
Residential - U.S. Government-sponsored entities
758,008

 
755,373

Commercial - U.S. Government agencies and sponsored entities
105,347

 
106,354

Residential - Non-government agencies
39,429

 
40,517

Commercial - Non-government agencies
134,771

 
137,583

Total available-for-sale securities
$
1,250,321

 
$
1,254,743

 
 
 
 
Equity securities
$
872

 
$
1,034


 
We did not sell any available-for-sale securities during the three and six months ended June 30, 2019 and June 30, 2018.

Investment securities of $753.3 million and $980.2 million at June 30, 2019 and December 31, 2018, respectively, were pledged to secure public funds on deposit and other short-term borrowings.

Provided below is a summary of the 134 and 336 investment securities which were in an unrealized or unrecognized loss position at June 30, 2019 and December 31, 2018, respectively, aggregated by major security type and length of time in a continuous unrealized or unrecognized loss position.
 
 
Less Than 12 Months
 
12 Months or Longer
 
Total
(dollars in thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
June 30, 2019
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
$
2,656

 
$
(5
)
 
$
10,456

 
$
(102
)
 
$
13,112

 
$
(107
)
Corporate securities
—

 
—

 
5,200

 
(28
)
 
5,200

 
(28
)
U.S. Treasury obligations and direct obligations of U.S Government agencies
—

 
—

 
27,943

 
(256
)
 
27,943

 
(256
)
Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

Residential - U.S. Government-sponsored entities
18,320

 
(194
)
 
426,811

 
(5,750
)
 
445,131

 
(5,944
)
Residential - Non-government agencies
—

 
—

 
—

 
—

 
—

 
—

Commercial - U.S. Government agencies and sponsored entities
—

 
—

 
30,253

 
(129
)
 
30,253

 
(129
)
Commercial - Non-government agencies
16,709

 
(57
)
 
—

 
—

 
16,709

 
(57
)
Total temporarily impaired securities
$
37,685

 
$
(256
)
 
$
500,663

 
$
(6,265
)
 
$
538,348

 
$
(6,521
)



13
 

 
Less Than 12 Months
 
12 Months or Longer
 
Total
(dollars in thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
December 31, 2018
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
$
38,099

 
$
(157
)
 
$
49,505

 
$
(1,318
)
 
$
87,604

 
$
(1,475
)
Corporate securities
49,729

 
(250
)
 
5,120

 
(160
)
 
54,849

 
(410
)
U.S. Treasury obligations and direct obligations of U.S Government agencies
30,029

 
(613
)
 
2,545

 
(70
)
 
32,574

 
(683
)
Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

Residential - U.S. Government-sponsored entities
88,957

 
(1,229
)
 
666,685

 
(21,437
)
 
755,642

 
(22,666
)
Residential - Non-government agencies
—

 
—

 
24,515

 
(464
)
 
24,515

 
(464
)
Commercial - U.S. Government-sponsored entities
13,973

 
(247
)
 
101,500

 
(2,365
)
 
115,473

 
(2,612
)
Commercial - Non-government agencies
33,847

 
(233
)
 
46,680

 
(919
)
 
80,527

 
(1,152
)
Total temporarily impaired securities
$
254,634

 
$
(2,729
)
 
$
896,550

 
$
(26,733
)
 
$
1,151,184

 
$
(29,462
)


Visa and MasterCard Class B Common Stock

As of June 30, 2019, 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 LEASES
 
Loans and leases, excluding loans held for sale, consisted of the following as of June 30, 2019 and December 31, 2018:
 
(dollars in thousands)
June 30, 2019
 
December 31, 2018
Commercial, financial and agricultural
$
590,071

 
$
581,177

Real estate:


 


Construction
72,835

 
67,269

Residential mortgage
1,513,104

 
1,424,384

Home equity
472,918

 
468,966

Commercial mortgage
1,094,256

 
1,041,685

Consumer
501,273

 
492,268

Leases
52

 
124

Gross loans and leases
4,244,509

 
4,075,873

Net deferred costs
2,604

 
2,493

Total loans and leases, net of deferred costs
$
4,247,113

 
$
4,078,366

 
 
 
 

 
During the six months ended June 30, 2019, we did not foreclose on any loans.

14
 


During the six months ended June 30, 2018, we foreclosed on one loan totaling $40 thousand.

During the six months ended June 30, 2019 and 2018, we did not transfer any loans to the held-for-sale category.

We did not sell any portfolio loans during the six months ended June 30, 2019 and 2018.

In the first quarter of 2019, we purchased consumer loans totaling $18.3 million which represented the outstanding balance at the time of purchase.

In the second quarter of 2019, we purchased consumer loans totaling $31.0 million which represented the outstanding balance at the time of purchase.

In 2018, we purchased consumer loans totaling $58.6 million, which included a 0.1 million premium over the $58.5 million outstanding balance at the time of purchase.

Impaired Loans
 
The following tables present by class, the balance in the allowance for loan and lease losses (the "Allowance") and the recorded investment in loans and leases based on the Company's impairment measurement method as of June 30, 2019 and December 31, 2018:
 
 
 
 
Real Estate
 
 
 
 
 
 
(dollars in thousands)
Comml, Fin & Ag
 
Constr
 
Resi Mortgage
 
Home Equity
 
Comml Mortgage
 
Consumer
 
Leases
 
Total
June 30, 2019
 

 
 

 
 

 
 
 
 

 
 
 
 

 
 

Allowance:
 

 
 

 
 

 
 
 
 

 
 
 
 

 
 

Individually evaluated for impairment
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Collectively evaluated for impairment
8,109

 
1,313

 
13,367

 
4,313

 
11,668

 
9,497

 
—

 
48,267

Total ending balance
$
8,109

 
$
1,313

 
$
13,367

 
$
4,313

 
$
11,668

 
$
9,497

 
$
—

 
$
48,267

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases:
 

 
 

 
 

 
 
 
 

 
 
 
 

 
 

Individually evaluated for impairment
$
178

 
$
—

 
$
7,569

 
$
244

 
$
2,097

 
$
—

 
$
—

 
$
10,088

Collectively evaluated for impairment
589,893

 
72,835

 
1,505,535

 
472,674

 
1,092,159

 
501,273

 
52

 
4,234,421

Subtotal
590,071

 
72,835

 
1,513,104

 
472,918

 
1,094,256

 
501,273

 
52

 
4,244,509

Net deferred costs (income)
412

 
(408
)
 
3,832

 
233

 
(1,398
)
 
(67
)
 
—

 
2,604

Total loans and leases, net of deferred costs (income)
$
590,483

 
$
72,427

 
$
1,516,936

 
$
473,151

 
$
1,092,858

 
$
501,206

 
$
52

 
$
4,247,113



 
 
 
Real Estate
 
 
 
 
 
 
(dollars in thousands)
Comml, Fin & Ag
 
Constr
 
Resi Mortgage
 
Home Equity
 
Comml Mortgage
 
Consumer
 
Leases
 
Total
December 31, 2018
 

 
 

 
 

 
 
 
 

 
 
 
 

 
 

Allowance:
 

 
 

 
 

 
 
 
 

 
 
 
 

 
 

Individually evaluated for impairment
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Collectively evaluated for impairment
8,027

 
1,202

 
14,349

 
3,788

 
13,358

 
7,192

 
—

 
47,916

Total ending balance
$
8,027

 
$
1,202

 
$
14,349

 
$
3,788

 
$
13,358

 
7,192

 
$
—

 
$
47,916

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases:
 

 
 

 
 

 
 
 
 

 
 
 
 

 
 

Individually evaluated for impairment
$
220

 
$
2,273

 
$
10,075

 
$
275

 
$
2,348

 
$
—

 
$
—

 
$
15,191

Collectively evaluated for impairment
580,957

 
64,996

 
1,414,309

 
468,691

 
1,039,337

 
492,268

 
124

 
4,060,682

Subtotal
581,177

 
67,269

 
1,424,384

 
468,966

 
1,041,685

 
492,268

 
124

 
4,075,873

Net deferred costs (income)
483

 
(342
)
 
3,821

 
—

 
(1,407
)
 
(62
)
 
—

 
2,493

Total loans and leases, net of deferred costs (income)
$
581,660

 
$
66,927

 
$
1,428,205

 
$
468,966

 
$
1,040,278

 
$
492,206

 
$
124

 
$
4,078,366




15
 

There were no impaired loans with an allowance recorded as of June 30, 2019 and December 31, 2018. The following table presents by class, information related to impaired loans as of June 30, 2019 and December 31, 2018:
 
 
June 30, 2019
 
December 31, 2018
(dollars in thousands)
Unpaid
Principal
Balance
 
Recorded
Investment
 
Allowance
Allocated
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Allowance
Allocated
Impaired loans:
 

 
 

 
 

 
 

 
 

 
 

Commercial, financial and agricultural
$
288

 
$
178

 
$
—

 
$
330

 
$
220

 
$
—

Real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction
—

 
—

 
—

 
3,076

 
2,273

 
—

Residential mortgage
8,306

 
7,569

 
—

 
11,019

 
10,075

 
—

Home equity
244

 
244

 
—

 
275

 
275

 
—

Commercial mortgage
2,097

 
2,097

 
—

 
2,348

 
2,348

 
—

Total impaired loans
$
10,935

 
$
10,088

 
$
—

 
$
17,048

 
$
15,191

 
$
—



The following table presents by class, the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2019 and 2018:
 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
(dollars in thousands)
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Commercial, financial and agricultural
$
185

 
$
2

 
$
628

 
$
3

 
$
199

 
$
5

 
$
540

 
$
5

Real estate:
 
 
 
 
 

 
 

 
 
 
 
 
 

 
 

Construction
1,434

 
32

 
2,464

 
28

 
1,890

 
62

 
2,517

 
54

Residential mortgage
8,583

 
607

 
12,832

 
159

 
9,289

 
713

 
13,358

 
296

Home equity
254

 
13

 
518

 
—

 
393

 
13

 
546

 
—

Commercial mortgage
2,138

 
23

 
3,616

 
36

 
2,222

 
46

 
3,726

 
74

Total
$
12,594

 
$
677

 
$
20,058

 
$
226

 
$
13,993

 
$
839

 
$
20,687

 
$
429



For the three and six months ended June 30, 2019 and 2018, the amount of interest income recognized on impaired loans within the period that the loans were impaired were primarily related to loans modified in a troubled debt restructuring ("TDR") that were on accrual status. For the three and six months ended June 30, 2019 and 2018, the amount of interest income recognized using a cash-based method of accounting during the period that the loans were impaired was not material.
 
Foreclosure Proceedings

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


16
 

Aging Analysis of Accruing and Non-Accruing Loans and Leases
 
For all loan types, the Company determines delinquency status by considering the number of days full payments required by the contractual terms of the loan are past due. The following tables present by class, the aging of the recorded investment in past due loans and leases as of June 30, 2019 and December 31, 2018:
 
(dollars in thousands)
Accruing
Loans
30 - 59 Days
Past Due
 
Accruing
Loans
60 - 89 Days
Past Due
 
Accruing
Loans
Greater Than
90 Days
Past Due
 
Nonaccrual
Loans
 
Total
Past Due
and
Nonaccrual
 
Loans and
Leases
Not
Past Due
 
Total
June 30, 2019
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial, financial and agricultural
$
1,104

 
$
469

 
$
—

 
$
—

 
$
1,573

 
$
588,910

 
$
590,483

Real estate:
 
 
 
 
 
 
 
 
 

 
 
 
 

Construction
—

 
—

 
—

 
—

 
—

 
72,427

 
72,427

Residential mortgage
89

 
975

 
—

 
738

 
1,802

 
1,515,134

 
1,516,936

Home equity
970

 
—

 
—

 
244

 
1,214

 
471,937

 
473,151

Commercial mortgage
—

 
—

 
—

 
—

 
—

 
1,092,858

 
1,092,858

Consumer
2,013

 
737

 
267

 
—

 
3,017

 
498,189

 
501,206

Leases
—

 
—

 
—

 
—

 
—

 
52

 
52

Total
$
4,176

 
$
2,181

 
$
267

 
$
982

 
$
7,606

 
$
4,239,507

 
$
4,247,113



(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
December 31, 2018
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial, financial and agricultural
$
1,348

 
$
162

 
$
—

 
$
—

 
$
1,510

 
$
580,150

 
$
581,660

Real estate:
 
 
 
 
 
 
 
 
 

 
 
 
 

Construction
—

 
—

 
—

 
—

 
—

 
66,927

 
66,927

Residential mortgage
3,966

 
157

 
—

 
2,048

 
6,171

 
1,422,034

 
1,428,205

Home equity
433

 
104

 
298

 
275

 
1,110

 
467,856

 
468,966

Commercial mortgage
—

 
—

 
—

 
—

 
—

 
1,040,278

 
1,040,278

Consumer
2,340

 
872

 
238

 
—

 
3,450

 
488,756

 
492,206

Leases
—

 
—

 
—

 
—

 
—

 
124

 
124

Total
$
8,087

 
$
1,295

 
$
536

 
$
2,323

 
$
12,241

 
$
4,066,125

 
$
4,078,366


 
Modifications

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

Concessions made to the original contractual terms of these loans consisted primarily of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. The principal balances on these TDRs had matured and/or were in default at the time of restructure, and we have no commitments to lend additional funds to any of these borrowers. There were $9.1 million of TDRs still accruing interest at June 30, 2019, none of which were more than 90 days delinquent. At December 31, 2018, there were $12.9 million of TDRs still accruing interest, none of which were more than 90 days delinquent.
 
Some loans modified in a TDR may already be on nonaccrual status and partial charge-offs may have already been taken against the outstanding loan balance. Thus, these loans have already been identified as impaired and have already been evaluated under the Company's allowance for loan and lease losses (the "Allowance") methodology. Loans that were not on nonaccrual status when modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan. The loans modified in a TDR did not have a material effect on our provision for loan and lease losses (the "Provision") and the Allowance during the three and six months ended June 30, 2019.


17
 

No loans were modified in a TDR during the three and six months ended June 30, 2019 and 2018.

No loans were modified as a TDR within the previous twelve months that subsequently defaulted during the three and six months ended June 30, 2019 and 2018.

We had no commitments on TDRs during the three and six months ended June 30, 2019 and 2018.
 
Credit Quality Indicators
 
The Company categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases individually by classifying the loans and leases by credit risk. This analysis includes non-homogeneous loans and leases, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
 
Special Mention. Loans and leases classified as special mention, while still adequately protected by the borrower's capital adequacy and payment capability, exhibit distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment. These exposures require management's close attention so as to avoid becoming undue or unwarranted credit exposures.
 
Substandard. Loans and leases classified as substandard are inadequately protected by the borrower's current financial condition and payment capability or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.
 
Doubtful. Loans and leases classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.
 
Loss. Loans and leases classified as loss are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Losses are taken in the period in which they surface as uncollectible.

Loans and leases not meeting the criteria above are considered to be pass-rated. The following table presents by class and credit indicator, the recorded investment in the Company's loans and leases as of June 30, 2019 and December 31, 2018:
 
(dollars in thousands)
Pass
 
Special
Mention
 
Substandard
 
Loss
 
Subtotal
 
Net 
Deferred
Costs
(Income)
 
Total
June 30, 2019
 

 
 

 
 

 
 
 
 

 
 

 
 

Commercial, financial and agricultural
$
574,264

 
$
3,994

 
$
11,813

 
$
—

 
$
590,071

 
$
412

 
$
590,483

Real estate:
 
 
 
 
 
 
 
 
 

 
 
 
 

Construction
72,835

 
—

 
—

 
—

 
72,835

 
(408
)
 
72,427

Residential mortgage
1,512,276

 
—

 
828

 
—

 
1,513,104

 
3,832

 
1,516,936

Home equity
472,674

 
—

 
244

 
—

 
472,918

 
233

 
473,151

Commercial mortgage
1,054,254

 
26,711

 
13,291

 
—

 
1,094,256

 
(1,398
)
 
1,092,858

Consumer
501,007

 
—

 
178

 
88

 
501,273

 
(67
)
 
501,206

Leases
52

 
—

 
—

 
—

 
52

 
—

 
52

Total
$
4,187,362

 
$
30,705

 
$
26,354

 
$
88

 
$
4,244,509

 
$
2,604

 
$
4,247,113




18
 

(dollars in thousands)
Pass
 
Special
Mention
 
Substandard
 
Loss
 
Subtotal
 
Net 
Deferred
Costs
(Income)
 
Total
December 31, 2018
 

 
 

 
 

 
 
 
 

 
 

 
 

Commercial, financial and agricultural
$
552,706

 
$
7,961

 
$
20,510

 
$
—

 
$
581,177

 
$
483

 
$
581,660

Real estate:
 
 
 
 
 
 
 
 
 

 
 
 
 

Construction
67,269

 
—

 
—

 
—

 
67,269

 
(342
)
 
66,927

Residential mortgage
1,422,240

 
—

 
2,144

 
—

 
1,424,384

 
3,821

 
1,428,205

Home equity
468,394

 
—

 
572

 
—

 
468,966

 
—

 
468,966

Commercial mortgage
1,029,581

 
10,412

 
1,692

 
—

 
1,041,685

 
(1,407
)
 
1,040,278

Consumer
492,030

 
—

 
80

 
158

 
492,268

 
(62
)
 
492,206

Leases
124

 
—

 
—

 
—

 
124

 
—

 
124

Total
$
4,032,344

 
$
18,373

 
$
24,998

 
$
158

 
$
4,075,873

 
$
2,493

 
$
4,078,366


 

19
 

5. ALLOWANCE FOR LOAN AND LEASE LOSSES
 
The following table presents by class, the activity in the Allowance for the periods indicated:
 
 
 
 
Real Estate
 
 
 
 
 
 
(dollars in thousands)
Commercial,
Financial &
Agricultural
 
Construction
 
Residential Mortgage
 
Home Equity
 
Commercial Mortgage
 
Consumer
 
Leases
 
Total
Three Months Ended June 30, 2019
Beginning balance
$
7,847

 
$
1,299

 
$
12,851

 
$
4,278

 
$
12,036

 
$
8,956

 
$
—

 
$
47,267

Provision (credit) for loan and lease 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2018
Beginning balance
$
7,476

 
$
1,714

 
$
14,207

 
$
3,328

 
$
16,186

 
$
6,306

 
$
—

 
$
49,217

Provision (credit) for loan and lease losses
496

 
91

 
24

 
(169
)
 
(1,121
)
 
1,211

 
—

 
532

 
7,972

 
1,805

 
14,231

 
3,159

 
15,065

 
7,517

 
—

 
49,749

Charge-offs
742

 
—

 
—

 
—

 
—

 
1,729

 
—

 
2,471

Recoveries
295

 
6

 
21

 
9

 
29

 
543

 
—

 
903

Net charge-offs (recoveries)
447

 
(6
)
 
(21
)
 
(9
)
 
(29
)
 
1,186

 
—

 
1,568

Ending balance
$
7,525

 
$
1,811

 
$
14,252

 
$
3,168

 
$
15,094

 
$
6,331

 
$
—

 
$
48,181

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
Real Estate
 
 
 
 
 
 
(dollars in thousands)
Commercial,
Financial &
Agricultural
 
Construction
 
Residential Mortgage
 
Home Equity
 
Commercial Mortgage
 
Consumer
 
Leases
 
Total
Six Months Ended June 30, 2019
Beginning balance
$
8,027

 
$
1,202

 
$
14,349

 
$
3,788

 
$
13,358

 
$
7,192

 
$
—

 
$
47,916

Provision (credit) for loan and lease 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
Beginning balance
$
7,594

 
$
1,835

 
$
14,328

 
$
3,317

 
$
16,801

 
$
6,126

 
$
—

 
$
50,001

Provision (credit) for loan and lease losses
732

 
(1,223
)
 
(123
)
 
(161
)
 
(1,751
)
 
2,847

 
—

 
321

 
8,326

 
612

 
14,205

 
3,156

 
15,050

 
8,973

 
—

 
50,322

Charge-offs
1,240

 
—

 
—

 
—

 
—

 
3,662

 
—

 
4,902

Recoveries
439

 
1,199

 
47

 
12

 
44

 
1,020

 
—

 
2,761

Net charge-offs (recoveries)
801

 
(1,199
)
 
(47
)
 
(12
)
 
(44
)
 
2,642

 
—

 
2,141

Ending balance
$
7,525

 
$
1,811

 
$
14,252

 
$
3,168

 
$
15,094

 
$
6,331

 
$
—

 
$
48,181

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


In accordance with GAAP, loans held for sale and other real estate assets are not included in our assessment of the Allowance.
 
Our Provision was a debit of $1.4 million and a debit of $2.7 million in the three and six months ended June 30, 2019, respectively, compared to a debit of $0.5 million and a debit of $0.3 million in the three and six months ended June 30, 2018, respectively.
 

20
 

6. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
 
The components of the Company's investments in unconsolidated subsidiaries were as follows:
 
(dollars in thousands)
June 30, 2019
 
December 31, 2018
Investments in low income housing tax credit partnerships
$
15,486

 
$
11,603

Investments in common securities of statutory trusts
1,547

 
2,169

Investments in affiliates
160

 
182

Other
54

 
54

Total
$
17,247

 
$
14,008


 
The Company invests in low-income housing tax credit ("LIHTC") partnerships. As of June 30, 2019 and December 31, 2018, the Company had $12.1 million and $8.3 million, respectively, in unfunded commitments related to the LIHTC partnerships. The expected payments for the unfunded commitments as of June 30, 2019 for the remainder of fiscal year 2019, the next five succeeding fiscal years and all years thereafter are as follows (dollars in thousands):

Year Ending December 31,
 
2019 (remainder)
$
4,018

2020
7,866

2021
94

2022
10

2023
10

2024
26

Thereafter
49

Total unfunded commitments
$
12,073


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

The following table presents amortization and tax credits recognized associated with our investments in LIHTC partnerships for the three and six months ended June 30, 2019 and June 30, 2018:

(dollars in thousands)
Three Months Ended
June 30, 2019
 
Three Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2018
Proportional amortization method:
 
 
 
 
 
 
 
Amortization expense recognized in income tax expense
$
259

 
$
113

 
$
517

 
$
227

Tax credits recognized in income tax expense
338

 
153

 
615

 
305




21
 

7. CORE DEPOSIT PREMIUM AND MORTGAGE SERVICING RIGHTS
 
The following table presents changes in core deposit premium and mortgage servicing rights for the periods presented:
 
(dollars in thousands)
Core
Deposit
Premium
 
Mortgage
Servicing
Rights
 
Total
Balance, January 1, 2018
$
2,006

 
$
15,843

 
$
17,849

Additions
—

 
807

 
807

Amortization
(1,337
)
 
(894
)
 
(2,231
)
Balance, June 30, 2018
$
669

 
$
15,756

 
$
16,425

 
 
 
 
 
 
Balance, January 1, 2019
$
—

 
$
15,596

 
$
15,596

Additions
—

 
742

 
742

Amortization
—

 
(1,072
)
 
(1,072
)
Balance, June 30, 2019
$
—

 
$
15,266

 
$
15,266


 
Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans and totaled $0.5 million and $0.7 million for the three and six months ended June 30, 2019, respectively, compared to $0.4 million and $0.8 million for the three and six months ended June 30, 2018, respectively.

Amortization of mortgage servicing rights was $0.6 million and $1.1 million for the three and six months ended June 30, 2019, respectively, compared to $0.4 million and $0.9 million for the three and six months ended June 30, 2018, respectively.

The following table presents 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
(dollars in thousands)
June 30, 2019
 
June 30, 2018
Fair market value, beginning of period
$
17,696

 
$
17,161

Fair market value, end of period
15,554

 
18,560

Weighted average discount rate
9.5
%
 
9.5
%
Forecasted constant prepayment rate assumption (1)
17.4

 
13.9


 
(1) Represents annualized loan prepayment rate assumption.

The gross carrying value and accumulated amortization related to our core deposit premium and mortgage servicing rights are presented below:
 
 
June 30, 2019
 
December 31, 2018
(dollars in thousands)
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
Core deposit premium
$
44,642

 
$
(44,642
)
 
$
—

 
$
44,642

 
$
(44,642
)
 
$
—

Mortgage servicing rights
66,755

 
(51,489
)
 
15,266

 
66,013

 
(50,417
)
 
15,596

Total
$
111,397

 
$
(96,131
)
 
$
15,266

 
$
110,655

 
$
(95,059
)
 
$
15,596


 

22
 

Based on the mortgage servicing rights held as of June 30, 2019, estimated amortization expense for the remainder of fiscal year 2019, the next five succeeding fiscal years and all years thereafter are as follows (dollars in thousands):
 
Year Ending December 31,
 
2019 (remainder)
$
1,481

2020
2,437

2021
1,941

2022
1,570

2023
1,297

2024
1,120

Thereafter
5,420

Total
$
15,266


 
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, 2019 and December 31, 2018, we were not party to any derivatives designated as part of a fair value or cash flow hedge.
 
Interest Rate Lock and Forward Sale Commitments
 
We enter into interest rate lock commitments on certain mortgage loans that are intended to be sold. To manage interest rate risk on interest rate lock commitments, we also enter into forward loan sale commitments. The interest rate locks and forward loan sale commitments are accounted for as undesignated derivatives and are recorded at their respective fair values in other assets or other liabilities, with changes in fair value recorded in current period earnings. These instruments serve to reduce our exposure to movements in interest rates. At June 30, 2019, we were a party to interest rate lock and forward sale commitments on $1.0 million and $7.8 million of mortgage loans, respectively.
 
The following table presents the location of all assets and liabilities associated with our derivative instruments within the consolidated balance sheets:
 
Derivatives Financial Instruments Not Designated as Hedging Instruments
 
Asset Derivatives
 
Liability Derivatives
 
Fair Value at
 
Fair Value at
(dollars in thousands)
 
Balance Sheet Location
 
June 30,
2019
 
December 31,
2018
 
June 30,
2019
 
December 31,
2018
Interest rate lock and forward sale commitments
 
Other assets / other liabilities
 
$
6

 
$
11

 
$
69

 
$
95


 

23
 

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, 2019
 
 
 
 

Interest rate lock and forward sale commitments
 
Mortgage banking income
 
$
(18
)
Loans held for sale
 
Other income
 
—

 
 
 
 
 
Three Months Ended June 30, 2018
 
 
 
 
Interest rate lock and forward sale commitments
 
Mortgage banking income
 
(36
)
Loans held for sale
 
Other income
 
7

 
 
 
 
 
Six Months Ended June 30, 2019
 
 
 
 
Interest rate lock and forward sale commitments
 
Mortgage banking income
 
21

Loans held for sale
 
Other income
 
—

 
 
 
 
 
Six Months Ended June 30, 2018
 
 
 
 
Interest rate lock and forward sale commitments
 
Mortgage banking income
 
(15
)
Loans held for sale
 
Other income
 
—



9. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
 
Federal Home Loan Bank Advances and Other Borrowings

The bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB") and maintained a $1.74 billion line of credit as of June 30, 2019, compared to $1.43 billion at December 31, 2018. At June 30, 2019, $1.40 billion was undrawn under this arrangement, compared to $1.18 billion at December 31, 2018. Short-term borrowings under this arrangement totaled $221.0 million at June 30, 2019, compared to $197.0 million at December 31, 2018.  Long-term borrowings under this arrangement totaled $50.0 million at June 30, 2019 and December 31, 2018. FHLB advances available at June 30, 2019 were secured by certain real estate loans with a carrying value of $2.34 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB.
 
At June 30, 2019 and December 31, 2018, our bank had additional unused borrowings available at the Federal Reserve discount window of $67.7 million and $73.9 million, respectively. As of June 30, 2019 and December 31, 2018, certain commercial and commercial real estate loans with a carrying value totaling $121.2 million and $123.3 million, respectively, were pledged as collateral on our line of credit with the Federal Reserve discount window. The Federal Reserve does not have the right to sell or repledge these loans.
 
Subordinated Debentures

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

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

24
 

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

On December 17, 2018, the Company completed the redemption of $20.0 million in floating rate trust preferred securities of Trust III. The redemption price was 100% of the aggregate liquidation amount of the securities plus accumulated but unpaid distributions up to but not including the redemption date. The Company also redeemed $0.6 million of common securities issued by Trust III and held by the Company, as a result of the concurrent redemption of 100% of the principal assets of Trust III, or $20.6 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust III trust preferred securities. The redemption was pursuant to the optional prepayment provisions of the indenture. On January 9, 2019, Trust III was canceled with the state of Connecticut.
 
In September 2004, we created a wholly-owned statutory trust, CPB Capital Trust IV ("Trust IV"). Trust IV issued $30.0 million in floating rate trust preferred securities bearing an interest rate of three-month LIBOR plus 2.45% and maturing on December 15, 2034. The principal assets of Trust IV are $30.9 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust IV trust preferred securities. Trust IV issued $0.9 million of common securities to the Company.
 
In December 2004, we created a wholly-owned statutory trust, CPB Statutory Trust V ("Trust V"). Trust V issued $20.0 million in floating rate trust preferred securities bearing an interest rate of three-month LIBOR plus 1.87% and maturing on December 15, 2034. The principal assets of Trust V are $20.6 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust V trust preferred securities. Trust V issued $0.6 million of common securities to the Company.
 
The floating trust preferred securities, the junior subordinated debentures that are the assets of Trusts IV and V and the common securities issued by Trusts IV and V are redeemable in whole or in part on any interest payment date on or after December 15, 2009 for Trust IV and V, or at any time in whole but not in part within 90 days following the occurrence of certain events. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from time to time to defer interest payments on the subordinated debentures, which would result in a deferral of distribution payments on the related trust preferred securities, for up to 20 consecutive quarterly periods without default or penalty.

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

10. REVENUE FROM CONTRACTS WITH CUSTOMERS

The following presents the Company's other operating income, segregated by revenue streams that are in-scope and out-of-scope of ASC 606, "Revenue from Contracts with Customers" for the three and six months ended June 30, 2019 and 2018.

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollars in thousands)
2019
 
2018
 
2019
 
2018
Other operating income:
 
 
 
 
 
 
 
In-scope of ASC 606
 
 
 
 
 
 
 
Service charges on deposit accounts
$
2,041

 
$
1,977

 
$
4,122

 
$
3,980

Other service charges and fees
3,193

 
2,835

 
5,761

 
5,391

Income on fiduciary activities
1,129

 
1,017

 
2,094

 
1,973

Fees on foreign exchange
28

 
28

 
54

 
60

Loan placement fees
107

 
220

 
256

 
417

In-scope other operating income
6,498

 
6,077

 
12,287

 
11,821

Out-of-scope other operating income
3,596

 
3,553

 
9,480

 
6,763

Total other operating income
$
10,094

 
$
9,630

 
$
21,767

 
$
18,584



25
 


11. SHARE-BASED COMPENSATION
 
Restricted Stock Units
 
The table below presents the activity of restricted stock units for the six months ended June 30, 2019:
 
 
Shares
 
Weighted Average Grant Date Fair Value
Non-vested restricted stock units, beginning of period
362,725

 
$
26.98

Changes during the period:
 

 
 

Granted
181,073

 
28.89

Vested
(134,256
)
 
24.31

Forfeited
(6,970
)
 
29.63

Non-vested restricted stock units, end of period
402,572

 
28.69



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 have any short term leases. 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 used the collateralized interest rate that the Company would have to pay to borrow over a similar term to estimate the Company’s lease liability as of January 1, 2019.

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,
(dollars in thousands)
2019
 
2019
Lease cost:
 
 
 
Operating lease cost
$
1,628

 
$
3,256

Variable lease cost
604

 
1,251

Less: sublease income
(11
)
 
(22
)
Total lease cost
$
2,221

 
4,485

 
 
 
 
Other information:
 
 
 
Operating cash flows from operating leases
$
(1,556
)
 
$
(3,105
)
Weighted-average remaining lease term - operating leases
14.05 years

 
14.21 years

Weighted-average discount rate - operating leases
3.92
%
 
3.92
%



26
 

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 2019, the next five succeeding fiscal years and all years thereafter (dollars in thousands):

Year Ending December 31,
Undiscounted Cash Flows
 
Lease Liability Expense
 
Lease Liability Reduction
2019 (remainder)
$
3,106

 
$
1,032

 
$
2,074

2020
6,015

 
1,939

 
4,076

2021
5,705

 
1,787

 
3,918

2022
5,268

 
1,645

 
3,623

2023
4,970

 
1,512

 
3,458

2024
4,812

 
1,383

 
3,429

Thereafter
40,920

 
7,669

 
33,251

Total
$
70,796

 
$
16,967

 
$
53,829



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,
(dollars in thousands)
2019
 
2019
Total rental income recognized
$
519

 
1,054



Based on the Company's leases as lessor as of June 30, 2019, estimated lease payments for the remainder of fiscal year 2019, the next five succeeding fiscal years and all years thereafter are as follows (dollars in thousands):

Year Ending December 31,
 
2019 (remainder)
$
982

2020
1,782

2021
1,842

2022
1,283

2023
450

2024
88

Thereafter
268

Total
$
6,695


      

27
 

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, 2019 and 2018, by component:
 
(dollars in thousands)
Before Tax
 
Tax Effect
 
Net of Tax
Three Months Ended June 30, 2019
 

 
 

 
 

Net unrealized gains on investment securities:
 

 
 

 
 

Net unrealized gains arising during the period
$
16,620

 
$
4,455

 
$
12,165

Less: Reclassification adjustments from AOCI realized in net income
—

 
—

 
—

Net unrealized gains on investment securities
16,620

 
4,455

 
12,165

 
 
 
 
 
 
Defined benefit plans:
 

 
 

 
 

Amortization of net actuarial loss
264

 
22

 
242

Amortization of net transition obligation
4

 
1

 
3

Amortization of prior service cost
4

 
1

 
3

Defined benefit plans, net
272

 
24

 
248

 
 
 
 
 
 
Other comprehensive income
$
16,892

 
$
4,479

 
$
12,413


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

 
 

 
 

Net unrealized losses on investment securities:
 

 
 

 
 

Net unrealized losses arising during the period
$
(5,057
)
 
$
(1,388
)
 
$
(3,669
)
Less: Reclassification adjustments from AOCI realized in net income
—

 
—

 
—

Net unrealized losses on investment securities
(5,057
)
 
(1,388
)
 
(3,669
)
 
 
 
 
 
 
Defined benefit plans:
 

 
 

 
 

Amortization of net actuarial loss
235

 
91

 
144

Amortization of net transition obligation
4

 
1

 
3

Amortization of prior service cost
4

 
1

 
3

Defined benefit plans, net
243

 
93

 
150

 
 
 
 
 
 
Other comprehensive loss
$
(4,814
)
 
$
(1,295
)
 
$
(3,519
)

28
 

(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:
 
 
 

 
 

Net actuarial losses arising during the period
—

 
—

 
—

Amortization of net actuarial loss
527

 
51

 
476

Amortization of net transition obligation
9

 
2

 
7

Amortization of prior service cost
9

 
2

 
7

Settlement


 


 
—

Defined benefit plans, net
545

 
55

 
490


 
 
 
 
 
Other comprehensive income
$
32,189

 
$
8,538

 
$
23,651

 
 
 
 
 
 


(dollars in thousands)
Before Tax
 
Tax Effect
 
Net of Tax
Six Months Ended June 30, 2018
 

 
 

 
 

Net unrealized losses on investment securities:
 

 
 

 
 

Net unrealized losses arising during the period
$
(25,512
)
 
$
(6,872
)
 
$
(18,640
)
Less: Reclassification adjustments from AOCI realized in net income
—

 
—

 
—

Net unrealized losses on investment securities
(25,512
)
 
(6,872
)
 
(18,640
)
 
 
 
 
 
 
Defined benefit plans:
 

 
 

 
 

Net actuarial losses arising during the period
—

 
—

 
—

Amortization of net actuarial loss
576

 
184

 
392

Amortization of net transition obligation
9

 
2

 
7

Amortization of prior service cost
9

 
2

 
7

Settlement
—

 
—

 
—

Defined benefit plans, net
594

 
188

 
406

 
 
 
 
 
 
Other comprehensive loss
$
(24,918
)
 
$
(6,684
)
 
$
(18,234
)
 
 
 
 
 
 

The following tables present the changes in each component of AOCI, net of tax, for the three and six months ended June 30, 2019 and 2018:
 
(dollars in thousands)
Investment
Securities
 
Defined
Benefit
Plans
 
AOCI
Three Months Ended June 30, 2019
 

 
 

 
 

Balance at beginning of period
(1,747
)
 
(6,208
)
 
(7,955
)
 
 
 
 
 
 
Other comprehensive income before reclassifications
12,165

 
—

 
12,165

Reclassification adjustments from AOCI
—

 
248

 
248

Total other comprehensive income
12,165

 
248

 
12,413

 
 
 
 
 
 
Balance at end of period
$
10,418

 
$
(5,960
)
 
$
4,458




29
 

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

 
 

 
 

Balance at beginning of period
$
(10,492
)
 
$
(7,237
)
 
$
(17,729
)
 
 
 
 
 
 
Impact of the adoption of new accounting standards
—

 
—

 
—

 
 
 
 
 
 
Other comprehensive income before reclassifications
(3,669
)
 
—

 
(3,669
)
Reclassification adjustments from AOCI
—

 
150

 
150

Total other comprehensive income (loss)
(3,669
)
 
150

 
(3,519
)
 
 
 
 
 
 
Balance at end of period
$
(14,161
)
 
$
(7,087
)
 
$
(21,248
)
(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 income (loss) before reclassifications
23,161

 
—

 
23,161

Reclassification adjustments from AOCI
—

 
490

 
490

Total other comprehensive income
23,161

 
490

 
23,651

 
 
 
 
 
 
Balance at end of period
$
10,418

 
$
(5,960
)
 
$
4,458

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

 
 

 
 

Balance at beginning of period
$
5,073

 
$
(6,112
)
 
$
(1,039
)
Impact of the adoption of new accounting standards
(139
)
 
—

 
(139
)
Adjusted balance at beginning of period
4,934

 
(6,112
)
 
(1,178
)
 
 
 
 
 
 
Impact of the adoption of new accounting standards
(455
)
 
(1,381
)
 
(1,836
)
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
(18,640
)
 
—

 
(18,640
)
Reclassification adjustments from AOCI
—

 
406

 
406

Total other comprehensive income (loss)
(18,640
)
 
406

 
(18,234
)
 
 
 
 
 
 
Balance at end of period
$
(14,161
)
 
$
(7,087
)
 
$
(21,248
)
 
 
 
 
 
 


30
 


The following table presents the amounts reclassified out of each component of AOCI for the three and six months ended June 30, 2019 and 2018:
 
 
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)
2019
 
2018
 
Sale of investment securities available-for-sale:
 
 
 
 
 
Realized losses on securities available-for-sale
$
—

 
$
—

 
Investment securities gains (losses)
Tax effect
—

 
—

 
Income tax benefit (expense)
Net of tax
$
—

 
$
—

 

 
 
 
 
 
 
Defined benefit retirement and supplemental executive retirement plan items:
 

 
 

 
 
Amortization of net actuarial loss
$
(264
)
 
$
(235
)
 
Salaries and employee benefits
Amortization of net transition obligation
(4
)
 
(4
)
 
Salaries and employee benefits
Amortization of prior service cost
(4
)
 
(4
)
 
Salaries and employee benefits
Total before tax
(272
)
 
(243
)
 

Tax effect
24

 
93

 
Income tax benefit (expense)
Net of tax
$
(248
)
 
$
(150
)
 

 
 
 
 
 
 
Total reclassification adjustments from AOCI for the period, net of tax
$
(248
)
 
$
(150
)
 

 
Amount Reclassified from AOCI
 
Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI Components
Six months ended June 30,
 
(dollars in thousands)
2019
 
2018
 
Sale of investment securities available-for-sale:
 
 
 
 
 
Realized losses on securities available-for-sale
$
—

 
$
—

 
Investment securities gains (losses)
Tax effect
—

 
—

 
Income tax benefit (expense)
Net of tax
$
—

 
$
—

 

 
 
 
 
 
 
Defined benefit retirement and supplemental executive retirement plan items:
 

 
 

 
 
Amortization of net actuarial loss
$
(527
)
 
$
(576
)
 
Salaries and employee benefits
Amortization of net transition obligation
(9
)
 
(9
)
 
Salaries and employee benefits
Amortization of prior service cost
(9
)
 
(9
)
 
Salaries and employee benefits
Total before tax
(545
)
 
(594
)
 

Tax effect
55

 
188

 
Income tax benefit (expense)
Net of tax
$
(490
)
 
$
(406
)
 

 
 
 
 
 
 
Total reclassification adjustments from AOCI for the period
$
(490
)
 
$
(406
)
 
Net of tax
 
 
 
 
 
 
 



31
 

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,
(dollars in thousands, except per share data)
2019
 
2018
 
2019
 
2018
Net income
$
13,534

 
$
14,224

 
$
29,571

 
$
28,501

 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
28,546,564

 
29,510,175

 
28,651,852

 
29,658,051

Dilutive effect of employee stock options and awards
182,946

 
204,767

 
195,934

 
223,483

Weighted average common shares outstanding - diluted
28,729,510

 
29,714,942

 
28,847,786

 
29,881,534

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.47

 
$
0.48

 
$
1.03

 
$
0.96

Diluted earnings per common share
$
0.47

 
$
0.48

 
$
1.03

 
$
0.95

 
 
 
 
 
 
 
 
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. 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.
 

32
 

Deposit Liabilities
 
The fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits and interest-bearing demand and savings accounts, are equal to the amount payable on demand. The fair value of time deposits is estimated using discounted cash flow analyses. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
 
Long-Term Debt
 
The fair value of our long-term debt is estimated by discounting scheduled cash flows over the contractual borrowing period at the estimated market rate for similar borrowing arrangements.
 
Derivatives

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

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

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

33
 

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

 
 
 
 
 
Fair Value Measurement Using
(dollars in thousands)
Carrying
Amount
 
Estimated
Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
June 30, 2019
 

 
 

 
 

 
 

 
 

Financial assets:
 

 
 

 
 

 
 

 
 

Cash and due from banks
$
83,534

 
$
83,534

 
$
83,534

 
$
—

 
$
—

Interest-bearing deposits in other banks
15,173

 
15,173

 
15,173

 
—

 
—

Investment securities
1,255,777

 
1,255,777

 
1,034

 
1,243,338

 
11,405

Loans held for sale
6,848

 
6,848

 
—

 
6,848

 
—

Net loans and leases
4,198,846

 
4,195,832

 
—

 
10,088

 
4,185,744

Accrued interest receivable
17,260

 
17,260

 
17,260

 
—

 
—

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

 
 

Deposits:
 

 
 

 
 

 
 

 
 

Noninterest-bearing demand
1,351,190

 
1,351,190

 
1,351,190

 
—

 
—

Interest-bearing demand and savings and money market
2,576,511

 
2,576,511

 
2,576,511

 
—

 
—

Time
1,049,148

 
1,045,184

 
—

 
—

 
1,045,184

Short-term borrowings
221,000

 
221,000

 
—

 
221,000

 
—

Long-term debt
101,547

 
97,710

 
—

 
97,710

 
—

Accrued interest payable (included in other liabilities)
4,890

 
4,890

 
4,890

 


 
—



 
 
 
 
 
 
 
Fair Value Measurement Using
(dollars in thousands)
Notional
Amount
 
Carrying
Amount
 
Estimated
Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
June 30, 2019
 
 
 

 
 

 
 

 
 

 
 

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
$
1,001

 
$
6

 
$
6

 
$
—

 
$
6

 
$
—

Forward sale commitments
7,798

 
(69
)
 
(69
)
 
—

 
(69
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
Off-balance sheet financial instruments:
 
 
 
 
 

 
 
 
 
 
 
Commitments to extend credit
1,085,507

 
1,246

 
1,246

 
—

 
1,246

 
—

Standby letters of credit and financial guarantees written
13,069

 
196

 
196

 
—

 
196

 
—



34
 

 
 
 
 
 
Fair Value Measurement Using
(dollars in thousands)
Carrying
Amount
 
Estimated
Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
December 31, 2018
 

 
 

 
 

 
 

 
 

Financial assets:
 

 
 

 
 

 
 

 
 

Cash and due from banks
$
80,569

 
$
80,569

 
$
80,569

 
$
—

 
$
—

Interest-bearing deposits in other banks
21,617

 
21,617

 
21,617

 
—

 
—

Investment securities
1,354,812

 
1,350,576

 
826

 
1,338,581

 
11,169

Loans held for sale
6,647

 
6,647

 
—

 
6,647

 
—

Net loans and leases
4,030,450

 
3,938,380

 
—

 
—

 
3,938,380

Accrued interest receivable
17,000

 
17,000

 
17,000

 
—

 
—

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

 
 

Deposits:
 

 
 

 
 

 
 

 
 

Noninterest-bearing demand
1,436,967

 
1,436,967

 
1,436,967

 
—

 
—

Interest-bearing demand and savings and money market
2,402,268

 
2,402,268

 
2,402,268

 
—

 
—

Time
1,107,255

 
1,099,560

 
—

 
—

 
1,099,560

Short-term borrowings
197,000

 
197,000

 
—

 
197,000

 
—

Long-term debt
122,166

 
118,057

 
—

 
118,057

 
—

Accrued interest payable (included in other liabilities)
5,051

 
5,051

 
5,051

 
—

 
—



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

 
$
11

 
$
11

 
$
—

 
$
11

 
$
—

Forward sale commitments
8,530

 
(95
)
 
(95
)
 
—

 
(95
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
Off-balance sheet financial instruments:
 

 
 

 
 

 
 

 
 

 
 

Commitments to extend credit
1,030,322

 
1,205

 
1,205

 
—

 
1,205

 
—

Standby letters of credit and financial guarantees written
13,377

 
201

 
201

 
—

 
201

 
—


Fair Value Measurements
 
We group our financial assets and liabilities at fair value into three levels based on the markets in which the financial assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:
 
•
Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities traded in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

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

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

35
 

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

The following tables present the fair value of assets and liabilities measured on a recurring basis as of June 30, 2019 and December 31, 2018:
 
 
 
 
Fair Value at Reporting Date Using
(dollars in thousands)
Fair Value
 
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
June 30, 2019
 

 
 

 
 

 
 

Available-for-sale securities:
 

 
 

 
 

 
 

Debt securities:
 

 
 

 
 

 
 

States and political subdivisions
$
154,504

 
$
—

 
$
143,099

 
$
11,405

Corporate securities
30,797

 
—

 
30,797

 
—

U.S. Treasury obligations and direct obligations of U.S Government agencies
29,615

 
—

 
29,615

 
—

Mortgage-backed securities:
 

 
 

 
 

 
 

Residential - U.S. Government sponsored entities
755,373

 
—

 
755,373

 
—

Commercial - U.S. Government agencies and sponsored entities
106,354

 
—

 
106,354

 
—

Residential - Non-government agencies
40,517

 
—

 
40,517

 
—

Commercial - Non-government agencies
137,583

 
—

 
137,583

 
—

Total available-for-sale securities
1,254,743

 
—

 
1,243,338

 
11,405

 
 
 
 
 
 
 
 
Equity securities
1,034

 
1,034

 
—

 
—

 
 
 
 
 
 
 
 
Derivatives: Interest rate lock and forward sale commitments
(63
)
 
—

 
(63
)
 
—

Total
$
1,255,714

 
$
1,034

 
$
1,243,275

 
$
11,405




36
 

 
 
 
Fair Value at Reporting Date Using
(dollars in thousands)
Fair Value
 
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
December 31, 2018
 

 
 

 
 

 
 

Available-for-sale securities:
 

 
 

 
 

 
 

Debt securities:
 

 
 

 
 

 
 

States and political subdivisions
$
173,674

 
$
—

 
$
162,505

 
$
11,169

Corporate securities
54,849

 
—

 
54,849

 
—

U.S. Treasury obligations and direct obligations of U.S Government agencies
32,574

 
—

 
32,574

 
—

Mortgage-backed securities:
 

 
 

 
 

 
 

Residential - U.S. Government sponsored entities
717,052

 
—

 
717,052

 
—

Commercial - U.S. Government agencies and sponsored entities
41,118

 
—

 
41,118

 
—

Residential - Non-government agencies
51,483

 
—

 
51,483

 
—

Commercial - Non-government agencies
134,728

 
—

 
134,728

 
—

Total available-for-sale securities
1,205,478

 
—

 
1,194,309

 
11,169

 
 
 
 
 
 
 
 
Equity securities
826

 
826

 
—

 
—

 
 
 
 
 
 
 
 
Derivatives: Interest rate lock and forward sale commitments
(84
)
 
—

 
(84
)
 
—

Total
$
1,206,220

 
$
826

 
$
1,194,225

 
$
11,169



For the six months ended June 30, 2019 and 2018, 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, 2018
$
11,169

Principal payments received
(204
)
Unrealized net gain (loss) included in other comprehensive income
440

Balance at June 30, 2019
$
11,405

 
 

Balance at December 31, 2017
$
11,794

Principal payments received
(189
)
Unrealized net gain (loss) included in other comprehensive income
(271
)
Balance at June 30, 2018
$
11,334


 
Within the states and political subdivisions available-for-sale debt securities category, the Company holds four mortgage revenue bonds issued by the City & County of Honolulu with an aggregate fair value of $11.4 million and $11.3 million at June 30, 2019 and June 30, 2018, respectively. The Company estimates the fair value of its mortgage revenue bonds by using a discounted cash flow model to calculate the present value of estimated future principal and interest payments.
 
The significant unobservable input used in the fair value measurement of the Company's mortgage revenue bonds is the weighted average discount rate. As of June 30, 2019, the weighted average discount rate utilized was 4.27% compared to 5.16% at June 30, 2018 and 5.06% at December 31, 2018, which was derived by incorporating a credit spread over the FHLB Fixed-Rate Advance curve. Significant increases (decreases) in the weighted average discount rate could result in a significantly lower (higher) fair value measurement.

37
 


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, 2019 and December 31, 2018:
 
 
 
 
Fair Value Measurements Using
(dollars in thousands)
Fair Value
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
June 30, 2019
 

 
 

 
 

 
 

Other real estate (1)
$
276

 
$
—

 
$
276

 
$
—

 
 
 
 
 
 
 
 
December 31, 2018
 

 
 

 
 

 
 

Other real estate (1)
$
414

 
$
—

 
$
414

 
$
—



(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. SEGMENT INFORMATION
 
We have the following three reportable segments: Banking Operations, Treasury and All Others. These segments are consistent with our internal functional reporting lines and are managed separately because each unit has different target markets, technological requirements, and specialized skills.
 
The Banking Operations segment includes construction and real estate development lending, commercial lending, residential mortgage lending, indirect auto lending, trust services, retail brokerage services and our retail branch offices, which provide a full range of deposit and loan products, as well as various other banking services. The Treasury segment is responsible for managing the Company's investment securities portfolio and wholesale funding activities. The All Others segment consists of all activities not captured by the Banking Operations or Treasury segments described above and includes activities such as electronic banking, data processing and management of bank owned properties.
 
The accounting policies of the segments are consistent with the Company's accounting policies that are described in Note 1 - Summary of Significant Accounting Policies to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC. The majority of the Company's net income is derived from net interest income. Accordingly, management focuses primarily on net interest income, rather than gross interest income and expense amounts, in evaluating segment profitability.
 
Intersegment net interest income (expense) was allocated to each segment based upon a funds transfer pricing process that assigns costs of funds to assets and earnings credits to liabilities based on market interest rates that reflect interest rate sensitivity and maturity characteristics. All administrative and overhead expenses are allocated to the segments at cost. Cash, investment securities, loans and leases and their related balances are allocated to the segment responsible for acquisition and maintenance of those assets. Segment assets also include all premises and equipment used directly in segment operations.


38
 

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

(dollars in thousands)
Banking
Operations
 
Treasury
 
All Others
 
Total
Three Months Ended June 30, 2019
 

 
 

 
 

 
 

Net interest income
$
42,589

 
$
2,789

 
$
—

 
$
45,378

Inter-segment net interest income (expense)
6,602

 
(2,688
)
 
(3,914
)
 
—

Credit (provision) for loan and lease losses
(1,404
)
 
—

 
—

 
(1,404
)
Other operating income:
 
 
 
 
 
 
 
Mortgage banking income
957

 
—

 
644

 
1,601

Service charges on deposit accounts
2,041

 
—

 
—

 
2,041

Other service charges and fees
1,584

 
—

 
2,107

 
3,691

Income from fiduciary activities
1,129

 
—

 
—

 
1,129

Equity in earnings of unconsolidated subsidiaries
71

 
—

 
—

 
71

Fees on foreign exchange
25

 
193

 
—

 
218

Income from bank-owned life insurance
—

 
914

 
—

 
914

Loan placement fees
107

 
—

 
—

 
107

Other
153

 
—

 
169

 
322

Other operating income
6,067

 
1,107

 
2,920

 
10,094

Other operating expense
(15,903
)
 
(399
)
 
(19,805
)
 
(36,107
)
Administrative and overhead expense allocation
(17,061
)
 
(211
)
 
17,272

 
—

Income before taxes
20,890

 
598

 
(3,527
)
 
17,961

Income tax (expense) benefit
(5,142
)
 
(154
)
 
869

 
(4,427
)
Net income (loss)
$
15,748

 
$
444

 
$
(2,658
)
 
$
13,534


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

 
 

 
 

 
 

Net interest income
$
37,281

 
$
5,391

 
$
—

 
$
42,672

Inter-segment net interest income (expense)
6,915

 
(4,941
)
 
(1,974
)
 
—

Credit (provision) for loan and lease losses
(532
)
 
—

 
—

 
(532
)
Other operating income:
 
 
 
 
 
 
 
Mortgage banking income
923

 
—

 
852

 
1,775

Service charges on deposit accounts
1,977

 
—

 
—

 
1,977

Other service charges and fees
1,287

 
8

 
2,082

 
3,377

Income from fiduciary activities
1,017

 
—

 
—

 
1,017

Equity in earnings of unconsolidated subsidiaries
37

 
—

 
—

 
37

Fees on foreign exchange
29

 
248

 


 
277

Income from bank-owned life insurance
—

 
501

 
—

 
501

Loan placement fees
220

 
—

 
—

 
220

Other
200

 
2

 
247

 
449

Other operating income
5,690

 
759

 
3,181

 
9,630

Other operating expense
(15,777
)
 
(358
)
 
(17,476
)
 
(33,611
)
Administrative and overhead expense allocation
(15,167
)
 
(223
)
 
15,390

 
—

Income before taxes
18,410

 
628

 
(879
)
 
18,159

Income tax (expense) benefit
(3,898
)
 
(133
)
 
96

 
(3,935
)
Net income (loss)
$
14,512

 
$
495

 
$
(783
)
 
$
14,224


39
 

(dollars in thousands)
Banking
Operations
 
Treasury
 
All Others
 
Total
Six Months Ended June 30, 2019
 

 
 

 
 

 
 

Net interest income
$
84,269

 
$
6,222

 
$
—

 
$
90,491

Inter-segment net interest income (expense)
13,292

 
(5,294
)
 
(7,998
)
 
—

Credit (provision) for loan and lease losses
(2,687
)
 
—

 
—

 
(2,687
)
Other operating income:
 
 
 
 
 
 
 
Mortgage banking income
1,607

 
—

 
1,418

 
3,025

Service charges on deposit accounts
4,122

 
—

 
—

 
4,122

Other service charges and fees
2,660

 
—

 
4,095

 
6,755

Income from fiduciary activities
2,094

 
—

 
—

 
2,094

Equity in earnings of unconsolidated subsidiaries
79

 
—

 
—

 
79

Fees on foreign exchange
47

 
322

 
—

 
369

Income from bank-owned life insurance
—

 
1,866

 
—

 
1,866

Loan placement fees
256

 
—

 
—

 
256

Other
299

 
2,554

 
348

 
3,201

Other operating income
11,164

 
4,742

 
5,861

 
21,767

Other operating expense
(31,807
)
 
(745
)
 
(37,903
)
 
(70,455
)
Administrative and overhead expense allocation
(32,458
)
 
(420
)
 
32,878

 
—

Income before taxes
41,773

 
4,505

 
(7,162
)
 
39,116

Income tax (expense) benefit
(10,194
)
 
(1,099
)
 
1,748

 
(9,545
)
Net income (loss)
$
31,579

 
$
3,406

 
$
(5,414
)
 
$
29,571

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

 
 

 
 

 
 

Net interest income
$
73,423

 
$
11,571

 
$
—

 
$
84,994

Inter-segment net interest income (expense)
13,836

 
(10,390
)
 
(3,446
)
 
—

Credit (provision) for loan and lease losses
(321
)
 
—

 
—

 
(321
)
Other operating income:
 
 
 
 
 
 
 
Mortgage banking income
1,916

 
—

 
1,706

 
3,622

Service charges on deposit accounts
3,980

 
—

 
—

 
3,980

Other service charges and fees
2,430

 
14

 
3,967

 
6,411

Income from fiduciary activities
1,973

 
—

 
—

 
1,973

Equity in earnings of unconsolidated subsidiaries
80

 
—

 
—

 
80

Fees on foreign exchange
53

 
435

 


 
488

Income from bank-owned life insurance
—

 
819

 
—

 
819

Loan placement fees
417

 
—

 
—

 
417

Other
355

 
2

 
437

 
794

Other operating income
11,204

 
1,270

 
6,110

 
18,584

Other operating expense
(31,702
)
 
(743
)
 
(34,570
)
 
(67,015
)
Administrative and overhead expense allocation
(30,113
)
 
(446
)
 
30,559

 
—

Income before taxes
36,327

 
1,262

 
(1,347
)
 
36,242

Income tax (expense) benefit
(7,579
)
 
(263
)
 
101

 
(7,741
)
Net income
$
28,748

 
$
999

 
$
(1,246
)
 
$
28,501

 
 
 
 
 
 
 
 


40
 

(dollars in thousands)
Banking
Operations
 
Treasury
 
All Others
 
Total
June 30, 2019
 
 
 
 
 
 
 
Investment securities
$
—

 
$
1,255,777

 
$
—

 
$
1,255,777

Loans and leases (including loans held for sale)
4,253,961

 
—

 
—

 
4,253,961

Other
20,833

 
251,213

 
138,222

 
410,268

Total assets
$
4,274,794

 
$
1,506,990

 
$
138,222

 
$
5,920,006



(dollars in thousands)
Banking
Operations
 
Treasury
 
All Others
 
Total
December 31, 2018
 
 
 
 
 
 
 
Investment securities
$
—

 
$
1,354,812

 
$
—

 
$
1,354,812

Loans and leases (including loans held for sale)
4,085,013

 
—

 
—

 
4,085,013

Other
36,905

 
256,652

 
73,644

 
367,201

Total assets
$
4,121,918

 
$
1,611,464

 
$
73,644

 
$
5,807,026



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


41
 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
Central Pacific Financial Corp. ("CPF") is a Hawaii corporation and a bank holding company. Our principal business is to serve as a holding company for our bank subsidiary, Central Pacific Bank. We refer to Central Pacific Bank herein as "our bank" or "the bank," and when we say "the Company," "we," "us" or "our," we mean the holding company on a consolidated basis with the bank and our other consolidated subsidiaries.
 
Central Pacific Bank is a full-service community bank with 35 branches and 78 ATMs located throughout the state of Hawaii. The bank offers a broad range of products and services including accepting time, savings, money market, and demand deposits and originating loans, including commercial loans, construction loans, commercial and residential mortgage loans, and consumer loans.

Basis of Presentation
 
Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements under "Part I, Item 1. Financial Statements (Unaudited)." The following discussion should also be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission (the "SEC") on February 28, 2019.
 
Critical Accounting Policies and Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") requires that management make certain judgments and use certain estimates and assumptions that affect amounts reported and disclosures made. Accounting estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimate are reasonably likely to occur from period to period and would materially impact our consolidated financial statements as of or for the periods presented. Management has discussed the development and selection of the critical accounting estimates noted below with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed the accompanying disclosures.

Allowance for Loan and Lease Losses
 
The allowance for loan and lease losses (the "Allowance") is management's estimate of incurred credit losses inherent in our loan and lease portfolio at the balance sheet date. We maintain our Allowance at an amount we expect to be sufficient to absorb probable losses incurred in our loan and lease portfolio.

The Company's approach to developing the Allowance has three basic elements. These elements include specific reserves for individually impaired loans, a general allowance for loans other than those analyzed as individually impaired, and qualitative adjustments based on environmental and other factors which may be internal or external to the Company.
 
Specific Reserve
 
Individually impaired loans in all loan categories are evaluated using one of three valuation methods as prescribed under Accounting Standards Codification ("ASC") 310-10, "Fair Value of Collateral, Observable Market Price, or Cash Flow". A loan is generally evaluated for impairment on an individual basis if it meets one or more of the following characteristics: risk-rated as substandard, doubtful or loss, loans on nonaccrual status, troubled debt restructures, or any loan deemed prudent by management to so analyze. If the valuation of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the Allowance or, alternatively, a specific reserve will be established and included in the overall Allowance balance. The Company did not record a specific reserve as of June 30, 2019 and December 31, 2018.

General Allowance

In determining the general allowance component of the Allowance, the Company utilizes a comprehensive approach to segment the loan portfolio into homogeneous groups. The Company's methodology segments the portfolio generally by FDIC Call Report codes. In the second quarter of 2017, an additional segment was added for auto dealer purchased loans. In the third quarter of 2018, another segment was broken out for multifamily commercial real estate loans. This results in eleven segments, and is consistent with general industry practice. For the purpose of determining general allowance loss factors, loss experience is derived from a migration analysis, with the exception of national syndicated loans and auto dealer purchased loans where an

42
 

average historical loss rate is applied due to limited historical loss experience. 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'. The Allowance methodology applies a look back period to January 1, 2010. The Company extends its look back period with each additional quarter passing. As of June 30, 2019, the look back period was nine years and six months.

Qualitative Adjustments

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

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

Financial Summary
 
Net income for the three months ended June 30, 2019 was $13.5 million, or $0.47 per diluted share, compared to $14.2 million, or $0.48 per diluted share for the three months ended June 30, 2018. Net income for the six months ended June 30, 2019 was $29.6 million, or $1.03 per diluted share, compared to $28.5 million, or $0.95 per diluted share for the six months ended June 30, 2018.
 
The following table presents annualized returns on average assets and average shareholders' equity, and basic and diluted earnings per share for the periods indicated. Returns on average assets and average shareholders' equity are annualized based on a 30/360 day convention.

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Return on average assets
0.92
%
 
1.00
%
 
1.01
%
 
1.01
%
Return on average shareholders’ equity
10.73

 
11.83

 
11.84

 
11.72

Basic earnings per common share
$
0.47

 
$
0.48

 
$
1.03

 
$
0.96

Diluted earnings per common share
0.47

 
0.48

 
1.03

 
0.95

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

Hawaii's general economic conditions continued to improve in 2018 and through the first half of 2019, but at a slower pace. The growth of Hawaii's economy has slowed, yet the Hawaii Department of Business, Economic Development and Tourism ("DBEDT") sees a positive forecast with continued growth at a steady pace in 2019. Tourism continues to be Hawaii's center of strength and its most significant economic driver. While visitor arrivals to Hawaii grew during the six months ended June 30, 2019, visitor spending was down from the same prior year period. According to the Hawaii Tourism Authority ("HTA"), 5.2

43
 

million visitors visited the state in the six months ended June 30, 2019. This was an increase of 4.2% from the number of visitor arrivals in the six months ended June 30, 2018. The HTA also reported total spending by visitors decreased to $8.9 billion in the six months ended June 30, 2019, or a decrease of $183.2 million, or 2.0%, from the six months ended June 30, 2018. According to DBEDT, total visitor arrivals and visitor spending are both expected to increase 2.6% and 1.1% in 2019, respectively, and 1.9% and 3.0% in 2020, respectively.

DBEDT reported Hawaii's economy, as measured by the growth of real personal income and real gross state product, continued positive growth in 2018. DBEDT projects real personal income and real gross state product to grow at a rate of 1.5% and 1.2%, respectively, for 2019 and 1.6% and 1.3%, respectively, for 2020.
 
Hawaii's labor market continues to be among the best in the nation. The Department of Labor and Industrial Relations reported that Hawaii's seasonally adjusted annual unemployment rate was 2.8% in June 2019, compared to 2.4% in June 2018. Hawaii's unemployment rate in June 2019 remained below the national seasonally adjusted unemployment rate of 3.7%. DBEDT projects Hawaii's seasonally adjusted annual unemployment rate to be 3.0% in 2019 and 3.1% in 2020.

Real estate lending is a primary focus for us, including residential mortgage and commercial mortgage loans. As a result, we are dependent on the strength of Hawaii's real estate market. Home sales in Hawaii remained strong in 2018. The Oahu real estate market closed out 2018 with its eighth straight year of appreciation, however the sales volume for the year dropped. During the first half of 2019, Oahu sales volume and median sales prices have slowed. According to the Honolulu Board of Realtors, Oahu unit sales volume declined by 3.7% for single-family homes and 8.8% for condominiums for the six months ended June 30, 2019, compared to the same time period last year. For the six months ended June 30, 2019, the median sales price for single-family homes on Oahu was $775,000, representing a decrease of 0.5% from $779,000 in the same prior year period. The median sales price for condominiums on Oahu for the six months ended June 30, 2019 was $419,000, representing a decrease of 1.4% from $425,000 in the same prior year period.

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

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

During 2018, the Federal Reserve increased the Federal Funds range four times, each by 25 basis points to 2.25%-2.50% as of December 31, 2018. The Federal Reserve left the Federal Funds range unchanged during the first half of 2019 but cut the Federal Funds range by 25 basis points to 2.00%-2.25% at its July 2019 meeting. The Federal Reserve pledged future moves will be done patiently and with an eye toward how global economic and financial developments unfold.

Further decreases in the Federal Funds rate would likely result in lower overall interest rates and may support the continued expansion of the U.S. economy. Changes in monetary policy, including changes in interest rates, could influence, among other things, (i) the amount of interest we receive on loans and securities, (ii) the amount of interest we pay on deposits and borrowings, (iii) our ability to originate loans and obtain deposits and (iv) the fair value of our assets and liabilities.

RISE2020

Commencing in the second quarter of 2019, the Company launched RISE2020, a new multifaceted initiative intended to enhance customer experience, drive stronger long-term growth and profitability, improve shareholder returns and lower our efficiency ratio. RISE2020 includes initiatives in the following key areas of opportunity: Digital Banking, Revenue Enhancements, Branch Transformation and Operational Excellence. RISE2020 is intended to provide Central Pacific Bank with best-in class products and services in several strategic areas. The Company plans to invest approximately $40 million in RISE2020 during the remainder of 2019 and throughout 2020. Some of these investments will be capitalized, while others are recurring annually. The Company expects annual operating expense to increase by approximately $7 million when RISE2020 is fully implemented by the start of 2021. During the second quarter of 2019, the Company incurred approximately $1.0 million in RISE2020-related expenses and expects to incur approximately $2.5 million in RISE2020-related expense during the second half of 2019. While operating expenses are expected to increase, the Company is forecasting enhanced revenue growth. As a result, we expect our efficiency ratio to be in the 63-65% range in 2019 and 2020. Longer-term, the Company is targeting a 15% return on average shareholders' equity and a 57% efficiency ratio by the end of 2022.


44
 

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, 2019 and 2018. A comparison of net interest income on a taxable-equivalent basis ("net interest income") for the three and six months ended June 30, 2019 and 2018 is set forth below.
 
(dollars in thousands)
Three Months Ended June 30,
2019
 
2018
 
Variance
Average
Balance
 
Average
Yield/
Rate
 
Interest
Income/
Expense
 
Average
Balance
 
Average
Yield/
Rate
 
Interest
Income/
Expense
 
Average
Balance
 
Average
Yield/
Rate
 
Interest
Income/
Expense
Assets
 
 
 

 
 
 
 
 
 

 
 

 
 
 
 

 
 

Interest earning assets:
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in other banks
$
8,002

 
2.34
%
 
46

 
$
26,300

 
1.78
%
 
117

 
$
(18,298
)
 
0.56
 %
 
(71
)
Investment securities, excluding valuation allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable (1)
1,147,759

 
2.63

 
7,544

 
1,341,717

 
2.60

 
8,720

 
(193,958
)
 
0.03

 
(1,176
)
Tax-exempt (1)
142,660

 
2.89

 
1,030

 
164,196

 
2.87

 
1,181

 
(21,536
)
 
0.02

 
(151
)
Total investment securities
1,290,419

 
2.66

 
8,574

 
1,505,913

 
2.63

 
9,901

 
(215,494
)
 
0.03

 
(1,327
)
Loans and leases, including loans held for sale (2)
4,171,558

 
4.37

 
45,540

 
3,836,739

 
4.04

 
38,699

 
334,819

 
0.33

 
6,841

Federal Home Loan Bank stock
15,998

 
4.02

 
161

 
7,163

 
2.24

 
40

 
8,835

 
1.78

 
121

Total interest earning assets
5,485,977

 
3.97

 
54,321

 
5,376,115

 
3.63

 
48,757

 
109,862

 
0.34

 
5,564

Noninterest-earning assets
370,488

 
 

 
 

 
287,582

 
 

 
 

 
82,906

 
 

 
 
Total assets
$
5,856,465

 
 

 
 

 
$
5,663,697

 
 

 
 

 
$
192,768

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing demand deposits
$
962,402

 
0.08
%
 
199

 
$
951,597

 
0.08
%
 
193

 
$
10,805

 
—
 %
 
6

Savings and money market deposits
1,577,437

 
0.38

 
1,507

 
1,495,884

 
0.12

 
459

 
81,553

 
0.26

 
1,048

Time deposits under $100,000
173,556

 
0.70

 
305

 
178,459

 
0.48

 
214

 
(4,903
)
 
0.22

 
91

Time deposits $100,000 and over
907,330

 
2.02

 
4,562

 
1,047,428

 
1.46

 
3,820

 
(140,098
)
 
0.56

 
742

Total interest-bearing deposits
3,620,725

 
0.73

 
6,573

 
3,673,368

 
0.51

 
4,686

 
(52,643
)
 
0.22

 
1,887

Short-term borrowings
175,347

 
2.57

 
1,123

 
9,900

 
1.96

 
48

 
165,447

 
0.61

 
1,075

Long-term debt
101,547

 
4.07

 
1,031

 
92,785

 
4.77

 
1,103

 
8,762

 
(0.70
)
 
(72
)
Total interest-bearing liabilities
3,897,619

 
0.90

 
8,727

 
3,776,053

 
0.62

 
5,837

 
121,566

 
0.28

 
2,890

Noninterest-bearing deposits
1,357,056

 
 
 
 

 
1,367,796

 
 
 
 

 
(10,740
)
 
 
 
 
Other liabilities
97,041

 
 

 
 

 
38,863

 
 

 
 

 
58,178

 
 

 
 
Total liabilities
5,351,716

 
 

 
 

 
5,182,712

 
 

 
 

 
169,004

 
 

 
 
Shareholders’ equity
504,749

 
 

 
 

 
480,985

 
 

 
 

 
23,764

 
 

 
 
Non-controlling interest
—

 
 

 
 

 
—

 
 

 
 

 
—

 
 

 
 
Total equity
504,749

 
 

 
 

 
480,985

 
 

 
 

 
23,764

 
 

 
 
Total liabilities and equity
$
5,856,465

 
 

 
 

 
$
5,663,697

 
 

 
 

 
$
192,768

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 

 
 

 
$
45,594

 
 

 
 

 
$
42,920

 
 

 
 

 
$
2,674

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate spread
 
 
3.07
%
 
 
 
 
 
3.01
%
 
 
 
 
 
0.06
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin
 

 
3.33
%
 
 

 
 

 
3.20
%
 
 

 
 

 
0.13
 %
 
 

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

45
 



(dollars in thousands)
Six Months Ended June 30,
2019
 
2018
 
Variance
Average
Balance
 
Average
Yield/
Rate
 
Interest
Income/
Expense
 
Average
Balance
 
Average
Yield/
Rate
 
Interest
Income/
Expense
 
Average
Balance
 
Average
Yield/
Rate
 
Interest
Income/
Expense
Assets
 
 
 

 
 
 
 
 
 

 
 

 
 
 
 

 
 

Interest earning assets:
 
 
 

 
 
 
 
 
 

 
 

 
 
 
 
 
 
Interest-bearing deposits in other banks
$
9,682

 
2.38
%
 
114

 
$
24,555

 
1.65
%
 
201

 
$
(14,873
)
 
0.73
 %
 
(87
)
Investment securities, excluding valuation allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable investment securities (1)
1,174,596

 
2.69

 
15,822

 
1,345,902

 
2.61

 
17,578

 
(171,306
)
 
0.08

 
(1,756
)
Tax-exempt investment securities (1)
147,899

 
2.88

 
2,127

 
164,684

 
2.87

 
2,362

 
(16,785
)
 
0.01

 
(235
)
Total investment securities
1,322,495

 
2.71

 
17,949

 
1,510,586

 
2.64

 
19,940

 
(188,091
)
 
0.07

 
(1,991
)
Loans and leases, including loans held for sale (2)
4,127,917

 
4.35

 
89,308

 
3,813,169

 
4.01

 
76,089

 
314,748

 
0.34

 
13,219

Federal Home Loan Bank stock
15,143

 
4.26

 
322

 
7,001

 
2.42

 
85

 
8,142

 
1.84

 
237

Total interest earning assets
5,475,237

 
3.95

 
107,693

 
5,355,311

 
3.61

 
96,315

 
119,926

 
0.34

 
11,378

Noninterest-earning assets
358,089

 
 

 
 

 
295,710

 
 

 
 

 
62,379

 
 

 
 
Total assets
$
5,833,326

 
 

 
 

 
$
5,651,021

 
 

 
 

 
$
182,305

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Equity
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing demand deposits
$
956,783

 
0.08
%
 
391

 
$
943,584

 
0.08
%
 
373

 
$
13,199

 
—
 %
 
18

Savings and money market deposits
1,525,425

 
0.30

 
2,298

 
1,497,642

 
0.11

 
828

 
27,783

 
0.19

 
1,470

Time deposits under $100,000
174,683

 
0.68

 
592

 
179,000

 
0.46

 
409

 
(4,317
)
 
0.22

 
183

Time deposits $100,000 and over
944,796

 
2.00

 
9,367

 
1,038,748

 
1.37

 
7,050

 
(93,952
)
 
0.63

 
2,317

Total interest-bearing deposits
3,601,687

 
0.71

 
12,648

 
3,658,974

 
0.48

 
8,660

 
(57,287
)
 
0.23

 
3,988

Short-term borrowings
156,550

 
2.60

 
2,016

 
9,356

 
1.97

 
91

 
147,194

 
0.63

 
1,925

Long-term debt
101,547

 
4.15

 
2,091

 
92,785

 
4.51

 
2,074

 
8,762

 
(0.36
)
 
17

Total interest-bearing liabilities
3,859,784

 
0.88

 
16,755

 
3,761,115

 
0.58

 
10,825

 
98,669

 
0.30

 
5,930

Noninterest-bearing deposits
1,376,437

 
 
 
 

 
1,361,776

 
 

 
 

 
14,661

 
 
 
 
Other liabilities
97,385

 
 

 
 

 
41,568

 
 

 
 

 
55,817

 
 

 
 
Total liabilities
5,333,606

 
 

 
 

 
5,164,459

 
 

 
 

 
169,147

 
 

 
 
Shareholders’ equity
499,720

 
 

 
 

 
486,554

 
 

 
 

 
13,166

 
 

 
 
Non-controlling interest
—

 
 

 
 

 
8

 
 

 
 

 
(8
)
 
 

 
 
Total equity
499,720

 
 

 
 

 
486,562

 
 

 
 

 
13,158

 
 

 
 
Total liabilities and equity
$
5,833,326

 
 

 
 

 
$
5,651,021

 
 

 
 

 
$
182,305

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 

 
 

 
$
90,938

 
 

 
 

 
$
85,490

 
 

 
 

 
$
5,448

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate spread
 
 
3.07
%
 
 
 
 
 
3.03
%
 
 
 
 
 
0.04
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin
 

 
3.33
%
 
 

 
 

 
3.20
%
 
 

 
 

 
0.13
 %
 
 

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

Net interest income (expressed on a taxable-equivalent basis) was $45.6 million for the three months ended June 30, 2019, representing an increase of 6.2% from $42.9 million in the three months ended June 30, 2018. Net interest income (expressed on a taxable-equivalent basis) was $90.9 million for the six months ended June 30, 2019, representing an increase of 6.4% from $85.5 million in the six months ended June 30, 2018. The increase in the three and six months ended June 30, 2019 was primarily attributable to a significant increase in average loans and leases balances funded by runoff of the investment

46
 

securities portfolio, combined with higher yields earned on the loans and leases and investment securities portfolios. In addition, average government time deposits (included in time deposits $100,000 and over) declined significantly. Partially offsetting this decrease were increases in rates paid on interest-bearing deposits and short-term borrowings, primarily attributable to the 25 basis point increases in the Federal Funds rate in each of the four quarters of 2018, combined with a significant increase in short-term borrowings.

Interest Income
 
Taxable-equivalent interest income was $54.3 million for the three months ended June 30, 2019, representing an increase of 11.4% from $48.8 million in the three months ended June 30, 2018. The increase was primarily attributable to a $334.8 million increase in average loans and leases compared to the three months ended June 30, 2018, accounting for approximately $3.4 million of the increase in interest income during the three months ended June 30, 2019. In addition, the average yields earned on the loans and leases portfolio during the three months ended June 30, 2019 increased by 33 bp, compared to the three months ended June 30, 2018, accounting for approximately $3.4 million of the increase in interest income. These increases were partially offset by a $215.5 million decline in average investment securities, which decreased interest income by approximately $1.4 million.

Taxable-equivalent interest income was $107.7 million for the six months ended June 30, 2019, representing an increase of 11.8% from $96.3 million in the six months ended June 30, 2018. The increase was primarily attributable to a $314.7 million increase in average loans and leases compared to the six months ended June 30, 2018, accounting for approximately $6.3 million of the increase in interest income during the six months ended June 30, 2019. In addition, the average yields earned on the loans and leases and investment securities portfolios during the six months ended June 30, 2019 increased by 34 bp and 7 bp, respectively, compared to the six months ended June 30, 2018, accounting for approximately $7.0 million and $0.5 million of the increase in interest income, respectively. These increases were partially offset by a $188.1 million decline in average investment securities, which decreased interest income by approximately $2.5 million.

Interest Expense
 
Interest expense for the three months ended June 30, 2019 was $8.7 million, representing an increase of 49.5% from the three months ended June 30, 2018. The increase was primarily attributable to 56 bp and 26 bp increases in average rates paid on time deposits $100,000 and over and savings and money market deposits, respectively, combined with the 61 bp increase in average rates paid on short-term borrowings, which increased interest expense by approximately $1.3 million, $1.0 million and $0.3 million, respectively. Time deposits $100,000 and over primarily consists of public funds which may be opportunistic sources of funding, but fluctuate more directly with changes in the Federal Funds rate. In addition, average short-term borrowings increased by $165.4 million, resulting in higher interest expense of approximately $0.8 million. These increases were partially offset by a $140.1 million decline in average time deposits $100,000 and over, which decreased interest expense by approximately $0.5 million.

Interest expense for the six months ended June 30, 2019 was $16.8 million, representing an increase of 54.8% from the six months ended June 30, 2018. The increase was primarily attributable to 63 bp and 19 bp increases in average rates paid on time deposits $100,000 and over and savings and money market deposits, respectively, combined with a 63 bp increase in average rates paid on short-term borrowings, which increased interest expense by approximately $3.0 million, $1.4 million and $0.5 million, respectively. In addition, average short-term borrowings increased by $147.2 million, resulting in higher interest expense of approximately $1.5 million. These increases were partially offset by a $94.0 million decline in average time deposits $100,000 and over, which decreased interest expense by approximately $0.6 million.

Net Interest Margin
 
Our net interest margin of 3.33% for the three months ended June 30, 2019 increased by 13 bp from the three months ended June 30, 2018. Our net interest margin of 3.33% for the six months ended June 30, 2019 increased by 13 bp from the six months ended June 30, 2018.

The average yields earned on our interest-earning assets, which increased by 34 bp in the three and six months ended June 30, 2019, compared to the same prior year periods, outpaced the increase in average rates paid on our interest-bearing liabilities, which increased by 28 bp and 30 bp in the three and six months ended June 30, 2019, respectively, compared to the same prior year periods.

The aforementioned increases in average yields earned on our loans and leases and taxable investment securities portfolios during the three and six months ended June 30, 2019 was partially offset by the aforementioned increases in average rates paid

47
 

on our time deposits $100,000 and over and savings and money market deposits during the three and six months ended June 30, 2019.

Provision for Loan and Lease Losses
 
Our Provision was a debit of $1.4 million during the three months ended June 30, 2019, compared to a debit of $0.5 million in the three months ended June 30, 2018. Our Provision was a debit of $2.7 million during the six months ended June 30, 2019, compared to a debit of $0.3 million in the six months ended June 30, 2018.

Our net charge-offs were $0.4 million during the three months ended June 30, 2019, compared to net charge-offs of $1.6 million in the three months ended June 30, 2018. Our net charge-offs were $2.3 million during the six months ended June 30, 2019, compared to net charge-offs of $2.1 million in the six months ended June 30, 2018.

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

 
Three Months Ended
(dollars in thousands)
June 30, 2019
 
June 30, 2018
 
$ Change
 
% Change
Other operating income:
 
 
 
 
 
 
 
Mortgage banking income
$
1,601

 
$
1,775

 
$
(174
)
 
-9.8
 %
Service charges on deposit accounts
2,041

 
1,977

 
64

 
3.2
 %
Other service charges and fees
3,691

 
3,377

 
314

 
9.3
 %
Income from fiduciary activities
1,129

 
1,017

 
112

 
11.0
 %
Equity in earnings of unconsolidated subsidiaries
71

 
37

 
34

 
91.9
 %
Fees on foreign exchange
218

 
277

 
(59
)
 
-21.3
 %
Income from bank-owned life insurance
914

 
501

 
413

 
82.4
 %
Loan placement fees
107

 
220

 
(113
)
 
-51.4
 %
Other:
 

 
 

 
 
 
 
Income recovered on nonaccrual loans previously charged-off
85

 
130

 
(45
)
 
-34.6
 %
Other recoveries
26

 
49

 
(23
)
 
-46.9
 %
Commissions on sale of checks
79

 
84

 
(5
)
 
-6.0
 %
Gain on sale of MasterCard stock
—

 
—

 
—

 
N.M.

Other
132

 
186

 
(54
)
 
-29.0
 %
Total other operating income
$
10,094

 
$
9,630

 
$
464

 
4.8
 %
 
 
 
 
 
 
 
 

For the three months ended June 30, 2019, total other operating income of $10.1 million increased by $0.5 million, or 4.8%, from $9.6 million in the year-ago quarter. The increase from the year-ago quarter was primarily due to higher income from bank-owned life insurance of $0.4 million and higher commissions and fees on investment services of $0.3 million (included in other service charges and fees), partially offset by higher amortization of mortgage servicing rights of $0.2 million (included in mortgage banking income). The higher income from bank-owned life insurance was primarily attributable to fluctuations in the equity markets during the quarter.


48
 

 
Six Months Ended
(dollars in thousands)
June 30, 2019
 
June 30, 2018
 
$ Change
 
% Change
Other operating income:
 
 
 
 
 
 
 
Mortgage banking income
$
3,025

 
$
3,622

 
$
(597
)
 
-16.5
 %
Service charges on deposit accounts
4,122

 
3,980

 
142

 
3.6
 %
Other service charges and fees
6,755

 
6,411

 
344

 
5.4
 %
Income from fiduciary activities
2,094

 
1,973

 
121

 
6.1
 %
Equity in earnings of unconsolidated subsidiaries
79

 
80

 
(1
)
 
-1.3
 %
Fees on foreign exchange
369

 
488

 
(119
)
 
-24.4
 %
Income from bank-owned life insurance
1,866

 
819

 
1,047

 
127.8
 %
Loan placement fees
256

 
417

 
(161
)
 
-38.6
 %
Other:
 

 
 

 
 
 
 
Income recovered on nonaccrual loans previously charged-off
167

 
226

 
(59
)
 
-26.1
 %
Other recoveries
52

 
95

 
(43
)
 
-45.3
 %
Commissions on sale of checks
159

 
170

 
(11
)
 
-6.5
 %
Gain on sale of MasterCard stock
2,555

 
—

 
2,555

 
N.M.

Other
268

 
303

 
(35
)
 
-11.6
 %
Total other operating income
$
21,767

 
$
18,584

 
$
3,183

 
17.1
 %
 
 
 
 
 
 
 
 

For the six months ended June 30, 2019, total other operating income of $21.8 million increased by $3.2 million, or 17.1%, from $18.6 million in the year-ago period. The increase from the year-ago period was primarily due to the conversion of MasterCard Class B common stock received during their initial public offering to Class A common stock and immediate sale of the converted shares resulting in a gain of $2.6 million in the first quarter of 2019, combined with higher income from bank-owned life insurance of $1.0 million and higher commissions and fees on investment services of $0.3 million (included in other service charges and fees). The higher income from bank-owned life insurance was primarily attributable to fluctuations in the equity markets. Partially offsetting the increases was lower mortgage banking income of $0.6 million.


49
 

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

 
Three Months Ended
(dollars in thousands)
June 30, 2019
 
June 30, 2018
 
$ Change
 
% Change
Other operating expense:
 
 
 
 
 
 
 
Salaries and employee benefits
$
20,563

 
$
18,783

 
$
1,780

 
9.5
 %
Net occupancy
3,525

 
3,360

 
165

 
4.9
 %
Equipment
1,138

 
1,044

 
94

 
9.0
 %
Amortization of core deposit premium
—

 
668

 
(668
)
 
-100.0
 %
Communication expense
903

 
746

 
157

 
21.0
 %
Legal and professional services
1,728

 
1,769

 
(41
)
 
-2.3
 %
Computer software expense
2,560

 
2,305

 
255

 
11.1
 %
Advertising expense
712

 
617

 
95

 
15.4
 %
Foreclosed asset expense
49

 
31

 
18

 
58.1
 %
Other:
 

 
 

 
 
 
 
Charitable contributions
175

 
131

 
44

 
33.6
 %
FDIC insurance assessment
362

 
434

 
(72
)
 
-16.6
 %
Miscellaneous loan expenses
317

 
324

 
(7
)
 
-2.2
 %
ATM and debit card expenses
620

 
698

 
(78
)
 
-11.2
 %
Armored car expenses
211

 
233

 
(22
)
 
-9.4
 %
Entertainment and promotions
1,023

 
273

 
750

 
274.7
 %
Stationery and supplies
279

 
236

 
43

 
18.2
 %
Directors’ fees and expenses
238

 
283

 
(45
)
 
-15.9
 %
Provision for residential mortgage loan repurchase losses
(403
)
 
—

 
(403
)
 
N.M.

Increase (decrease) to the reserve for unfunded commitments
487

 
66

 
421

 
637.9
 %
Other
1,620

 
1,610

 
10

 
0.6
 %
Total other operating expense
$
36,107

 
$
33,611

 
$
2,496

 
7.4
 %
 
 
 
 
 
 
 
 

For the three months ended June 30, 2019, total other operating expense was $36.1 million and increased by $2.5 million, or 7.4%, from $33.6 million in the year-ago quarter. The increase was primarily due to higher salaries and employee benefits of $1.8 million, higher entertainment and promotions expense of $0.8 million, and higher computer software expense of $0.3 million. The increase in salaries and employee benefits was partially attributable to the addition of positions in strategic areas and higher commissions, combined with annual merit increases effective in the second quarter of 2019. The higher entertainment and promotions expense in the second quarter of 2019 was primarily attributable to expenses related to a core deposit gathering campaign. These increases were partially offset by lower amortization of core deposit premium of $0.7 million, as the intangible asset was fully amortized as of September 30, 2018.


50
 

 
Six Months Ended
(dollars in thousands)
June 30, 2019
 
June 30, 2018
 
$ Change
 
% Change
Other operating expense:
 
 
 
 
 
 
 
Salaries and employee benefits
$
40,452

 
$
37,288

 
$
3,164

 
8.5
 %
Net occupancy
6,983

 
6,626

 
357

 
5.4
 %
Equipment
2,144

 
2,112

 
32

 
1.5
 %
Amortization of core deposit premium
—

 
1,337

 
(1,337
)
 
-100.0
 %
Communication expense
1,637

 
1,644

 
(7
)
 
-0.4
 %
Legal and professional services
3,298

 
3,590

 
(292
)
 
-8.1
 %
Computer software expense
5,157

 
4,572

 
585

 
12.8
 %
Advertising expense
1,423

 
1,229

 
194

 
15.8
 %
Foreclosed asset expense
208

 
325

 
(117
)
 
-36.0
 %
Other:
 

 
 

 
 
 
 
Charitable contributions
329

 
331

 
(2
)
 
-0.6
 %
FDIC insurance assessment
863

 
868

 
(5
)
 
-0.6
 %
Miscellaneous loan expenses
611

 
623

 
(12
)
 
-1.9
 %
ATM and debit card expenses
1,270

 
1,346

 
(76
)
 
-5.6
 %
Armored car expenses
409

 
399

 
10

 
2.5
 %
Entertainment and promotions
1,253

 
432

 
821

 
190.0
 %
Stationery and supplies
504

 
437

 
67

 
15.3
 %
Directors’ fees and expenses
480

 
514

 
(34
)
 
-6.6
 %
Provision for residential mortgage loan repurchase losses
(403
)
 
—

 
(403
)
 
N.M.

Increase (decrease) to the reserve for unfunded commitments
654

 
107

 
547

 
511.2
 %
Other
3,183

 
3,235

 
(52
)
 
-1.6
 %
Total other operating expense
$
70,455

 
$
67,015

 
$
3,440

 
5.1
 %
 
 
 
 
 
 
 
 

For the six months ended June 30, 2019, total other operating expense was $70.5 million and increased by $3.4 million, or 5.1%, from $67.0 million in the year-ago quarter. The increase was primarily due to higher salaries and employee benefits of $3.2 million, higher entertainment and promotions expense of $0.8 million and higher computer software expense of $0.6 million. These increases were partially offset by lower amortization of core deposit premium of $1.3 million, and lower legal and professional services of $0.3 million compared to the year-ago period.

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

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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollars in thousands)
2019
 
2018
 
2019
 
2018
Total other operating expense
$
36,107

 
$
33,611

 
$
70,455

 
$
67,015

 
 
 
 
 
 
 
 
Net interest income
$
45,378

 
$
42,672

 
$
90,491

 
$
84,994

Total other operating income
10,094

 
9,630

 
21,767

 
18,584

Total revenue
$
55,472

 
$
52,302

 
$
112,258

 
$
103,578

 
 
 
 
 
 
 
 
Efficiency ratio
65.09
%
 
64.26
%
 
62.76
%
 
64.70
%

51
 


Our efficiency ratio increased to 65.09% in the three months ended June 30, 2019 compared to 64.26% in the year-ago quarter and improved to 62.76% in the six months ended June 30, 2019 compared to 64.70% in the year-ago period. The efficiency ratio in the six months ended June 30, 2019 was positively impacted by the aforementioned $2.6 million gain on sale of MasterCard stock.

Income Taxes
 
The Company recorded income tax expense of $4.4 million and $9.5 million for the three and six months ended June 30, 2019, respectively, compared to $3.9 million and $7.7 million in the same prior year periods, respectively. The effective tax rate for the three and six months ended June 30, 2019 was 24.7% and 24.4%, respectively, compared to 21.7% and 21.4% in the same prior year periods, respectively. The increases in income tax expense and the effective tax rate in the three and six months ended June 30, 2019 was primarily due to higher pre-tax income in the current quarter, combined with an income tax benefit of $0.7 million related to the finalization of the impact of H.R.1, commonly referred to as the Tax Cuts and Jobs Act, recorded in the first quarter of 2018 and an income tax benefit of $0.6 million related to a tax accounting method change strategy recorded in the second quarter of 2018.

The valuation allowance on our net deferred tax assets ("DTA") totaled $3.3 million at June 30, 2019 and $3.5 million at December 31, 2018, of which $3.2 million and $3.3 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 $0.1 million and $0.2 million as of June 30, 2019 and December 31, 2018 relates to a Hawaii capital loss carryforward balance that we do not expect to be able to utilize. Net of the valuation allowance, the Company's net DTA totaled $13.0 million at June 30, 2019, compared to a net DTA of $21.5 million as of December 31, 2018, and is included in other assets on our consolidated balance sheets.
 
Financial Condition
 
Total assets at June 30, 2019 of $5.92 billion increased by $113.0 million from $5.81 billion at December 31, 2018.
 
Investment Securities
 
Investment securities of $1.26 billion at June 30, 2019 decreased by $99.0 million, or 7.3%, from December 31, 2018. The decrease reflects $126.5 million in principal runoff, offset by a $27.4 million increase in the market valuation on the available-for-sale portfolio.


52
 

Loans and Leases

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

(dollars in thousands)
 
June 30, 2019
 
December 31, 2018
 
$ Change
 
% Change
Hawaii:
 
 

 
 

 
 

 
 

Commercial, financial and agricultural
 
$
435,353

 
$
439,112

 
$
(3,759
)
 
(0.9
)%
Real estate:
 
 
 
 
 
 
 
 
Construction
 
72,427

 
64,654

 
7,773

 
12.0

Residential mortgage
 
1,516,936

 
1,428,205

 
88,731

 
6.2

Home equity
 
473,151

 
468,966

 
4,185

 
0.9

Commercial mortgage
 
905,479

 
861,086

 
44,393

 
5.2

Consumer
 
353,282

 
357,908

 
(4,626
)
 
(1.3
)
Leases
 
52

 
124

 
(72
)
 
(58.1
)
Total loans and leases
 
3,756,680

 
3,620,055

 
136,625

 
3.8

Allowance for loan and lease losses
 
(42,414
)
 
(42,993
)
 
579

 
(1.3
)
Net loans and leases
 
$
3,714,266

 
$
3,577,062

 
$
137,204

 
3.8

 
 
 
 
 
 
 
 
 
U.S. Mainland:
 
 

 
 

 
 

 
 

Commercial, financial and agricultural
 
$
155,130

 
$
142,548

 
$
12,582

 
8.8

Real estate:
 
 
 
 
 
 
 
 
Construction
 
—

 
2,273

 
(2,273
)
 
(100.0
)
Residential mortgage
 
—

 
—

 
—

 
—

Home equity
 
—

 
—

 
—

 
—

Commercial mortgage
 
187,379

 
179,192

 
8,187

 
4.6

Consumer
 
147,924

 
134,298

 
13,626

 
10.1

Leases
 
—

 
—

 
—

 
—

Total loans and leases
 
490,433

 
458,311

 
32,122

 
7.0

Allowance for loan and lease losses
 
(5,853
)
 
(4,923
)
 
(930
)
 
18.9

Net loans and leases
 
$
484,580

 
$
453,388

 
$
31,192

 
6.9

 
 
 
 
 
 
 
 
 
Total:
 
 

 
 

 
 

 
 

Commercial, financial and agricultural
 
$
590,483

 
$
581,660

 
$
8,823

 
1.5

Real estate:
 
 
 
 
 
 
 
 
Construction
 
72,427

 
66,927

 
5,500

 
8.2

Residential mortgage
 
1,516,936

 
1,428,205

 
88,731

 
6.2

Home equity
 
473,151

 
468,966

 
4,185

 
0.9

Commercial mortgage
 
1,092,858

 
1,040,278

 
52,580

 
5.1

Consumer
 
501,206

 
492,206

 
9,000

 
1.8

Leases
 
52

 
124

 
(72
)
 
(58.1
)
Total loans and leases
 
4,247,113

 
4,078,366

 
168,747

 
4.1

Allowance for loan and lease losses
 
(48,267
)
 
(47,916
)
 
(351
)
 
0.7

Net loans and leases
 
$
4,198,846

 
$
4,030,450

 
$
168,396

 
4.2


Loans and leases, net of deferred costs, of $4.25 billion at June 30, 2019 increased by $168.7 million, or 4.1%, from December 31, 2018. The increase reflects net increases in the following loan portfolios: residential mortgage of $88.7 million, commercial mortgage of $52.6 million, consumer of $9.0 million, commercial, financial and agricultural of $8.8 million, construction of $5.5 million, and home equity of $4.2 million.

The Hawaii loan portfolio increased by $136.6 million, or 3.8%, from December 31, 2018. The increase reflects net increases in the following loan portfolios: residential mortgage of $88.7 million, commercial mortgage of $44.4 million, construction of $7.8 million, and home equity of $4.2 million. The increases in the portfolios were primarily due to an increased demand from

53
 

both new and existing customers. These increases were partially offset by net decreases in the following loan portfolios: consumer of $4.6 million and commercial, financial and agricultural of $3.8 million.

The U.S. Mainland loan portfolio increased by $32.1 million, or 7.0% from December 31, 2018. The net increase was primarily attributable to net increases in the consumer loan portfolio of $13.6 million, commercial, financial and agricultural loan portfolio of $12.6 million, and commercial mortgage loan portfolio of $8.2 million.

In the first quarter of 2019, we purchased U.S Mainland consumer loans totaling $18.3 million which represented the outstanding balance at the time of purchase. In the second quarter of 2019, we purchased U.S Mainland consumer loans totaling $31.0 million which represented the outstanding balance at the time of purchase.

In 2018, we purchased U.S Mainland consumer loans totaling $58.6 million, which included a $0.1 million premium over the $58.5 million outstanding balance at the time of purchase.


54
 

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

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

(dollars in thousands)
June 30, 2019
 
December 31, 2018
 
$ Change
 
% Change
Nonperforming Assets
 

 
 

 
 
 
 
Nonaccrual loans (including loans held for sale):
 

 
 

 
 
 
 
Real estate:
 
 
 
 
 
 
 
Residential mortgage
$
738

 
$
2,048

 
$
(1,310
)
 
(64.0
)
Home equity
244

 
275

 
(31
)
 
(11.3
)
Total nonaccrual loans
982

 
2,323

 
(1,341
)
 
(57.7
)
 
 
 
 
 
 
 
 
Other real estate owned ("OREO"):
 
 
 
 
 

 
 
Real estate:
 
 
 
 
 
 
 
Residential mortgage
276

 
414

 
(138
)
 
(33.3
)
Total OREO
276

 
414

 
(138
)
 
(33.3
)
Total nonperforming assets
1,258

 
2,737

 
(1,479
)
 
(54.0
)
 
 
 
 
 
 
 
 
Accruing Loans Delinquent for 90 Days or More
 
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
Home equity
—

 
298

 
(298
)
 
(100.0
)
Consumer
267

 
238

 
29

 
12.2

Total accruing loans delinquent for 90 days or more
267

 
536

 
(269
)
 
(50.2
)
 
 
 
 
 
 
 
 
Restructured Loans Still Accruing Interest
 
 
 
 
 

 
 
Commercial, financial and agricultural
178

 
220

 
(42
)
 
(19.1
)
Real estate:
 
 
 
 
 
 
 
Construction
—

 
2,273

 
(2,273
)
 
(100.0
)
Residential mortgage
6,831

 
8,026

 
(1,195
)
 
(14.9
)
Commercial mortgage
2,097

 
2,348

 
(251
)
 
(10.7
)
Total restructured loans still accruing interest
9,106

 
12,867

 
(3,761
)
 
(29.2
)
 
 
 
 
 
 
 
 
Total nonperforming assets, accruing loans delinquent for 90 days or more and restructured loans still accruing interest
$
10,631

 
$
16,140

 
$
(5,509
)
 
(34.1
)
 
 
 
 
 
 
 
 
Ratio of nonaccrual loans to total loans and leases
0.02
%
 
0.06
%
 
 
 
(0.04
)%
Ratio of nonperforming assets to total loans and leases and OREO
0.03
%
 
0.07
%
 
 
 
(0.04
)%
Ratio of nonperforming assets and accruing loans delinquent for 90 days or more to total loans and leases and OREO
0.04
%
 
0.08
%
 
 
 
(0.04
)%
Ratio of nonperforming assets, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and leases and OREO
0.25
%
 
0.40
%
 
 
 
(0.15
)%


55
 

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

(dollars in thousands)
 
Balance at December 31, 2018
$
2,737

Additions
810

Reductions:
 

Payments
(2,126
)
Return to accrual status
(25
)
Sales of nonperforming assets
—

Charge-offs and/or valuation adjustments
(138
)
Total reductions
(2,289
)
Net increase
(1,479
)
Balance at June 30, 2019
$
1,258


Nonperforming assets, which includes nonaccrual loans and leases and other real estate, totaled $1.3 million at June 30, 2019, compared to $2.7 million at December 31, 2018. There were no nonperforming loans classified as held for sale at June 30, 2019 and December 31, 2018. The decrease in nonperforming assets from December 31, 2018 was primarily attributable to $2.1 million in repayments of nonaccrual loans and a $0.1 million write-down of a Hawaii residential mortgage foreclosed asset, offset by two additions to nonaccrual loans totaling $0.8 million.
 
Troubled debt restructurings ("TDRs") included in nonperforming assets at June 30, 2019 consisted of three Hawaii residential mortgage loans with a combined principal balance of $0.4 million.

Concessions made to the original contractual terms of these loans consisted primarily of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. The principal balances on these TDRs had matured and/or were in default at the time of restructure and we have no commitments to lend additional funds to any of these borrowers. There were $9.1 million of TDRs still accruing interest at June 30, 2019, none of which were more than 90 days delinquent. At December 31, 2018, there were $12.9 million of TDRs still accruing interest, none of which were more than 90 days delinquent.


56
 

Allowance for Loan and Lease Losses
 
The following table sets forth certain information with respect to the Allowance as of the dates and for the periods indicated:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollars in thousands)
2019
 
2018
 
2019
 
2018
Allowance for Loan and Lease Losses:
 

 
 

 
 

 
 

Balance at beginning of period
$
47,267

 
$
49,217

 
$
47,916

 
$
50,001

 
 
 
 
 
 
 
 
Provision (credit) for loan and lease losses
1,404

 
532

 
2,687

 
321

 
 
 
 
 
 
 
 
Charge-offs:
 
 
 
 
 
 
 
Commercial, financial and agricultural
839

 
742

 
1,302

 
1,240

Consumer
1,459

 
1,729

 
3,710

 
3,662

Total charge-offs
2,298

 
2,471

 
5,012

 
4,902

 
 
 
 
 
 
 
 
Recoveries:
 

 
 

 
 

 
 

Commercial, financial and agricultural
315

 
295

 
548

 
439

Real estate:
 
 
 
 
 
 
 
Construction
592

 
6

 
598

 
1,199

Residential mortgage
372

 
21

 
394

 
47

Home equity
9

 
9

 
18

 
12

Commercial mortgage
25

 
29

 
25

 
44

Consumer
581

 
543

 
1,093

 
1,020

Total recoveries
1,894

 
903

 
2,676

 
2,761

 
 
 
 
 
 
 
 
Net charge-offs
404

 
1,568

 
2,336

 
2,141

 
 
 
 
 
 
 
 
Balance at end of period
$
48,267

 
$
48,181

 
$
48,267

 
$
48,181

 
 
 
 
 
 
 
 
Allowance as a percentage of total loans and leases
1.14
%
 
1.24
%
 
1.14
%
 
1.24
%
 
 
 
 
 
 
 
 
Annualized ratio of net charge-offs to average loans and leases
0.04
%
 
0.16
%
 
0.11
%
 
0.11
%
 
Our Allowance at June 30, 2019 totaled $48.3 million compared to $47.9 million at December 31, 2018. During the three months ended June 30, 2019, we recorded a debit to the Provision of $1.4 million primarily due to the increase in our loan portfolio and reflects net charge-offs of $0.4 million. During the six months ended June 30, 2019, we recorded a debit to the Provision of $2.7 million primarily due to the increase in our loan portfolio and reflects net charge-offs of $2.3 million.
 
Our Allowance as a percentage of total loans and leases decreased from 1.17% at December 31, 2018 to 1.14% at June 30, 2019. The decrease in our Allowance as a percentage of total loans and leases reflects the credit quality of the loan portfolio, real estate markets and general economic conditions both in Hawaii and the U.S. Mainland. Our Allowance as a percentage of nonperforming assets increased from 1,750.68% at December 31, 2018 to 3,836.80% at June 30, 2019.
 
In accordance with GAAP, loans held for sale and other real estate assets are not included in our assessment of the Allowance.

Federal Home Loan Bank Stock
 
The bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB"). FHLB stock of $17.8 million at June 30, 2019 increased by $1.2 million, or 7.1%, from the FHLB stock balance at December 31, 2018.  FHLB stock has an activity-based stock requirement, thus as borrowings increase, so will our holdings of FHLB stock. There is a minimum requirement of $7.0 million in FHLB stock even if we have no borrowings outstanding.


57
 

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

(dollars in thousands)
June 30,
2019
 
December 31,
2018
 
$ Change
 
% Change
Noninterest-bearing demand deposits
$
1,351,190

 
$
1,436,967

 
$
(85,777
)
 
(6.0
)%
Interest-bearing demand deposits
1,002,706

 
954,011

 
48,695

 
5.1

Savings and money market deposits
1,573,805

 
1,448,257

 
125,548

 
8.7

Time deposits less than $100,000
171,106

 
176,707

 
(5,601
)
 
(3.2
)
Core deposits
4,098,807

 
4,015,942

 
82,865

 
2.1

 
 
 
 
 
 
 
 
Government time deposits
574,825

 
631,293

 
(56,468
)
 
(8.9
)
Other time deposits $100,000 to $250,000
105,382

 
106,783

 
(1,401
)
 
(1.3
)
Other time deposits greater than $250,000
197,835

 
192,472

 
5,363

 
2.8

Total time deposits $100,000 and greater
878,042

 
930,548

 
(52,506
)
 
(5.6
)
 
 
 
 
 
 
 
 
Total deposits
$
4,976,849

 
$
4,946,490

 
$
30,359

 
0.6


Total deposits of $4.98 billion at June 30, 2019 increased by $30.4 million from total deposits of $4.95 billion at December 31, 2018. Net increases in savings and money market deposits of $125.5 million and interest-bearing demand deposits of $48.7 million, were partially offset by net decreases in noninterest-bearing demand deposits of $85.8 million, and government time deposits of $56.5 million.
 
Core deposits, which we define as demand deposits, savings and money market deposits, and time deposits less than $100,000, totaled $4.10 billion at June 30, 2019 and increased by $82.9 million, or 2.1%, from December 31, 2018. Core deposits as a percentage of total deposits was 82.4% at June 30, 2019, compared to 81.2% at December 31, 2018.

Capital Resources
 
In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources and uses of capital in conjunction with an analysis of the size and quality of our assets, the level of risk and regulatory capital requirements. As part of this ongoing assessment, the Board of Directors reviews our capital position on an ongoing basis to ensure it is adequate, including, but not limited to, need for raising additional capital or returning capital to our shareholders, including the ability to declare cash dividends or repurchase our securities.
 
Common and Preferred Equity
 
Shareholders' equity totaled $515.7 million at June 30, 2019, compared to $491.7 million at December 31, 2018. The change in total shareholders' equity was attributable to net income of $29.6 million and other comprehensive income of $23.7 million, partially offset by the repurchase of 490,700 shares of common stock under our repurchase program, at a cost of $14.0 million and cash dividends paid of $12.6 million in the six months ended June 30, 2019. During the six months ended June 30, 2019, we repurchased approximately 1.7% of our common stock outstanding as of December 31, 2018.

Our total shareholders' equity to total assets ratio was 8.71% at June 30, 2019, compared to 8.47% at December 31, 2018. Our book value per share was $18.05 and $16.97 at June 30, 2019 and December 31, 2018, respectively.
 
Holding Company Capital Resources
 
CPF is required to act as a source of strength to the bank under the Dodd-Frank Act. CPF is obligated to pay its expenses and payments on its junior subordinated debentures which fund payments on the outstanding trust preferred securities.
 
CPF relies on the bank to pay dividends to fund its obligations. As of June 30, 2019, on a stand-alone basis, CPF had an available cash balance of approximately $12.8 million in order to meet its ongoing obligations.


58
 

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, 2019, the bank had Statutory Retained Earnings of $55.2 million. On July 23, 2019, the Company's Board of Directors declared a cash dividend of $0.23 per share on the Company's outstanding common stock, which was a 9.5% increase from the $0.21 per share a year-ago.
 
Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. Our ability to pay cash dividends to our shareholders is subject to restrictions under federal and Hawaii law, including restrictions imposed by the FRB and covenants set forth in various agreements we are a party to, including covenants set forth in our subordinated debentures.
 
In the year ended December 31, 2018, the Company repurchased 1,155,157 shares of common stock, at a cost of $32.8 million, under the Company's repurchase plan.

In June 2019, the Company’s Board of Directors authorized the repurchase of up to $30 million of its common stock from time to time in the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase program (the "Repurchase Plan"). The Repurchase Plan replaces and supersedes in its entirety the share repurchase program previously approved by the Company's Board of Directors, which had $6.8 million in remaining repurchase authority. In the six months ended June 30, 2019, a total of 490,700 shares of common stock, at a cost of $14.0 million, were repurchased under the Company's stock repurchase plans. As of June 30, 2019, $29.9 million remained available for repurchase under the Company's Repurchase Plan. The Company's Repurchase Plan has no expiration date.

Trust Preferred Securities

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

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

As of June 30, 2019, we have two remaining statutory trusts, CPB Capital Trust IV ("Trust IV") and CPB Statutory Trust V ("Trust V"), which issued a total of $50.0 million in floating rate trust preferred securities. The trust preferred securities, the underlying floating rate junior subordinated debentures that are the assets of Trusts IV and V, and the common securities issued by Trusts IV and V are redeemable in whole or in part on any interest payment date on or after December 15, 2009 for Trust IV and V, or at any time in whole but not in part within 90 days following the occurrence of certain events. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from time to time to defer subordinated debenture interest payments, which would result in a deferral of dividend payments on the related trust preferred securities, for up to 20 consecutive quarterly periods without default or penalty.

Regulatory Capital Ratios
 
General capital adequacy regulations adopted by the FRB and FDIC require an institution to maintain minimum leverage capital, Tier 1 risk-based capital, total risk-based capital, and common equity Tier 1 ("CET1") capital ratios. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and

59
 

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 2018 Form 10-K.
 
The Company's and the bank's leverage capital, tier 1 risk-based capital, total risk-based capital, and CET1 risk-based capital ratios as of June 30, 2019 were above the levels required for a "well capitalized" regulatory designation.
 
The following table sets forth the Company's and the bank's capital ratios, as well as the minimum capital adequacy requirements applicable to all financial institutions as of the dates indicated.
 
 
 
Actual
 
Minimum Required
for Capital Adequacy
Purposes
 
Minimum Required
to be
Well Capitalized
(dollars in thousands)
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Company
 
 

 
 

 
 

 
 

 
 

 
 

At June 30, 2019:
 
 

 
 

 
 

 
 

 
 

 
 

Leverage capital
 
$
556,403

 
9.5
%
 
$
234,568

 
4.0
%
 


 
N/A
Tier 1 risk-based capital
 
556,403

 
12.7

 
262,536

 
6.0

 


 
N/A
Total risk-based capital
 
606,567

 
13.9

 
350,048

 
8.0

 


 
N/A
CET1 risk-based capital
 
506,403

 
11.6

 
196,902

 
4.5

 


 
N/A
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2018:
 
 

 
 

 
 

 
 

 
 

 
 
Leverage capital
 
$
570,260

 
9.9
%
 
$
230,847

 
4.0
%
 


 
N/A
Tier 1 risk-based capital
 
570,260

 
13.5

 
252,921

 
6.0

 


 
N/A
Total risk-based capital
 
619,419

 
14.7

 
337,228

 
8.0

 


 
N/A
CET1 risk-based capital
 
500,260

 
11.9

 
189,691

 
4.5

 


 
N/A
 
 
 
 
 
 
 
 
 
 
 
 
 
Central Pacific Bank
 
 

 
 

 
 

 
 

 
 

 
 

At June 30, 2019:
 
 

 
 

 
 

 
 

 
 

 
 

Leverage capital
 
$
544,480

 
9.3
%
 
$
234,408

 
4.0
%
 
$
293,009

 
5.0
%
Tier 1 risk-based capital
 
544,480

 
12.5

 
262,283

 
6.0

 
349,711

 
8.0

Total risk-based capital
 
594,644

 
13.6

 
349,711

 
8.0

 
437,139

 
10.0

CET1 risk-based capital
 
544,480

 
12.5

 
196,713

 
4.5

 
284,140

 
6.5

 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2018:
 
 

 
 

 
 

 
 

 
 

 
 

Leverage capital
 
$
533,166

 
9.3
%
 
$
230,638

 
4.0
%
 
$
288,298

 
5.0
%
Tier 1 risk-based capital
 
533,166

 
12.7

 
252,667

 
6.0

 
336,889

 
8.0

Total risk-based capital
 
582,325

 
13.8

 
336,889

 
8.0

 
421,111

 
10.0

CET1 risk-based capital
 
533,166

 
12.7

 
189,500

 
4.5

 
273,722

 
6.5


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

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

60
 

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, 2019, over a one-year horizon, assuming no balance sheet growth and given both a 100 bp upward and 100 bp downward parallel shift in interest rates.
 
Rate Change
 
Estimated Net Interest Income Sensitivity
+100 bp
 
1.54
 %
-100 bp
 
(4.24
)%

Liquidity and Borrowing Arrangements
 
Our objective in managing liquidity is to maintain a balance between sources and uses of funds in order to economically meet the cash requirements of customers for loans and deposit withdrawals and participate in lending and investment opportunities as they arise. We monitor our liquidity position in relation to changes in loan and deposit balances on a daily basis to ensure maximum utilization, maintenance of an adequate level of readily marketable assets and access to short-term funding sources.
 
Core deposits have historically provided us with a sizable source of relatively stable and low cost funds, but are subject to competitive pressure in our market. In addition to core deposit funding, we also have access to a variety of other short-term and long-term funding sources, which include proceeds from maturities of our investment securities, as well as secondary funding sources such as the FHLB, secured repurchase agreements and the Federal Reserve discount window, available to meet our liquidity needs. While we historically have had access to these other funding sources, access to these sources may not be guaranteed and can be restricted in the future as a result of market conditions or the Company's and bank's financial position.
 
The bank is a member of and maintained a $1.74 billion line of credit with the FHLB as of June 30, 2019, compared to $1.43 billion at December 31, 2018. We had $221.0 million in short-term borrowings under this arrangement at June 30, 2019, compared to $197.0 million at December 31, 2018. Long-term borrowings under this arrangement totaled $50.0 million at June 30, 2019 and December 31, 2018. FHLB advances available at June 30, 2019 were secured by certain real estate loans with a carrying value of $2.34 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB. At June 30, 2019, $1.40 billion was undrawn under this arrangement, compared to $1.18 billion at December 31, 2018.
 
At June 30, 2019 and December 31, 2018, our bank had additional unused borrowings available at the Federal Reserve discount window of $67.7 million and $73.9 million, respectively. As of June 30, 2019 and December 31, 2018, certain commercial and commercial real estate loans with a carrying value totaling $121.2 million and $123.3 million, respectively, were pledged as collateral on our line of credit with the Federal Reserve discount window. The Federal Reserve does not have the right to sell or repledge these loans.
 
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, 2018. During the first quarter of 2019, the Company signed an extension to its existing agreement with a computer software vendor. This extension increases the Company's contractual obligations for the years 2022 through 2024 by approximately $6 million per year. There have been no other material changes in our contractual obligations since December 31, 2018.
 

61
 

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, 2019 would not result in a fluctuation of NII that would exceed the established policy limits.

Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this report and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), the Company's management, including the principal executive officer and principal financial officer, conducted an evaluation of the effectiveness and design of the Company's disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, the Company's principal executive officer and principal financial officer concluded, as of the end of the period covered by this report, that the Company's disclosure controls and procedures were effective.
 
Changes in Internal Control Over Financial Reporting
 
As of the end of the period covered by this report, there have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

62
 

PART II.   OTHER INFORMATION
 
Item 1A. Risk Factors
 
There have been no material changes from the Risk Factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 28, 2019, except as described below.

Our RISE2020 initiative may not be successful.

During the second half of 2019 and throughout 2020, we intend to invest an aggregate of approximately $40 million to upgrade our branch spaces, digital banking platforms and ATM network through a new initiative we call RISE2020. RISE2020 is intended to enhance customer experience, drive stronger long-term growth and profitability, improve shareholder returns and lower our efficiency ratio. However, we cannot provide any assurance that RISE2020 will achieve any of our objectives or will achieve our objectives to the extent we have forecasted. In particular, the costs of RISE2020 may exceed our expectations; we may not be able to attract new business from existing customers; new customers may not be attracted to our platform despite the amount of expense we incur; and implementation of RISE2020 initiatives may disrupt our operations. If our RISE2020 initiative is not successful, our overall noninterest expense will have increased without a corresponding increase in revenue and growth which could have a material adverse effect on our business, financial condition or results of operations.
 
Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds.
 
Issuer Purchases of Equity Securities
 
In June 2019, the Company’s Board of Directors authorized the repurchase of up to $30 million of its common stock from time to time in the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase program (the "Repurchase Plan"). The Repurchase Plan replaces and supersedes in its entirety the share repurchase program previously approved by the Company's Board of Directors, which had $6.8 million in remaining repurchase authority.

In the three months ended June 30, 2019, the Company repurchased 213,700 shares of common stock, at an aggregate cost of $6.2 million, under the Company's stock repurchase plans. As of June 30, 2019, a total of $29.9 million remained available for repurchase under the Company's Repurchase Plan. There is no expiration date on the Repurchase Plan.
 
 
 
Issuer Purchases of Equity Securities
Period
 
Total
Number
of Shares
Purchased
 
Average
Price Paid
per Share
 
Total Shares
Purchased as
Part of Publicly
Announced
Programs
 
Maximum Dollar
Value of
Shares That
May Yet Be
Purchased Under
the Program
April 1-30, 2019
 
93,500

 
$
29.54

 
93,500

 
$
10,198,569

May 1-31, 2019
 
71,900

 
29.34

 
71,900

 
8,089,146

June 1-30, 2019
 
48,300

 
28.41

 
48,300

 
29,942,428

Total
 
213,700

 
$
29.22

 
213,700

 
29,942,428

 
 



63
 

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*
 
 
 
 
 
 
 
 
 
*
 
Filed herewith.
 
 
 
**
 
Furnished herewith.
 
 
 



64
 

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:
August 6, 2019
/s/ Paul K. Yonamine
 
 
Paul K. Yonamine
 
 
Chairman and Chief Executive Officer
 
 
 
Date:
August 6, 2019
/s/ David S. Morimoto
 
 
David S. Morimoto
 
 
Executive Vice President and Chief Financial Officer


65

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