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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 March 31, 2021
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 April 19, 2021 was 28,292,530 shares.
1

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 - March 31, 2021 and December 31, 2020 | 4
| Consolidated Statements of Income - Three months ended March 31, 2021 and 2020 | 5
| Consolidated Statements of Comprehensive Income - Three months ended March 31, 2021 and 2020 | 6
| Consolidated Statements of Changes in Equity - Three months ended March 31, 2021 and 2020 | 7
| Consolidated Statements of Cash Flows - Three months ended March 31, 2021 and 2020 | 8
| Notes to Consolidated Financial Statements (Unaudited) | 9
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 45
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 69
Item 4. | Controls and Procedures | 69
Part II. | Other Information | 70
Item 1A. | Risk Factors | 70
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 70
Item 6. | Exhibits | 71
Signatures |  | 72

2

PART I. FINANCIAL INFORMATION
Forward-Looking Statements and Factors that Could Affect Future Results
This document may contain forward-looking statements concerning: projections of revenues, expenses, income or loss, earnings or loss per share, capital expenditures, the payment or nonpayment of dividends, capital position, net interest margin or other financial items; statements of plans, objectives and expectations of Central Pacific Financial Corp. or its management or Board of Directors, including those relating to business plans, use of capital resources, products or services and regulatory developments and regulatory actions; statements of future economic performance including anticipated performance results in light of the COVID-19 pandemic and from our RISE2020 initiative; or any statements of the assumptions underlying or relating to any of the foregoing. Words such as "believes," "plans," "anticipates," "expects," "intends," "forecasts," "hopes," "targeting," "continue," "remain," "will," "should," "estimates," "may" and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
While we believe that our forward-looking statements and the assumptions underlying them are reasonably based, such statements and assumptions are by their nature subject to risks and uncertainties, and thus could later prove to be inaccurate or incorrect. Accordingly, actual results could differ materially from those statements or projections for a variety of reasons, including, but not limited to: the adverse effects of the COVID-19 pandemic virus on local, national and international economies, including, but not limited to, the adverse impact on tourism and construction in the State of Hawaii, our borrowers, customers, third-party contractors, vendors and employees as well as the effects of government programs and initiatives in response to COVID-19; the impact of our participation in the Paycheck Protection Program ("PPP") and fulfillment of government guarantees on our PPP loans; the increase in inventory or adverse conditions in the real estate market and deterioration in the construction industry; adverse changes in the financial performance and/or condition of our borrowers and, as a result, increased loan delinquency rates, deterioration in asset quality, and losses in our loan portfolio; our ability to successfully implement our RISE2020 initiative; the impact of local, national, and international economies and events (including natural disasters such as wildfires, volcanic eruptions, hurricanes, tsunamis, storms, earthquakes and pandemic virus and disease, including COVID-19) on the Company's business and operations and on tourism, the military, and other major industries operating within the Hawaii market and any other markets in which the Company does business; deterioration or malaise in domestic economic conditions, including any destabilization in the financial industry and deterioration of the real estate market, as well as the impact of declining levels of consumer and business confidence in the state of the economy in general and in financial institutions in particular; changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), changes in capital standards, other regulatory reform and federal and state legislation, including but not limited to regulations promulgated by the Consumer Financial Protection Bureau (the "CFPB"), government-sponsored enterprise reform, and any related rules and regulations which affect our business operations and competitiveness; the costs and effects of legal and regulatory developments, including legal proceedings or regulatory or other governmental inquiries and proceedings and the resolution thereof, the results of regulatory examinations or reviews and the effect of, and our ability to comply with, any regulations or regulatory orders or actions we are or may become subject to; ability to successfully implement our initiatives to lower our efficiency ratio; the effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System (the "FRB" or the "Federal Reserve"); inflation, interest rate, securities market and monetary fluctuations, including the anticipated replacement of the London Interbank Offered Rate ("LIBOR") Index and the impact on our loans and debt which are tied to that index; negative trends in our market capitalization and adverse changes in the price of the Company's common stock; political instability; acts of war or terrorism; pandemic virus and disease, including COVID-19; changes in consumer spending, borrowings and savings habits; failure to maintain effective internal control over financial reporting or disclosure controls and procedures; cybersecurity and data privacy breaches and the consequence therefrom; the ability to address deficiencies in our internal controls over financial reporting or disclosure controls and procedures; technological changes and developments; changes in the competitive environment among financial holding companies and other financial service providers; the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board ("FASB") and other accounting standard setters and the cost and resources required to implement such changes; our ability to attract and retain key personnel; changes in our organization, compensation and benefit plans; and our success at managing the risks involved in the foregoing items.
For further information with respect to factors that could cause actual results to materially differ from the expectations or projections stated in the forward-looking statements, please see the Company's publicly available Securities and Exchange Commission filings, including the Company's Form 10-K for the last fiscal year and, in particular, the discussion of "Risk Factors" set forth therein and herein. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Form 10-Q. Forward-looking statements speak only as of the date on which such statements are made. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events except as required by law.
3

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)

(dollars in thousands) | March 31, 2021 |  | December 31, 2020
Assets |  |  |
Cash and due from banks | $ | 93,358 |  |  | $ | 97,546 |
Interest-bearing deposits in other banks | 166,533 |  |  | 6,521 |
Investment securities: |  |  |
Available-for-sale debt securities, at fair value | 1,216,341 |  |  | 1,182,609 |
Equity securities, at fair value | 1,435 |  |  | 1,351 |
Total investment securities | 1,217,776 |  |  | 1,183,960 |
Loans held for sale | 5,234 |  |  | 16,687 |
Loans | 5,137,849 |  |  | 4,964,113 |
Allowance for credit losses | (81,553) |  |  | (83,269) |
Loans, net of allowance for credit losses | 5,056,296 |  |  | 4,880,844 |
Premises and equipment, net | 72,599 |  |  | 65,278 |
Accrued interest receivable | 19,440 |  |  | 20,224 |
Investment in unconsolidated subsidiaries | 31,487 |  |  | 29,968 |
Mortgage servicing rights | 11,094 |  |  | 11,865 |
Bank-owned life insurance | 167,110 |  |  | 163,161 |
Federal Home Loan Bank stock | 8,155 |  |  | 8,237 |
Right-of-use lease asset | 44,727 |  |  | 45,857 |
Other assets | 85,456 |  |  | 64,435 |
Total assets | $ | 6,979,265 |  |  | $ | 6,594,583 |
Liabilities |  |  |
Deposits: |  |  |
Noninterest-bearing demand | $ | 2,070,428 |  |  | $ | 1,790,269 |
Interest-bearing demand | 1,237,574 |  |  | 1,174,888 |
Savings and money market | 2,004,368 |  |  | 1,932,043 |
Time | 896,580 |  |  | 898,918 |
Total deposits | 6,208,950 |  |  | 5,796,118 |
Short-term borrowings | — |  |  | 22,000 |
Long-term debt | 105,436 |  |  | 105,385 |
Lease liability | 46,033 |  |  | 47,191 |
Other liabilities | 75,933 |  |  | 77,156 |
Total liabilities | 6,436,352 |  |  | 6,047,850 |
Contingent liabilities and other commitments (see Notes 8, 15 and 16) |  |  |
Equity |  |  |
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding: none at March 31, 2021 and December 31, 2020 | — |  |  | — |
Common stock, no par value, authorized 185,000,000 shares; issued and outstanding: 28,282,530 at March 31, 2021 and 28,183,340 at December 31, 2020 | 443,505 |  |  | 442,635 |
Additional paid-in capital | 95,721 |  |  | 94,842 |
Retained earnings (Accumulated deficit) | 628 |  |  | (10,920) |
Accumulated other comprehensive income | 3,011 |  |  | 20,128 |
Total shareholders' equity | 542,865 |  |  | 546,685 |
Non-controlling interest | 48 |  |  | 48 |
Total equity | 542,913 |  |  | 546,733 |
Total liabilities and equity | $ | 6,979,265 |  |  | $ | 6,594,583 |

See accompanying notes to consolidated financial statements.
4

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

| Three Months Ended March 31, |  |
(dollars in thousands, except per share data) | 2021 |  | 2020 |  |  |  |
Interest income: |  |  |  |  |  |  |
Interest and fees on loans | $ | 46,074 |  |  | $ | 46,204 |  |  |  |  |
Interest and dividends on investment securities: |  |  |  |  |  |  |
Taxable interest | 5,106 |  |  | 6,757 |  |  |  |  |
Tax-exempt interest | 514 |  |  | 668 |  |  |  |  |
Dividends | 18 |  |  | 17 |  |  |  |  |
Interest on deposits in other banks | 10 |  |  | 36 |  |  |  |  |
Dividends on Federal Home Loan Bank stock | 59 |  |  | 132 |  |  |  |  |
Total interest income | 51,781 |  |  | 53,814 |  |  |  |  |
Interest expense: |  |  |  |  |  |  |
Interest on deposits: |  |  |  |  |  |  |
Demand | 86 |  |  | 176 |  |  |  |  |
Savings and money market | 274 |  |  | 1,118 |  |  |  |  |
Time | 588 |  |  | 3,268 |  |  |  |  |
Interest on short-term borrowings | 2 |  |  | 508 |  |  |  |  |
Interest on long-term debt | 1,027 |  |  | 914 |  |  |  |  |
Total interest expense | 1,977 |  |  | 5,984 |  |  |  |  |
Net interest income | 49,804 |  |  | 47,830 |  |  |  |  |
Provision for credit losses | (821) |  |  | 11,127 |  |  |  |  |
Net interest income after provision for credit losses | 50,625 |  |  | 36,703 |  |  |  |  |
Other operating income: |  |  |  |  |  |  |
Mortgage banking income | 2,970 |  |  | 337 |  |  |  |  |
Service charges on deposit accounts | 1,478 |  |  | 2,050 |  |  |  |  |
Other service charges and fees | 3,790 |  |  | 4,897 |  |  |  |  |
Income from fiduciary activities | 1,231 |  |  | 1,297 |  |  |  |  |
Income from bank-owned life insurance | 797 |  |  | (19) |  |  |  |  |
Other | 445 |  |  | 324 |  |  |  |  |
Total other operating income | 10,711 |  |  | 8,886 |  |  |  |  |
Other operating expense: |  |  |  |  |  |  |
Salaries and employee benefits | 19,827 |  |  | 20,054 |  |  |  |  |
Net occupancy | 3,764 |  |  | 3,672 |  |  |  |  |
Equipment | 1,000 |  |  | 1,097 |  |  |  |  |
Communication expense | 769 |  |  | 837 |  |  |  |  |
Legal and professional services | 2,377 |  |  | 2,028 |  |  |  |  |
Computer software expense | 3,783 |  |  | 2,943 |  |  |  |  |
Advertising expense | 1,658 |  |  | 1,092 |  |  |  |  |
Other | 4,668 |  |  | 2,719 |  |  |  |  |
Total other operating expense | 37,846 |  |  | 34,442 |  |  |  |  |
Income before income taxes | 23,490 |  |  | 11,147 |  |  |  |  |
Income tax expense | 5,452 |  |  | 2,821 |  |  |  |  |
Net income | $ | 18,038 |  |  | $ | 8,326 |  |  |  |  |
Per common share data: |  |  |  |  |  |  |
Basic earnings per common share | $ | 0.64 |  |  | $ | 0.30 |  |  |  |  |
Diluted earnings per common share | $ | 0.64 |  |  | $ | 0.29 |  |  |  |  |
Cash dividends declared | $ | 0.23 |  |  | $ | 0.23 |  |  |  |  |
Weighted average common shares outstanding used in computation: |  |  |  |  |  |  |
Basic shares | 28,108,648 |  |  | 28,126,400 |  |  |  |  |
Diluted shares | 28,313,014 |  |  | 28,277,753 |  |  |  |  |

See accompanying notes to consolidated financial statements.
5

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

|  | Three Months Ended March 31, |  |
(dollars in thousands) |  | 2021 |  | 2020 |  |  |  |
Net income |  | $ | 18,038 |  |  | $ | 8,326 |  |  |  |  |
Other comprehensive (loss) income, net of tax: |  |  |  |  |  |  |  |
Net change in unrealized (loss) gain on investment securities |  | (17,301) |  |  | 10,147 |  |  |  |  |
Defined benefit plans |  | 184 |  |  | 516 |  |  |  |  |
Total other comprehensive (loss) income, net of tax |  | (17,117) |  |  | 10,663 |  |  |  |  |
Comprehensive income |  | $ | 921 |  |  | $ | 18,989 |  |  |  |  |

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 |  | Retained Earnings (Accum. Deficit) |  | Accum. Other Comp. Income (Loss) |  | Non- Controlling Interest |  | Total
| (dollars in thousands, except per share data)
Balance at December 31, 2020 | 28,183,340 |  |  | $ | — |  |  | $ | 442,635 |  |  | $ | 94,842 |  |  | $ | (10,920) |  |  | $ | 20,128 |  |  | $ | 48 |  |  | $ | 546,733 |
Net income | — |  |  | — |  |  | — |  |  | — |  |  | 18,038 |  |  | — |  |  | — |  |  | 18,038 |
Other comprehensive loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (17,117) |  |  | — |  |  | (17,117) |
Cash dividends declared ($0.23 per share) | — |  |  | — |  |  | — |  |  | — |  |  | (6,490) |  |  | — |  |  | — |  |  | (6,490) |
Share-based compensation | 99,190 |  |  | — |  |  | 870 |  |  | 879 |  |  | — |  |  | — |  |  | — |  |  | 1,749 |
Balance at March 31, 2021 | 28,282,530 |  |  | $ | — |  |  | $ | 443,505 |  |  | $ | 95,721 |  |  | $ | 628 |  |  | $ | 3,011 |  |  | $ | 48 |  |  | $ | 542,913 |

| Common Shares Outstanding |  | Preferred Stock |  | Common Stock |  | Additional Paid-In Capital |  | Accum. Deficit |  | Accum. Other Comp. Income (Loss) |  | Non- Controlling Interest |  | Total
| (dollars in thousands, except per share data)
Balance at December 31, 2019 | 28,289,257 |  |  | $ | — |  |  | $ | 447,602 |  |  | $ | 91,611 |  |  | $ | (19,102) |  |  | $ | 8,409 |  |  | $ | — |  |  | $ | 528,520 |
Impact of the adoption of new accounting standards (1) | — |  |  | — |  |  | — |  |  | — |  |  | (3,156) |  |  | — |  |  | — |  |  | (3,156) |
Adjusted balance at January 1, 2020 | 28,289,257 |  |  | — |  |  | 447,602 |  |  | 91,611 |  |  | (22,258) |  |  | 8,409 |  |  | — |  |  | 525,364 |
Net income | — |  |  | — |  |  | — |  |  | — |  |  | 8,326 |  |  | — |  |  | — |  |  | 8,326 |
Other comprehensive income | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 10,663 |  |  | — |  |  | 10,663 |
Cash dividends declared ($0.23 per share) | — |  |  | — |  |  | — |  |  | — |  |  | (6,496) |  |  | — |  |  | — |  |  | (6,496) |
Common stock repurchased and retired and other related costs | (206,802) |  |  | — |  |  | (4,749) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (4,749) |
Share-based compensation | 32,898 |  |  | — |  |  | — |  |  | 673 |  |  | — |  |  | — |  |  | — |  |  | 673 |
Noncontrolling interest | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 49 |  |  | 49 |
Balance at March 31, 2020 | 28,115,353 |  |  | $ | — |  |  | $ | 442,853 |  |  | $ | 92,284 |  |  | $ | (20,428) |  |  | $ | 19,072 |  |  | $ | 49 |  |  | $ | 533,830 |
(1) Represents the impact of the adoption of Accounting Standards Update ("ASU") ASU 2016-13.

See accompanying notes to consolidated financial statements.
7

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

| Three Months Ended March 31,
(dollars in thousands) | 2021 |  | 2020
Cash flows from operating activities: |  |  |
Net income | $ | 18,038 |  |  | $ | 8,326 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
Provision for credit losses | (821) |  |  | 11,127 |
Depreciation and amortization of premises and equipment | 1,608 |  |  | 1,504 |
Non-cash lease (benefit) expense | (28) |  |  | 59 |
Cash flows from operating leases | (1,599) |  |  | (1,594) |
Loss on disposal of fixed assets | 32 |  |  | — |
Loss on sale of other real estate, net of write-downs | — |  |  | 64 |
Amortization of mortgage servicing rights | 1,232 |  |  | 1,547 |
Net amortization and accretion of premium/discounts on investment securities | 2,391 |  |  | 1,982 |
Share-based compensation expense | 879 |  |  | 673 |
Net gain on sales of residential mortgage loans | (2,439) |  |  | (727) |
Proceeds from sales of loans held for sale | 57,439 |  |  | 31,498 |
Originations of loans held for sale | (43,547) |  |  | (25,598) |
Equity in earnings of unconsolidated subsidiaries | (107) |  |  | (26) |
Distributions from unconsolidated subsidiaries | 181 |  |  | 73 |
Net (increase) decrease in cash surrender value of bank-owned life insurance | (898) |  |  | 19 |
Deferred income taxes | (6,687) |  |  | (406) |
Net tax benefit (expense) from share-based compensation | 131 |  |  | (48) |
Net change in other assets and liabilities | (6,126) |  |  | 2,772 |
Net cash provided by operating activities | 19,679 |  |  | 31,245 |
Cash flows from investing activities: |  |  |
Proceeds from maturities of and calls on investment securities available-for-sale | 80,015 |  |  | 50,878 |
Purchases of investment securities available-for-sale | (139,785) |  |  | (96,068) |
Net loan originations | (138,572) |  |  | (41,339) |
Purchases of loan portfolios | (36,059) |  |  | (22,340) |
Purchases of bank-owned life insurance | (3,550) |  |  | — |
Proceeds from bank-owned life insurance | 499 |  |  | — |
Net purchases of premises, equipment and land | (8,961) |  |  | (5,608) |
Contributions to unconsolidated subsidiaries | (2,736) |  |  | (422) |
Net proceeds from redemption of (purchases of) FHLB stock | 82 |  |  | (3,126) |
Net cash used in investing activities | (249,067) |  |  | (118,025) |
Cash flows from financing activities: |  |  |
Net increase in deposits | 412,832 |  |  | 16,046 |
Net (decrease) increase in short-term borrowings | (22,000) |  |  | 72,000 |
Cash dividends paid on common stock | (6,490) |  |  | (6,496) |
Repurchases of common stock and other related costs | — |  |  | (4,749) |
Net proceeds from issuance of common stock and stock option exercises | 870 |  |  | — |
Net cash provided by financing activities | 385,212 |  |  | 76,801 |
Net increase (decrease) in cash and cash equivalents | 155,824 |  |  | (9,979) |
Cash and cash equivalents at beginning of period | 104,067 |  |  | 102,972 |
Cash and cash equivalents at end of period | $ | 259,891 |  |  | $ | 92,993 |
Supplemental disclosure of cash flow information: |  |  |
Cash paid during the period for: |  |  |
Interest | $ | 1,681 |  |  | $ | 6,140 |
Income taxes | 2,445 |  |  | 170 |

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, 2020. In the opinion of management, all adjustments necessary for a fair presentation have been made and include all normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.
Reclassifications
Certain amounts reported in prior years in the financial statements have been reclassified to conform to the current year’s presentation. These reclassifications did not impact net income, the consolidated balance sheets and the consolidated statements of cash flows.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
In January 2020, we acquired a 50% ownership interest in a mortgage loan origination and brokerage company, Oahu HomeLoans, LLC. The bank concluded that the investment meets the consolidation requirements under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 810, "Consolidation." The bank concluded that the entity meets the definition of a variable interest entity and that we are the primary beneficiary of the variable interest entity. Accordingly, the investment has been consolidated into our financial statements.
We also have non-controlling equity investments in affiliates that are accounted for under the cost method and are included in investment in unconsolidated subsidiaries.
Our investments in unconsolidated subsidiaries accounted for under the equity, proportional amortization and cost methods were $0.2 million, $27.7 million and $3.6 million, respectively, at March 31, 2021 and $0.3 million, $28.1 million and $1.6 million, respectively, at December 31, 2020. Our policy for determining impairment of these investments includes an evaluation of whether a loss in value of an investment is other than temporary. Evidence of a loss in value includes absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. We perform impairment tests whenever indicators of impairment are present. If the value of an investment declines and it is considered other than temporary, the investment is written down to its respective fair value in the period in which this determination is made.
The Company sponsors the Central Pacific Bank Foundation, which is not consolidated in the Company's financial statements.
Risks and Uncertainties
COVID-19 Pandemic
In December 2019, a novel strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China, and has since spread across the globe. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has severely impacted the level of economic activity in the local, national and global economies and financial markets. The pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. The Company and its customers have been adversely affected by the COVID-19 pandemic. The full extent to which the
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COVID-19 pandemic negatively impacts the Company's business, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, is unknown at this time and will depend on future developments, including the scope and duration of the pandemic, the success of the continued COVID-19 vaccine rollout, and other actions taken by governmental authorities and other third parties in response to the pandemic. If the pandemic continues to be sustained, it may further adversely impact the Company and the State of Hawaii and impair the ability of the Company's customers to fulfill their contractual obligations to the Company. This could cause the Company to experience a material adverse effect on its business operations, asset valuations, financial condition, and results of operations. Material adverse effects may include all or a combination of losses in operations, higher provisions for credit losses and valuation impairments on the Company's investments, loans, mortgage servicing rights, deferred tax assets, or counter-party risk derivatives.
Investment Securities
Investments in debt securities are designated as trading, available-for-sale ("AFS"), or held-to-maturity ("HTM"). Investments in debt securities are designated as HTM only if we have the positive intent and ability to hold these securities to maturity. HTM securities are reported at amortized cost in the consolidated balance sheets. Trading securities are reported at fair value, with changes in fair value included in net income. Debt securities not classified as HTM or trading are classified as AFS and are reported at fair value, with net unrealized gains and losses, net of applicable taxes, excluded from net income and included in accumulated other comprehensive income (loss) ("AOCI").
Equity securities with readily determinable fair values are carried at fair value, with changes in fair value included in net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.
The Company classifies its investment securities portfolio into the following major security types: mortgage-backed securities ("MBS"), other debt securities and equity securities. The Company’s MBS portfolio is comprised primarily of residential MBS issued by United States of America ("U.S.") government entities and agencies. These securities are either explicitly or implicitly guaranteed by an agency of the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The remainder of the MBS portfolio are commercial MBS issued by U.S government entities and agencies (which there is no minimum credit rating), non-agency residential MBS (which shall meet a minimum credit rating of AAA) and non-agency commercial MBS (which shall meet a minimum credit rating of BBB and meet minimum internal credit guidelines).
The Company’s other debt securities portfolio is comprised of obligations issued by U.S. government entities and agencies, obligations issued by states and political subdivisions (which shall meet a minimum credit rating of BBB), and corporate bonds (which shall meet a minimum credit rating of BBB-).
Interest income on investment securities includes amortization of premiums and accretion of discounts. We amortize premiums to the earliest call date. We accrete discounts associated with investment securities using the effective interest method over the life of the respective security instrument. Gains and losses on the sale of investment securities are recorded on the trade date and determined using the specific identification method.
A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days delinquent. Interest accrued but not received for a security placed on non-accrual status is reversed against current period interest income. There were no investment securities on nonaccrual status as of March 31, 2021 and the Company did not reverse any accrued interest against interest income during the three months ended March 31, 2021.
Allowance for Credit Losses (“ACL”) for AFS Debt Securities
AFS debt securities in an unrealized loss position are evaluated for impairment at least quarterly. For AFS debt securities in an unrealized loss position, the Company first assesses whether or not it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the investment security’s amortized cost basis is written down to fair value through net income.
For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In conducting this assessment for debt securities in an unrealized loss position, management evaluates the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the investment security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost
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basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in AOCI.
Changes in the ACL are recorded as a provision for (or reversal of) credit losses. Losses are charged against the ACL when management believes the uncollectibility of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
As of March 31, 2021, the declines in market values of our AFS debt securities were primarily attributable to changes in interest rates and volatility in the financial markets. Because we have no intent to sell securities in an unrealized loss position and it is not more likely than not that we will be required to sell such securities before recovery of its amortized cost basis, we do not believe a credit loss exists and an ACL was not recorded.
The Company has made a policy election to exclude accrued interest receivable from the amortized cost basis of debt securities and report accrued interest receivable together with accrued interest on loans in the consolidated balance sheets. Accrued interest receivable on AFS debt securities totaled $3.9 million as of March 31, 2021. Accrued interest receivable on AFS debt securities is excluded from the estimate of credit losses.
ACL for HTM Debt Securities
Management measures expected credit losses on HTM debt securities on a collective basis by major security type. For pools of such securities with common risk characteristics, the historical lifetime probability of default and severity of loss in the event of default is derived or obtained from external sources. Expected credit losses for these securities are estimated using a loss rate methodology which considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.
Expected credit loss on each security in the HTM portfolio that do not share common risk characteristics with any of the pools of debt securities is individually measured based on net realizable value, or the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the recorded amortized cost basis of the security.
Accrued interest on HTM debt securities is reported in accrued interest receivable on the consolidated balance sheets and is excluded from the estimate of credit losses.
The Company did not have any HTM debt securities as of March 31, 2021.
Federal Home Loan Bank Stock
We are a member of the Federal Home Loan Bank of Des Moines (the "FHLB"). The bank is required to obtain and hold a specific number of shares of capital stock of the FHLB equal to the sum of a membership investment requirement and an activity-based investment requirement. The securities are reported at cost and are presented separately in the consolidated balance sheets.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost, net of the ACL. Amortized cost is the unpaid principal amount outstanding, net of unamortized purchase premiums and discounts, unamortized deferred loan origination fees and costs and cumulative principal charge-offs. Purchase premiums and discounts are generally amortized into interest income over the contractual terms of the underlying loans using the effective interest method. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the life of the related loan as an adjustment to yield and are typically amortized using the interest method over the contractual term of the loan, adjusted for actual prepayments. Deferred loan fees and costs on loans paid in full are recognized as a component of interest income on loans.
Interest income on loans is accrued at the contractual rate of interest on the unpaid principal balance. Accrued interest receivable on loans totaled $15.6 million at March 31, 2021 and is reported together with accrued interest on AFS debt securities on the consolidated balance sheets. Upon adoption of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” the Company made the accounting policy election to not measure an estimate of credit losses on accrued interest receivable as the Company writes off any uncollectible accrued interest receivable in a timely manner. The Company believes COVID-19 modified loans have distinct risk characteristics that cause them to be monitored and assessed for credit risk differently than their unmodified counterparts. Thus, in the third quarter of 2020, the Company elected to measure a reserve on the accrued interest receivable for loans on active payment forbearance or
11

deferral. As a result, during the third quarter of 2020, the Company recorded a reserve of $0.2 million against accrued interest receivable with the offset recorded to provision for credit losses. The reserve has remained unchanged through March 31, 2021.
Nonaccrual Loans
The Company determines delinquency status by considering the number of days full payments required by the contractual terms of the loan are past due. Loans are generally placed on nonaccrual status when principal and/or interest payments are 90 days past due, or earlier should management determine that the borrowers will be unable to meet contractual principal and/or interest obligations, unless the loans are well-secured and in the process of collection. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income should management determine that the collectability of such accrued interest is doubtful. All subsequent receipts are applied to principal outstanding and no interest income is recognized unless the financial condition and payment record of the borrowers warrant such recognition and the loan is restored to accrual status. A nonaccrual loan may be restored to an accrual basis when principal and interest payments are current for a predetermined period, normally at least six months, and full payment of principal and interest is reasonably assured.
Troubled Debt Restructuring (“TDR”)
A loan is accounted for and reported as a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) the Company grants a concession to the borrower experiencing financial difficulty that it would not otherwise consider for a borrower or transaction with similar credit risk characteristics. A restructuring that results in only an insignificant delay in payment is not considered a concession. A delay may be considered insignificant if the payments subject to the delay are insignificant relative to the unpaid principal or collateral value and the contractual amount due, or the delay in timing of the restructured payment period is insignificant relative to the frequency of payments, the debt’s original contractual maturity or original expected duration.
TDRs that are performing and on accrual status as of the date of the modification remain on accrual status. TDRs that are nonperforming as of the date of modification generally remain as nonaccrual until the prospect of future payments in accordance with the modified loan agreement is reasonably assured, generally demonstrated when the borrower maintains compliance with the restructured terms for a predetermined period, normally at least six months. TDRs with temporary below-market concessions remain designated as a TDR regardless of the accrual or performance status until the loan is paid off.
Expected credit losses are estimated on a collective (pool) basis when they share similar risk characteristics. If a TDR financial asset shares similar risk characteristics with other financial assets, it is evaluated with those other financial assets on a collective basis. If it does not share similar risk characteristics with other financial assets, it is evaluated individually. The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed TDRs are evaluated to determine the required ACL using the same method as all other loans held for investment, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the ACL is determined by discounting the expected future cash flows at the original interest rate of the loan. Based on the underlying risk characteristics, TDRs performing in accordance with their modified contractual terms may be collectively evaluated.
In April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued a revised interagency statement encouraging financial institutions to work with customers affected by the COVID-19 pandemic and providing additional information regarding loan modifications. The revised interagency statement clarifies the interaction between the interagency statement issued on March 22, 2020 and the temporary relief provided by Section 4013 of the Coronavirus Aid, Relief and Economic Security ("CARES") Act. Section 4013 allows financial institutions to suspend the requirements to classify certain loan modifications as TDRs. The revised statement also provides supervisory interpretations on past due and nonaccrual regulatory reporting of loan modification programs and regulatory capital. Section 4013 and the interagency guidance are being applied by the Company to loan modifications made related to the COVID-19 pandemic as eligible and appropriate. The application of the guidance reduced the number of TDRs that were reported. In December 2020, the Consolidated Appropriations Act, 2021 was signed into law. Section 541 of this legislation, “Extension of Temporary Relief From Troubled Debt Restructurings and Insurer Clarification,” extends Section 4013 of the CARES Act to the earlier of January 1, 2022 or 60 days after the termination of the national emergency declared relating to COVID-19.
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Future TDRs are indeterminable and will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the success of the continued COVID-19 vaccine rollout, and other actions taken by governmental authorities and other third parties in response to the pandemic.
ACL for Loans
Under the current expected credit loss methodology, the ACL for loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Our policy is to charge off a loan in the period in which the loan is deemed to be uncollectible and all interest previously accrued but not collected is reversed against current period interest income. We consider a loan to be uncollectible when it is probable that a loss has been incurred and the Company can make a reasonable estimate of the loss. In these instances, the likelihood of and/or timeframe for recovery of the amount due is uncertain, weak, or protracted. Subsequent receipts, if any, are credited first to the remaining principal, then to the ACL for loans as recoveries, and finally to unaccrued interest.
The ACL for loans represents management's estimate of all expected credit losses over the expected life of our existing loan portfolio. Management estimates the ACL balance using relevant available information about the collectability of cash flows, from internal and external sources, including historical information relating to past events, current conditions, and reasonable and supportable forecasts of future economic conditions. When the Company is unable to forecast future economic events, management may revert to historical information.
The Company's methodologies incorporate a reasonable and supportable forecast period of one year and revert to historical loss information on a straight-line basis over a one year reversion period.
The Company maintains an ACL at an appropriate level as of a given balance sheet date to absorb management’s best estimate of expected life of loan credit losses.
Historical credit loss experience provides the basis for the Company’s expected credit loss estimate. Adjustments to historical loss information may be made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, or when historical asset terms do not reflect the contractual terms of the financial assets being evaluated.
The ACL methodology may also consider other adjustments to address changes in conditions, trends, and circumstances such as local industry changes that could have a significant impact on the risk profile of the loan portfolio and provide for losses in the loan portfolio that may not be reflected and/or captured in the historical loss data. These factors include: lending policies, imprecision in forecasting future economic conditions, loan profile, lending staff, problem loan trends, loan review, collateral, credit concentration and other internal and external factors.
The Company uses the Moody’s Analytics Baseline forecast service for its economic forecast assumption. The Moody’s Analytics Baseline forecast includes both National and Hawaii specific economic indicators. The Moody’s Analytics forecast service is widely used in the industry and is reasonable and supportable. It is updated at least monthly and includes a variety of upside and downside economic scenarios from the Baseline. Generally the Company will use the most recent Baseline forecast from Moody’s as of the balance sheet date. During times of economic and market volatility or instability, the Company may include a qualitative factor for forecast imprecision that factors in other potential economic scenarios available by Moody’s Analytics or may apply overrides to its statistical models to enhance the reasonableness of its loss estimates.
The ACL is measured on a collective or pool basis when similar risk characteristics exist. The Company segments its portfolio generally by Federal Financial Institutions Examination Council ("FFIEC") Call Report codes. Loan pools are further segmented by risk utilizing risk ratings or bands of payment delinquency (including TDR or non-accrual status), depending on what is most appropriate for each segment. Additional sub-segmentation may be utilized to identify groups of loans with unique risk characteristics relative to the rest of the portfolio.
The Company relies on a third-party platform which offers multiple methodologies to measure historical life-of-loan losses. The Company has also developed statistical models internally to incorporate future economic conditions and forecast expected credit losses based on various macro-economic indicators such as unemployment and income levels.
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The Company has identified the following portfolio segments to measure the allowance for credit losses:

Loan Segment |  | Historical Lifetime Loss Method |  | Historical Lookback Period |  | Economic Forecast Length |  | Reversion Method
Construction |  | Probability of Default/Loss Given Default ("PD/LGD") |  | 2008-Present |  | One Year |  | One Year (straight-line basis)
Commercial real estate |  | Loss-Rate Migration |  | 2008-Present |  |
Multi-family mortgage |  | PD/LGD |  | 2008-Present |  |
Commercial, financial and agricultural |  | Loss-Rate Migration |  | 2008-Present |  |
Home equity lines of credit |  | Loss-Rate Migration |  | 2008-Present |  |
Residential mortgage |  | Loss-Rate Migration |  | 2008-Present |  |
Consumer - other revolving |  | Loss-Rate Migration |  | 2008-Present |  |
Consumer - non-revolving |  | Loss-Rate Migration |  | 2008-Present |  |
Purchased Mainland portfolios (Dealer, Other consumer) |  | Weighted-Average Remaining Maturity ("WARM") |  | 2008-Present |  |

Below is a description and the risk characteristics of each segment:
Construction loans
Construction loans include both residential and commercial development projects. Each construction project is evaluated for economic viability and construction loans pose higher credit risks than typical secured loans. Financial strength of the borrower, completion risk (the risk that the project will not be completed on time and within budget) and geographic location are the predominant risk characteristics of this segment.
Commercial real estate loans
Commercial real estate loans are secured by commercial properties. The predominant risk characteristic of this segment is operating risk, which is the risk that the borrower will be unable to generate sufficient cash flows from the operation of the property. Interest rate conditions and the commercial real estate market through economic cycles also impact risk levels.
Multi-family mortgage loans
Multi-family mortgage loans can comprise multi-building properties with extensive amenities to a single building with no amenities. The primary risk characteristic of this segment is operating risk or the ability to generate sufficient rental cash flows from the operation of the property within the owner’s strategy and resources.
Commercial, financial and agricultural loans
Loans in this category consist primarily of term loans and lines of credit to small and middle-market businesses and professionals. The predominant risk characteristics of this segment are the cash flows of the business we lend to, global cash flows including guarantor liquidity, as well as economic and market conditions. The borrower’s business is typically regarded as the principal source of repayment, though our underwriting policy and practice generally requires secondary sources of support or collateral to mitigate risk.
Paycheck Protection Program (“PPP”) loans are also in this category and are considered lower risk as they are guaranteed by the Small Business Administration (“SBA”) and may be forgivable in whole or in part in accordance with the requirements of the PPP.
Home equity lines of credit
Home equity lines of credit include fixed or floating interest rate loans and are secured by single-family owner-occupied primary residences in Hawaii. They are underwritten based on a minimum FICO score, maximum debt-to-income ratio, and maximum combined loan-to-value ratio. Home equity lines of credit are monitored based on credit score, delinquency, end of draw period and maturity.
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Residential mortgage loans
Residential mortgage loans include fixed-rate and adjustable-rate loans primarily secured by single-family owner-occupied primary residences in Hawaii. Economic conditions such as unemployment levels, future changes in interest rates and other market factors impact the level of credit risk inherent in the portfolio.
Consumer loans - other revolving
This segment consists of consumer unsecured lines of credit. Its predominant risk characteristics relate to current and projected economic conditions as well as employment and income levels attributed to the borrower.
Consumer loans - non-revolving
This segment consists of consumer non-revolving (term) loans, including auto dealer loans. Its predominant risk characteristics relate to current and projected economic conditions as well as employment and income levels attributed to the borrower.
Purchased consumer portfolios
Credit risk for purchased consumer loans is managed on a pooled basis. The predominant risk characteristics of purchased consumer loans include current and projected economic conditions, employment and income levels, and the quality of purchased consumer loans.
Below is a description of the methodologies mentioned above:
PD/LGD
The PD/LGD calculation is based on a cohort methodology whereby loans in the same cohort are tracked over time to identify defaults and corresponding losses. PD/LGD analysis requires a portfolio segmented into pools, and we elected to then further sub-segment by risk characteristics such as Risk Rating, days past due, delinquency counters, TDR status and Nonaccrual status to measure losses accurately. PD measures the count or dollar amount of loans that defaulted in a given cohort. LGD measures the losses related to the loans that defaulted. Total loss rate is calculated using the formula ‘PD times LGD’.
Migration
Migration analysis is a cohort-based approach that measures cumulative net charge-offs over a defined time-horizon to calculate a loss rate that will be applied to the loan pool. Migration analysis requires the portfolio to be segmented into pools then further sub-segmented by risk characteristics such as risk rating, days past due, delinquency counters, TDR status and Nonaccrual status to measure loss rates accurately. The key inputs to run a migration analysis are the length and frequency of the migration period, the dates for the migration periods to start and the number of migration periods used for the analysis. For each migration period, the analysis will determine the outstanding balance in each segment and/or sub-segment at the start of each period. These loans will then be followed for the length of the migration period to identify the amount of associated charge-offs and recoveries. A loss rate for each migration period is calculated using the formula 'net charge-offs over the period divided by beginning loan balance.
WARM
Under the WARM methodology, lifetime losses are calculated by determining the remaining life of the loan pool and then applying a loss rate which includes a forecast component over this remaining life. The methodology considers historical loss experience as well as a loss forecast expectation to estimate credit losses for the remaining balance of the loan pool. The calculated loss rate is applied to the contractual term (adjusted for prepayments) to determine the loan pool’s current expected credit losses.
Other
If a loan ceases to share similar risk characteristics with other loans in its segment, it will be moved to a different pool sharing similar risk characteristics. Loans that do not share risk characteristics are evaluated on an individual basis based on the fair value of the collateral or other approaches such as discounted cash flow (“DCF”) techniques. Loans evaluated individually are not included in the collective evaluation.
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Determining the Term
Expected credit losses are estimated over the contractual term of the loans and are adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. If such renewal options or extensions are present, these options are evaluated in determining the contractual term.
Reserve for Off-Balance Sheet Credit Exposures
The Company maintains a separate and distinct reserve for off-balance-sheet credit exposures which is included in other liabilities on the Company’s consolidated balance sheets. The Company estimates the amount of expected losses by calculating a commitment usage factor for letters of credit, non-revolving lines of credit, and revolving lines of credit over the remaining life during which the Company is exposed to credit risk via a contractual obligation to extend credit.
Letters of credit are generally unlikely to advance since they are typically in place only to ensure various forms of performance of the borrowers. Many of the letters of credit are cash secured. Non-revolving lines of credit are determined to be likely to advance as these are typically construction lines. Meanwhile, the likelihood of revolving lines of credit advancing varies with each individual borrower. Therefore, the future usage of each line was estimated based on the average line utilization of the revolving line of credit portfolio as a whole.
The estimate also applies the loss factors for each loan type used in the ACL for loans methodology, which is based on historical losses, economic conditions and reasonable and supportable forecasts. The reserve for off-balance sheet credit exposures is recorded as a provision for credit losses on off-balance sheet credit exposures in the provision for credit losses.
Purchased Credit Deteriorated (“PCD”) Financial Assets
The Company has purchased financial assets, none of which were credit deteriorated since origination at the time of purchase. The Company does not purchase any financial assets that are greater than 30 days delinquent at the time of purchase.
PCD financial assets, if any, are recorded at the amount paid. An ACL for PCD financial assets will be determined using the same methodology as other financial assets. The initial ACL determined on a collective basis is allocated to individual financial assets. The sum of the financial asset’s purchase price and the ACL becomes its initial amortized cost. The difference between the initial amortized costs basis and the par value of the financial asset is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the ACL are recorded through the provision for credit losses.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Adopted in 2021
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740)." This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. It also improves consistent application of GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company adopted ASU 2019-12 effective January 1, 2021 and it did not have a material impact on our consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, "Codification Improvements." This ASU issues improvements to the codification by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to the financial statements is codified, reducing the likelihood that disclosure requirements would be missed. The Company adopted ASU 2020-10 effective January 1, 2021 and it did not have a material impact on our consolidated financial statements.
Impact of Other Recently Issued Accounting Pronouncements on Future Filings
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)." This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. Entities can (1) elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can also (2) elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships
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affected by reference rate reform, if certain criteria are met. Finally, entities can (3) make a one-time election to sell and/or reclassify held-to-maturity (“HTM”) debt securities that reference an interest rate affected by reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company will elect (1) above for all contract modifications that meet the stated criteria. As the Company currently does not utilize hedge accounting, (2) above is currently not applicable. The Company currently does not have HTM debt securities and therefore, (3) above is currently not applicable.
3. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, fair value and related ACL on AFS debt securities are as follows:

(dollars in thousands) | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value |  | ACL
March 31, 2021 |  |  |  |  |  |  |  |  |
Available-for-sale: |  |  |  |  |  |  |  |  |
Debt securities: |  |  |  |  |  |  |  |  |
States and political subdivisions | $ | 165,180 |  |  | $ | 3,355 |  |  | $ | (2,190) |  |  | $ | 166,345 |  |  | $ | — |
Corporate securities | 47,175 |  |  | 189 |  |  | (1,197) |  |  | 46,167 |  |  | — |
U.S. Treasury obligations and direct obligations of U.S Government agencies | 41,565 |  |  | 90 |  |  | (478) |  |  | 41,177 |  |  | — |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |
Residential - U.S. Government-sponsored entities | 814,051 |  |  | 13,300 |  |  | (12,085) |  |  | 815,266 |  |  | — |
Commercial - U.S. Government agencies and sponsored entities | 85,778 |  |  | 1,710 |  |  | (1,609) |  |  | 85,879 |  |  | — |
Residential - Non-government agencies | 18,318 |  |  | 594 |  |  | (112) |  |  | 18,800 |  |  | — |
Commercial - Non-government agencies | 41,315 |  |  | 1,392 |  |  | — |  |  | 42,707 |  |  | — |
Total available-for-sale securities | $ | 1,213,382 |  |  | $ | 20,630 |  |  | $ | (17,671) |  |  | $ | 1,216,341 |  |  | $ | — |

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

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

(dollars in thousands) | Amortized Cost |  | Fair Value
March 31, 2021 |  |  |
Equity securities | $ | 1,096 |  |  | $ | 1,435 |
December 31, 2020 |  |  |
Equity securities | 1,068 |  |  | 1,351 |

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The amortized cost and estimated fair value of our AFS debt securities at March 31, 2021 are shown below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

| March 31, 2021
(dollars in thousands) | Amortized Cost |  | Fair Value
Available-for-sale: |  |  |
Due in one year or less | $ | 21,146 |  |  | $ | 21,381 |
Due after one year through five years | 28,707 |  |  | 29,691 |
Due after five years through ten years | 93,484 |  |  | 93,093 |
Due after ten years | 110,583 |  |  | 109,524 |
Mortgage-backed securities: |  |  |
Residential - U.S. Government-sponsored entities | 814,051 |  |  | 815,266 |
Commercial - U.S. Government agencies and sponsored entities | 85,778 |  |  | 85,879 |
Residential - Non-government agencies | 18,318 |  |  | 18,800 |
Commercial - Non-government agencies | 41,315 |  |  | 42,707 |
Total available-for-sale securities | $ | 1,213,382 |  |  | $ | 1,216,341 |

We did not sell any available-for-sale securities during the three months ended March 31, 2021 and March 31, 2020
Investment securities with fair value of $494.1 million and $483.6 million at March 31, 2021 and December 31, 2020, respectively, were pledged to secure public funds on deposit and other short-term borrowings.
At March 31, 2021 and December 31, 2020, there were no holdings of investment securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders' equity.
There were a total of 95 and 37 AFS debt securities which were in an unrealized loss position, without an ACL, at March 31, 2021 and December 31, 2020, respectively. The following tables summarize AFS debt securities which were in an unrealized loss position at March 31, 2021 and December 31, 2020, aggregated by major security type and length of time in a continuous unrealized loss position.

| Less Than 12 Months |  | 12 Months or Longer |  | Total
(dollars in thousands) | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
March 31, 2021 |  |  |  |  |  |  |  |  |  |  |
Debt securities: |  |  |  |  |  |  |  |  |  |  |
States and political subdivisions | $ | 59,427 |  |  | $ | (2,190) |  |  | $ | — |  |  | $ | — |  |  | $ | 59,427 |  |  | $ | (2,190) |
Corporate securities | 30,810 |  |  | (1,197) |  |  | — |  |  | — |  |  | 30,810 |  |  | (1,197) |
U.S. Treasury obligations and direct obligations of U.S Government agencies | 14,001 |  |  | (329) |  |  | 16,389 |  |  | (149) |  |  | 30,390 |  |  | (478) |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |
Residential - U.S. Government-sponsored entities | 409,049 |  |  | (12,085) |  |  | — |  |  | — |  |  | 409,049 |  |  | (12,085) |
Residential - Non-government agencies | 905 |  |  | (112) |  |  | — |  |  | — |  |  | 905 |  |  | (112) |
Commercial - U.S. Government agencies and sponsored entities | 22,398 |  |  | (1,609) |  |  | — |  |  | — |  |  | 22,398 |  |  | (1,609) |
Total temporarily impaired securities | $ | 536,590 |  |  | $ | (17,522) |  |  | $ | 16,389 |  |  | $ | (149) |  |  | $ | 552,979 |  |  | $ | (17,671) |

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| Less Than 12 Months |  | 12 Months or Longer |  | Total
(dollars in thousands) | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |
Debt securities: |  |  |  |  |  |  |  |  |  |  |
States and political subdivisions | $ | 21,313 |  |  | $ | (177) |  |  | $ | — |  |  | $ | — |  |  | $ | 21,313 |  |  | $ | (177) |
Corporate securities | 4,869 |  |  | (131) |  |  | — |  |  | — |  |  | 4,869 |  |  | (131) |
U.S. Treasury obligations and direct obligations of U.S Government agencies | 5,980 |  |  | (24) |  |  | 20,925 |  |  | (262) |  |  | 26,905 |  |  | (286) |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |
Residential - U.S. Government-sponsored entities | 76,402 |  |  | (299) |  |  | — |  |  | — |  |  | 76,402 |  |  | (299) |
Residential - Non-government agencies | 989 |  |  | (34) |  |  | — |  |  | — |  |  | 989 |  |  | (34) |
Commercial - U.S. Government-sponsored entities | 16,977 |  |  | (500) |  |  | — |  |  | — |  |  | 16,977 |  |  | (500) |
Total temporarily impaired securities | $ | 126,530 |  |  | $ | (1,165) |  |  | $ | 20,925 |  |  | $ | (262) |  |  | $ | 147,455 |  |  | $ | (1,427) |

The Company has evaluated its AFS investment securities that are in an unrealized loss position and has determined that the unrealized losses on the Company's investment securities are unrelated to credit quality and are primarily attributable to changes in interest rates and volatility in the financial markets since purchase. Investment securities in an unrealized loss position are evaluated on at least a quarterly basis, and include evaluating the changes in the investment securities' ratings issued by rating agencies and changes in the financial condition of the issuer. For mortgage-related securities, delinquency and loss information with respect to the underlying collateral, changes in levels of subordination for the Company's particular position within the repayment structure, and remaining credit enhancement as compared to projected credit losses of the security are also evaluated. All of the investment securities in an unrealized loss position continue to be rated investment grade by one or more major rating agencies. Because we have no intent to sell securities in an unrealized loss position and it is not more likely than not that we will be required to sell such securities before recovery of its amortized cost basis, the Company has not recorded an ACL and unrealized losses on these securities and have not been recognized into income.
Visa Class B Common Stock
As of March 31, 2021, the Company owns 34,631 shares of Class B common stock of Visa, Inc. ("Visa"). These shares were received in 2008 as part of Visa's initial public offering ("IPO"). These shares are transferable only under limited circumstances until they can be converted into shares of the publicly traded Class A common stock. This conversion will not occur until the resolution of certain litigation, which is indemnified by Visa members. Since its IPO, Visa has funded a litigation reserve to settle these litigation claims. At its discretion, Visa may continue to increase the litigation reserve based upon a change in the conversion ratio of each member bank’s restricted Class B common stock to unrestricted Class A common stock. Due to the existing transfer restriction and the uncertainty of the outcome of the Visa litigation, the Company has determined that the Visa Class B common stock does not have a readily determinable fair value and chooses to carry the shares on the Company's consolidated balance sheets at zero cost basis.
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4. LOANS AND CREDIT QUALITY
Loans, excluding loans held for sale, net of ACL under ASC 326 as of March 31, 2021 and December 31, 2020 consisted of the following:

(dollars in thousands) | March 31, 2021 |  | December 31, 2020
Commercial, financial and agricultural: |  |  |
Small Business Administration Paycheck Protection Program | $ | 618,104 |  |  | $ | 425,993 |
Other | 514,303 |  |  | 545,136 |
Real estate: |  |  |
Construction | 138,284 |  |  | 125,625 |
Residential mortgage | 1,684,936 |  |  | 1,687,251 |
Home equity | 558,348 |  |  | 550,216 |
Commercial mortgage | 1,166,175 |  |  | 1,158,203 |
Consumer | 476,591 |  |  | 479,580 |
Gross loans | 5,156,741 |  |  | 4,972,004 |
Net deferred (fees) costs | (18,892) |  |  | (7,891) |
Total loans, net of deferred fees and costs | 5,137,849 |  |  | 4,964,113 |
Allowance for credit losses | (81,553) |  |  | (83,269) |
Total loans, net of allowance for credit losses | $ | 5,056,296 |  |  | $ | 4,880,844 |

The bank is a Small Business Administration ("SBA") approved lender and actively participated in assisting customers with loan applications for the SBA’s Paycheck Protection Program, or PPP, which was part of the CARES Act. PPP loans have a two or five-year term and earn interest at 1%. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan, which the Company is recognizing over the life of the loan. The Company saw tremendous interest in the PPP.T he SBA began accepting submissions for the initial round of PPP loans on April 3, 2020. In April 2020, the Paycheck Protection Program and Health Care Enhancement Act added an additional round of funding for the PPP. In June 2020, the Paycheck Protection Program Flexibility Act of 2020 was enacted, which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Through the end of the second round in August 2020, the Company funded over 7,200 PPP loans totaling over $558 million and received gross processing fees of over $21 million.
In December 2020, the Consolidated Appropriations Act, 2021 was passed which among other things, included a third round of funding and a new simplified forgiveness procedure for PPP loans of $150,000 or less. During the first quarter of 2021, the Company funded over 3,600 loans totaling over $292 million in the third round, earning additional gross processing fees of over $15 million.
The Company developed a PPP forgiveness portal and with assistance from a third party vendor has assisted its customers with applying for forgiveness from the SBA. Since the start of the SBA forgiveness, we have received forgiveness payments totaling over $233 million. A total outstanding balance of $618.1 million and net deferred fees of $20.3 million remain as of March 31, 2021. Although the Company believes that the majority of the remaining loans will ultimately be forgiven by the SBA in accordance with the terms of the program, there could be risks and liabilities by the Company that cannot be determined at this time.
The Company did not transfer any loans to the held-for-sale category during the three months ended March 31, 2021 and 2020.
The Company did not sell any loans originally held for investment during the three months ended March 31, 2021 and 2020.
The Company has previously purchased loan portfolios, none of which were credit deteriorated since origination at the time of purchase.
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The following table presents loans purchased by class for the periods presented:

(dollars in thousands) | U.S. Mainland Consumer - Unsecured |  | U.S. Mainland Consumer - Automobile |  | Total
Three Months Ended March 31, 2021 |  |  |  |  |
Purchases: |  |  |  |  |
Outstanding balance | $ | 22,534 |  |  | $ | 12,990 |  |  | $ | 35,524 |
Purchase premium (discount) | (131) |  |  | 666 |  |  | 535 |
Purchase price | $ | 22,403 |  |  | $ | 13,656 |  |  | $ | 36,059 |
Three Months Ended March 31, 2020 |  |  |  |  |
Purchases: |  |  |  |  |
Outstanding balance | $ | 22,953 |  |  | $ | — |  |  | $ | 22,953 |
Purchase premium (discount) | (613) |  |  | — |  |  | (613) |
Purchase price | $ | 22,340 |  |  | $ | — |  |  | $ | 22,340 |
Note: Purchases of unsecured consumer loans were made under forward flow purchase agreements.

Collateral-Dependent Loans
In accordance with ASC 326, a loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table presents the amortized cost basis of collateral-dependent loans by class, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans as of March 31, 2021 and December 31, 2020:

(dollars in thousands) | Secured by 1-4 Family Residential Properties |  | Secured by Nonfarm Nonresidential Properties |  | Secured by Real Estate and Business Assets |  |  |  | Total |  | Allocated ACL
March 31, 2021 |  |  |  |  |  |  |  |  |  |  |
Commercial, financial and agricultural | $ | — |  |  | $ | — |  |  | $ | 636 |  |  |  |  | $ | 636 |  |  | $ | 160 |
Real estate: |  |  |  |  |  |  |  |  |  |  |
Residential mortgage | 10,141 |  |  | — |  |  | — |  |  |  |  | 10,141 |  |  | — |
Home equity | 439 |  |  | — |  |  | — |  |  |  |  | 439 |  |  | — |
Commercial mortgage | — |  |  | 584 |  |  | — |  |  |  |  | 584 |  |  | — |
Total | $ | 10,580 |  |  | $ | 584 |  |  | $ | 636 |  |  |  |  | $ | 11,800 |  |  | $ | 160 |

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

21

Foreclosure Proceedings
The Company had $1.6 million of residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure at both March 31, 2021 and December 31, 2020.
The Company did not foreclose on any loans during the three months ended March 31, 2021 and 2020.
The Company did not sell any foreclosed properties during the three months ended March 31, 2021 and 2020.
Nonaccrual and Past Due Loans
For all loan types, the Company determines delinquency status by considering the number of days full payments required by the contractual terms of the loan are past due. The following tables present by class, the aging of the recorded investment in past due loans as of March 31, 2021 and December 31, 2020. The following tables also present the amortized cost of loans on nonaccrual status for which there was no related ACL under ASC 326 as of March 31, 2021 and December 31, 2020.

(dollars in thousands) | Accruing Loans 30 - 59 Days Past Due |  | Accruing Loans 60 - 89 Days Past Due |  | Accruing Loans Greater Than 90 Days Past Due |  | Nonaccrual Loans |  | Total Past Due and Nonaccrual |  | Loans and Leases Not Past Due |  | Total |  | Nonaccrual Loans With No ACL
March 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial, financial and agricultural: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
SBA PPP | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 597,819 |  |  | $ | 597,819 |  |  | $ | — |
Other | 279 |  |  | 54 |  |  | — |  |  | 1,412 |  |  | 1,745 |  |  | 512,444 |  |  | 514,189 |  |  | — |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 137,976 |  |  | 137,976 |  |  | — |
Residential mortgage | 2,122 |  |  | 272 |  |  | 4,522 |  |  | 4,553 |  |  | 11,469 |  |  | 1,676,044 |  |  | 1,687,513 |  |  | 4,553 |
Home equity | — |  |  | 135 |  |  | — |  |  | 439 |  |  | 574 |  |  | 558,940 |  |  | 559,514 |  |  | 439 |
Commercial mortgage | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 1,164,338 |  |  | 1,164,338 |  |  | — |
Consumer | 1,550 |  |  | 670 |  |  | 262 |  |  | 790 |  |  | 3,272 |  |  | 473,228 |  |  | 476,500 |  |  | — |
Total | $ | 3,951 |  |  | $ | 1,131 |  |  | $ | 4,784 |  |  | $ | 7,194 |  |  | $ | 17,060 |  |  | $ | 5,120,789 |  |  | $ | 5,137,849 |  |  | $ | 4,992 |

(dollars in thousands) | Accruing Loans 30 - 59 Days Past Due |  | Accruing Loans 60 - 89 Days Past Due |  | Accruing Loans Greater Than 90 Days Past Due |  | Nonaccrual Loans |  | Total Past Due and Nonaccrual |  | Loans and Leases Not Past Due |  | Total |  | Nonaccrual Loans With No ACL
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial, financial and agricultural: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
SBA PPP | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 416,375 |  |  | $ | 416,375 |  |  | $ | — |
Other | 613 |  |  | 350 |  |  | — |  |  | 1,461 |  |  | 2,424 |  |  | 542,667 |  |  | 545,091 |  |  | — |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 125,407 |  |  | 125,407 |  |  | — |
Residential mortgage | 2,832 |  |  | 689 |  |  | 567 |  |  | 4,115 |  |  | 8,203 |  |  | 1,682,009 |  |  | 1,690,212 |  |  | 4,115 |
Home equity | 273 |  |  | 3 |  |  | — |  |  | 524 |  |  | 800 |  |  | 550,466 |  |  | 551,266 |  |  | 524 |
Commercial mortgage | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 1,156,328 |  |  | 1,156,328 |  |  | — |
Consumer | 2,725 |  |  | 906 |  |  | 240 |  |  | 92 |  |  | 3,963 |  |  | 475,471 |  |  | 479,434 |  |  | — |
Total | $ | 6,443 |  |  | $ | 1,948 |  |  | $ | 807 |  |  | $ | 6,192 |  |  | $ | 15,390 |  |  | $ | 4,948,723 |  |  | $ | 4,964,113 |  |  | $ | 4,639 |

In accordance with the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" issued in April 2020, loans with deferrals granted because of COVID-19 are not considered past due and/or reported as nonaccrual if deemed collectible during the deferral period.
22

Troubled Debt Restructurings
Troubled debt restructurings ("TDRs") included in nonperforming assets at March 31, 2021 consisted of two Hawaii residential mortgage loans with a principal balance of $0.2 million and one Hawaii commercial, financial and agricultural loan with a principal balance of $0.6 million. There were $7.5 million of TDRs still accruing interest at March 31, 2021, of which one loan totaling $0.1 million was more than 90 days delinquent. At December 31, 2020, there were $7.8 million of TDRs still accruing interest, of which one loan totaling $0.7 million was more than 90 days delinquent.
The Company offers various types of concessions when modifying a loan. Concessions made to the original contractual terms of the loan typically consists of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. In these cases, the principal balance on the TDR had matured and/or was in default at the time of restructure, and there were no commitments to lend additional funds to the borrower during the three months ended March 31, 2021 and 2020.
As discussed in Note 1 to these financial statements, Section 4013 of CARES Act and the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" provided banks an optional TDR election for certain loan modifications related to COVID-19 as long as the borrowers were not more than 30 days past due as of December 31, 2019 or at the time of modification program implementation, respectively, and meets other applicable criteria. The Company did not identify any loans in the first quarter of 2021 that were modified and did not meet the criteria under Section 4013 of CARES Act or the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)". The Company had active loan deferrals with outstanding balances of approximately $39.5 million and $119.3 million resulting from the COVID-19 pandemic that were not classified as a TDR at March 31, 2021 and December 31, 2020. The following table sets forth loans on active payment forbearance or deferral as of March 31, 2021:

| Loans on Active Forbearance or Deferral |  |  |  |  |  |  |  |
(dollars in thousands) | Loan Count |  | Balance |  | Accrued Interest Receivable |  | Total Loans |  | % of Asset Class |  | Total Loans, Excl. PPP |  | % of Asset Class, Excl. PPP
Commercial, financial and agricultural | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1,112,008 |  |  | — | % |  | $ | 514,189 |  |  | — | %
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |
Construction | — |  |  | — |  |  | — |  |  | 137,976 |  |  | — | % |  | 137,976 |  |  | — | %
Residential mortgage | 88 |  |  | 38,571 |  |  | 984 |  |  | 1,687,513 |  |  | 2.3 | % |  | 1,687,513 |  |  | 2.3 | %
Home equity | — |  |  | — |  |  | — |  |  | 559,514 |  |  | — | % |  | 559,514 |  |  | — | %
Commercial mortgage | — |  |  | — |  |  | — |  |  | 1,164,338 |  |  | — | % |  | 1,164,338 |  |  | — | %
Consumer | 83 |  |  | 928 |  |  | — |  |  | 476,500 |  |  | 0.2 | % |  | 476,500 |  |  | 0.2 | %
Total loans | 171 |  |  | $ | 39,499 |  |  | $ | 984 |  |  | $ | 5,137,849 |  |  | 0.8 | % |  | $ | 4,540,030 |  |  | 0.9 | %

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

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

No loans were modified in a TDR during the three months ended March 31, 2020.
No loans were modified as a TDR within the previous twelve months that subsequently defaulted during the three months ended March 31, 2021 and 2020.
23

Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans by credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk rating of loans. Loans not meeting the following criteria that are analyzed individually as part of the described process are considered to be pass-rated loans.
Special Mention. Loans classified as special mention, while still adequately protected by the borrower's capital adequacy and payment capability, exhibit distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment. These exposures require management's close attention so as to avoid becoming undue or unwarranted credit exposures.
Substandard. Loans classified as substandard are inadequately protected by the borrower's current financial condition and payment capability or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.
Loss. Loans classified as loss are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Losses are taken in the period in which they surface as uncollectible.
24

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

| Amortized Cost of Term Loans by Origination Year |  |  |  |
(dollars in thousands) | 2021 |  | 2020 |  | 2019 |  | 2018 |  | 2017 |  | Prior |  | Amortized Cost of Revolving Loans |  | Total
March 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial, financial and agricultural - SBA PPP: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 278,212 |  |  | $ | 319,607 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 597,819 |
Subtotal | 278,212 |  |  | 319,607 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 597,819 |
Commercial, financial and agricultural - Other: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | 26,676 |  |  | 75,241 |  |  | 53,756 |  |  | 61,131 |  |  | 39,649 |  |  | 124,952 |  |  | 74,084 |  |  | 455,489 |
Special Mention | 978 |  |  | 6,823 |  |  | 12,354 |  |  | 2,904 |  |  | 20,107 |  |  | 8,409 |  |  | 1,001 |  |  | 52,576 |
Substandard | — |  |  | 262 |  |  | 820 |  |  | 1,061 |  |  | 951 |  |  | 3,030 |  |  | — |  |  | 6,124 |
Subtotal | 27,654 |  |  | 82,326 |  |  | 66,930 |  |  | 65,096 |  |  | 60,707 |  |  | 136,391 |  |  | 75,085 |  |  | 514,189 |
Construction: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | 4,854 |  |  | 29,053 |  |  | 34,004 |  |  | 33,818 |  |  | 8,143 |  |  | 20,865 |  |  | 4,070 |  |  | 134,807 |
Special Mention | — |  |  | — |  |  | — |  |  | 3,169 |  |  | — |  |  | — |  |  | — |  |  | 3,169 |
Subtotal | 4,854 |  |  | 29,053 |  |  | 34,004 |  |  | 36,987 |  |  | 8,143 |  |  | 20,865 |  |  | 4,070 |  |  | 137,976 |
Residential mortgage: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | 148,010 |  |  | 534,754 |  |  | 235,514 |  |  | 113,088 |  |  | 120,950 |  |  | 525,067 |  |  | — |  |  | 1,677,383 |
Special Mention | — |  |  | 991 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 991 |
Substandard | — |  |  | 1,218 |  |  | 393 |  |  | 805 |  |  | 2,079 |  |  | 4,644 |  |  | — |  |  | 9,139 |
Subtotal | 148,010 |  |  | 536,963 |  |  | 235,907 |  |  | 113,893 |  |  | 123,029 |  |  | 529,711 |  |  | — |  |  | 1,687,513 |
Home equity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | 5,288 |  |  | 16,899 |  |  | 13,330 |  |  | 13,820 |  |  | 716 |  |  | 5,693 |  |  | 502,628 |  |  | 558,374 |
Special Mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 701 |  |  | 701 |
Substandard | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 439 |  |  | — |  |  | 439 |
Subtotal | 5,288 |  |  | 16,899 |  |  | 13,330 |  |  | 13,820 |  |  | 716 |  |  | 6,132 |  |  | 503,329 |  |  | 559,514 |
Commercial mortgage: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | 17,839 |  |  | 134,944 |  |  | 144,012 |  |  | 124,952 |  |  | 163,055 |  |  | 455,960 |  |  | 16,029 |  |  | 1,056,791 |
Special Mention | — |  |  | — |  |  | 2,018 |  |  | 30,564 |  |  | 4,742 |  |  | 33,038 |  |  | — |  |  | 70,362 |
Substandard | — |  |  | — |  |  | 1,788 |  |  | 18,964 |  |  | 1,873 |  |  | 14,560 |  |  | — |  |  | 37,185 |
Subtotal | 17,839 |  |  | 134,944 |  |  | 147,818 |  |  | 174,480 |  |  | 169,670 |  |  | 503,558 |  |  | 16,029 |  |  | 1,164,338 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | 36,826 |  |  | 100,204 |  |  | 126,940 |  |  | 70,102 |  |  | 38,443 |  |  | 33,193 |  |  | 69,739 |  |  | 475,447 |
Substandard | — |  |  | 166 |  |  | 441 |  |  | 267 |  |  | 87 |  |  | 65 |  |  | — |  |  | 1,026 |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | 16 |  |  | 11 |  |  | — |  |  | 27 |
Subtotal | 36,826 |  |  | 100,370 |  |  | 127,381 |  |  | 70,369 |  |  | 38,546 |  |  | 33,269 |  |  | 69,739 |  |  | 476,500 |
Total | $ | 518,683 |  |  | $ | 1,220,162 |  |  | $ | 625,370 |  |  | $ | 474,645 |  |  | $ | 400,811 |  |  | $ | 1,229,926 |  |  | $ | 668,252 |  |  | $ | 5,137,849 |

25

| Amortized Cost of Term Loans by Origination Year |  |  |  |
(dollars in thousands) | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016 |  | Prior |  | Amortized Cost of Revolving Loans |  | Total
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial, financial and agricultural - SBA PPP: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 416,375 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 416,375 |
Subtotal | 416,375 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 416,375 |
Commercial, financial and agricultural - Other: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 86,456 |  |  | $ | 55,660 |  |  | $ | 61,314 |  |  | $ | 47,672 |  |  | $ | 39,337 |  |  | $ | 98,136 |  |  | $ | 82,465 |  |  | $ | 471,040 |
Special Mention | 9,690 |  |  | 16,120 |  |  | 6,293 |  |  | 26,109 |  |  | 1,556 |  |  | 6,989 |  |  | 420 |  |  | 67,177 |
Substandard | 200 |  |  | 839 |  |  | 1,043 |  |  | 1,045 |  |  | 2,570 |  |  | 1,177 |  |  | — |  |  | 6,874 |
Subtotal | 96,346 |  |  | 72,619 |  |  | 68,650 |  |  | 74,826 |  |  | 43,463 |  |  | 106,302 |  |  | 82,885 |  |  | 545,091 |
Construction: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | 22,491 |  |  | 29,518 |  |  | 36,790 |  |  | 9,365 |  |  | 2,163 |  |  | 19,138 |  |  | 3,099 |  |  | 122,564 |
Special Mention | — |  |  | — |  |  | 2,843 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,843 |
Subtotal | 22,491 |  |  | 29,518 |  |  | 39,633 |  |  | 9,365 |  |  | 2,163 |  |  | 19,138 |  |  | 3,099 |  |  | 125,407 |
Residential mortgage: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | 556,479 |  |  | 276,645 |  |  | 127,490 |  |  | 136,307 |  |  | 180,782 |  |  | 406,020 |  |  | — |  |  | 1,683,723 |
Special Mention | 997 |  |  | — |  |  | — |  |  | 597 |  |  | 142 |  |  | — |  |  | — |  |  | 1,736 |
Substandard | — |  |  | — |  |  | 537 |  |  | 785 |  |  | 1,381 |  |  | 2,050 |  |  | — |  |  | 4,753 |
Subtotal | 557,476 |  |  | 276,645 |  |  | 128,027 |  |  | 137,689 |  |  | 182,305 |  |  | 408,070 |  |  | — |  |  | 1,690,212 |
Home equity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | 17,582 |  |  | 15,851 |  |  | 15,567 |  |  | 679 |  |  | 1,023 |  |  | 4,592 |  |  | 494,741 |  |  | 550,035 |
Special Mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 707 |  |  | 707 |
Substandard | — |  |  | — |  |  | — |  |  | — |  |  | 200 |  |  | 324 |  |  | — |  |  | 524 |
Subtotal | 17,582 |  |  | 15,851 |  |  | 15,567 |  |  | 679 |  |  | 1,223 |  |  | 4,916 |  |  | 495,448 |  |  | 551,266 |
Commercial mortgage: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | 130,448 |  |  | 144,244 |  |  | 123,519 |  |  | 166,618 |  |  | 104,381 |  |  | 363,837 |  |  | 16,200 |  |  | 1,049,247 |
Special Mention | — |  |  | 2,021 |  |  | 31,647 |  |  | 2,919 |  |  | 13,546 |  |  | 19,653 |  |  | — |  |  | 69,786 |
Substandard | — |  |  | 1,791 |  |  | 19,000 |  |  | 1,934 |  |  | — |  |  | 14,570 |  |  | — |  |  | 37,295 |
Subtotal | 130,448 |  |  | 148,056 |  |  | 174,166 |  |  | 171,471 |  |  | 117,927 |  |  | 398,060 |  |  | 16,200 |  |  | 1,156,328 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | 112,955 |  |  | 147,940 |  |  | 78,486 |  |  | 44,571 |  |  | 17,445 |  |  | 4,032 |  |  | 73,423 |  |  | 478,852 |
Special Mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 250 |  |  | 250 |
Substandard | — |  |  | 138 |  |  | 102 |  |  | 22 |  |  | — |  |  | 22 |  |  | — |  |  | 284 |
Loss | — |  |  | 16 |  |  | — |  |  | 26 |  |  | 2 |  |  | 4 |  |  | — |  |  | 48 |
Subtotal | 112,955 |  |  | 148,094 |  |  | 78,588 |  |  | 44,619 |  |  | 17,447 |  |  | 4,058 |  |  | 73,673 |  |  | 479,434 |
Total | $ | 1,353,673 |  |  | $ | 690,783 |  |  | $ | 504,631 |  |  | $ | 438,649 |  |  | $ | 364,528 |  |  | $ | 940,544 |  |  | $ | 671,305 |  |  | $ | 4,964,113 |

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

(dollars in thousands) | Pass |  | Special Mention |  | Substandard |  | Loss |  | Subtotal |  | Net Deferred Costs (Income) |  | Total
March 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial, financial and agricultural: SBA PPP | $ | 618,104 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 618,104 |  |  | $ | (20,285) |  |  | $ | 597,819 |
Commercial, financial and agricultural: Other | 455,603 |  |  | 52,576 |  |  | 6,124 |  |  | — |  |  | 514,303 |  |  | (114) |  |  | 514,189 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |
Construction | 135,115 |  |  | 3,169 |  |  | — |  |  | — |  |  | 138,284 |  |  | (308) |  |  | 137,976 |
Residential mortgage | 1,674,806 |  |  | 991 |  |  | 9,139 |  |  | — |  |  | 1,684,936 |  |  | 2,577 |  |  | 1,687,513 |
Home equity | 557,208 |  |  | 701 |  |  | 439 |  |  | — |  |  | 558,348 |  |  | 1,166 |  |  | 559,514 |
Commercial mortgage | 1,058,628 |  |  | 70,362 |  |  | 37,185 |  |  | — |  |  | 1,166,175 |  |  | (1,837) |  |  | 1,164,338 |
Consumer | 475,538 |  |  | — |  |  | 1,026 |  |  | 27 |  |  | 476,591 |  |  | (91) |  |  | 476,500 |
Total | $ | 4,975,002 |  |  | $ | 127,799 |  |  | $ | 53,913 |  |  | $ | 27 |  |  | $ | 5,156,741 |  |  | $ | (18,892) |  |  | $ | 5,137,849 |

(dollars in thousands) | Pass |  | Special Mention |  | Substandard |  | Loss |  | Subtotal |  | Net Deferred Costs (Income) |  | Total
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial, financial and agricultural: SBA PPP | $ | 425,993 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 425,993 |  |  | $ | (9,618) |  |  | $ | 416,375 |
Commercial, financial and agricultural: Other | 471,085 |  |  | 67,177 |  |  | 6,874 |  |  | — |  |  | 545,136 |  |  | (45) |  |  | 545,091 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |
Construction | 122,782 |  |  | 2,843 |  |  | — |  |  | — |  |  | 125,625 |  |  | (218) |  |  | 125,407 |
Residential mortgage | 1,680,762 |  |  | 1,736 |  |  | 4,753 |  |  | — |  |  | 1,687,251 |  |  | 2,961 |  |  | 1,690,212 |
Home equity | 548,985 |  |  | 707 |  |  | 524 |  |  | — |  |  | 550,216 |  |  | 1,050 |  |  | 551,266 |
Commercial mortgage | 1,051,122 |  |  | 69,786 |  |  | 37,295 |  |  | — |  |  | 1,158,203 |  |  | (1,875) |  |  | 1,156,328 |
Consumer | 478,998 |  |  | 250 |  |  | 284 |  |  | 48 |  |  | 479,580 |  |  | (146) |  |  | 479,434 |
Total | $ | 4,779,727 |  |  | $ | 142,499 |  |  | $ | 49,730 |  |  | $ | 48 |  |  | $ | 4,972,004 |  |  | $ | (7,891) |  |  | $ | 4,964,113 |

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5. ALLOWANCE FOR CREDIT LOSSES AND RESERVE FOR OFF-BALANCE SHEET CREDIT EXPOSURES
The following table presents by class, the activity in the ACL for loans under ASC 326 during the three months ended March 31, 2021 and March 31, 2020:

| Commercial, Financial and Agricultural |  | Real Estate |  |  |  |  |  |  |  |  |  |
(dollars in thousands) | SBA PPP |  | Other |  | Construction |  | Residential Mortgage |  | Home Equity |  | Commercial Mortgage |  |  |  | Consumer |  |  |  |  |  | Total
Three Months Ended March 31, 2021
Beginning balance | 304 |  |  | 18,717 |  |  | 4,277 |  |  | 16,484 |  |  | 5,449 |  |  | 22,163 |  |  |  |  | 15,875 |  |  |  |  |  |  | 83,269 |
Provision for credit losses on loans | 185 |  |  | (2,733) |  |  | 770 |  |  | (1,233) |  |  | (207) |  |  | 563 |  |  |  |  | 1,681 |  |  |  |  |  |  | (974) |
| 489 |  |  | 15,984 |  |  | 5,047 |  |  | 15,251 |  |  | 5,242 |  |  | 22,726 |  |  |  |  | 17,556 |  |  |  |  |  |  | 82,295 |
Charge-offs | — |  |  | 609 |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 1,098 |  |  |  |  |  |  | 1,707 |
Recoveries | — |  |  | 89 |  |  | — |  |  | 106 |  |  | 9 |  |  | 8 |  |  |  |  | 753 |  |  |  |  |  |  | 965 |
Net charge-offs (recoveries) | — |  |  | 520 |  |  | — |  |  | (106) |  |  | (9) |  |  | (8) |  |  |  |  | 345 |  |  |  |  |  |  | 742 |
Ending balance | $ | 489 |  |  | $ | 15,464 |  |  | $ | 5,047 |  |  | $ | 15,357 |  |  | $ | 5,251 |  |  | $ | 22,734 |  |  |  |  | $ | 17,211 |  |  |  |  |  |  | $ | 81,553 |
Three Months Ended March 31, 2020
Beginning balance prior to ASC 326 | $ | — |  |  | $ | 8,136 |  |  | $ | 1,792 |  |  | $ | 13,327 |  |  | $ | 4,206 |  |  | $ | 11,113 |  |  |  |  | $ | 9,397 |  |  |  |  |  |  | $ | 47,971 |
Impact of adoption of ASC 326 | — |  |  | (627) |  |  | 479 |  |  | 608 |  |  | (1,614) |  |  | 2,624 |  |  |  |  | 2,096 |  |  |  |  |  |  | 3,566 |
Beginning balance | — |  |  | 7,509 |  |  | 2,271 |  |  | 13,935 |  |  | 2,592 |  |  | 13,737 |  |  |  |  | 11,493 |  |  |  |  |  |  | 51,537 |
Provision for credit losses on loans | — |  |  | 1,231 |  |  | 655 |  |  | (935) |  |  | (314) |  |  | 5,779 |  |  |  |  | 2,913 |  |  |  |  |  |  | 9,329 |
| — |  |  | 8,740 |  |  | 2,926 |  |  | 13,000 |  |  | 2,278 |  |  | 19,516 |  |  |  |  | 14,406 |  |  |  |  |  |  | 60,866 |
Charge-offs | — |  |  | 437 |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 2,217 |  |  |  |  |  |  | 2,654 |
Recoveries | — |  |  | 342 |  |  | 131 |  |  | 181 |  |  | 31 |  |  | 2 |  |  |  |  | 746 |  |  |  |  |  |  | 1,433 |
Net charge-offs (recoveries) | — |  |  | 95 |  |  | (131) |  |  | (181) |  |  | (31) |  |  | (2) |  |  |  |  | 1,471 |  |  |  |  |  |  | 1,221 |
Ending balance | $ | — |  |  | $ | 8,645 |  |  | $ | 3,057 |  |  | $ | 13,181 |  |  | $ | 2,309 |  |  | $ | 19,518 |  |  |  |  | $ | 12,935 |  |  |  |  |  |  | $ | 59,645 |

The following table presents the activity in the reserve for off-balance sheet credit exposures, included in other liabilities, during the three months ended March 31, 2021 and March 31, 2020.

(dollars in thousands) |
Three Months Ended March 31, 2021 |
Beginning balance | $ | 4,884 |
Provision for off-balance sheet credit exposures | 153 |
Ending balance | $ | 5,037 |
Three Months Ended March 31, 2020 |
Beginning balance prior to ASC 326 | $ | 1,272 |
Impact of adoption of ASC 326 | 740 |
Balance after adoption of ASC 326 | 2,012 |
Provision for off-balance sheet credit exposures | 1,798 |
Ending balance | $ | 3,810 |

In accordance with GAAP, other real estate assets are not included in our assessment of the ACL.
In the three months ended March 31, 2021, our provision for credit losses was a credit of $0.8 million, which consisted of a credit to the provision for credit losses on loans of $1.0 million and a $0.2 million provision for credit losses on off-balance sheet credit exposures. In the three months ended March 31, 2020, our provision for credit loss was $11.1 million, which consisted of a provision for credit losses on loans of $9.3 million and a $1.8 million provision for credit losses on off-balance sheet credit exposures.
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6. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
The components of the Company's investments in unconsolidated subsidiaries were as follows:

(dollars in thousands) | March 31, 2021 |  | December 31, 2020
Investments in low income housing tax credit partnerships | $ | 27,683 |  |  | $ | 28,090 |
Investments in common securities of statutory trusts | 1,547 |  |  | 1,547 |
Investments in affiliates | 203 |  |  | 277 |
Other | 2,054 |  |  | 54 |
Total | $ | 31,487 |  |  | $ | 29,968 |

The Company invests in low-income housing tax credit ("LIHTC") and other partnerships. As of March 31, 2021 and December 31, 2020, the Company had $14.4 million and $17.2 million, respectively, in unfunded commitments related to the LIHTC partnerships and $2.0 million and none, respectively, related to other partnerships. The expected payments for the unfunded commitments as of March 31, 2021 for the remainder of fiscal year 2021, the next five succeeding fiscal years and all years thereafter are as follows:

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

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

(dollars in thousands) | Three Months Ended March 31, 2021 |  | Three Months Ended March 31, 2020 |  |  |  |
Proportional amortization method: |  |  |  |  |  |  |
Amortization expense recognized in income tax expense | $ | 407 |  |  | $ | 348 |  |  |  |  |
Tax credits recognized in income tax expense | 474 |  |  | 400 |  |  |  |  |

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7. MORTGAGE SERVICING RIGHTS
The following table presents changes in mortgage servicing rights for the periods presented:

(dollars in thousands) |  |  | Mortgage Servicing Rights |  |
Balance, January 1, 2020 |  |  | $ | 14,718 |  |  |
Additions |  |  | 174 |  |  |
Amortization |  |  | (1,547) |  |  |
Balance, March 31, 2020 |  |  | $ | 13,345 |  |  |
Balance, January 1, 2021 |  |  | $ | 11,865 |  |  |
Additions |  |  | 461 |  |  |
Amortization |  |  | (1,232) |  |  |
Balance, March 31, 2021 |  |  | $ | 11,094 |  |  |

Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans and totaled $0.5 million for the three months ended March 31, 2021 compared to $0.2 million for the three months ended March 31, 2020.
Amortization of mortgage servicing rights totaled $1.2 million for the three months ended March 31, 2021 compared to $1.5 million for the three months ended March 31, 2020.
The following tables present the fair market value and key assumptions used in determining the fair market value of our mortgage servicing rights:

| Three Months Ended |  | Three Months Ended
(dollars in thousands) | March 31, 2021 |  | March 31, 2020
Fair market value, beginning of period | $ | 12,003 |  |  | $ | 15,820 |
Fair market value, end of period | 11,673 |  |  | 13,525 |
Weighted average discount rate | 9.6 | % |  | 9.5 | %
Weighted average prepayment speed assumption | 17.5 | % |  | 16.1 | %

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

| March 31, 2021 |  | December 31, 2020
(dollars in thousands) | Gross Carrying Value |  | Accumulated Amortization |  | Net Carrying Value |  | Gross Carrying Value |  | Accumulated Amortization |  | Net Carrying Value
Mortgage servicing rights | $ | 71,370 |  |  | $ | (60,276) |  |  | $ | 11,094 |  |  | $ | 70,909 |  |  | $ | (59,044) |  |  | $ | 11,865 |

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Based on the mortgage servicing rights held as of March 31, 2021, estimated amortization expense for the remainder of fiscal year 2021, the next five succeeding fiscal years and all years thereafter are as follows:

(dollars in thousands) |
Year Ending December 31, |
2021 (remainder) | $ | 3,642 |
2022 | 3,584 |
2023 | 2,918 |
2024 | 950 |
2025 | — |
2026 | — |
Thereafter | — |
Total | $ | 11,094 |

We perform an impairment assessment of our mortgage servicing rights whenever events or changes in circumstance indicate that the carrying value of the asset may not be recoverable.
8. DERIVATIVES
We utilize various designated and undesignated derivative financial instruments to reduce our exposure to movements in interest rates including interest rate lock commitments and forward sale commitments. We measure all derivatives at fair value on our consolidated balance sheet. In each reporting period, we record the derivative instruments in other assets or other liabilities depending on whether the derivatives are in an asset or liability position. For derivative instruments that are designated as cash flow hedging instruments, we record the effective portion of the changes in the fair value of the derivative in AOCI, net of tax, until earnings are affected by the variability of cash flows of the hedged transaction. We immediately recognize the portion of the gain or loss in the fair value of the derivative that represents hedge ineffectiveness in current period earnings. For derivative instruments that are not designated as hedging instruments, changes in the fair value of the derivative are included in current period earnings. At March 31, 2021 and December 31, 2020, we were not party to any derivatives designated as part of a fair value or cash flow hedge.
Interest Rate Lock and Forward Sale Commitments
We enter into interest rate lock commitments on certain mortgage loans that are intended to be sold. To manage interest rate risk on interest rate lock commitments, we also enter into forward loan sale commitments. The interest rate locks and forward loan sale commitments are accounted for as undesignated derivatives and are recorded at their respective fair values in other assets or other liabilities, with changes in fair value recorded in current period earnings. These instruments serve to reduce our exposure to movements in interest rates. At March 31, 2021, we were a party to interest rate lock and forward sale commitments on $1.9 million and $7.1 million of mortgage loans, respectively.
Risk Participation Agreements
In the first and fourth quarters of 2020, the Company entered into credit risk participation agreements ("RPA") with financial institution counterparties for interest rate swaps related to loans in which we participate. The risk participation agreements entered into by us and a participant bank provide credit protection to the financial institution counterparties should the borrowers fail to perform on their interest rate derivative contracts with the financial institutions.
The following table presents the location of all assets and liabilities associated with our derivative instruments within the consolidated balance sheets:

Derivatives Financial Instruments Not Designated as Hedging Instruments |  | Asset Derivatives |  | Liability Derivatives
| Fair Value at |  | Fair Value at
(dollars in thousands) |  | Balance Sheet Location |  | March 31, 2021 |  | December 31, 2020 |  | March 31, 2021 |  | December 31, 2020
Interest rate lock and forward sale commitments and risk participation agreements |  | Other assets / other liabilities |  | $ | 84 |  |  | $ | 18 |  |  | $ | 18 |  |  | $ | 163 |

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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 March 31, 2021 |  |  |  |
Interest rate lock and forward sale commitments |  | Mortgage banking income |  | $ | 180 |
Loans held for sale |  | Other income |  | (1) |
Risk participation agreements |  | Other service charges and fees |  | 31 |
Three Months Ended March 31, 2020 |  |  |  |
Interest rate lock and forward sale commitments |  | Mortgage banking income |  | 99 |
Risk participation agreements |  | Other service charges and fees |  | 1,288 |

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 $1.80 billion line of credit as of March 31, 2021, compared to $1.81 billion at December 31, 2020. At March 31, 2021, $1.56 billion was undrawn under this arrangement, compared to $1.52 billion at December 31, 2020. There were no short-term borrowings under this arrangement at March 31, 2021, compared to $22.0 million at December 31, 2020. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled $237.1 million at March 31, 2021, compared to $268.0 million at December 31, 2020. There were no long-term borrowings under this arrangement at March 31, 2021 and December 31, 2020. FHLB advances and standby letters of credit available at March 31, 2021 were secured by certain real estate loans with a carrying value of $2.72 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB.
At March 31, 2021 and December 31, 2020, our bank had additional unused borrowings available at the Federal Reserve discount window of $65.9 million and $64.5 million, respectively. As of March 31, 2021 and December 31, 2020, certain commercial and commercial real estate loans with a carrying value totaling $133.5 million and $136.9 million, respectively, were pledged as collateral on our line of credit with the Federal Reserve discount window. The Federal Reserve does not have the right to sell or repledge these loans.
To bolster the effectiveness of the SBA's PPP, the Federal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The Paycheck Protection Program Liquidity Facility ("PPPLF") will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. At March 31, 2021, there were no funds drawn from the Federal Reserve Bank under the PPPLF and no PPP loans were pledged to the Federal Reserve Bank.
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"). We completed the redemption of $20 million of floating rate trust preferred securities issued by Trust II in January 2019 and $20 million of floating rate trust preferred securities issued by Trust III in December 2018.
In September 2004, we created a wholly-owned statutory trust, CPB Capital Trust IV ("Trust IV"). Trust IV issued $30.0 million in floating rate trust preferred securities bearing an interest rate of three-month LIBOR plus 2.45% and maturing on December 15, 2034. The principal assets of Trust IV are $30.9 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust IV trust preferred securities. Trust IV issued $0.9 million of common securities to the Company.
In December 2004, we created a wholly-owned statutory trust, CPB Statutory Trust V ("Trust V"). Trust V issued $20.0 million in floating rate trust preferred securities bearing an interest rate of three-month LIBOR plus 1.87% and maturing on December 15, 2034. The principal assets of Trust V are $20.6 million of the Company's junior subordinated debentures with an
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identical interest rate and maturity as the Trust V trust preferred securities. Trust V issued $0.6 million of common securities to the Company.
At March 31, 2021 and December 31, 2020, the Company had the following junior subordinated debentures outstanding, which is recorded in long-term debt on the Company's consolidated balance sheets:

(dollars in thousands) | March 31, 2021
Name of Trust | Subordinated Debentures |  | Interest Rate
Trust IV | $ | 30,928 |  |  | Three month LIBOR + 2.45%
Trust V | 20,619 |  |  | Three month LIBOR + 1.87%
Total | $ | 51,547 |  |  |
| December 31, 2020
Name of Trust | Subordinated Debentures |  | Interest Rate
Trust IV | $ | 30,928 |  |  | Three month LIBOR + 2.45%
Trust V | 20,619 |  |  | Three month LIBOR + 1.87%
Total | $ | 51,547 |  |  |

The floating trust preferred securities, the junior subordinated debentures that are the assets of Trusts IV and V and the common securities issued by Trusts IV and V are redeemable in whole or in part on any interest payment date on or after December 15, 2009 for Trust IV and V, or at any time in whole but not in part within 90 days following the occurrence of certain events. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from time to time to defer interest payments on the subordinated debentures, which would result in a deferral of distribution payments on the related trust preferred securities, for up to 20 consecutive quarterly periods without default or penalty.
The subordinated debentures may be included in Tier 1 capital, with certain limitations applicable, under current regulatory guidelines and interpretations.
Subordinated Notes
As of March 31, 2021, the Company had the following subordinated notes outstanding:

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

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

| Three Months Ended March 31, |  |
(dollars in thousands) | 2021 |  | 2020 |  |  |  |
Other operating income: |  |  |  |  |  |  |
In-scope of ASC 606 |  |  |  |  |  |  |
Mortgage banking income | $ | 838 |  |  | $ | 229 |  |  |  |  |
Service charges on deposit accounts | 1,478 |  |  | 2,050 |  |  |  |  |
Other service charges and fees | 3,178 |  |  | 2,996 |  |  |  |  |
Income on fiduciary activities | 1,231 |  |  | 1,297 |  |  |  |  |
In-scope other operating income | 6,725 |  |  | 6,572 |  |  |  |  |
Out-of-scope other operating income | 3,986 |  |  | 2,314 |  |  |  |  |
Total other operating income | $ | 10,711 |  |  | $ | 8,886 |  |  |  |  |

11. SHARE-BASED COMPENSATION
Restricted Stock Units
The table below presents the activity of restricted stock units for the three months ended March 31, 2021:

| Shares |  | Weighted Average Grant Date Fair Value
Non-vested restricted stock units, beginning of period | 532,374 |  |  | $ | 22.49 |
Changes during the period: |  |  |
Granted | 210,566 |  |  | 21.67 |
Vested | (53,112) |  |  | 28.97 |
Forfeited | (4,757) |  |  | 16.43 |
Non-vested restricted stock units, end of period | 685,071 |  |  | 21.78 |

12. LEASES
We lease certain land and buildings for our bank branches and ATMs. In some instances, a lease may contain renewal options to extend the term of the lease. All renewal options are likely to be exercised and therefore have been recognized as part of our right-of-use assets and lease liabilities in accordance with ASC 842, "Leases". Certain leases also contain variable payments that are primarily determined based on common area maintenance costs and Hawaii state tax rates. All leases are operating leases and we do not include any short term leases in the calculation of the right-of-use assets and lease liabilities. The most significant assumption related to the Company’s application of ASC 842 was the discount rate assumption. As most of the Company’s lease agreements do not provide for an implicit interest rate, the Company uses the collateralized interest rate that the Company would have to pay to borrow over a similar term to estimate the Company’s lease liability.
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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 March 31, |  |
(dollars in thousands) | 2021 |  | 2020 |  |  |  |
Lease cost: |  |  |  |  |  |  |
Operating lease cost | $ | 1,571 |  |  | $ | 1,653 |  |  |  |  |
Variable lease cost | 720 |  |  | 678 |  |  |  |  |
Less: sublease income | — |  |  | (12) |  |  |  |  |
Total lease cost | $ | 2,291 |  |  | $ | 2,319 |  |  |  |  |
Other information: |  |  |  |  |  |  |
Operating cash flows from operating leases | $ | (1,599) |  |  | $ | (1,594) |  |  |  |  |
Weighted-average remaining lease term - operating leases | 11.78 years |  | 13.36 years |  |  |  |
Weighted-average discount rate - operating leases | 3.89 | % |  | 3.92 | % |  |  |  |

The following is a schedule of annual undiscounted cash flows for our operating leases and a reconciliation of those cash flows to the operating lease liabilities for the remainder of fiscal year 2021, 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
2021 (remainder) | $ | 4,809 |  |  | $ | 1,285 |  |  | $ | 3,524 |
2022 | 5,954 |  |  | 1,560 |  |  | 4,394 |
2023 | 5,396 |  |  | 1,405 |  |  | 3,991 |
2024 | 5,091 |  |  | 1,262 |  |  | 3,829 |
2025 | 4,795 |  |  | 1,117 |  |  | 3,678 |
2026 | 4,551 |  |  | 978 |  |  | 3,573 |
Thereafter | 27,536 |  |  | 4,492 |  |  | 23,044 |
Total | $ | 58,132 |  |  | $ | 12,099 |  |  | $ | 46,033 |

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

| Three Months Ended March 31, |  |
(dollars in thousands) | 2021 |  | 2020 |  |  |  |
Total rental income recognized | $ | 520 |  |  | $ | 533 |  |  |  |  |

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Based on the Company's leases as lessor as of March 31, 2021, estimated lease payments for the remainder of fiscal year 2021, the next five succeeding fiscal years and all years thereafter are as follows:

(dollars in thousands) |
Year Ending December 31, |
2021 (remainder) | $ | 2,046 |
2022 | 1,575 |
2023 | 582 |
2024 | 222 |
2025 | 119 |
2026 | 72 |
Thereafter | 106 |
Total | $ | 4,722 |

13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables present the components of other comprehensive income for the three months ended March 31, 2021 and 2020, by component:

(dollars in thousands) | Before Tax |  | Tax Effect |  | Net of Tax
Three Months Ended March 31, 2021 |  |  |  |  |
Net unrealized losses on investment securities: |  |  |  |  |
Net unrealized losses arising during the period | $ | (23,619) |  |  | $ | (6,318) |  |  | $ | (17,301) |
Less: Reclassification adjustments from AOCI realized in net income | — |  |  | — |  |  | — |
Net unrealized losses on investment securities | (23,619) |  |  | (6,318) |  |  | (17,301) |
Defined benefit plans: |  |  |  |  |
Amortization of net actuarial loss | 246 |  |  | 66 |  |  | 180 |
Amortization of net transition obligation | 5 |  |  | 1 |  |  | 4 |
Defined benefit plans, net | 251 |  |  | 67 |  |  | 184 |
Other comprehensive loss | $ | (23,368) |  |  | $ | (6,251) |  |  | $ | (17,117) |

(dollars in thousands) | Before Tax |  | Tax Effect |  | Net of Tax
Three Months Ended March 31, 2020 |  |  |  |  |
Net unrealized gains on investment securities: |  |  |  |  |
Net unrealized gains arising during the period | $ | 13,858 |  |  | $ | 3,711 |  |  | $ | 10,147 |
Less: Reclassification adjustments from AOCI realized in net income | — |  |  | — |  |  | — |
Net unrealized gains on investment securities | 13,858 |  |  | 3,711 |  |  | 10,147 |
Defined benefit plans: |  |  |  |  |
Net actuarial gains arising during the period | 427 |  |  | 114 |  |  | 313 |
Amortization of net actuarial loss | 268 |  |  | 72 |  |  | 196 |
Amortization of net transition obligation | 5 |  |  | 1 |  |  | 4 |
Amortization of prior service cost | 4 |  |  | 1 |  |  | 3 |
Defined benefit plans, net | 704 |  |  | 188 |  |  | 516 |
Other comprehensive income | $ | 14,562 |  |  | $ | 3,899 |  |  | $ | 10,663 |

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

(dollars in thousands) | Investment Securities |  | Defined Benefit Plans |  | AOCI
Three Months Ended March 31, 2021 |  |  |  |  |
Balance at beginning of period | $ | 26,651 |  |  | $ | (6,523) |  |  | $ | 20,128 |
Other comprehensive income (loss) before reclassifications | (17,301) |  |  | — |  |  | (17,301) |
Reclassification adjustments from AOCI | — |  |  | 184 |  |  | 184 |
Total other comprehensive income (loss) | (17,301) |  |  | 184 |  |  | (17,117) |
Balance at end of period | $ | 9,350 |  |  | $ | (6,339) |  |  | $ | 3,011 |

(dollars in thousands) | Investment Securities |  | Defined Benefit Plans |  | AOCI
Three Months Ended March 31, 2020 |  |  |  |  |
Balance at beginning of period | $ | 14,825 |  |  | $ | (6,416) |  |  | $ | 8,409 |
Other comprehensive income before reclassifications | 10,147 |  |  | 313 |  |  | 10,460 |
Reclassification adjustments from AOCI | — |  |  | 203 |  |  | 203 |
Total other comprehensive income | 10,147 |  |  | 516 |  |  | 10,663 |
Balance at end of period | $ | 24,972 |  |  | $ | (5,900) |  |  | $ | 19,072 |

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

| Amount Reclassified from AOCI |  | Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI Components | Three months ended March 31, |
(dollars in thousands) | 2021 |  | 2020 |
Defined benefit retirement and supplemental executive retirement plan items: |  |  |  |  |
Amortization of net actuarial loss | $ | (246) |  |  | $ | (268) |  |  | Other operating expense - other
Amortization of net transition obligation | (5) |  |  | (5) |  |  | Other operating expense - other
Amortization of prior service cost | — |  |  | (4) |  |  | Other operating expense - other
Total before tax | (251) |  |  | (277) |  |  |
Tax effect | 67 |  |  | 74 |  |  | Income tax benefit (expense)
Net of tax | $ | (184) |  |  | $ | (203) |  |  |
Total reclassification adjustments from AOCI for the period, net of tax | $ | (184) |  |  | $ | (203) |  |  |

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

| Three Months Ended March 31, |  |
(dollars in thousands, except per share data) | 2021 |  | 2020 |  |  |  |
Net income | $ | 18,038 |  |  | $ | 8,326 |  |  |  |  |
Weighted average common shares outstanding - basic | 28,108,648 |  |  | 28,126,400 |  |  |  |  |
Dilutive effect of employee stock options and awards | 204,366 |  |  | 151,353 |  |  |  |  |
Weighted average common shares outstanding - diluted | 28,313,014 |  |  | 28,277,753 |  |  |  |  |
Basic earnings per common share | $ | 0.64 |  |  | $ | 0.30 |  |  |  |  |
Diluted earnings per common share | $ | 0.64 |  |  | $ | 0.29 |  |  |  |  |

15. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
Disclosures about Fair Value of Financial Instruments
Fair value estimates, methods and assumptions are set forth below for our financial instruments.
Short-Term Financial Instruments
The carrying values of short-term financial instruments are deemed to approximate fair values. Such instruments are considered readily convertible to cash and include cash and due from financial institutions, interest-bearing deposits in other financial institutions, accrued interest receivable, the majority of Federal Home Loan Bank advances and other short-term borrowings, and accrued interest payable.
Investment Securities
The fair value of investment securities is based on market price quotations received from third-party pricing services. The third-party pricing services utilize pricing models supported with timely market data information. Where quoted market prices are not available, fair values are based on quoted market prices of comparable securities.
Loans
Fair values of loans are estimated based on discounted cash flows of portfolios of loans with similar financial characteristics including the type of loan, interest terms and repayment history. Fair values are calculated by discounting scheduled cash flows through estimated maturities using estimated market discount rates. Estimated market discount rates are reflective of credit and interest rate risks inherent in the Company's various loan types and are derived from available market information, as well as specific borrower information. As of March 31, 2021, the weighted average discount rate used in the valuation of loans was 5.06%. In accordance with ASU 2016-01, the fair value of loans are measured based on the notion of exit price.
Loans Held for Sale
The fair value of loans classified as held for sale are generally based upon quoted prices for similar assets in active markets, acceptance of firm offer letters with agreed upon purchase prices, discounted cash flow models that take into account market observable assumptions, or independent appraisals of the underlying collateral securing the loans. We report the fair values of Hawaii and U.S. Mainland construction and commercial real estate loans, if any, net of applicable selling costs on our consolidated balance sheets.
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Deposit Liabilities
The fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits and interest-bearing demand and savings accounts, are equal to the amount payable on demand. The fair value of time deposits is estimated using discounted cash flow analyses. As of March 31, 2021, the weighted average discount rate used in the valuation of time deposits was 0.29%. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
Long-Term Debt
The fair value of our long-term debt is estimated by discounting scheduled cash flows over the contractual borrowing period at the estimated market rate for similar borrowing arrangements. As of March 31, 2021, the weighted average discount rate used in the valuation of long-term debt was 5.95%.
Derivatives
The fair values of derivative financial instruments are based upon current market values, if available. If there are no relevant comparables, fair values are based on pricing models using current assumptions for interest rate swaps and options.
Off-Balance Sheet Financial Instruments
The fair values of off-balance sheet financial instruments are estimated based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties, current settlement values or quoted market prices of comparable instruments.
Limitations
Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument. Because no market exists for a significant portion of our financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of future business and the value of assets and liabilities that are not considered financial instruments. For example,
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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)
March 31, 2021 |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |
Cash and due from banks | $ | 93,358 |  |  | $ | 93,358 |  |  | $ | 93,358 |  |  | $ | — |  |  | $ | — |
Interest-bearing deposits in other banks | 166,533 |  |  | 166,533 |  |  | 166,533 |  |  | — |  |  | — |
Investment securities | 1,217,776 |  |  | 1,217,776 |  |  | 1,435 |  |  | 1,206,745 |  |  | 9,596 |
Loans held for sale | 5,234 |  |  | 5,234 |  |  | — |  |  | 5,234 |  |  | — |
Net loans | 5,056,296 |  |  | 4,931,010 |  |  | — |  |  | — |  |  | 4,931,010 |
Accrued interest receivable | 19,440 |  |  | 19,440 |  |  | 19,440 |  |  | — |  |  | — |
Financial liabilities: |  |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |  |
Noninterest-bearing demand | 2,070,428 |  |  | 2,070,428 |  |  | 2,070,428 |  |  | — |  |  | — |
Interest-bearing demand and savings and money market | 3,241,942 |  |  | 3,241,942 |  |  | 3,241,942 |  |  | — |  |  | — |
Time | 896,580 |  |  | 896,753 |  |  | — |  |  | — |  |  | 896,753 |
Long-term debt | 105,436 |  |  | 90,479 |  |  | — |  |  | — |  |  | 90,479 |
Accrued interest payable (included in other liabilities) | 2,023 |  |  | 2,023 |  |  | 2,023 |  |  | — |  |  | — |

|  |  |  |  |  |  | Fair Value Measurement Using
(dollars in thousands) | Notional Amount |  | Carrying Amount |  | Estimated Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
March 31, 2021 |  |  |  |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |  |  |  |
Interest rate lock commitments | $ | 1,881 |  |  | $ | 84 |  |  | $ | 84 |  |  | $ | — |  |  | $ | 84 |  |  | $ | — |
Forward sale commitments | 7,136 |  |  | (1) |  |  | (1) |  |  | — |  |  | (1) |  |  | — |
Risk participation agreement | 37,704 |  |  | (17) |  |  | (17) |  |  | — |  |  | — |  |  | (17) |
Off-balance sheet financial instruments: |  |  |  |  |  |  |  |  |  |  |
Commitments to extend credit | 1,292,373 |  |  | — |  |  | 1,570 |  |  | — |  |  | 1,570 |  |  | — |
Standby letters of credit and financial guarantees written | 11,306 |  |  | — |  |  | 170 |  |  | — |  |  | 170 |  |  | — |

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|  |  |  |  | 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, 2020 |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |
Cash and due from banks | $ | 97,546 |  |  | $ | 97,546 |  |  | $ | 97,546 |  |  | $ | — |  |  | $ | — |
Interest-bearing deposits in other banks | 6,521 |  |  | 6,521 |  |  | 6,521 |  |  | — |  |  | — |
Investment securities | 1,183,960 |  |  | 1,183,960 |  |  | 1,351 |  |  | 1,170,283 |  |  | 12,326 |
Loans held for sale | 16,687 |  |  | 16,687 |  |  | — |  |  | 16,687 |  |  | — |
Net loans | 4,880,844 |  |  | 4,795,776 |  |  | — |  |  | — |  |  | 4,795,776 |
Accrued interest receivable | 20,224 |  |  | 20,224 |  |  | 20,224 |  |  | — |  |  | — |
Financial liabilities: |  |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |  |
Noninterest-bearing demand | 1,790,269 |  |  | 1,790,269 |  |  | 1,790,269 |  |  | — |  |  | — |
Interest-bearing demand and savings and money market | 3,106,931 |  |  | 3,106,931 |  |  | 3,106,931 |  |  | — |  |  | — |
Time | 898,918 |  |  | 899,562 |  |  | — |  |  | — |  |  | 899,562 |
Short-term borrowings | 22,000 |  |  | 22,000 |  |  | — |  |  | 22,000 |  |  | — |
Long-term debt | 105,385 |  |  | 92,488 |  |  | — |  |  | — |  |  | 92,488 |
Accrued interest payable (included in other liabilities) | 1,727 |  |  | 1,727 |  |  | 1,727 |  |  | — |  |  | — |

|  |  |  |  |  |  | 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, 2020 |  |  |  |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |  |  |  |
Interest rate lock commitments | $ | 714 |  |  | $ | 18 |  |  | $ | 18 |  |  | $ | — |  |  | $ | 18 |  |  | $ | — |
Forward sale commitments | 16,603 |  |  | (115) |  |  | (115) |  |  | — |  |  | (115) |  |  | — |
Risk participation agreements | 37,762 |  |  | (48) |  |  | (48) |  |  | — |  |  | — |  |  | (48) |
Off-balance sheet financial instruments: |  |  |  |  |  |  |  |  |  |  |
Commitments to extend credit | 1,176,065 |  |  | — |  |  | 1,313 |  |  | — |  |  | 1,313 |  |  | — |
Standby letters of credit and financial guarantees written | 10,544 |  |  | — |  |  | 158 |  |  | — |  |  | 158 |  |  | — |

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.
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We base our fair values on the price that we would expect to receive if an asset were sold, or the price that we would expect to pay to transfer a liability in an orderly transaction between market participants at the measurement date. We also maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.
We use fair value measurements to record adjustments to certain financial assets and liabilities and to determine fair value disclosures. Available-for-sale and equity securities and derivatives are recorded at fair value on a recurring basis. From time to time, we may be required to record other financial assets at fair value on a nonrecurring basis such as loans held for sale, impaired loans, mortgage servicing rights, and other real estate owned. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.
There were no transfers of financial assets and liabilities into or out of Level 3 of the fair value hierarchy during the three months ended March 31, 2021.
The following tables present the fair value of assets and liabilities measured on a recurring basis as of March 31, 2021 and December 31, 2020:

|  |  | 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)
March 31, 2021 |  |  |  |  |  |  |
Available-for-sale securities: |  |  |  |  |  |  |
Debt securities: |  |  |  |  |  |  |
States and political subdivisions | $ | 166,345 |  |  | $ | — |  |  | $ | 157,654 |  |  | $ | 8,691 |
Corporate securities | 46,167 |  |  | — |  |  | 46,167 |  |  | — |
U.S. Treasury obligations and direct obligations of U.S Government agencies | 41,177 |  |  | — |  |  | 41,177 |  |  | — |
Mortgage-backed securities: |  |  |  |  |  |  |
Residential - U.S. Government sponsored entities | 815,266 |  |  | — |  |  | 815,266 |  |  | — |
Commercial - U.S. Government agencies and sponsored entities | 85,879 |  |  | — |  |  | 85,879 |  |  | — |
Residential - Non-government agencies | 18,800 |  |  | — |  |  | 17,895 |  |  | 905 |
Commercial - Non-government agencies | 42,707 |  |  | — |  |  | 42,707 |  |  | — |
Total available-for-sale securities | 1,216,341 |  |  | — |  |  | 1,206,745 |  |  | 9,596 |
Equity securities | 1,435 |  |  | 1,435 |  |  | — |  |  | — |
Derivatives: Interest rate lock and forward sale commitments | 66 |  |  | — |  |  | 83 |  |  | (17) |
Total | $ | 1,217,842 |  |  | $ | 1,435 |  |  | $ | 1,206,828 |  |  | $ | 9,579 |

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|  |  | 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, 2020 |  |  |  |  |  |  |
Available-for-sale securities: |  |  |  |  |  |  |
Debt securities: |  |  |  |  |  |  |
States and political subdivisions | $ | 168,766 |  |  | $ | — |  |  | $ | 157,429 |  |  | $ | 11,337 |
Corporate securities | 48,008 |  |  | — |  |  | 48,008 |  |  | — |
U.S. Treasury obligations and direct obligations of U.S Government agencies | 33,145 |  |  | — |  |  | 33,145 |  |  | — |
Mortgage-backed securities: |  |  |  |  |  |  |
Residential - U.S. Government sponsored entities | 778,826 |  |  | — |  |  | 778,826 |  |  | — |
Commercial - U.S. Government agencies and sponsored entities | 87,469 |  |  | — |  |  | 87,469 |  |  | — |
Residential - Non-government agencies | 23,423 |  |  | — |  |  | 22,434 |  |  | 989 |
Commercial - Non-government agencies | 42,972 |  |  | — |  |  | 42,972 |  |  | — |
Total available-for-sale securities | 1,182,609 |  |  | — |  |  | 1,170,283 |  |  | 12,326 |
Equity securities | 1,351 |  |  | 1,351 |  |  | — |  |  | — |
Derivatives: Interest rate lock and forward sale commitments | (145) |  |  | — |  |  | (97) |  |  | (48) |
Total | $ | 1,183,815 |  |  | $ | 1,351 |  |  | $ | 1,170,186 |  |  | $ | 12,278 |

For the three months ended March 31, 2021 and 2020, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

| Available-For-Sale Debt Securities: |  |
(dollars in thousands) | States and Political Subdivisions |  | Residential - Non-Government Agencies |  | Total
Balance at December 31, 2020 | $ | 11,337 |  |  | $ | 989 |  |  | $ | 12,326 |
Principal payments received | (1,973) |  |  | (5) |  |  | (1,978) |
Unrealized net loss included in other comprehensive income | (673) |  |  | (79) |  |  | (752) |
Balance at March 31, 2021 | $ | 8,691 |  |  | $ | 905 |  |  | $ | 9,596 |
Balance at December 31, 2019 | $ | 11,255 |  |  | $ | — |  |  | $ | 11,255 |
Principal payments received | (109) |  |  | — |  |  | (109) |
Unrealized net gain included in other comprehensive income | 426 |  |  | — |  |  | 426 |
Balance at March 31, 2020 | $ | 11,572 |  |  | $ | — |  |  | $ | 11,572 |

Within the states and political subdivisions available-for-sale debt securities category, the Company holds three mortgage revenue bonds issued by the City & County of Honolulu with an aggregate fair value of $8.7 million and $11.6 million at March 31, 2021 and March 31, 2020, respectively. Within the other MBS non-agency category, the Company holds two mortgage backed bonds issued by Habitat for Humanity with a fair value of $0.9 million at March 31, 2021. The Company estimates the aggregate fair value of $9.6 million by using a discounted cash flow model to calculate the present value of estimated future principal and interest payments.
The significant unobservable input used in the fair value measurement of the Company's mortgage revenue bonds and Habitat for Humanity mortgage backed bonds is the weighted average discount rate. As of March 31, 2021, the weighted average discount rate utilized was 3.38% compared to 3.25% at March 31, 2020 and 2.83% at December 31, 2020, which was derived by incorporating a credit spread over the FHLB Fixed-Rate Advance curve. Significant increases (decreases) in the weighted average discount rate could result in a significantly lower (higher) fair value measurement.
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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 March 31, 2021 and December 31, 2020:

|  |  | Fair Value Measurements Using
(dollars in thousands) | Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
March 31, 2021 |  |  |  |  |  |  |
Other real estate (1) | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
December 31, 2020 |  |  |  |  |  |  |
Other real estate (1) | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |

(1)Represents other real estate that is carried at fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral.
16. LEGAL PROCEEDINGS
We are involved in legal actions, but do not believe the ultimate disposition of those actions will have a material adverse impact on our results of operations or consolidated financial statements.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Central Pacific Financial Corp. ("CPF") is a Hawaii corporation and a bank holding company. Our principal business is to serve as a holding company for our bank subsidiary, Central Pacific Bank. We refer to Central Pacific Bank herein as "our bank" or "the bank," and when we say "the Company," "we," "us" or "our," we mean the holding company on a consolidated basis with the bank and our other consolidated subsidiaries.
Central Pacific Bank is a full-service community bank with 31 branches and 69 ATMs located throughout the state of Hawaii as of March 31, 2021.
The bank offers a broad range of products and services including accepting demand, money market, savings and time deposits and originating loans, including commercial loans, construction loans, commercial real estate loans, residential mortgage loans, and consumer loans.
Basis of Presentation
Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements under "Part I, Item 1. Financial Statements (Unaudited)." The following discussion should also be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2020 filed with the U.S. Securities and Exchange Commission (the "SEC") on February 23, 2021, including the
“Risk Factors” set forth therein.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") requires that management make certain judgments and use certain estimates and assumptions that affect amounts reported and disclosures made. Actual results may differ from those estimates and such differences could be material to the financial statements.
Accounting estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimate are reasonably likely to occur from period to period and would materially impact our consolidated financial statements as of or for the periods presented. Management has discussed the development and selection of the critical accounting estimates noted below with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed the accompanying disclosures.
The Company identified a significant accounting policy which involves a higher degree of judgment and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial statements. At December 31, 2019, the significant accounting policy which we believed to be the most critical in preparing our consolidated financial statements is the determination of the allowance for loan and lease losses. This is further described in Note 1 - Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements in our 2019 Form 10-K.
On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which created material changes to the Company’s existing critical accounting policy that existed at December 31, 2019. The significant accounting policy which we believe to be the most critical in preparing our consolidated financial statements is the determination of the allowance for credit losses on loans.
Allowance for Credit Losses on Loans
Management considers the policies related to the allowance for credit losses ("ACL") on loans as the most critical to the financial statement presentation. The total ACL on loans includes activity related to allowances calculated in accordance with Accounting Standards Codification (“ASC”) 326, "Financial Instruments – Credit Losses". The ACL is established through the provision for credit losses on loans charged to current earnings. The amount maintained in the ACL reflects management’s continuing evaluation of the estimated loan losses expected to be recognized over the life of the loans in our loan portfolio at the balance sheet date. The ACL is comprised of specific reserves assigned to certain loans that don’t share general risk characteristics and general reserves on pools of loans that do share general risk characteristics. Factors contributing to the determination of specific reserves include the creditworthiness of the borrower, and more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. A reserve is recorded when the
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carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. For purposes of establishing the general reserve, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and calculate the net amount expected to be collected over the life of the loans to estimate the expected credit losses in the loan portfolio. The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. Refer to Note 1 - Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements in this report for further discussion of the risk factors considered by management in establishing the ACL.
Financial Summary
Net income for the three months ended March 31, 2021 was $18.0 million, or $0.64 per diluted share, compared to net income of $8.3 million, or $0.29 per diluted share for the three months ended March 31, 2020.
During the three months ended March 31, 2021, the Company recorded a credit to the provision for credit losses, which includes the provisions for credit losses on loans and off-balance sheet credit exposures, of $0.8 million, compared to a provision of $11.1 million during the three months ended March 31, 2020.
Excluding the provision for credit losses and income tax expense, the Company's pre-tax, pre-provision income for the three months ended March 31, 2021 was $22.7 million, compared to $22.3 million for the three months ended March 31, 2020.
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 March 31,
|  |  |  |  | 2021 |  | 2020
Return on average assets |  |  |  |  | 1.07 | % |  | 0.55 | %
Return on average shareholders’ equity |  |  |  |  | 13.07 |  |  | 6.21 |
Basic earnings per common share |  |  |  |  | $ | 0.64 |  |  | $ | 0.30 |
Diluted earnings per common share |  |  |  |  | 0.64 |  |  | 0.29 |

COVID-19 Pandemic
The ongoing novel coronavirus pandemic ("COVID-19") has caused significant disruption in the local, national and global economies and financial markets. The pandemic has resulted in temporary and permanent closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. Continuation and further spread of COVID-19 could cause additional quarantines, shutdowns, reductions in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability.
In response to the anticipated economic effects of COVID-19, the Board of Governors of the Federal Reserve System (the "FRB") has taken a number of actions that have significantly affected the financial markets in the United States, including actions intended to result in substantial decreases in market interest rates. On March 3, 2020, the 10-year Treasury yield fell below 1.00% for the first time, and the FRB reduced the target federal funds range by 50 basis points to 1.00% to 1.25%. On March 15, 2020, the FRB further reduced the target federal funds range by 100 basis points to 0% to 0.25% and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by COVID-19. On March 22, 2020, the FRB announced that it would continue its quantitative easing program in amounts necessary to support the smooth functioning of markets for Treasury securities and agency MBS. We expect that these reductions in interest rates, among other actions of the FRB and the Federal government generally, especially if prolonged, could adversely affect our net interest income, margins and profitability. In the March 2021 meeting, the FRB elected to hold the target federal funds rate at 0% to 0.25% and officials expect it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with their assessments of maximum employment and inflation has risen to 2.00% and is on track to moderately exceed 2.00% for some time.
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In late March 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law as an over $2 trillion economic stimulus package. The CARES Act is intended to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors.
In December 2020, Congress passed another $900 billion aid package, or the Consolidated Appropriations Act, 2021, which
extends certain relief provisions under the CARES Act.
In March 2021, Congress passed another $1.9 trillion aid package, or the American Rescue Plan Act of 2021, which builds upon many of the measures in the CARES Act from March 2020 and in the Consolidated Appropriations Act, 2021, from December 2020.
Hawaii's economy continues to be significantly impacted by COVID-19. On March 4, 2020, Hawaii Governor David Ige issued a Proclamation declaring a state of emergency to support ongoing State and county responses to COVID-19. Since then, Governor Ige issued nineteen supplemental emergency proclamations which includes travel restrictions and other measures.
As a result of these restrictions and vaccinations administered, the spread of COVID-19 has been relatively contained. The infection rate in the State of Hawaii is one of the lowest per capita in the country at 1,816 cases per 100,000 population. As of April 23, 2021 the Centers for Disease Control and Prevention reported there were 31,802 cases (7-day moving average of 75.3 new infections) and 478 COVID-19-related deaths in Hawaii. Over 30% of Hawaii's population has been fully vaccinated, which is the 8th highest in the nation.
During the first quarter of 2020, in response to Governor Ige's statewide restrictions on the movements of Hawaii residents and visitors to combat the potential spread of COVID-19 in Hawaii, the Company announced it would temporarily close certain branch locations. The decision to temporarily close the branches was made to protect the health and well-being of the Company's employees and customers. Some branches, such as the in-store branches with limited floor space, made it challenging to operate with social distancing in mind. The staff from the temporarily closed branches were redeployed to work at the remaining branches or assist other areas of the bank. The Company quickly responded to the changing environment by executing its business continuity plan and the majority of our support staff, even at the executive level, were working remotely on a full-time or rotating basis. The Company continues to prudently manage through the pandemic and has put in place preventative measures including face masks, plexiglass shields, social distancing, enhanced cleaning and remote work for the majority of non-branch employees. The Company believes the actions it has taken to date, allows it to meet the needs of its customers and community while ensuring the safety of all employees and customers.
In July 2020, the Board of Directors of the Company approved a plan to consolidate four branches on the island of Oahu in 2020. Three of the branches were in-store branches on Oahu, which were temporarily closed since March 2020 due to the COVID-19 pandemic, and were permanently closed during the third quarter of 2020. These in-store branches had a small square footage which did not allow for adequate social distancing. The fourth branch was a full-service branch on Oahu that was closed during the fourth quarter of 2020. Our digital rollout is well-aligned with our branch consolidation initiative, and much of the transactional activity that was processed by these branches was migrated to our digital channels or other neighboring branches. The Company incurred $0.3 million in pre-tax expenses related to the consolidation of the three in-store branches during the third quarter of 2020 and an additional $1.3 million in pre-tax expenses related to the consolidation of the fourth branch during the fourth quarter of 2020. The Company anticipates annual expense savings of approximately $1.8 million related to the consolidation of the four branches.
As of March 31, 2021, the Company has re-opened all of its branches that were temporarily closed. The Company is implementing a gradual, phased-in return-to-office plan that includes a portion of the workforce continuing with flexible, remote work schedules.
Our operations, like those of other financial institutions that operate in our market, are significantly influenced by economic conditions in Hawaii, including the strength of the real estate market and the tourism industry. The COVID-19 pandemic and the mandatory 10-day self quarantine has resulted in a significant decline in tourism to the state of Hawaii. As a result, m any customers and businesses across the state have been significantly impacted by the COVID-19 pandemic. However the state is making progress towards economic recovery. Visitor arrivals have recently been approaching 20,000 per day in April 2021, or nearly two-thirds of pre-pandemic levels. While still elevated, Hawaii's unemployment rate of 9.0% during the month of March 2021 is significantly down from its peak of 21.9% in April and May of last year. Should the process stall or economic conditions in the state of Hawaii worsen, it could lead to additional provisions for credit losses and lower interest and fee income, which if significant, could have a material impact to our results of operations and financial statements.
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COVID-19 may also materially disrupt banking and other financial activity generally and in Hawaii where the Bank operates. This may result in a decline in customer demand for our products and services, including loans and deposits which could negatively impact our liquidity position and our growth strategy. Any one or more of these developments could have a material adverse effect on our business, operations, consolidated financial condition, and consolidated results of operations.
Financial position and results of operations
The disruptions in the economy have impaired and could continue to impair the ability of some of our borrowers to make their monthly loan payments, which could result in significant increases in delinquencies, defaults, foreclosures and declining collateral values. As a result, the COVID-19 pandemic could result in the recognition of credit losses in our loan portfolios and increase our allowance for credit losses, particularly as customers draw on their lines of credit or seek additional loans to help finance their businesses when government stimulus payments taper off. Similarly, because of changing economic and market conditions affecting issuers, we could be required to recognize an allowance for credit losses in future periods on the securities we hold as well as reductions in other comprehensive income.
Through guidance from regulatory agencies, the Company has prudently worked with its borrowers impacted by COVID-19 to defer payments, interest, and fees. The Company is currently working on returning borrowers to payment as the economy begins to recover. Loans on active payment forbearance or deferrals granted to borrowers impacted by the COVID-19 pandemic declined significantly from $120.2 million or, 2.4% of the total loan portfolio (or 2.6% excluding PPP loans) as of December 31, 2020, to $39.5 million, or 0.8% of the total loan portfolio (or 0.9% excluding PPP loans), as of March 31, 2021, as many borrowers resumed payments.
The following table sets forth loans to borrowers impacted by COVID-19 on active payment forbearance or deferral and the percentage of loans on active payment forbearance or deferral to total loans and total loans, excluding PPP loans, as of March 31, 2021:

| Loans on Active Forbearance or Deferral |  |  |  |  |  |  |  |
(dollars in thousands) | Loan Count |  | Balance |  | Accrued Interest Receivable |  | Total Loans |  | % of Asset Class |  | Total Loans, Excl. PPP |  | % of Asset Class, Excl. PPP
Commercial, financial and agricultural | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1,112,008 |  |  | — | % |  | $ | 514,189 |  |  | — | %
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |
Construction | — |  |  | — |  |  | — |  |  | 137,976 |  |  | — | % |  | 137,976 |  |  | — | %
Residential mortgage | 88 |  |  | 38,571 |  |  | 984 |  |  | 1,687,513 |  |  | 2.3 | % |  | 1,687,513 |  |  | 2.3 | %
Home equity | — |  |  | — |  |  | — |  |  | 559,514 |  |  | — | % |  | 559,514 |  |  | — | %
Commercial mortgage | — |  |  | — |  |  | — |  |  | 1,164,338 |  |  | — | % |  | 1,164,338 |  |  | — | %
Consumer | 83 |  |  | 928 |  |  | — |  |  | 476,500 |  |  | 0.2 | % |  | 476,500 |  |  | 0.2 | %
Total loans | 171 |  |  | $ | 39,499 |  |  | $ | 984 |  |  | $ | 5,137,849 |  |  | 0.8 | % |  | $ | 4,540,030 |  |  | 0.9 | %

The Company’s interest income could also be reduced due to COVID-19. Interest and fees still accrue on amounts that are deemed collectible during the deferral period, however, should the Company later determine that collection of payments is not expected and eventual credit losses on these deferred payments emerge, accrued and unpaid interest income and fees will need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. During the third quarter of 2020, the Company recorded a reserve on the accrued interest receivable for loans on active forbearance or deferral totaling $0.2 million. This reserve balance has remained unchanged through March 31, 2021. The Company may need to increase this reserve or reverse accrued interest receivable which may negatively impact interest income in future periods if it is determined that the accrued interest receivable is uncollectible.
The Company’s aggregate fee income could be reduced due to COVID-19. The Company has experienced a decline in transactional activity due to COVID-19. In addition, to support our customers during this difficult time, the Company temporarily waived non-CPB ATM fees and early withdrawal fees on our time deposits and granted temporary increases on debit card and mobile deposit transaction limits throughout the second quarter of 2020. Beginning July 1, 2020, we reinstated these fees that were waived throughout the previous quarter, but the temporary increases on debit card and mobile deposit transaction limits remain in place.
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Liquidity and capital
Through our past experience during the Great Recession in the late 2000s, we believe we have developed robust liquidity and capital stress tests and comprehensive liquidity and capital contingency plans. We further believe our liquidity and capital positions are strong. The Company currently estimates that it has sufficient liquidity and capital to withstand an economic recession brought about by COVID-19. However, the Company's regulatory capital ratios could be adversely impacted by significant credit losses and lower interest income and fees or by a longer and deeper recession than we currently anticipate. To protect against this possibility, the Company issued $55.0 million in subordinated debt in October 2020, which is classified as tier 2 capital for regulatory purposes, and downstreamed $46.8 million to the bank.
The Company relies on cash on hand as well as dividends from its subsidiary bank to service its debt. If the Company’s capital deteriorates such that its subsidiary bank is unable to pay dividends to it for an extended period of time or the bank is otherwise restricted in its ability to pay dividends to the Company, the Company may not be able to service its debt or pay dividends to its shareholders.
The Company’s liquidity was impacted by loan principal and interest payment deferrals that are being granted for certain customers due to COVID-19. Cash flow from loan payments was reduced due to the deferrals which are being granted in three month deferral periods, as needed. Requests for loan payment deferrals continued to decline significantly in the first quarter of 2021. While a significant number of loan payment deferrals ended in the first quarter of 2021, we assisted some borrowers with additional deferrals as needed. Additionally, liquidity could be adversely impacted if customers withdraw significant deposit balances due to COVID-19 concerns. During 2020 and the first quarter of 2021, we experienced the reverse where there was a significant inflow of deposits due to government stimulus and general market uncertainty. However this may not continue.
In the case of loans serviced by the Company for certain third parties, including those under the Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corp. ("FHLMC") programs, the Company is required to advance to the owners the payment of principal and interest on a scheduled basis for four months even when such payment was not collected from the borrower due to payment forbearance granted or payment delinquency. Such amounts advanced are recorded as a receivable by the Company and are expected to be collected from the borrower and/or government agencies (FNMA or FHLMC).
The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile. The collateral that is pledged for wholesale funding lines, could lose value and may result in less funding availability. The Company has access to the Paycheck Protection Program Liquidity Facility (“PPPLF”), which is an extension of credit to eligible financial institutions that originate Paycheck Protection Program (“PPP”) loans that takes the PPP loans as collateral at face value. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession causes large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.
In March 2020, we decided to suspend our share repurchase program as a result of the uncertainty posed by the pandemic. In January 2021, our Board of Directors approved a new authorization to repurchase up to $25 million in common stock. We can provide no assurance on how many shares we may repurchase, if any, under this repurchase program.
Asset valuation
The Company currently does not expect COVID-19 to affect its ability to account timely for the assets on its balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in the methodology used to determine the fair value of assets measured in accordance with GAAP.
The Company has a significant real estate loan portfolio. Due to COVID-19, the real estate loan collateral used to secure such loans could experience a reduction in value which could lead to credit impairments and asset write-downs. Thus far, the Hawaii real estate market continues to be extremely strong and real estate collateral values have remained relatively stable, but we cannot provide any assurance as to future levels of stability.
Processes, controls and business continuity plan
The Company's Business Continuity Plan includes a Pandemic Preparedness Plan which it successfully activated in early March 2020. The Company’s remote workforce plan has been rolled out with an overall smooth transition. The Company already had Virtual Private Network ("VPN") technology capability, and during the first quarter of 2020, expanded VPN access to over
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70% of its employees. In addition to VPN, the Company believes it is well-setup with the latest technologies that enable our operations to continue efficiently. The Company is using collaboration tools and several other cloud-based software programs. For its customers, during the third quarter of 2020 the Company launched its premier digital banking platform which is one of the key initiatives and milestones in its RISE2020 initiative.
The Company is developing a gradual, phased-in return-to-office plan that includes a portion of the workforce continuing with flexible, remote work schedules. The Company may incur additional costs related to its continued deployment of the remote workforce plan. A remote workforce plan potentially could introduce operational or internal control challenges and risks, including resource constraints. The Company is closely monitoring operations to mitigate those risks, and currently does not anticipate significant challenges to its ability to maintain its systems and internal controls in light of the measures the Company has taken to prevent the spread of COVID-19. However, should there be significant changes to government orders, the health and well-being of our workforce, or to our critical systems and vendors, there could be an adverse impact on our operations. As an essential service provider, the COVID-19 vaccine became available to our employees in March 2021. Many of the Company's employees are fully vaccinated at this point.
Lending operations and accommodations to borrowers
To support its customers during this difficult time, the Company moved quickly to put in place a number of COVID-19 relief programs for its consumer and business customers affected by the pandemic. For its customers, the Company offered an employment disruption loan as well as consumer, commercial, commercial mortgage, and residential mortgage payment deferral programs. In addition, as previously mentioned, we waived non-CPB ATM fees and early withdrawal fees on our time deposits throughout the second quarter of 2020 and increased spending cap limits on debit cards and mobile deposit limits to $10,000 daily. Beginning July 1, 2020, the previously waived fees have been reinstated but the increased spending cap limits will remain in place temporarily.
The bank is a Small Business Administration ("SBA") approved lender and actively participated in assisting customers with loan applications for the SBA’s Paycheck Protection Program, or PPP, which was part of the CARES Act. PPP loans have a two or five-year term and earn interest at 1%. The SBA pays the originating bank a processing fee ranging from 1% to 5% based on the size of the loan, which the Company is recognizing over the life of the loan. The Company saw tremendous interest in the PPP. With the significant increase in volume of PPP loan requests, the Company redeployed staff to handle and assist with loan processing. Additionally, the Company brought on some outside resources to assist with the PPP.
T he SBA began accepting submissions for the initial round of PPP loans on April 3, 2020. In April 2020, the Paycheck Protection Program and Health Care Enhancement Act added an additional round of funding for the PPP. In June 2020, the Paycheck Protection Program Flexibility Act of 2020 was enacted, which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Through the end of the second round in August 2020, the Company funded over 7,200 PPP loans totaling over $558 million and received gross processing fees of over $21 million.
In December 2020, the Consolidated Appropriations Act, 2021 was passed which among other things, included a third round of funding and a new simplified forgiveness procedure for PPP loans of $150,000 or less. During the first quarter of 2021, the Company funded over 3,600 loans totaling over $292 million in the third round, earning additional gross processing fees of over $15 million.
The Company developed a PPP forgiveness portal and with assistance from a third party vendor has assisted its customers with applying for forgiveness from the SBA. Since the start of the SBA forgiveness, we have received forgiveness payments totaling over $233 million. A total outstanding balance of $618.1 million and net deferred fees of $20.3 million remain as of March 31, 2021. Although the Company believes that the majority of the remaining loans will ultimately be forgiven by the SBA in accordance with the terms of the program, there could be risks and liabilities by the Company that cannot be determined at this time.
In September 2020, the Company became aware of a Federal criminal complaint related to PPP loan fraud on a $10.0 million PPP loan that the Bank originated in April 2020. The CEO of the borrower was charged by the U.S. Department of Justice for submitting a fraudulent PPP loan application to the Bank. The Federal investigation is ongoing and charges are currently pending. Neither the Company nor the Bank is a party to the Federal complaint, and we have been cooperating with Federal authorities. We believe that we originated the subject PPP loan in accordance with all SBA PPP requirements. Accordingly, we currently expect that the SBA guarantee remains in effect. Based on current facts and circumstances, we also expect to be fully repaid on the loan. Therefore we continue to hold the $10.0 million PPP loan on our balance sheet as a performing asset as of March 31, 2021.
The Company is staying in close contact with its customers and has increased its client outreach efforts. The Company is monitoring its client’s financial health during this challenging time and is providing guidance to help them through the
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pandemic. Further, the Company believes it is prudently making loan modifications for certain borrowers to allow deferral of loan principal and/or interest for a limited-term period.
The Company provided initial three-month principal and interest payment forbearance for our residential mortgage customers, and three-month principal and interest payment deferrals for our consumer customers. Both residential mortgage and consumer customers were granted extensions to their forbearance or deferral, if needed.The Company is deferring either the full loan payment or the principal component of the loan payment for typically three to six months for its commercial real estate and commercial and industrial loan customers on a case-by-case basis depending on need. As of March 31, 2021, the Company had loan payment forbearance or deferrals on outstanding balances of $39.5 million, or 0.8% of total loans (or 0.9% of total loans, excluding PPP loans). Of this amount, $38.3 million were on extended payment forbearance or deferrals as of March 31, 2021.
In accordance with the revised interagency guidance issued in April 2020 and Section 4013 of the CARES Act, banks are provided an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of February 29, 2020 (time of modification program implementation) and December 31, 2019, respectively. The Company did not identify any new loans during the first quarter of 2021 that were modified and did not meet the criteria under Section 4013 of the CARES Act or the interagency guidance.
Collectibility of the accrued interest on deferred loans is uncertain. During the third quarter of 2020, the Company recorded a reserve on the accrued interest receivable of loans on active forbearance or deferral totaling $0.2 million, with the offset recorded to provision for credit losses. This reserve remained unchanged through March 31, 2021. The Company may need to increase this reserve or reverse accrued interest receivable which may negatively impact interest income in future periods if it is determined that the accrued interest receivable is uncollectible. Additional loan modifications to capitalize interest and/or extend loan terms may also be necessary. The Company anticipates limited new or extended loan deferrals in the second quarter of 2021 as the Hawaii economic recovery progresses.
As part of the CARES Act, the Section 1112 debt relief program authorized the SBA to pay, for a 6-month period, the principal, interest, and associated fees that borrowers owed on covered 7(a) loans, 504 loans, and Microloans reported in regular servicing status (excluding PPP loans). Under Section 325 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) enacted December 29, 2020, Section 1112 was amended and authorized a second round of payments covering the principal, interest, and associated fees that borrowers owed on covered loans for a 3-month period beginning with payments due February 1, 2021, followed by an additional payment for a 2-month period for borrowers with an assigned North American Industry Classification System code beginning with 61, 71, 72, 213, 315, 448, 451, 481, 485, 487, 511, 512, 515, 532, or 812. As of March 31, 2021, the Company had $10.9 million in SBA loans. During the three months ended March 31, 2021, the Company received $0.5 million in loan payments from the SBA.
Credit
Following the recovery from the Great Recession, the Company believes it has implemented a disciplined approach to credit that includes tighter underwriting standards with a focus on making quality loans and maintaining a diversified loan portfolio. The Company’s loan portfolio today is diversified by product and by industry.
The disruptions in the economy resulting from the COVID-19 pandemic have impaired and could continue to impair the ability of some of our borrowers to make their monthly loan payments, which could result in significant increases in delinquencies, defaults, foreclosures and declining collateral values. As a result, the COVID-19 pandemic could result in the recognition of credit losses in our loan portfolios and increase our ACL, particularly as businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize an allowance for credit losses in future periods on the securities we hold as well as reductions in other comprehensive income.
In March 2020, the Company reviewed its entire commercial loan portfolio and actively reached out to its customers to determine the initial impact, if any, of COVID-19 on their businesses. The review continued throughout the remainder of 2020. The Company proactively worked with many of its customers in providing loan payment deferrals, as well as assisted in the application and approval of PPP loans.
The volume of loan payment deferrals granted peaked in May 2020 at approximately $605 million in total loan balances, and has since declined to $39.5 million, or 0.8% of total loans (or 0.9% of total loans, excluding PPP loans), at March 31, 2021. The Company is providing alternative payment plans on a limited basis following the end of the payment deferral periods. Our consumer loan payment deferrals totaled $0.9 million at March 31, 2021, compared to $2.3 million at December 31, 2020. Our residential mortgage loans on active payment forbearance totaled $38.6 million at March 31, 2021, compared to $70.4 million at December 31, 2020. The majority of the residential mortgage loans in forbearance were in an extended 90-day forbearance
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period at March 31, 2021. Most borrowers are beginning to resume payments with the total count dropping from a peak of 467 at May 31, 2020 to 88 at March 31, 2021. There were no commercial, commercial real estate and construction loan portfolios, loans on active payment deferral at March 31, 2021, compared to $47.5 million at December 31, 2020.
In the first quarter of 2021, we continued our stepped-up credit assessment and monitoring as well as our outreach to our customers. Criticized loans declined by $10.5 million from the previous quarter to $181.7 million, or 4.0% of the total loan portfolio excluding PPP loans. Special mention loans declined by $14.7 million to $127.8 million, or 2.8% of the total loan portfolio excluding PPP loans. Classified loans increased by $4.2 million to $53.9 million, or 1.2% of the total loan portfolio excluding PPP loans. The loan improvements were the result of our continued assessment of borrower risk based on the borrower’s near-term strategy and outlook, management strength and actions they’ve taken, overall financial condition, and external funding and deferral support. Approximately 27% of special mention balances and 8% of classified balances also received PPP loans.
The Company believes that the residential, home equity and commercial real estate and construction loan portfolios are lower risk. The weighted average loan-to-values at origination in these portfolios are 62%, 63%, and 61%, respectively, and we believe they will be less impacted by the pandemic. These loans comprise approximately $3.5 billion or 78% of our total loan portfolio, net of PPP loans. Overall, the Company's loan portfolio remains well diversified.
Material Trends
The majority of our operations are concentrated in the state of Hawaii. As a result, our performance is significantly influenced by the real estate markets, economic environment and environmental conditions in Hawaii. Macroeconomic conditions also influence our performance. A favorable business environment is generally characterized by expanding gross state product, low unemployment, robust tourism and rising personal income; while an unfavorable business environment is characterized by the reverse.
Following the solid performances of our leading economic indicators in 2019, Hawaii's economy was greatly impacted by the COVID-19 pandemic in 2020. Hawaii's visitor industry continues to be significantly impacted by the COVID-19 pandemic, however the state is making progress towards economic recovery. Beginning October 15, 2020, passengers arriving from out-of-state and traveling inter-county could bypass the mandatory 14-day self-quarantine with a valid negative COVID-19 Nucleic Acid Amplification Test ("NAAT") test result from a Trusted Testing and Travel Partner through the state’s Safe Travels program. Effective November 24, all trans-Pacific travelers participating in the pre-travel testing program were required to have a negative test result before their departure to Hawaii, and test results would no longer be accepted once a traveler arrived in Hawaii. On December 10, 2020, the mandatory quarantine was reduced from 14 to 10 days in accordance with the U.S. Centers for Disease Control and Prevention’s ("CDC") guidelines.
On December 2, 2020, Kauai County temporarily suspended its participation in the state’s Safe Travels program making it mandatory for all travelers to Kauai to quarantine upon arrival. Kauai rejoined the program on April 5, 2021.
According to preliminary statistics from the Hawaii Tourism Authority ("HTA"), the average daily census showed that there were 90,776 visitors in Hawaii on any given day in February 2021, compared to 250,052 visitors per day in February 2020. In the first two months of 2021, approximately 407,000 total visitors arrived in the state compared to 1.7 million total visitors in the first two months of 2020. This was a decrease of 75.9% from the year-ago period. The HTA also reported that total spending by visitors decreased to $769 million in the first two months of 2021, a decrease of 75.8%, from $3.17 billion in the same year-ago period.
According to projections provided by the Hawaii Department of Business Economic Development and Tourism ("DBEDT") in early March 2021, total visitor arrivals are expected to increase to approximately 5.5 million visitors in 2021, an increase of 102.9% from the 2020 level. Visitor arrivals are projected to increase to 8.3 million in 2022, 9.2 million in 2023, and 9.8 million in 2024. Visitor spending is expected to increase to approximately $9.76 billion in 2021.
Recent statistics provided by DBEDT indicate the tourism industry may be rebounding quicker than initially expected with visitor arrivals approaching 20,000 per day in April 2021, or nearly two-thirds of pre-pandemic levels. We believe tourism gains will further increase in the second half of 2021 after vaccinations increase and travel restrictions loosen.
Hawaii's unemployment rate went from one of the lowest in the nation to one of the highest. The Department of Labor and Industrial Relations reported that Hawaii's seasonally adjusted annual unemployment rate was 9.0% in the month of March 2021. The unemployment rate of 9.0% in March 2021 ranked highest in the nation, above the national seasonally adjusted
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unemployment rate of 6.0% but has significantly improved compared to a high of 21.9% in the months of April and May 2020. DBEDT projects Hawaii's seasonally adjusted annual unemployment rate to be around 8.2% in 2021.
According to the latest data available from the Honolulu Board of Realtors, sales of Oahu single-family homes and condominiums in March 2021 saw significant double-digit growth of 19.1% and 52.7%, respectively, compared to pre-pandemic activity last March. In the three months ended March 31, 2021, sale of single family homes and condominiums are up 11.9% and 32.5%, respectively. For the third consecutive month, the median price for a single-family home set a new record of $950,000, representing a 17.3% year-over-year increase and a 3.5% increase over February’s record of $917,500. The median price for a condominium increased by 3.7% to $451,000, compared to $435,000 in March 2020.
RISE2020
Commencing in the second quarter of 2019, the Company launched RISE2020, a multifaceted initiative intended to enhance customer experience, drive stronger long-term growth and profitability, improve shareholder returns and lower our efficiency ratio. RISE2020 includes initiatives in the following key areas of opportunity: Digital Banking, Revenue Enhancements, Branch Transformation and Operational Excellence. RISE2020 is intended to provide Central Pacific Bank with premier products and services in several strategic areas. During 2019, the outsourcing of the Company's residential mortgage loan servicing, the launch of its new website under the cpb.bank domain name and the implementation of its end-to-end commercial loan origination system were completed. During the first quarter of 2020, the Company opened its concept branch, providing its customers a glimpse into the future of Central Pacific Bank. After significant development, the Company's new online and mobile banking platforms for its retail customers launched in August 2020. The rollout of newly upgraded ATMs was completed in the fourth quarter of 2020. Despite several challenges resulting from the impact of the COVID-19 pandemic, the Company completed its RISE2020 initiative culminating with the grand opening of the fully renovated Central Pacific Plaza headquarters building and flagship main branch, and the launch of a new brand design in early January 2021.
Results of Operations
Net Interest Income
Net interest income, when annualized and expressed as a percentage of average interest earning assets, is referred to as "net interest margin." Interest income, which includes loan fees and resultant yield information, is expressed on a taxable equivalent basis using a federal statutory tax rate of 21% for the three months ended March 31, 2021 and 2020. A comparison of net interest income on a taxable-equivalent basis ("net interest income") for the three months ended March 31, 2021 and 2020 is set forth below. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in volume and (ii) changes in rates. The change in volume is calculated as change in average balance, multiplied by prior period average yield/rate. The change in rate is calculated as change in average yield/rate, multiplied by current period volume. The change in interest income not solely due to change in volume or change in rate has been allocated proportionately to change in volume and change in average yield/rate.
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(dollars in thousands) | Three Months Ended March 31,
2021 |  | 2020 |  | Variance
Average Balance |  | Average Yield/ Rate |  | Interest Income/ Expense |  | Average Balance |  | Average Yield/ Rate |  | Interest Income/ Expense |  | Average Balance |  | Average Yield/ Rate |  | Interest Income/ Expense
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing deposits in other banks | $ | 43,442 |  |  | 0.10 | % |  | 10 |  |  | $ | 11,082 |  |  | 1.29 | % |  | 36 |  |  | $ | 32,360 |  |  | (1.19) | % |  | (26) |
Investment securities, excluding ACL: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable (1) | 1,081,271 |  |  | 1.90 |  |  | 5,124 |  |  | 1,027,695 |  |  | 2.64 |  |  | 6,774 |  |  | 53,576 |  |  | (0.74) |  |  | (1,650) |
Tax-exempt (1) | 93,665 |  |  | 2.78 |  |  | 651 |  |  | 105,330 |  |  | 3.21 |  |  | 845 |  |  | (11,665) |  |  | (0.43) |  |  | (194) |
Total investment securities | 1,174,936 |  |  | 1.97 |  |  | 5,775 |  |  | 1,133,025 |  |  | 2.69 |  |  | 7,619 |  |  | 41,911 |  |  | (0.72) |  |  | (1,844) |
Loans, including loans held for sale (2) | 5,079,874 |  |  | 3.66 |  |  | 46,074 |  |  | 4,462,347 |  |  | 4.16 |  |  | 46,204 |  |  | 617,527 |  |  | (0.50) |  |  | (130) |
Federal Home Loan Bank stock | 7,534 |  |  | 3.13 |  |  | 59 |  |  | 14,589 |  |  | 3.61 |  |  | 132 |  |  | (7,055) |  |  | (0.48) |  |  | (73) |
Total interest earning assets | 6,305,786 |  |  | 3.32 |  |  | 51,918 |  |  | 5,621,043 |  |  | 3.85 |  |  | 53,991 |  |  | 684,743 |  |  | (0.53) |  |  | (2,073) |
Noninterest-earning assets | 433,039 |  |  |  |  |  |  | 386,194 |  |  |  |  |  |  | 46,845 |  |  |  |  |
Total assets | $ | 6,738,825 |  |  |  |  |  |  | $ | 6,007,237 |  |  |  |  |  |  | $ | 731,588 |  |  |  |  |
Liabilities and Equity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand deposits | $ | 1,186,963 |  |  | 0.03 | % |  | 86 |  |  | $ | 1,013,795 |  |  | 0.07 | % |  | 176 |  |  | $ | 173,168 |  |  | (0.04) | % |  | (90) |
Savings and money market deposits | 1,972,800 |  |  | 0.06 |  |  | 274 |  |  | 1,651,751 |  |  | 0.27 |  |  | 1,118 |  |  | 321,049 |  |  | (0.21) |  |  | (844) |
Time deposits up to $250,000 | 236,828 |  |  | 0.41 |  |  | 241 |  |  | 266,549 |  |  | 0.89 |  |  | 591 |  |  | (29,721) |  |  | (0.48) |  |  | (350) |
Time deposits over $250,000 | 657,004 |  |  | 0.21 |  |  | 347 |  |  | 743,877 |  |  | 1.45 |  |  | 2,677 |  |  | (86,873) |  |  | (1.24) |  |  | (2,330) |
Total interest-bearing deposits | 4,053,595 |  |  | 0.09 |  |  | 948 |  |  | 3,675,972 |  |  | 0.50 |  |  | 4,562 |  |  | 377,623 |  |  | (0.41) |  |  | (3,614) |
Short-term borrowings | 2,456 |  |  | 0.30 |  |  | 2 |  |  | 139,813 |  |  | 1.46 |  |  | 508 |  |  | (137,357) |  |  | (1.16) |  |  | (506) |
Long-term debt | 105,402 |  |  | 3.95 |  |  | 1,027 |  |  | 101,547 |  |  | 3.62 |  |  | 914 |  |  | 3,855 |  |  | 0.33 |  |  | 113 |
Total interest-bearing liabilities | 4,161,453 |  |  | 0.19 |  |  | 1,977 |  |  | 3,917,332 |  |  | 0.61 |  |  | 5,984 |  |  | 244,121 |  |  | (0.42) |  |  | (4,007) |
Noninterest-bearing deposits | 1,905,147 |  |  |  |  |  |  | 1,445,724 |  |  |  |  |  |  | 459,423 |  |  |  |  |
Other liabilities | 120,247 |  |  |  |  |  |  | 107,458 |  |  |  |  |  |  | 12,789 |  |  |  |  |
Total liabilities | 6,186,847 |  |  |  |  |  |  | 5,470,514 |  |  |  |  |  |  | 716,333 |  |  |  |  |
Shareholders’ equity | 551,976 |  |  |  |  |  |  | 536,721 |  |  |  |  |  |  | 15,255 |  |  |  |  |
Non-controlling interest | 2 |  |  |  |  |  |  | 2 |  |  |  |  |  |  | — |  |  |  |  |
Total equity | 551,978 |  |  |  |  |  |  | 536,723 |  |  |  |  |  |  | 15,255 |  |  |  |  |
Total liabilities and equity | $ | 6,738,825 |  |  |  |  |  |  | $ | 6,007,237 |  |  |  |  |  |  | $ | 731,588 |  |  |  |  |
Net interest income |  |  |  |  | $ | 49,941 |  |  |  |  |  |  | $ | 48,007 |  |  |  |  |  |  | $ | 1,934 |
Interest rate spread |  |  | 3.13 | % |  |  |  |  |  | 3.24 | % |  |  |  |  |  | (0.11) | % |  |
Net interest margin |  |  | 3.19 | % |  |  |  |  |  | 3.43 | % |  |  |  |  |  | (0.24) | % |  |
(1) At amortized cost. |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(2) Includes nonaccrual loans. |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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| 2021 Compared to 2020
| Increase (Decrease) Due to Change In: |  |  |
(dollars in thousands) | Volume |  | Rate |  |  | Net Change
Interest earning assets: |  |  |  |  |  |
Interest-bearing deposits in other banks | $ | 104 |  |  | $ | (130) |  |  |  | $ | (26) |
Investment securities, excluding ACL: |  |  |  |  |  |
Taxable (1) | 353 |  |  | (2,003) |  |  |  | (1,650) |
Tax-exempt (1) | (94) |  |  | (100) |  |  |  | (194) |
Total investment securities | 259 |  |  | (2,103) |  |  |  | (1,844) |
Loans, including loans held for sale (2) | 6,320 |  |  | (6,450) |  |  |  | (130) |
Federal Home Loan Bank stock | (64) |  |  | (9) |  |  |  | (73) |
Total interest earning assets | 6,619 |  |  | (8,692) |  |  |  | (2,073) |
Interest-bearing liabilities: |  |  |  |  |  |
Interest-bearing demand deposits | 30 |  |  | (120) |  |  |  | (90) |
Savings and money market deposits | 213 |  |  | (1,057) |  |  |  | (844) |
Time deposits up to $250,000 | (66) |  |  | (284) |  |  |  | (350) |
Time deposits over $250,000 | (312) |  |  | (2,018) |  |  |  | (2,330) |
Total interest-bearing deposits | (135) |  |  | (3,479) |  |  |  | (3,614) |
Short-term borrowings | (499) |  |  | (7) |  |  |  | (506) |
Long-term debt | 32 |  |  | 81 |  |  |  | 113 |
Total interest-bearing liabilities | (602) |  |  | (3,405) |  |  |  | (4,007) |
Net interest income | $ | 7,221 |  |  | $ | (5,287) |  |  |  | $ | 1,934 |

Net interest income (expressed on a taxable-equivalent basis) was $49.9 million for the three months ended March 31, 2021, representing an increase of 4.0% from $48.0 million in the three months ended March 31, 2020. The increase in the three months ended March 31, 2021 was primarily due to loans originated and forgiven under the SBA Paycheck Protection Program ("PPP"), combined with lower rates paid on interest-bearing liabilities. These increases were partially offset by decreases in yields earned on interest-earning assets. Net interest income for the three months ended March 31, 2021 included $5.2 million in PPP net interest income and net loan fees, which are accreted into income over the term of the loans and accelerated when the loans are forgiven or paid-off. During the three months ended March 31, 2021, approximately $100.6 million in PPP loans were forgiven which resulted in the immediate recognition of $2.4 million in net loan fees. The decreases in yields earned on interest-earning assets and rates paid on interest-bearing liabilities were primarily attributable to the historically low interest rate environment during the pandemic environment. During the three months ended March 31, 2021, the Company had an average PPP loan balance of $526.8 million, which earned approximately 3.99% in net interest income and net loan fees.
Interest Income
Taxable-equivalent interest income was $51.9 million for the first quarter of 2021, representing a decrease of 3.8% from $54.0 million in the year-ago quarter. The 50 bp decrease in the average yields earned on loans during the first quarter of 2021, compared to the year-ago quarter, decreased interest income by approximately $6.5 million. In addition, the 72 bp decline in yields earned on investment securities during the first quarter of 2021, compared to the year-ago quarter, decreased interest income by approximately $2.1 million. Also contributing to these decreases was an additional day in the year-ago quarter. These decreases were partially offset by a $617.5 million increase in average loans during the first quarter of 2021, compared to the year-ago quarter, accounting for an increase of approximately $6.3 million in interest income during the first quarter of 2021. The significant increase in average loans was primarily attributable to the aforementioned PPP loans.
Interest Expense
Interest expense for the first quarter of 2021 was $2.0 million, representing a decrease of 67.0% from $6.0 million in the year-ago quarter. The decrease was primarily attributable to declines in rates paid on deposits, combined with improved deposit composition as noninterest-bearing deposits and lower-cost interest -bearing demand and savings and money market deposits
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increased significantly from the year-ago quarter. Rates paid on savings and money market deposits and time deposits over $250,000 declined by 21 bp and 124 bp, respectively, which decreased interest expense by approximately $1.1 million and $2.0 million, respectively. In addition, average time deposits over $250,000 and short-term borrowings declined by $86.9 million and $137.4 million resulting in a decrease in interest expense of approximately $0.3 million and $0.5 million, respectively. Time deposits over $250,000 primarily consists of public funds which may be opportunistic sources of funding, but fluctuate more directly with changes in the Federal Funds rate.
Net Interest Margin
Our net interest margin of 3.19% for the first quarter of 2021 decreased by 24 bp from 3.43% in the year-ago quarter.
The decline in net interest margin for the first quarter of 2021 compared to the year-ago quarter is primarily due to lower yields earned on average loans and investment securities of 50 bp and 72 bp, respectively, partially offset by lower rates paid on interest-bearing liabilities of 42 bp, primarily attributable to the historically low interest rate environment we are currently operating in due to the pandemic environment.
Provision for Credit Losses
In the three months ended March 31, 2021, our provision for credit losses was a credit of $0.8 million, which consisted of a credit to the provision for credit losses on loans of $1.0 million and a $0.2 million provision for credit losses on off-balance sheet credit exposures. In the three months ended March 31, 2020, our provision for credit loss was $11.1 million, which consisted of a provision for credit losses on loans of $9.3 million and a $1.8 million provision for credit losses on off-balance sheet credit exposures. The provision for credit losses in the year-ago quarter was primarily due to adverse economic conditions brought on by the COVID-19 pandemic, while the credit to the provision for credit losses in the current quarter was primarily due to improved economic forecasts.
We did not record a provision for credit losses on investment securities and we did not record a provision for credit losses on accrued interest receivable during the three months ended March 31, 2021 and three months ended March 31, 2020.
Our net charge-offs were $0.7 million during the first quarter of 2021, compared to net charge-offs of $1.2 million in the year-ago quarter.
Other Operating Income
The following tables set forth components of other operating income for the periods indicated:

| Three Months Ended
(dollars in thousands) | March 31, 2021 |  | March 31, 2020 |  | $ Change |  | % Change
Other operating income: |  |  |  |  |  |  |
Mortgage banking income | $ | 2,970 |  |  | $ | 337 |  |  | $ | 2,633 |  |  | 781.3 | %
Service charges on deposit accounts | 1,478 |  |  | 2,050 |  |  | (572) |  |  | -27.9 | %
Other service charges and fees | 3,790 |  |  | 4,897 |  |  | (1,107) |  |  | -22.6 | %
Income from fiduciary activities | 1,231 |  |  | 1,297 |  |  | (66) |  |  | -5.1 | %
Income from bank-owned life insurance | 797 |  |  | (19) |  |  | 816 |  |  | -4,294.7 | %
Other: |  |  |  |  |  |  |
Equity in earnings of unconsolidated subsidiaries | 107 |  |  | 26 |  |  | 81 |  |  | 311.5 | %
Income recovered on nonaccrual loans previously charged-off | 35 |  |  | 23 |  |  | 12 |  |  | 52.2 | %
Other recoveries | 28 |  |  | 40 |  |  | (12) |  |  | -30.0 | %
Commissions on sale of checks | 77 |  |  | 81 |  |  | (4) |  |  | -4.9 | %
Other | 198 |  |  | 154 |  |  | 44 |  |  | 28.6 | %
Total other operating income | $ | 10,711 |  |  | $ | 8,886 |  |  | $ | 1,825 |  |  | 20.5 | %
Not meaningful ("N.M.")
Note: Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period.

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For the first quarter of 2021, total other operating income of $10.7 million increased by $1.8 million, or 20.5%, from $8.9 million in the year-ago quarter. The increase from the year-ago quarter was primarily due to higher mortgage banking income of $2.6 million and higher income from bank-owned life insurance of $0.8 million in the first quarter of 2021. Strong residential mortgage demand enabled the Company to grow its residential mortgage portfolio and realize higher gains on sales of residential mortgage loans of $1.7 million (included in mortgage banking income) and higher loan placement fees of $0.6 million (included in mortgage banking income). The higher income from bank-owned life insurance was primarily attributable to gains in the equity markets during the first quarter of 2021. These increases were partially offset by lower other service charges and fees of $1.1 million and lower service charges on deposit accounts of $0.6 million resulting from lower transactional activity in the first quarter of 2021 due to the pandemic.

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

| Three Months Ended
(dollars in thousands) | March 31, 2021 |  | March 31, 2020 |  | $ Change |  | % Change
Other operating expense: |  |  |  |  |  |  |
Salaries and employee benefits | $ | 19,827 |  |  | $ | 20,054 |  |  | $ | (227) |  |  | -1.1 | %
Net occupancy | 3,764 |  |  | 3,672 |  |  | 92 |  |  | 2.5 | %
Equipment | 1,000 |  |  | 1,097 |  |  | (97) |  |  | -8.8 | %
Communication expense | 769 |  |  | 837 |  |  | (68) |  |  | -8.1 | %
Legal and professional services | 2,377 |  |  | 2,028 |  |  | 349 |  |  | 17.2 | %
Computer software expense | 3,783 |  |  | 2,943 |  |  | 840 |  |  | 28.5 | %
Advertising expense | 1,658 |  |  | 1,092 |  |  | 566 |  |  | 51.8 | %
Other: |  |  |  |  |  |  |
Pension and SERP expense | 247 |  |  | 293 |  |  | (46) |  |  | -15.7 | %
Foreclosed asset expense | 3 |  |  | 67 |  |  | (64) |  |  | -95.5 | %
Charitable contributions | 21 |  |  | 187 |  |  | (166) |  |  | -88.8 | %
FDIC insurance assessment | 440 |  |  | — |  |  | 440 |  |  | N.M.
Miscellaneous loan expenses | 370 |  |  | 300 |  |  | 70 |  |  | 23.3 | %
ATM and debit card expenses | 665 |  |  | 634 |  |  | 31 |  |  | 4.9 | %
Armored car expenses | 192 |  |  | 294 |  |  | (102) |  |  | -34.7 | %
Entertainment and promotions | 199 |  |  | 280 |  |  | (81) |  |  | -28.9 | %
Stationery and supplies | 213 |  |  | 248 |  |  | (35) |  |  | -14.1 | %
Directors’ fees and expenses | 217 |  |  | 241 |  |  | (24) |  |  | -10.0 | %
Directors' deferred compensation plan expense | 902 |  |  | (1,483) |  |  | 2,385 |  |  | -160.8 | %
Loss on disposal of fixed assets | 32 |  |  | — |  |  | 32 |  |  | N.M.
Other | 1,167 |  |  | 1,658 |  |  | (491) |  |  | -29.6 | %
Total other operating expense | $ | 37,846 |  |  | $ | 34,442 |  |  | $ | 3,404 |  |  | 9.9 | %
Note: Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period.

For the first quarter of 2021, total other operating expense was $37.8 million and increased by $3.4 million, or 9.9%, from $34.4 million in the year-ago quarter. The increase was primarily due to higher directors' deferred compensation plan expense of $2.4 million, computer software expense of $0.8 million, advertising expense of $0.6 million, and FDIC insurance assessment of $0.4 million.

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

|  |  | Three Months Ended March 31,
(dollars in thousands) |  |  |  |  | 2021 |  | 2020
Total other operating expense |  |  |  |  | $ | 37,846 |  |  | $ | 34,442 |
Net interest income |  |  |  |  | $ | 49,804 |  |  | $ | 47,830 |
Total other operating income |  |  |  |  | 10,711 |  |  | 8,886 |
Total revenue before provision for credit losses |  |  |  |  | $ | 60,515 |  |  | $ | 56,716 |
Efficiency ratio |  |  |  |  | 62.54 | % |  | 60.73 | %

Our efficiency ratio increased to 62.54% in the first quarter of 2021, compared to 60.73% in the year-ago quarter. The efficiency ratio in the first quarter of 2021 was negatively impacted by the aforementioned higher other operating expense, offset by increases in net interest income and other operating income.
Income Taxes
The Company recorded income tax expense of $5.5 million for the three months ended March 31, 2021, compared to $2.8 million in the three months ended March 31, 2020. The effective tax rate for the three months ended March 31, 2021 was 23.21%, compared to 25.31% in the three months ended March 31, 2020.
The valuation allowance on our net deferred tax assets ("DTA") totaled $3.4 million at March 31, 2021 and $3.4 million at December 31, 2020, of which $3.2 million and $3.2 million, respectively, related to our DTA from net apportioned net operating loss ("NOL") carryforwards for California state income tax purposes as we do not expect to generate sufficient income in California to utilize the DTA. The remaining valuation allowance of $0.2 million and $0.2 million as of March 31, 2021 and December 31, 2020 relates to a Hawaii capital loss carryforward balance that we do not expect to be able to utilize. Net of the valuation allowance, the Company's net DTA totaled $33.1 million at March 31, 2021, compared to a net DTA of $26.4 million as of December 31, 2020, and is included in other assets on our consolidated balance sheets.
Financial Condition
Total assets at March 31, 2021 of $6.98 billion increased by $384.7 million from $6.59 billion at December 31, 2020.
Investment Securities
Investment securities of $1.22 billion at March 31, 2021 increased by $33.8 million, or 2.9%, from December 31, 2020. The increase reflects $139.8 million in net purchases, partially offset by a $23.6 million decrease in the market valuation on the available-for-sale portfolio and $82.4 million in principal runoff.
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Loans
The following table sets forth information regarding our outstanding loans by category and geographic location as of the dates indicated.

(dollars in thousands) |  | March 31, 2021 |  | December 31, 2020 |  | $ Change |  | % Change
Hawaii: |  |  |  |  |  |  |  |
Commercial, financial and agricultural: |  |  |  |  |  |  |  |
SBA Paycheck Protection Program |  | $ | 548,880 |  |  | $ | 375,879 |  |  | $ | 173,001 |  |  | 46.0 | %
Other |  | 399,154 |  |  | 426,670 |  |  | (27,516) |  |  | (6.4) |
Real estate: |  |  |  |  |  |  |  |
Construction |  | 137,976 |  |  | 125,407 |  |  | 12,569 |  |  | 10.0 |
Residential mortgage |  | 1,687,513 |  |  | 1,690,212 |  |  | (2,699) |  |  | (0.2) |
Home equity |  | 559,514 |  |  | 551,266 |  |  | 8,248 |  |  | 1.5 |
Commercial mortgage |  | 911,216 |  |  | 898,055 |  |  | 13,161 |  |  | 1.5 |
Consumer |  | 319,032 |  |  | 332,430 |  |  | (13,398) |  |  | (4.0) |
Leases |  | — |  |  | — |  |  | — |  |  | — |
Total loans |  | 4,563,285 |  |  | 4,399,919 |  |  | 163,366 |  |  | 3.7 |
Allowance for credit losses ("ACL") |  | (70,961) |  |  | (73,152) |  |  | 2,191 |  |  | (3.0) |
Loans, net of ACL |  | $ | 4,492,324 |  |  | $ | 4,326,767 |  |  | $ | 165,557 |  |  | 3.8 |
U.S. Mainland: |  |  |  |  |  |  |  |
Commercial, financial and agricultural: |  |  |  |  |  |  |  |
SBA Paycheck Protection Program |  | $ | 48,939 |  |  | $ | 40,496 |  |  | $ | 8,443 |  |  | 20.8 | %
Other |  | 115,035 |  |  | 118,421 |  |  | (3,386) |  |  | (2.9) |
Real estate: |  |  |  |  |  |  |  |
Construction |  | — |  |  | — |  |  | — |  |  | — |
Residential mortgage |  | — |  |  | — |  |  | — |  |  | — |
Home equity |  | — |  |  | — |  |  | — |  |  | — |
Commercial mortgage |  | 253,122 |  |  | 258,273 |  |  | (5,151) |  |  | (2.0) |
Consumer |  | 157,468 |  |  | 147,004 |  |  | 10,464 |  |  | 7.1 |
Leases |  | — |  |  | — |  |  | — |  |  | — |
Total loans |  | 574,564 |  |  | 564,194 |  |  | 10,370 |  |  | 1.8 |
ACL |  | (10,592) |  |  | (10,117) |  |  | (475) |  |  | 4.7 |
Loans, net of ACL |  | $ | 563,972 |  |  | $ | 554,077 |  |  | $ | 9,895 |  |  | 1.8 |
Total: |  |  |  |  |  |  |  |
Commercial, financial and agricultural: |  |  |  |  |  |  |  |
SBA Paycheck Protection Program |  | $ | 597,819 |  |  | $ | 416,375 |  |  | $ | 181,444 |  |  | 43.6 | %
Other |  | 514,189 |  |  | 545,091 |  |  | (30,902) |  |  | (5.7) |
Real estate: |  |  |  |  |  |  |  |
Construction |  | 137,976 |  |  | 125,407 |  |  | 12,569 |  |  | 10.0 |
Residential mortgage |  | 1,687,513 |  |  | 1,690,212 |  |  | (2,699) |  |  | (0.2) |
Home equity |  | 559,514 |  |  | 551,266 |  |  | 8,248 |  |  | 1.5 |
Commercial mortgage |  | 1,164,338 |  |  | 1,156,328 |  |  | 8,010 |  |  | 0.7 |
Consumer |  | 476,500 |  |  | 479,434 |  |  | (2,934) |  |  | (0.6) |
Leases |  | — |  |  | — |  |  | — |  |  | — |
Total loans |  | 5,137,849 |  |  | 4,964,113 |  |  | 173,736 |  |  | 3.5 |
ACL |  | (81,553) |  |  | (83,269) |  |  | 1,716 |  |  | (2.1) |
Loans, net of ACL |  | $ | 5,056,296 |  |  | $ | 4,880,844 |  |  | $ | 175,452 |  |  | 3.6 |

Loans, net of deferred costs, of $5.14 billion at March 31, 2021 increased by $173.7 million, or 3.5%, from December 31, 2020. The increase reflects net increases in the following loan portfolios: SBA Paycheck Protection Program loans of $181.4 million, construction of $12.6 million, home equity of $8.2 million and commercial mortgage of $8.0 million. These increases were
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partially offset by net decreases in the following loan portfolios: other commercial of $30.9 million, consumer of $2.9 million, and residential mortgage of $2.7 million.
The Hawaii loan portfolio increased by $163.4 million, or 3.7%, from December 31, 2020. The increase reflects net increases in the following loan portfolios: SBA Paycheck Protection Program loans of $173.0 million, commercial mortgage of $13.2 million, construction of $12.6 million, and home equity of $8.2 million.These increases were partially offset by net decreases in the other commercial and consumer portfolios of $27.5 million and $13.4 million, respectively. The increases in the portfolios were primarily due to an increased demand from both new and existing customers.
The U.S. Mainland loan portfolio increased by $10.4 million, or 1.8% from December 31, 2020. The net increase was primarily attributable to net increases in the consumer and SBA Paycheck Protection Program loan portfolios of $10.5 million and $8.4 million, respectively, partially offset by a net decrease in the commercial mortgage and other commercial loan portfolios of $5.2 million and $3.4 million, respectively. Refer to Note 4 - Loans and Credit Quality in the accompanying notes to the consolidated financial statements in this report for information on U.S. Mainland loan portfolio purchases.
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Nonperforming Assets, Accruing Loans Delinquent for 90 Days or More, Restructured Loans Still Accruing Interest
The following table sets forth nonperforming assets, accruing loans delinquent for 90 days or more and restructured loans still accruing interest as of the dates indicated.

(dollars in thousands) | March 31, 2021 |  | December 31, 2020 |  | $ Change |  | % Change
Nonperforming Assets ("NPAs") [1] |  |  |  |  |  |  |
Nonaccrual loans: |  |  |  |  |  |  |
Commercial, financial and agricultural - Other | $ | 1,412 |  |  | $ | 1,461 |  |  | $ | (49) |  |  | (3.4) | %
Real estate: |  |  |  |  |  |  |
Residential mortgage | 4,553 |  |  | 4,115 |  |  | 438 |  |  | 10.6 |
Home equity | 439 |  |  | 524 |  |  | (85) |  |  | (16.2) |
Consumer | 790 |  |  | 92 |  |  | 698 |  |  | 758.7 |
Total nonaccrual loans | 7,194 |  |  | 6,192 |  |  | 1,002 |  |  | 16.2 |
Other real estate owned ("OREO"): |  |  |  |  |  |  |
Real estate: |  |  |  |  |  |  |
Residential mortgage | — |  |  | — |  |  | — |  |  | — |
Total OREO | — |  |  | — |  |  | — |  |  | — |
Total nonperforming assets | 7,194 |  |  | 6,192 |  |  | 1,002 |  |  | 16.2 |
Accruing Loans Delinquent for 90 Days or More [1] |  |  |  |  |  |  |
Real estate: |  |  |  |  |  |  |
Residential mortgage | 4,522 |  |  | 567 |  |  | 3,955 |  |  | 697.5 |
Consumer | 262 |  |  | 240 |  |  | 22 |  |  | 9.2 |
Total accruing loans delinquent for 90 days or more | 4,784 |  |  | 807 |  |  | 3,977 |  |  | 492.8 |
Restructured Loans Still Accruing Interest [1] |  |  |  |  |  |  |
Commercial, financial and agricultural - Other | 63 |  |  | 100 |  |  | (37) |  |  | (37.0) |
Real estate: |  |  |  |  |  |  |
Residential mortgage | 5,473 |  |  | 5,718 |  |  | (245) |  |  | (4.3) |
Commercial mortgage | 1,698 |  |  | 1,761 |  |  | (63) |  |  | (3.6) |
Consumer | 198 |  |  | 207 |  |  | (9) |  |  | (4.3) |
Total restructured loans still accruing interest | 7,432 |  |  | 7,786 |  |  | (354) |  |  | (4.5) |
Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest | $ | 19,410 |  |  | $ | 14,785 |  |  | $ | 4,625 |  |  | 31.3 |
Ratio of nonaccrual loans to total loans | 0.14 | % |  | 0.12 | % |  |  |  | 0.02 | %
Ratio of NPAs to total loans and OREO | 0.14 | % |  | 0.12 | % |  |  |  | 0.02 | %
Ratio of NPAs and accruing loans delinquent for 90 days or more to total loans and OREO | 0.23 | % |  | 0.14 | % |  |  |  | 0.09 | %
Ratio of NPAs, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO | 0.38 | % |  | 0.30 | % |  |  |  | 0.08 | %
Ratio of classified assets and OREO to tier 1 capital and ACL | 7.98 | % |  | 7.49 | % |  |  |  | 0.49 | %
[1] Section 4013 of the CARES Act and the revised Interagency Statement are being applied to loan modifications related to the COVID-19 pandemic as eligible and applicable. These loan modifications are not included in the delinquent or restructured loan balances presented above.

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

(dollars in thousands) |
Balance at December 31, 2020 | $ | 6,192 |
Additions | 2,257 |
Reductions: |
Payments | (292) |
Return to accrual status | (99) |
Sales of NPAs | — |
Net charge-offs, valuation and other adjustments | (864) |
Total reductions | (1,255) |
Net increase | 1,002 |
Balance at March 31, 2021 | $ | 7,194 |

Nonperforming assets, which includes nonaccrual loans and other real estate owned, totaled $7.2 million at March 31, 2021, compared to $6.2 million at December 31, 2020. There were no nonperforming loans classified as held for sale at March 31, 2021 and December 31, 2020. The increase in nonperforming assets from December 31, 2020 was primarily attributable to additions to nonaccrual loans totaling $2.3 million, offset by $0.9 million in net charge-offs, valuation and other adjustments, $0.3 million in repayments of nonaccrual loans, and $0.1 million in loans returned to accrual status.
Troubled debt restructurings ("TDRs") included in nonperforming assets at March 31, 2021 consisted of two Hawaii residential mortgage loans with a combined principal balance of $0.2 million. There were $7.5 million of TDRs still accruing interest at March 31, 2021, of which one loan totaling $0.1 million was more than 90 days delinquent. At December 31, 2020, there were $7.8 million of TDRs still accruing interest, of which one loan totaling $0.7 million was more than 90 days delinquent.
Loan payment forbearance or deferrals were made for borrowers impacted by the COVID-19 pandemic with loan balances totaling $39.5 million, or 0.8% of total loans (or 0.9% of total loans, excluding PPP loans), as of March 31, 2021, compared to $120.2 million, or 2.4% of the total loan portfolio (or 2.6% excluding PPP loans) as of December 31, 2020.
The Company's ratio of classified assets and other real estate owned to tier 1 capital and the ACL increased from 7.49% at December 31, 2020 to 7.98% at March 31, 2021.
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Allowance for Credit Losses
The following table sets forth certain information with respect to the ACL as of the dates and for the periods indicated:

| Three Months Ended March 31, |  |
(dollars in thousands) | 2021 |  | 2020 |  |  |  |
Allowance for Credit Losses: |  |  |  |  |  |  |
Balance at beginning of period | $ | 83,269 |  |  | $ | 47,971 |  |  |  |  |
Adoption of ASU 2016-13 | — |  |  | 3,566 |  |  |  |  |
Adjusted balance at beginning of period | 83,269 |  |  | 51,537 |  |  |  |  |
Provision for credit losses on loans [1] [2] | (974) |  |  | 9,329 |  |  |  |  |
Charge-offs: |  |  |  |  |  |  |
Commercial, financial and agricultural - Other | 609 |  |  | 437 |  |  |  |  |
Consumer | 1,098 |  |  | 2,217 |  |  |  |  |
Total charge-offs | 1,707 |  |  | 2,654 |  |  |  |  |
Recoveries: |  |  |  |  |  |  |
Commercial, financial and agricultural - Other | 89 |  |  | 342 |  |  |  |  |
Real estate: |  |  |  |  |  |  |
Construction | — |  |  | 131 |  |  |  |  |
Residential mortgage | 106 |  |  | 181 |  |  |  |  |
Home equity | 9 |  |  | 31 |  |  |  |  |
Commercial mortgage | 8 |  |  | 2 |  |  |  |  |
Consumer | 753 |  |  | 746 |  |  |  |  |
Total recoveries | 965 |  |  | 1,433 |  |  |  |  |
Net charge-offs | 742 |  |  | 1,221 |  |  |  |  |
Balance at end of period | $ | 81,553 |  |  | $ | 59,645 |  |  |  |  |
ACL as a percentage of total loans | 1.59 | % |  | 1.32 | % |  |  |  |
ACL as a percentage of total loans, excluding PPP loans | 1.80 | % |  | 1.32 | % |  |  |  |
ACL as a percentage of nonaccrual loans | 1133.63 | % |  | 1681.56 | % |  |  |  |
Annualized ratio of net charge-offs to average loans | 0.06 | % |  | 0.11 | % |  |  |  |
[1] The Company has recorded a reserve on accrued interest receivable for loans on active payment forbearance or deferral, which were granted to borrowers impacted by the COVID-19 pandemic. This reserve was recorded as a contra-asset against accrued interest receivable and is adjusted through an offset to provision for credit losses. The provision for credit losses on loans presented in this table excludes the provision for credit losses on accrued interest receivable.
[2] As of January 1, 2021, the provision for credit losses on off-balance sheet credit exposures (previously included in other operating expense) is included in the provision for credit losses line on the consolidated statements of income. The allowance for off-balance sheet credit exposures continues to be included in other liabilities. For roll-forward purposes, in this table we exclude the provision for credit losses on off-balance sheet credit exposures.

Our ACL at March 31, 2021 totaled $81.6 million compared to $83.3 million at December 31, 2020.
On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. The Company recorded increases of $3.6 million to the ACL for loans and $0.7 million to the reserve for off-balance sheet credit exposures, included in other liabilities, offset by a net decrease to retained earnings (or a net increase to accumulated deficit) of $3.2 million and a $1.1 million increase to other assets for the related impact to net deferred tax assets as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13.
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During the three months ended March 31, 2021, we recorded a credit to the provision for credit losses on loans of $1.0 million and net charge-offs of $0.7 million. The credit to the provision is driven by improved economic forecasts under the current COVID-19 pandemic.
Our ACL as a percentage of total loans decreased from 1.68% at December 31, 2020 to 1.59% at March 31, 2021. Excluding the PPP loan portfolio, which is guaranteed by the SBA, our ACL as a percentage of total loans was 1.80% at March 31, 2021, compared to 1.83% at December 31, 2020. Our ACL as a percentage of nonaccrual loans decreased from 1344.78% at December 31, 2020 to 1133.63% at March 31, 2021.
In accordance with GAAP, loans held for sale and other real estate assets are not included in our assessment of the ACL.
Federal Home Loan Bank Stock
The bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB"). FHLB stock of $8.2 million at March 31, 2021 decreased by $0.1 million, or 1.0%, from the FHLB stock balance at December 31, 2020. FHLB stock has an activity-based stock requirement, thus as borrowings decline, so will our holdings of FHLB stock. We have a minimum requirement of $7.9 million in FHLB stock even if we have no borrowings outstanding.
Deposits
The following table sets forth the composition of our deposits by category for the periods indicated:

(dollars in thousands) | March 31, 2021 |  | December 31, 2020 |  | $ Change |  | % Change
Noninterest-bearing demand deposits | $ | 2,070,428 |  |  | $ | 1,790,269 |  |  | $ | 280,159 |  |  | 15.6 | %
Interest-bearing demand deposits | 1,237,574 |  |  | 1,174,888 |  |  | 62,686 |  |  | 5.3 |
Savings and money market deposits | 2,004,368 |  |  | 1,932,043 |  |  | 72,325 |  |  | 3.7 |
Time deposits less than $100,000 | 145,497 |  |  | 149,063 |  |  | (3,566) |  |  | (2.4) |
Time deposits $100,000 to $250,000 | 88,814 |  |  | 90,149 |  |  | (1,335) |  |  | (1.5) | %
Core deposits | 5,546,681 |  |  | 5,136,412 |  |  | 410,269 |  |  | 8.0 |
Government time deposits | 500,194 |  |  | 500,344 |  |  | (150) |  |  | — |
Other time deposits greater than $250,000 | 162,075 |  |  | 159,362 |  |  | 2,713 |  |  | 1.7 |
Total time deposits greater than $250,000 | 662,269 |  |  | 659,706 |  |  | 2,563 |  |  | 0.4 |
Total deposits | $ | 6,208,950 |  |  | $ | 5,796,118 |  |  | $ | 412,832 |  |  | 7.1 |
[1] As of January 1, 2021, other time deposits $100,000 to $250,000 have been included in core deposits. Prior period amounts have been reclassified to conform to current period presentation.

Total deposits of $6.21 billion at March 31, 2021 increased by $412.8 million, or 7.1%, from total deposits of $5.80 billion at December 31, 2020. Net increases in noninterest-bearing demand deposits of $280.2 million, savings and money market deposits of $72.3 million, interest-bearing demand deposits of $62.7 million, and other time deposits greater than $250,000 of $2.7 million were partially offset by net decreases in time deposits less than $100,000 of $3.6 million, time deposits $100,000 to $250,000 of $1.3 million, and government time deposits of $0.2 million.
Core deposits, which we define as demand deposits, savings and money market deposits, and time deposits up to $250,000, totaled $5.55 billion at March 31, 2021 and increased by $410.3 million, or 8.0%, from December 31, 2020. The deposit of PPP funds and other government stimulus into both new and existing deposit accounts largely contributed to the increase in core deposits. The addition of PPP funds may be temporary as the PPP monies are spent by the businesses in accordance with the program. Going forward the Company is focused on expanding banking relationships with the new businesses we assisted with PPP. Core deposits as a percentage of total deposits was 89.3% at March 31, 2021, compared to 88.6% at December 31, 2020.
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Capital Resources
In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources and uses of capital in conjunction with an analysis of the size and quality of our assets, the anticipated performance of our business (including the effects of the COVID-19 pandemic) and the level of risk and regulatory capital requirements. As part of this ongoing assessment, the Board of Directors reviews our capital position on an ongoing basis to ensure it is adequate, including, but not limited to, 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 $542.9 million at March 31, 2021, compared to $546.7 million at December 31, 2020. The change in total shareholders' equity was primarily attributable to other comprehensive loss of $17.1 million and cash dividends declared of $6.5 million, partially offset by net income of $18.0 million in the three months ended March 31, 2021. In the three months ended March 31, 2021, we did not repurchase any shares of our common stock.
Our total shareholders' equity to total assets ratio was 7.78% at March 31, 2021, compared to 8.29% at December 31, 2020. The decline in our total shareholders' equity to total assets ratio was primarily due to the significant increase in the total assets denominator attributable to $597.8 million in PPP loans, net of deferred fees and costs. Our book value per share was $19.19 and $19.40 at March 31, 2021 and December 31, 2020, respectively.
Holding Company Capital Resources
CPF is required to act as a source of strength to the bank under the Dodd-Frank Act. CPF is obligated to pay its expenses and payments on its junior subordinated debentures which fund payments on the outstanding trust preferred securities, and payments on its subordinated notes.
CPF relies on the bank to pay dividends to fund its obligations. As of March 31, 2021, on a stand-alone basis, CPF had an available cash balance of approximately $11.8 million in order to meet its ongoing obligations.
As a Hawaii state-chartered bank, the bank may only pay dividends to the extent it has retained earnings as defined under Hawaii banking law ("Statutory Retained Earnings"), which differs from GAAP retained earnings. As of March 31, 2021, the bank had Statutory Retained Earnings of $94.8 million. Provisions of federal law also impact the ability of the bank to pay dividends to the Company. On April 27, 2021, the Company's Board of Directors declared a cash dividend of $0.24 per share on the Company's outstanding common stock, which increased by 4.3% from the $0.23 per share a year-ago.
Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. Our ability to pay cash dividends to our shareholders is subject to restrictions under federal and Hawaii law, including restrictions imposed by the FRB and covenants set forth in various agreements we are a party to, including covenants set forth in our subordinated debentures and subordinated notes.
In the year ended December 31, 2020, the Company repurchased 206,802 shares of common stock, at a cost of $4.7 million, under the Company's repurchase plan.
In January 2020, the Company’s Board of Directors authorized the repurchase of up to $30 million of its common stock from time to time in the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase program (the "Repurchase Plan"). The Repurchase Plan replaced and superseded in its entirety the share repurchase program previously approved by the Company's Board of Directors, which had $26.6 million in remaining repurchase authority. The Company's Repurchase Plan was subject to a one year expiration. In the first quarter of 2020, the Company repurchased 206,802 shares of common stock, at a cost of $4.7 million, under the Company's repurchase plan. In March 2020, the Company temporarily suspended the Repurchase Plan due to uncertainty during the current COVID-19 pandemic.
On January 26, 2021, the Company's Board of Directors approved a new share repurchase authorization of up to $25 million of its common stock. The Company did not repurchase any shares during the first quarter of 2021. We cannot provide any assurance when or to what extent we will resume repurchases under our Repurchase Plan.
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Trust Preferred Securities
As of March 31, 2021, we have two remaining statutory trusts, CPB Capital Trust IV ("Trust IV") and CPB Statutory Trust V ("Trust V"), which issued a total of $50.0 million in floating rate trust preferred securities. The trust preferred securities, the underlying floating rate junior subordinated debentures that are the assets of Trusts IV and V, and the common securities issued by Trusts IV and V are redeemable in whole or in part on any interest payment date on or after December 15, 2009 for Trust IV and V, or at any time in whole but not in part within 90 days following the occurrence of certain events. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from time to time to defer subordinated debenture interest payments, which would result in a deferral of dividend payments on the related trust preferred securities, for up to 20 consecutive quarterly periods without default or penalty.
The Company determined that its investments in Trust IV and Trust V did not represent a variable interest and therefore the Company was not the primary beneficiary of each of the trusts. As a result, consolidation of the trusts by the Company were not required.
Subordinated Notes
On October 20, 2020, the Company completed a $55 million private placement of ten-year fixed-to-floating rate subordinated notes, which will be used to support regulatory capital ratios and for general corporate purposes. The Company exchanged the privately placed notes for registered notes with the same terms and in the same aggregate principal amount at the end of the fourth quarter of 2020. The notes bear a fixed interest rate of 4.75% for the first five years and will reset quarterly thereafter for the remaining five years to the then current three-month Secured Overnight Financing Rate, as published by the Federal Reserve Bank of New York, plus 456 basis points. The subordinated notes had a carrying value of $53.9 million, net of unamortized debt issuance costs of $1.1 million, at March 31, 2021.
The subordinated notes may be included in Tier 2 capital, with certain limitations applicable, under current regulatory
guidelines and interpretations.
Regulatory Capital Ratios
General capital adequacy regulations adopted by the FRB and FDIC require an institution to maintain minimum leverage capital, Tier 1 risk-based capital, total risk-based capital, and common equity Tier 1 ("CET1") capital ratios. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. For a further discussion of the effect of forthcoming changes in required regulatory capital ratios, see the discussion in the "Business — Supervision and Regulation" sections of our 2020 Form 10-K.
In March 2020, the FDIC, FRB and OCC, collectively, issued three interim final rules that impact the reporting of regulatory capital in the Call Report. The revisions include:
1.Revising the definition of eligible retained income in the capital rule;
2.Permitting banking organizations to neutralize the effects of purchasing assets through the Money Market Mutual Fund Liquidity Facility ("MMLF") on their risk-based and leverage capital ratios;
3.Providing banking organizations that implement the Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses, Topic 326, Measurement of Credit Losses on Financial Instruments, before the end of 2020 the option to delay for two years an estimate of the CECL methodology’s effect on regulatory capital, relative to the incurred loss methodology’s effect on capital, followed by a three-year transition period;
4.Allowing banking organizations to implement the final rule titled Standardized Approach for Calculating the Exposure Amount of Derivative Contracts (the "SA-CCR rule") for the first quarter of 2020, on a best efforts basis.
The Company has elected to exercise the option to delay for two years an estimate of the CECL methodology on regulatory capital.
The Company's and the bank's leverage capital, tier 1 risk-based capital, total risk-based capital, and CET1 risk-based capital ratios as of March 31, 2021 were above the levels required for a "well capitalized" regulatory designation.
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The following table sets forth the Company's and the bank's capital ratios, as well as the minimum capital adequacy requirements applicable to all financial institutions as of the dates indicated.

|  | Actual |  | Minimum Required for Capital Adequacy Purposes |  | Minimum Required to be Well Capitalized
(dollars in thousands) |  | Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Ratio
Company |  |  |  |  |  |  |  |  |  |  |  |
At March 31, 2021: |  |  |  |  |  |  |  |  |  |  |  |
Leverage capital |  | $ | 594,655 |  |  | 8.9 | % |  | $ | 268,903 |  |  | 4.0 | % |  |  |  | N/A
Tier 1 risk-based capital |  | 594,655 |  |  | 13.1 |  |  | 273,274 |  |  | 6.0 |  |  |  |  | N/A
Total risk-based capital |  | 699,899 |  |  | 15.4 |  |  | 364,366 |  |  | 8.0 |  |  |  |  | N/A
CET1 risk-based capital |  | 544,655 |  |  | 12.0 |  |  | 204,956 |  |  | 4.5 |  |  |  |  | N/A
At December 31, 2020: |  |  |  |  |  |  |  |  |  |  |  |
Leverage capital |  | $ | 581,358 |  |  | 8.8 | % |  | $ | 263,979 |  |  | 4.0 | % |  |  |  | N/A
Tier 1 risk-based capital |  | 581,358 |  |  | 12.9 |  |  | 271,027 |  |  | 6.0 |  |  |  |  | N/A
Total risk-based capital |  | 686,130 |  |  | 15.2 |  |  | 361,370 |  |  | 8.0 |  |  |  |  | N/A
CET1 risk-based capital |  | 531,358 |  |  | 11.8 |  |  | 203,270 |  |  | 4.5 |  |  |  |  | N/A
Central Pacific Bank |  |  |  |  |  |  |  |  |  |  |  |
At March 31, 2021: |  |  |  |  |  |  |  |  |  |  |  |
Leverage capital |  | $ | 632,702 |  |  | 9.4 | % |  | $ | 268,714 |  |  | 4.0 | % |  | $ | 335,892 |  |  | 5.0 | %
Tier 1 risk-based capital |  | 632,702 |  |  | 13.9 |  |  | 272,862 |  |  | 6.0 |  |  | 363,816 |  |  | 8.0 |
Total risk-based capital |  | 682,847 |  |  | 15.0 |  |  | 363,816 |  |  | 8.0 |  |  | 454,770 |  |  | 10.0 |
CET1 risk-based capital |  | 632,702 |  |  | 13.9 |  |  | 204,647 |  |  | 4.5 |  |  | 295,601 |  |  | 6.5 |
At December 31, 2020: |  |  |  |  |  |  |  |  |  |  |  |
Leverage capital |  | $ | 620,372 |  |  | 9.4 | % |  | $ | 263,735 |  |  | 4.0 | % |  | $ | 329,668 |  |  | 5.0 | %
Tier 1 risk-based capital |  | 620,372 |  |  | 13.7 |  |  | 270,821 |  |  | 6.0 |  |  | 361,094 |  |  | 8.0 |
Total risk-based capital |  | 670,087 |  |  | 14.9 |  |  | 361,094 |  |  | 8.0 |  |  | 451,368 |  |  | 10.0 |
CET1 risk-based capital |  | 620,372 |  |  | 13.7 |  |  | 203,115 |  |  | 4.5 |  |  | 293,389 |  |  | 6.5 |

Asset/Liability Management and Interest Rate Risk
Our earnings and capital are sensitive to risk of interest rate fluctuations. Interest rate risk arises when rate-sensitive assets and rate-sensitive liabilities mature or reprice during different periods or in differing amounts. In the normal course of business, we are subjected to interest rate risk through the activities of making loans and taking deposits, as well as from our investment securities portfolio and other interest-bearing funding sources. Asset/liability management attempts to coordinate our rate-sensitive assets and rate-sensitive liabilities to meet our financial objectives.
Our Asset/Liability Management Policy seeks to maximize the risk-adjusted return to shareholders while maintaining consistently acceptable levels of liquidity, interest rate risk and capitalization. Our Asset/Liability Management Committee, or ALCO, monitors interest rate risk through the use of interest rate sensitivity gap, net interest income and market value of portfolio equity simulation and rate shock analyses. This process is designed to measure the impact of future changes in interest rates on net interest income and market value of portfolio equity. Adverse interest rate risk exposures are managed through the shortening or lengthening of the duration of assets and liabilities.
ALCO utilizes a detailed and dynamic simulation model to measure and manage interest rate risk exposures. The simulation process is designed to measure the impact of future changes in interest rates on net interest income and market value of portfolio equity and to allow ALCO to model alternative balance sheet strategies.
The following reflects our net interest income sensitivity analysis as of March 31, 2021. Net interest income is estimated assuming no balance sheet growth under a flat interest rate scenario. The net interest income sensitivity is measured as the
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change in net interest income in alternate interest rate scenarios as a percentage of the flat rate scenario. The alternate rate scenarios typically assume rates move up or down 100 bps in an instantaneous, parallel fashion. However, due to historically low rates stemming from the COVID-19 pandemic, market rate changes in the down 100 bp scenario were limited.

Rate Change |  | Estimated Net Interest Income Sensitivity
+100 bp |  | 4.28 | %
-100 bp |  | (5.11) | %

Liquidity and Borrowing Arrangements
Our objective in managing liquidity is to maintain a balance between sources and uses of funds in order to economically meet the cash requirements of customers for loans and deposit withdrawals and participate in lending and investment opportunities as they arise. We monitor our liquidity position in relation to changes in loan and deposit balances on a daily basis to ensure maximum utilization, maintenance of an adequate level of readily marketable assets and access to short-term funding sources.
Core deposits have historically provided us with a sizable source of relatively stable and low cost funds, but are subject to competitive pressure in our market. In addition to core deposit funding, we also have access to a variety of other short-term and long-term funding sources, which include proceeds from maturities of our investment securities, as well as secondary funding sources such as the FHLB, secured repurchase agreements and the Federal Reserve discount window, available to meet our liquidity needs. While we historically have had access to these other funding sources, access to these sources may not be guaranteed and can be restricted in the future as a result of market conditions or the Company's and bank's financial position.
The bank maintained a $1.80 billion line of credit with the FHLB as of March 31, 2021, compared to $1.81 billion at December 31, 2020. There were no short-term borrowings under this arrangement at March 31, 2021, compared to $22.0 million at December 31, 2020. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled $237.1 million at March 31, 2021, compared to $268.0 million at December 31, 2020. There were no long-term borrowings under this arrangement at March 31, 2021 and December 31, 2020. FHLB advances and standby letters of credit available at March 31, 2021 were secured by certain real estate loans with a carrying value of $2.72 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB. At March 31, 2021, $1.56 billion was undrawn under this arrangement, compared to $1.52 billion at December 31, 2020.
At March 31, 2021 and December 31, 2020, our bank had additional unused borrowings available at the Federal Reserve discount window of $65.9 million and $64.5 million, respectively. As of March 31, 2021 and December 31, 2020, certain commercial and commercial real estate loans with a carrying value totaling $133.5 million and $136.9 million, respectively, were pledged as collateral on our line of credit with the Federal Reserve discount window. The Federal Reserve does not have the right to sell or repledge these loans.
To bolster the effectiveness of the PPP, the Federal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The Paycheck Protection Program Liquidity Facility ("PPPLF") will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. At March 31, 2021, there were no funds drawn from the Federal Reserve Bank under the PPPLF and no PPP loans pledged to the Federal Reserve Bank.
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, 2020. There have been no material changes in our contractual obligations since December 31, 2020.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency rates, commodity prices and equity prices. Our primary market risk exposure is interest rate risk that occurs when rate-sensitive assets and rate-sensitive liabilities mature or reprice during different periods or in differing amounts. Asset/liability management attempts to coordinate our rate-sensitive assets and rate-sensitive liabilities to meet our financial objectives. The Asset/Liability Committee ("ALCO") monitors interest rate risk through the use of interest rate sensitivity gap, net interest income and market value of portfolio equity simulation, and rate shock analyses. Adverse interest rate risk exposures are managed through the shortening or lengthening of the duration of assets and liabilities.
The primary analytical tool we use to measure and manage our interest rate risk is a simulation model that projects changes in net interest income ("NII") as market interest rates change. Our ALCO policy requires that simulated changes in NII should be within certain specified ranges, or steps must be taken to reduce interest rate risk. The results of the model indicate that the mix of rate-sensitive assets and liabilities at March 31, 2021 would not result in a fluctuation of NII that would exceed the established policy limits.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), the Company's management, including the principal executive officer and principal financial officer, conducted an evaluation of the effectiveness and design of the Company's disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, the Company's principal executive officer and principal financial officer concluded, as of the end of the period covered by this report, that the Company's disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
As of the end of the period covered by this report, t here have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a15(f) and 15d-15(f) of the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Certain claims and lawsuits have been filed or are pending against us arising in the ordinary course of business. In the opinion of management, all such matters are of a nature that, if disposed of unfavorably, would not have a material adverse effect on our consolidated results of operations or financial position.
Item 1A. Risk Factors
There have been no material changes from the Risk Factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on February 23, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
In January 2020, the Company’s Board of Directors authorized the repurchase of up to $30 million of its common stock from time to time in the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase program (the "Repurchase Plan"). The Repurchase Plan replaced and superseded in its entirety the share repurchase program previously approved by the Company's Board of Directors.
In March 2020, the Company temporarily suspended the Repurchase Plan due to uncertainty during the current COVID-19 pandemic. As a result, the Company did not repurchase any shares of common stock under the Company's Repurchase Plan during the remainder of 2020.
On January 26, 2021, the Company's Board of Directors approved a new share repurchase authorization of up to $25 million of its common stock. As of March 31, 2021, $25.0 million remained available for repurchase as the Company did not repurchase any shares during the first quarter of 2021. We cannot provide any assurance as to when or if we will recommence our share repurchase program.

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

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Item 6. Exhibits

Exhibit No. |  | Document
31.1 |  | Rule 13a-14(a) Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2 |  | Rule 13a-14(a) Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1 |  | Section 1350 Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 **
32.2 |  | Section 1350 Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 **
101.INS |  | XBRL Instance Document*
101.SCH |  | XBRL Taxonomy Extension Schema Document*
101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB |  | XBRL Taxonomy Extension Label Linkbase Document*
101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF |  | XBRL Taxonomy Extension Definition Linkbase Document*
104 |  | Cover Page Interactive Data File (formatted as Inline XBRL and included within the Exhibit 101 attachments)
* |  | Filed herewith.
** |  | Furnished herewith.

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

|  | CENTRAL PACIFIC FINANCIAL CORP.
|  | (Registrant)
Date: | April 28, 2021 | /s/ Paul K. Yonamine
|  | Paul K. Yonamine
|  | Chairman and Chief Executive Officer
Date: | April 28, 2021 | /s/ David S. Morimoto
|  | David S. Morimoto
|  | Executive Vice President and Chief Financial Officer

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