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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

We are a bank holding company that, through our banking subsidiary, Central Pacific Bank, offers full service commercial banking in the state of Hawaii.

We strive to provide exceptional customer service and products that meet our customers' needs. Our products and services consist primarily of the following:

•Loans: Our loans consist of commercial, financial and agricultural, commercial mortgage, and construction loans to small and medium-sized companies, business professionals, and real estate investors and developers, as well as residential mortgage, home equity and consumer loans to local homeowners and individuals. Our lending activities contribute to a key component of our revenues reported in interest income.

•Deposits: We offer a full range of deposit products and services including checking, savings and time deposits, cash management, and digital banking services. We also maintain a broad branch and ATM network in the state of Hawaii. The interest paid on such deposits has a significant impact on our interest expense, an important factor in determining our earnings. In addition, fees and service charges on deposit accounts contribute to our revenues.

Additionally, we offer wealth management products and services, such as non-deposit investment products, annuities, insurance, investment management, asset custody and general consultation and planning services.

Executive Overview

In 2021, we believe we delivered strong financial performance for the Company despite the pandemic environment.

•We recorded net income of $79.9 million, or $2.83 per diluted common share in 2021, compared to $37.3 million, or $1.32 per diluted common share in 2020.

•We recorded return on average assets ("ROA") and return on average shareholders' equity ("ROE") ratios of 1.13% and 14.38%, respectively, in 2021, compared to ROA and ROE ratios of 0.58% and 6.85%, respectively, in 2020.

•Asset quality remains strong as our nonperforming assets totaled $5.9 million, or 0.08% of total assets at December 31, 2021, compared to $6.2 million, or 0.09% of total assets at December 31, 2020.

•We realized strong core loan growth of $462.6 million, or 10.2% (excluding Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans), or total loan growth of $137.5 million, or 2.8% (including PPP loans), as well as strong core deposit growth of $1.02 billion, or 19.9% in 2021.

•Our capital position and consistent profitability allowed us to increase our regular cash dividends paid from $0.92 per share in 2020 to $0.96 per share in 2021. In addition, we repurchased 696,894 shares of common stock under our share repurchase program for $18.7 million, or an average of $26.79 per share.

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 included initiatives in the following key areas of opportunity: Digital Banking, Revenue Enhancements, Branch Transformation and Operational Excellence. RISE2020 was 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 was 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. Following the completion, we continue to monitor and further enhance our facilities, platforms and processes that were part of the RISE2020 initiative.

Banking-as-a-Service ("BaaS") Initiative

In January 2022, the Company announced the launch of a new BaaS initiative with the goal of expanding the Company both in and beyond Hawaii by investing in or collaborating with leading fintech companies. The BaaS initiative is being developed based on the successful product development and launch strategies used in the Company's new Shaka digital product. Shaka, Hawaii’s first all-digital checking account, was launched with a VIP waitlist campaign and a large social media influencer campaign. As of February 18, 2022, over 3,500 Shaka accounts have been opened since the product launch on November 8, 2021.

Beginning in the first quarter of 2022, the Company will continue its BaaS initiatives with an equity investment in Swell Financial, Inc. ("Swell"), a new fintech company. Swell plans to launch a consumer banking app that combines checking, credit and more into one integrated account, and Central Pacific Bank will serve as the bank sponsor. There will also be a collaboration between the Company, Swell and Elevate Credit, Inc. (NYSE:ELVT), a leading provider of digital lending solutions. Swell is scheduled to launch its first product in mid-2022, which is all-digital and available for consumers across most of the U.S. Mainland.

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 II, Item 8. Financial Statements and Supplementary Data."

COVID-19 Pandemic

The ongoing novel coronavirus disease ("COVID-19") pandemic caused significant disruption in the local, national and global economies and financial markets in 2020. While the economy now appears to be on a track for recovery and most COVID-19 related restrictions have been lifted, continuation and worsening of COVID-19 could cause 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. While interest rates have remained low, inflation has significantly increased. We expect future increases in interest rates to moderate inflation which in effect may adversely impact the Company's loan origination and sales and pressure funding costs. Changes in market interest rates, which we do not control or have little to no influence over, affect our net interest income, margins and profitability. Therefore, we control the composition of our financial assets and liabilities with asset repricing options and maintain models that monitor those positions and sensitivity of our interest rate risk to best mitigate the adverse effects of the changing interest rate environment.

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. Hawaii's economy which was significantly impacted by COVID-19, appears to be on track for recovery. Most of the government imposed restrictions have been loosened, and the tourism industry has started to rebound. While like the rest of the nation, the state of Hawaii experienced a rise in COVID-19 cases related to the Delta and Omicron variants, the recent cases have been less severe. Large scale shutdowns like those that occurred in 2020 are unlikely as the majority of the population is now vaccinated and it is anticipated that we will shift from a pandemic to an endemic as society learns to live with the virus. As of February 2, 2022 the Centers for Disease Control and Prevention reported there were 224,257 cumulative cases (7-day moving average of 1,463 new infections and 10.3% positivity rate) and 1,204 COVID-19-related deaths in Hawaii. As of February 2, 2022, 75.0% of Hawaii's population has been fully vaccinated.

The state of Hawaii has successfully run its ‘Safe Travels’ program since July 2021, which allows travelers who were fully vaccinated in the United States or its territories to enter Hawaii on domestic flights without pretravel testing/quarantine starting the 15th day after the completion of their vaccination. Visitor arrivals greatly increased in the summer of 2021 with the daily average exceeding 30,000 per day in July 2021, or approximately 90% of pre-pandemic levels. However, in August 2021, similar to many other states, Hawaii experienced a spike in COVID-19 cases due to the Delta variant. To mitigate further spread and due to concerns over hospital capacity, Governor Ige asked that only essential travel to Hawaii occur which resulted in a decline to approximately 20,000 per day in September 2021. Governor Ige welcomed back vaccinated visitors in November

2021. Travel picked up during the holidays in December 2021 and visitors averaged approximately 27,000 per day. In January 2022, visitors were approximately 23,000 per day. In response to the Omicron variant, certain foreign travel restrictions have been imposed which will delay the return of international visitors, and the full impacts in Hawaii remain uncertain.

Hawaii's unemployment rate decreased to 5.7% during the month of December 2021 and is significantly down from its peak of 21.9% in April and May of 2020.

Financial position and results of operations

Through guidance from regulatory agencies, the Company prudently worked with its borrowers impacted by COVID-19 to defer payments, interest, and fees. Loans on active payment forbearance or deferrals granted to borrowers impacted by the COVID-19 pandemic peaked at $605 million in May 2020. Since then nearly all borrowers who received payment forbearance or deferral have resumed payments. As of December 31, 2021, $0.4 million, or 0.01% of the total loan portfolio, remained on payment deferral.

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. Due to the significant decline in loans on active forbearance or deferral, the Company reversed the $0.2 million reserve during the second quarter of 2021 and no longer has a reserve on accrued interest receivable as of December 31, 2021.

To support our customers during the onset of the pandemic, 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.

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 maintains access to multiple sources of liquidity and wholesale funding markets have remained open. During 2020 and 2021, we experienced a significant inflow of deposits due to government stimulus and general market uncertainty; however, this may not continue.

To further strengthen its capital position, the Company issued $55.0 million in subordinated debt in October 2020 which is classified as tier 2 capital for regulatory purposes, and down-streamed $46.8 million of the net proceeds from our offering to the bank, which qualifies as tier 1 capital for regulatory purchases for the bank.

In March 2020, we decided to suspend our share repurchase program in light of the pandemic. In January 2021, our Board of Directors approved a new authorization to repurchase up to $25 million in common stock. In 2021, the Company repurchased 696,894 shares of common stock under our share repurchase program for $18.7 million, or an average of $26.79 per share.

During the second and third quarters of 2021, the Company repurchased 391,300 shares of common stock for $10.2 million and recorded $6.5 million against common stock and $3.7 million against retained earnings. During the fourth quarter of 2021, the Company elected to apply the total cost of all shares repurchased in 2021 and going forward as a reduction to common stock. This resulted in a $3.7 million reclassification adjustment to increase retained earnings and a corresponding $3.7 million decrease in common stock during the fourth quarter of 2021 related to the repurchases completed in the second and third quarters of 2021. This reclassification adjustment did not impact net income, our consolidated statements of income, comprehensive income and cash flows, or any of the Company's financial ratios.

Asset valuation

COVID-19 has not affected the Company’s ability to account timely for the assets on its balance sheet. The Company has also not made significant changes in the methodology used to determine the fair value of assets measured in accordance with GAAP, except for updating certain valuation assumptions to account for pandemic-related circumstances such as widening credit spreads.

The Company has a significant real estate loan portfolio. Thus far, Hawaii real estate market continues to be extremely strong and real estate collateral values have remained relatively stable, but we cannot be assured this will continue.

Processes, controls and business continuity plan

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

The Company deployed a remote workforce plan at the onset of the pandemic in 2020 and has been able to continue operations without disruption as well as maintain its systems and internal controls in light of the measures the Company has taken to prevent the spread of COVID-19. 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. In September 2021, the Company implemented required weekly COVID testing for the small portion of its workforce that remained unvaccinated. Over 95% of the Company’s employees are fully vaccinated as of December 31, 2021.

Lending operations and accommodations to borrowers

To support its customers during the onset of the pandemic in 2020, 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, 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 were reinstated but the increased spending cap limits will remain in place temporarily.

The SBA began accepting submissions for the initial round of PPP loans on April 3, 2020. In April 2020, the Paycheck Protection Program and Health Care Enhancement Act added an additional round of funding for the PPP. In June 2020, the Paycheck Protection Program Flexibility Act of 2020 was enacted, which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Through the end of the second round in August 2020, the Company funded over 7,200 PPP loans totaling $558.9 million and received gross processing fees of $21.2 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 2021, the Company funded over 4,600 loans totaling $320.9 million in the third round, which ended on May 31, 2021, and received additional gross processing fees of $18.4 million.

The Company has developed a PPP forgiveness portal and, with assistance from a third party vendor, has assisted its customers with applying for forgiveness from the SBA. We have received forgiveness payments and repayments from borrowers totaling $784.9 million as of December 31, 2021. A total outstanding balance of $94.9 million and net deferred fees of $3.5 million remain as of December 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 had previously become aware of two PPP loans that it originated for $10.0 million and $3.0 million, in which they were under investigation for borrower fraud and/or misrepresentations. The $10.0 million PPP loan was fully repaid for all principal and interest outstanding by the SBA in the third quarter of 2021 under their 100% guarantee. The $3.0 million loan was partially forgiven by the SBA, and the remaining principal balance on the loan totaled $0.3 million at December 31, 2021.

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 was deferring either the full loan

payment or the principal component of the loan payment for generally three to six months for its commercial real estate and commercial and industrial loan customers on a case-by-case basis depending on need. Nearly all of loans that were granted forbearance or deferral have returned to payment. As of December 31, 2021, the Company had loan payment forbearance or deferrals on outstanding balances of $0.4 million, or 0.01% of total loans.

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. As of December 31, 2021, there were no loans with modifications that 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)".

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 balance was reversed during the second quarter of 2021 due to the significant decline in loans on active forbearance or deferral. The Company no longer has a reserve on accrued interest receivable as of December 31, 2021.

Credit

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 $0.4 million, or 0.01% of total loans, at December 31, 2021. Most borrowers have resumed payments with the total count on active deferral dropping from a peak of 467 at May 31, 2020 to 36 at December 31, 2021. The Company is providing alternative payment plans on a limited basis following the end of the payment deferral period. Our consumer loan payment deferrals totaled $0.4 million at December 31, 2021, compared to $2.3 million at December 31, 2020. There were no residential mortgage loans on active payment forbearance at December 31, 2021, compared to $70.4 million at December 31, 2020. There were no commercial, commercial real estate and construction loan portfolio loans on active payment deferral at December 31, 2021, compared to $47.5 million at December 31, 2020.

Criticized loans at December 31, 2021 decreased by $116.3 million from the previous year to $76.0 million, or 1.5% of the total loan portfolio excluding PPP loans. Special mention loans decreased by $110.8 million to $31.7 million, or 0.6% of the total loan portfolio excluding PPP loans. Classified loans decreased by $5.5 million to $44.3 million, or 0.9% of the total loan portfolio excluding PPP loans.

The Company believes that the residential, home equity and commercial real estate and construction loan portfolios are lower risk. These loans comprise of $3.86 billion or 77.0% of our total loan portfolio, net of PPP loans. Overall, the Company's loan portfolio remains well diversified.

Business Environment

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

Following 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 continued to be impacted by the COVID-19 pandemic in 2021, however the state is making progress towards economic recovery as travel restrictions have started to loosen. Starting July 2021, passengers arriving from out-of-state could bypass the State’s mandatory 10-day self-quarantine if they were fully vaccinated in the United States or with a valid negative COVID-19 NAAT test result from a Trusted Testing Partner prior to their departure through the Safe Travels program.

According to preliminary year-end statistics from the Hawaii Tourism Authority ("HTA"), approximately 6.8 million total visitors arrived in the state in the year ended December 31, 2021. This was an increase approximately 150.3% from the 2.7 million visitor arrivals in the year ended December 31, 2020, but a decline of approximately 34.7% from the pre-pandemic and record year in 2019. The HTA also reported that total spending by visitors was $13.0 billion in the year ended December 31,

2021 (total spending statistics for 2020 were not available), which declined by approximately 26.6% from the pre-pandemic and record year in 2019. According to a recent report by The Economic Research Organization at the University of Hawaii ("UHERO"), total visitor arrivals is expected to increase to approximately 8.3 million in 2022 and visitor spending is expected to increase to approximately $16.5 billion in 2022.

The Department of Labor and Industrial Relations reported that Hawaii's seasonally adjusted annual unemployment rate 5.7% in the month of December 2021, The unemployment rate of 5.7% in December 2021 continues to decline from the high of 21.9% in the months of April and May 2020, but remains above the national seasonally adjusted unemployment rate of 3.9%. UHERO projects Hawaii's seasonally adjusted annual unemployment rate to be around 5.4% in 2022.

Hawaii's economy is measured by the growth of real personal income and real gross state product. The State of Hawaii's Department of Business, Economic Development and Tourism ("DBEDT") is expected to report real personal income grew by approximately 0.1% and real gross state product grew by approximately 3.9% for 2021. DBEDT projects real personal income to decline by 3.2% and real gross state product to increase by 3.0% for 2022.

Real estate lending is a primary focus for us, including residential mortgage and commercial mortgage loans. As a result, we are dependent on the strength of Hawaii's real estate market. 2021 was a record year for the Oahu real estate market. According to the Honolulu Board of Realtors, the median resale price for a single-family on Oahu exceeded $1 million during the months of August to December 2021. For the year ended December 31, 2021, the median price for a single-family home on Oahu was $990,000, representing an increase of 19.3% from the median resale price of $830,000 for the year ended December 31, 2020. The median resale price for condominiums on Oahu was $475,000 for the year ended December 31, 2021, representing an increase of 9.2% from the median resale price of $435,000 for the year ended December 31, 2020. Oahu unit sales volume increased by 17.9% for single-family homes, and increased by 53.1% for condominiums in 2021 from 2020.

As we have seen in the past, our operating results are significantly impacted by the economy in Hawaii and the composition of our loan portfolio. Loan demand, deposit growth, provision for credit losses, asset quality, noninterest income and noninterest expense are all affected by changes in economic conditions. If the residential and commercial real estate markets we have exposure to deteriorate our results of operations would be negatively impacted. See the "Overview of Results of Operations—Concentrations of Credit Risk" section for a further discussion on how a deteriorating real estate market, combined with the elevated concentration risk within our portfolio, could have a significant negative impact on our asset quality and credit losses.

In an attempt to help the overall economy, the FRB has kept interest rates low through its targeted Fed Funds rate. On March 3, 2020, the Federal Reserve reduced the Federal Funds range by 50 basis points to 1.00% to 1.25%. On March 15, 2020, the Federal Reserve further reduced the 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. During the remainder of 2020 and all of 2021, the Federal Reserve elected to hold the Federal Funds rate at 0% to 0.25%. Officials expect rates to increase beginning in 2022 due to increased inflation risks.

Changes in monetary policy, including changes in interest rates, could influence, among other things, (i) the amount of interest we receive on loans and securities, (ii) the amount of interest we pay on deposits and borrowings, (iii) our ability to originate loans and obtain deposits, and (iv) the fair value of our assets and liabilities.

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 a number of judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense in the financial statements and the related disclosures made. Various elements of our accounting policies, by their nature, involve the application of highly sensitive and judgmental estimates and assumptions. Some of these policies and estimates relate to matters that are highly complex and contain substantial inherent uncertainties. Actual amounts and values as of the balance sheet dates may be materially different than the amounts and values reported due to the inherent uncertainty in the estimation process. Also, future amounts and values could differ materially from those estimates due to changes in values and circumstances after the balance sheet date.

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 policy and 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, 2021, 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 credit losses. This is further described in Note 1 - Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements in this report.

On January 1, 2020, the Company adopted Accounting Standards Update ("ASU") 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which created material changes to the Company’s existing critical accounting policy that existed at December 31, 2019. Effective January 1, 2020 through December 31, 2021, 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 provisioning of current expected credit losses as a charge to current earnings. Loan losses are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed while allowance is credited if subsequent recoveries are made. The amount maintained in the ACL reflects management’s continuing evaluation of the estimated credit losses expected to be recognized over the life of the loans in our loan portfolio at the balance sheet date. Allowance for credit losses is measured on a collective basis when similar risk characteristics exist. 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.

Overview of Results of Operations

2021 vs. 2020 Comparison

In 2021, we recognized net income of $79.9 million, or fully diluted earnings per common share ("EPS") of $2.83, compared to net income of $37.3 million, or EPS of $1.32, in 2020. Our ROA and ROE for 2021 was 1.13% and 14.38%, respectively, compared to 0.58% and 6.85%, respectively, in 2020.

We recorded a credit to the provision for credit losses of $14.6 million in 2021, compared to a debit to the provision of $42.1 million in 2020. The credit to the provision for credit losses was driven by the improved economic forecast assumptions used in our credit reserve modeling, improvements in the loan portfolio and lower net charge-offs in 2021.

Net interest income increased by $13.4 million from 2020 to 2021, primarily driven by higher net interest income and fees on PPP loans, combined with lower deposit and borrowing costs due to the historically low interest rate environment, partially offset by lower yields earned on the loans and investment securities portfolios.

Other operating income decreased by $2.1 million from 2020 to 2021. The decrease in other operating income was primarily due to lower mortgage banking income, partially offset by higher ATM fees included in other service charges and fees. See Table 3 - Components of Other Operating Income for more information.

Other operating expense increased by $11.3 million from 2020 to 2021. The increase was primarily due to higher salaries and employee benefits, higher legal and professional services, higher advertising expense, and higher directors' deferred compensation plan expense. The higher salaries and employee benefits in 2021 is primarily attributable to strategic hirings for the Company's RISE2020 and BaaS initiatives, higher incentive compensation due to stronger Company performance,and non-recurring severance costs. See Table 4 - Components of Other Operating Expense for more information.

2020 vs. 2019 Comparison

In 2020, we recognized net income of $37.3 million, or EPS of $1.32, compared to net income of $58.3 million, or EPS of $2.03, in 2019. Our ROA and ROE for 2020 was 0.58% and 6.85%, respectively, compared to 0.99% and 11.36%, respectively, in 2019.

We recorded a provision for credit losses of $42.1 million in 2020, compared to a credit of $6.3 million in 2019. The higher provision for credit losses was driven by the economic forecast which captured the effect of the COVID-19 pandemic and led to the decline in net income, EPS, ROA and ROE in 2020 compared to 2019.

Net interest income increased by $13.6 million from 2019 to 2020, primarily driven by lower deposit and borrowing costs due to the historically low interest rate environment due to the pandemic environment, combined with net interest income and fees on PPP loans, partially offset by lower yields earned on the loans and investment securities portfolios.

Other operating income increased by $3.4 million from 2019 to 2020. The increase in other operating income was primarily due to higher mortgage banking income, partially offset by lower service charges on deposit accounts. In addition, the Company recorded a gain of $2.6 million during the first quarter of 2019 from the conversion of MasterCard Class B common stock received during their initial public offering to Class A common stock and immediate sale of the converted shares. See Table 3 - Components of Other Operating Income for more information.

Other operating expense increased by $10.1 million from 2019 to 2020. The increase in other operating expense was primarily due to higher salaries and employee benefits, higher computer software expenses, higher legal and professional expenses, branch consolidation costs, and higher advertising expense, partially offset by lower director deferred compensation plan expense and lower entertainment and promotions expense. See Table 4 - Components of Other Operating Expense for more information.

Net Interest Income

The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the yields and rates thereon. Net interest income, when 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%. Table 2 presents an analysis of changes in components of net interest income between years. 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.

Table 1. Average Balances, Interest Income and Expense, Yields, and Rates (Taxable-Equivalent)

Assets

Interest-earning assets:

Investment securities, excluding valuation allowance:

Liabilities and Equity

Interest-bearing liabilities:

Non-controlling interest 25 2 —

(1) At amortized cost.

(2) Includes nonaccrual loans.

Table 2. Analysis of Changes in Net Interest Income (Taxable-Equivalent)

Increase (Decrease)Due to Change In: Increase (Decrease)Due to Change In:

(Dollars in thousands) Volume Rate NetChange Volume Rate NetChange

Interest-earning assets

Investment securities, excluding valuation allowance:

Interest-bearing liabilities

The banking and financial services industry in the state of Hawaii generally, and particularly in our target market areas, is highly competitive. Net interest income is our primary source of earnings and is derived primarily from the difference between the interest we earn on loans and investments versus the interest we pay on deposits and borrowings. Net interest income (expressed on a taxable-equivalent basis) totaled $211.6 million in 2021, which increased by $13.3 million, or 6.7%, from $198.3 million in 2020, which increased by $13.4 million, or 7.3%, from net interest income of $184.9 million recognized in 2019. The increase in net interest income for 2021 was primarily the result of higher net interest income and fees on PPP loans, combined with lower deposit and borrowing costs due to the historically low interest rate environment during the pandemic environment, partially offset by lower yields earned on the loans and investment securities portfolios. In 2021, the Company recognized net interest income and fees on PPP loans of $26.4 million, compared to $12.2 million in 2020.

Average yields earned on our interest-earning assets declined by 24 bp in the year ended December 31, 2021, from the year ended December 31, 2020. The decline in average yields earned on interest-earning assets in 2021 was primarily attributable to the 51 bp decrease in average yields earned on investment securities and the 1 bp decrease in average yields earned on loans. Excluding net interest income and fee on PPP loans, the normalized average yield on loans in 2021 was 3.58%, compared to the normalized average yield on loans in 2020 of 3.87%

Average rates paid on our interest-bearing liabilities in the year ended December 31, 2021 declined by 18 bp from the year ended December 31, 2020. The decline in average rates paid on our interest-bearing liabilities in 2021 was primarily attributable to the 58 bp decrease in average rates paid on our time deposits over $250,000, the 41 bp decrease in average rates paid on our time deposits up to $250,000, the 7 bp decrease in average rates paid on our savings and money market deposits and the 50 bp decrease in average rates paid on our FHLB advances and other short-term borrowings..

proceeds in $98.8 million in higher yield investment securities with an average yield of 1.55% and a weighted average life of 6.1 years. The investment securities sold had an average yield of 1.13% and a weighted average life of 2.6 years. Gross realized gains and losses on the sale of the investment securities were $1.1 million and $1.0 million, respectively. The specific identification method was used as the basis for determining the cost of all securities sold.

In the second quarter of 2021, $175.0 million in available-for-sale were sold as part of an investment portfolio rebalancing strategy due to faster than expected prepayments. We received $175.0 million in gross proceeds and reinvested the proceeds in $186.1 million in higher yield investment securities with an average yield of 1.70% and a weighted average life of 6.9 years. The investment securities sold had an average yield of -0.11% and a weighted average life of 1.6 years. Gross realized losses and gains on the sale of the investment securities were $2.2 million and $2.2 million, respectively. The specific identification method was used as the basis for determining the cost of all securities sold.

In the fourth quarter of 2020, $89.9 million in available-for-sale securities were sold as part of an investment portfolio rebalancing strategy due to the large downward shift in interest rates and the change in expected prepayments. We received $90.1 million in gross proceeds and reinvested the proceeds in $105.1 million in higher yield, longer duration investment securities with an average yield of 1.27% and a weighted-average life of 4.6 years. The investment securities sold had an average yield of 0.28% and a weighted-average life of 1.2 years. Gross realized losses and gains on the sale of the investment securities were $0.3 million and $0.5 million, respectively. The specific identification method was used as the basis for determining the cost of all securities sold.

In the third quarter of 2020, $90.4 million in available-for-sale non-agency commercial mortgage-backed securities with retail mall exposure were sold to mitigate credit risk during the pandemic. The investment securities sold had an average yield of 3.44% and a weighted-average life of 14.03 years. Gross realized gains and losses on the sale of the investment securities were $0.2 million and $0.6 million, respectively. The specific identification method was used as the basis for determining the cost of all securities sold.

Interest Income

Our primary sources of interest income include interest on loans, which represented 88.4%, 87.4%, and 84.1% of taxable-equivalent interest income in 2021, 2020 and 2019, respectively, as well as interest earned on investment securities, which represented 11.4%, 12.4% and 15.4% of taxable-equivalent interest income, respectively. Interest income expressed on a taxable-equivalent basis of $219.3 million in 2021 increased by $6.2 million, or 2.9%, from the $213.1 million earned in 2020, which decreased by $4.1 million, or 1.9%, from the $217.2 million earned in 2019.

The increase in interest income in 2021 from 2020 was primarily due to higher net interest income and fees on PPP loans of $14.2 million due to higher forgiveness and payoffs, combined with the $238.4 million increase in average investment securities which contributed to an increase of $5.4 million in current year interest income. These increases were partially offset by a decline in average yields earned on the investment securities portfolio of 51 bp, which contributed to decline in current year interest income of $6.8 million. In addition, the normalized average yield on core loans (or total loans excluding PPP loans) declined by 29 bp.

The decrease in interest income in 2020 from 2019 was primarily due to the decline in average yields earned on the loans and investment securities portfolios of 48 bp and 34 bp, respectively, which contributed to decreases in 2020 interest income of $23.2 million and $3.8 million, respectively, from 2019. The $117.7 million decline in average investment securities also contributed to a decrease of $3.2 million in 2020 interest income from 2019. These decreases were partially offset by a $613.9 million increase in average loans, which contributed to an increase of $26.6 million in 2020 interest income from 2019. The increase in average loans was largely attributable to a $358.3 million average PPP loan portfolio, which contributed to an increase of $12.2 million in 2020 net interest income and an average yield of 3.41%.

Interest Expense

In 2021, interest expense was $7.7 million which represented a decrease of $7.0 million, or 47.6%, compared to interest expense of $14.7 million in 2020, which was a decrease of $17.6 million, or 54.4%, compared to $32.3 million in 2019.

In 2021, the decreases in the average rates paid on savings and money market deposits of 7 bp, time deposits up to $250,000 of 41 bp, and time deposits of over $250,000 of 58 bp, contributed to the decrease in interest expense in 2021 from 2020of $1.5 million, $0.9 million, and $3.2 million, respectively. In addition, the decrease in average time deposits over $250,000 and the decrease in average FHLB advances and other short-term borrowings contributed to the decrease in current year interest expense of $1.2 million and $0.7 million, respectively.

In 2020, the decreases in the average rates paid on savings and money market deposits of 20 bp, time deposits of over $250,000 of 117 bp, FHLB advances and other short-term borrowings of 151 bp, and long-term debt of 94 bp, contributed to the decrease in interest expense in 2021 from 2020of $3.6 million, $8.2 million, $1.4 million, and $1.1 million, respectively. In addition, the decreases in average time deposits of $250,000 and over and FHLB advances and other short-term borrowings contributed to the decrease in 2020 interest expense of $1.2 million and $0.7 million, respectively.

Net Interest Margin

Our net interest margin was 3.18%, 3.30% and 3.35% in 2021, 2020 and 2019, respectively. The decrease in our net interest margin in 2021 from 2020 was primarily due to lower yields on our interest-earning assets due to the historically low interest rate environment we are currently operating in due to the pandemic environment. Average yields earned on interest-earning assets declined by 24 bp, led by declines in average yields earned on investment securities of 51 bp. Excluding net interest income and fees on PPP loans, our normalized average yield on loans declined by 29 bp. These decreases were partially offset by a 18 bp decrease in average rates paid on interest-bearing liabilities.

The decrease in our net interest margin in 2020 from 2019 was primarily due to lower yields on our interest-earning assets. Average yields earned on interest-earning assets declined by 40 bp, led by declines in average yields earned on loans and investment securities of 48 bp and 34 bp, respectively. These decreases were partially offset by a 47 bp decrease in average rates paid on interest-bearing liabilities.

During 2021, the Federal Reserve maintained its Federal Funds range at 0% to 0.25%. Federal Reserve officials have stated they expect to raise interest rates beginning in 2022 due to inflation concerns.

Other Operating Income

The following table sets forth components of other operating income and the total as a percentage of average assets for the periods indicated.

Table 3. Components of Other Operating Income

Dollar Change Percent Change

Mortgage banking income:

Other:

Gain on sale of MasterCard stock — — 2,555 — (2,555) N.M. (100.0) *

* Not meaningful ("N.M.")

Total other operating income of $43.1 million in 2021 decreased by $2.1 million, or 4.7%, from the $45.2 million earned in 2020, which increased by $3.4 million, or 8.1%, from the $41.8 million earned in 2019.

The decrease in other operating income in 2021 from 2020 was primarily due to lower mortgage banking income of $6.0 million and lower bank-owned life insurance of $0.3 million, partially offset by higher other service charges and fees of $3.5 million. The lower mortgage banking income was primarily attributable to fewer loans sold as more loans were placed in our residential mortgage loan portfolio in 2021 compared to 2020, combined with thinner gain on sale margins. The Company's Home Loans division had another impressive year with $1.18 billion in loan originations in 2021, down just slightly from the record $1.20 billion in loan originations in 2020. The lower amortization of mortgage servicing rights (included in mortgage banking income) was primarily attributable to the increase in market interest rates. These decreases were partially offset by higher other service charges and fees, primarily attributable to higher ATM and debit card fees. During the second quarter of 2020, certain service charges were suspended to support our customers through the pandemic. In addition, there were less transactional activity due to the pandemic resulting in lower service charges on deposit accounts and other service charges and fees during 2020.

The increase in other operating income in 2020 from 2019 was primarily due to higher mortgage banking income of $7.0 million and higher bank-owned life insurance of $0.7 million. The higher mortgage banking income was attributable to a

Company record $1.20 billion in loan originations by the Company's Home Loan division in 2020. The higher amortization of mortgage servicing rights (included in mortgage banking income) was primarily attributable to the decline in market interest rates. The higher income from bank-owned life insurance was primarily attributable to volatility in the equity markets. These increases were partially offset by lower service charges on deposit accounts of $2.2 million and a one-time gain of $2.6 million from the conversion of MasterCard Class B common stock received during their initial public offering to Class A common stock and immediate sale of the converted shares in the first quarter of 2019.

Other Operating Expense

The following table sets forth components of other operating expense and the total as a percentage of average assets for the periods indicated.

Table 4. Components of Other Operating Expense

Dollar Change Percent Change

Other:

* Not meaningful ("N.M.")

Total other operating expense of $163.0 million in 2021 increased by $11.3 million, or 7.5%, from total operating expense of $151.7 million in 2020, which increased by $10.1 million, or 7.2%, compared to 2019.

The increase in total other operating expense in 2021, compared to 2020, was primarily due to higher salaries and employee benefits of $6.4 million, higher net occupancy expense of $1.0 million, higher legal and professional services of $1.4 million, higher advertising expense of $1.7 million, and higher directors' deferred compensation plan expenses of $2.2 million. The increase in salaries and employee benefits is primarily due to strategic hiring for our RISE2020 and BaaS initiatives, higher incentive compensation due to improved Company performance and nonrecurring severance payments. The higher advertising expense is primarily due to the Company's new branding along with marketing expenses for our new Shaka product. Fluctuations in the directors' deferred compensation expense are primarily due to volatility in the equity markets. These increases were partially offset by several nonrecurring expenses in late 2020 which included: $1.6 million in branch consolidation costs related to the consolidation of three in-store branches and one traditional branch in 2020 compared to $0.4 million in branch consolidation costs related to the consolidation of one traditional branch in 2021, $0.8 million in settlements of legal proceedings, a $0.7 million FHLB advance prepayment fee, and $0.6 million in losses on disposal of fixed assets in 2020, compared to $0.1 million in losses in 2021.

The increase in total other operating expense in 2020, compared to 2019, was primarily due to a higher salaries and employee benefits of $3.0 million, higher computer software expense of $1.9 million, higher legal and professional services of $1.7 million, higher advertising expense of $1.1 million, and higher FDIC insurance assessment of $1.0 million. The increase in the FDIC insurance assessment is primarily due to the increase in deposits, combined with the Small Bank Assessment Credits which were used up during the second quarter of 2020. In addition, the Company recognized several nonrecurring expenses in late 2020 totaling $5.9 million which included: $2.0 million in employee incentives and other benefits, $1.6 million in branch consolidation costs related to the closure of three in-store branches and one traditional branch in 2020, $0.8 million in settlements of legal proceedings, a $0.7 million FHLB advance prepayment fee, $0.6 million in losses on disposal of fixed assets and $0.5 million in other nonrecurring expenses (included in other). These increases were partially offset by lower directors' deferred compensation expense of $1.5 million and lower entertainment and promotions expense of $1.3 million.

A key measure of operating efficiency tracked by management is the efficiency ratio, which is calculated by dividing total other operating expenses by total pre-provision revenue (net interest income plus 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. Our efficiency ratio increased to 64.16% in 2021, compared to 62.47% in 2020 and 62.69% in 2019. The increase in our efficiency ratio in 2021 was primarily driven by the aforementioned increases in other operating expenses, partially offset by increases in net interest income.

In 2021, the provision for off-balance sheet credit exposures was reclassified from other operating expense and is now included in the provision for credit losses in the consolidated statements of income. The efficiency ratio in prior periods has been adjusted retrospectively to reflect this change.

The following table sets forth a reconciliation to our efficiency ratio for each of the dates indicated and the impact of the reclassification of the provision for credit losses in the consolidated statements of income:

Table 5. Reconciliation of Efficiency Ratio

As Reclassified:

Unadjusted:

Impact of Change:

Total operating expenses $ — $ (2,994) $ (29)

Net interest income — — —

Total other operating income — — —

Total revenue $ — $ — $ —

Efficiency ratio — % (1.24) % (0.01) %

Income Taxes

In 2021, the Company recorded income tax expense of $25.8 million, compared to $11.8 million in 2020, and $19.6 million in 2019. Our effective tax rate was 24.4% in 2021 compared to 24.0% in 2020 and 25.2% in 2019.

The increase in income tax expense and the effective tax rate in 2021 from 2020 was primarily attributable to higher pre-tax income, combined with lower tax-exempt income, decreasing the impact of net favorable permanent differences, primarily due to a credit to the provision for credit losses.

The decrease in income tax expense and the effective tax rate in 2020 from 2019 was primarily attributable to lower pre-tax income, increasing the impact of net favorable permanent differences, primarily due to a higher provision for credit losses.

As of December 31, 2021, the valuation allowance on our net deferred tax assets ("DTA") totaled $3.4 million, of which $3.2 million 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 $0.2 million relates to a valuation allowance on the Hawaii capital loss carryforward balance that we do not expect to be able to utilize. Net of this valuation allowance, the Company's net DTA totaled $25.8 million as of December 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 of $7.42 billion at December 31, 2021 increased by $824.5 million, or 12.5%, from the $6.59 billion at December 31, 2020, and total liabilities of $6.86 billion at December 31, 2021 increased by $813.0 million, or 13.4%, from the $6.05 billion at December 31, 2020. The increase in total assets and total liabilities in 2021 was primarily due to our strong loan and deposit growth.

Loan Portfolio

Our lending activities are focused on commercial, financial and agricultural loans, commercial mortgages, and construction loans to small and medium-sized companies, business professionals, and real estate investors and developers, as well as residential mortgages, home equity and consumer loans to local home-buyers and individuals. Our strategy for generating commercial loans has traditionally relied upon teams of commercial real estate and commercial banking officers organized by geographical and industry lines who are responsible for client prospecting and business development.

To manage credit risk (i.e., the ability of borrowers to repay their loan obligations), management analyzes the borrower's financial condition, repayment source, collateral and other factors that could impact credit quality, such as national and local economic conditions and industry conditions related to respective borrowers. The general underwriting guidelines require analysis and documentation to include among other things, overall credit worthiness of borrower, guarantor support, use of funds, loan term, minimum equity, loan-to-value standards, repayment terms, sources of repayment, covenants, pricing, collateral, insurance, and documentation standards. All loan requests considered by us should be for a clearly defined legitimate purpose with a determinable primary source, as well as alternate sources of repayment. All loans should be supported by appropriate documentation including, current financial statements, credit reports, collateral information, asset verification, tax returns, title reports, and appraisals (where appropriate).

We score consumer and small business loans using underwriting matrices ("Scorecards") developed based on the results of an analysis from a reputable national credit scoring company commissioned by our bank. The Scorecards use the attributes that were determined to most highly correlate with probability of repayment. Those attributes include, but are not limited to the following: (i) credit score, (ii) credit limit amount, and (iii) debt-to-income ratio.

Loans totaled $5.10 billion at December 31, 2021, which increased by $137.5 million, or 2.8%, from the $4.96 billion at December 31, 2020, which increased by $514.6 million, or 11.6%, from the $4.45 billion held at December 31, 2019. Core loans, or total loans excluding PPP loans, increased by $462.6 million, or 10.2%, in 2021. The increase in our loan portfolio in 2021 was largely due to strong residential mortgage demand from new and existing customers. The increase in total loans included net increases in the following loan portfolios: residential mortgage of $185.8 million, or 11.0%, consumer of $144.5 million, or 30.1%, home equity of $86.0 million, or 15.6%, and commercial mortgage of $63.9 million, or 5.5%. These increases were partially offset by net decreases in the following loan portfolios: PPP of $325.0 million, other commercial, financial, and agricultural of $15.0 million, or 2.7%, and construction of $2.5 million, or 2.0%. In 2021, we did not foreclose on any loans. In addition, we recorded loan charge-offs of $6.1 million.

The following table sets forth information regarding outstanding loans, net of deferred (fees) costs, by category as of the dates indicated.

Table 6. Loans by Categories

December 31,

Commercial, financial and agricultural:

Real estate:

The following table sets forth the geographic distribution of our loan portfolio, net of deferred (fees) costs, and related ACL as of the dates indicated.

Table 7. Geographic Distribution

(Dollars in thousands) Hawaii U.S. Mainland Total Hawaii U.S. Mainland Total

Commercial, financial and agricultural:

Real estate:

Commercial, Financial and Agricultural - Small Business Administration Payroll Protection Program

The bank is a 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. The SBA began accepting submissions for the initial round of PPP loans on April 3, 2020. In April 2020, the Paycheck Protection Program and Health Care Enhancement Act added an additional round of funding for the PPP. In June 2020, the Paycheck Protection Program Flexibility Act of 2020 was enacted, which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Through the end of the second round in August 2020, the Company funded over 7,200 PPP loans totaling $558.9 million and received gross processing fees of $21.2 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 2021, the Company funded over 4,600 loans totaling $320.9 million in the third round,

which ended on May 31, 2021, and received additional gross processing fees of $18.4 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. We have received forgiveness payments and repayments from borrowers totaling over $784.9 million as of December 31, 2021. A total outstanding balance of $94.9 million and net deferred fees of $3.5 million remain as of December 31, 2021.

Commercial, Financial and Agricultural - Other

Loans in this category consist primarily of term loans and lines of credit to small and middle-market businesses and professionals. The borrower's business is typically regarded as the principal source of repayment, although our underwriting policy and practice generally requires additional sources of collateral, including real estate and other business assets, as well as personal guarantees where possible to mitigate risk. Risk of credit losses could be greater in this loan category relative to secured loans where a greater percentage of the loan amount is usually covered by collateral. Nonetheless, any collateral or personal guarantees obtained on commercial loans can mitigate the increased risk and help to reduce credit losses.

Our historical approach to commercial lending involves teams of lending and cash management personnel who focus on relationship development including loans, deposits and other bank services to new and existing commercial clients.

In 2021, our commercial, financial, and agricultural loan portfolio, excluding PPP loans, decreased by $15.0 million. The decrease in 2021 was attributable to runoff in the U.S. Mainland and Hawaii portfolios of $10.7 million and $4.3 million, respectively.Our commercial, financial, and agricultural loan portfolio, excluding PPP loans, decreased by $25.2 million in 2020.

Real Estate—Construction

Construction loans include both residential and commercial development projects. Each construction project is evaluated for economic viability. Construction loans pose higher credit risks than typical secured loans. In addition to the financial strength of the borrower, construction loans have the added element of completion risk, which is the risk that the project will not be completed on time and within budget, resulting in additional costs that could affect the economic viability of the project and market risk at the time construction is complete.

In 2021, our construction loan portfolio decreased by $2.5 million. Our construction loan portfolio increased by $29.6 million in 2020. These fluctuations are driven by the start and completion of construction projects and are consistent with a normal construction cycle.

Interest Reserves

Our policies require interest reserves for construction loans, including loans to build commercial buildings, residential developments (both large tract projects and individual houses), and multi-family projects.

The outstanding principal balance of loans with interest reserves was $51.3 million at December 31, 2021, compared to $59.0 million in the prior year, while remaining interest reserves was $5.2 million, or 10.1% of the outstanding principal balance of loans with interest reserves at December 31, 2021, compared to $5.3 million, or 8.9% of the outstanding principal balance of loans with interest reserves at December 31, 2020.

Interest reserves allow the Company to advance funds to borrowers to make scheduled payments during the construction period. These advances typically are capitalized and added to the borrower's outstanding loan balance, although we have the right to demand payment under certain circumstances. Our policy is to determine if interest reserve amounts are appropriately included in each project's construction budget and are adequate to cover the expected duration of the construction period.

The amount, terms, and conditions of the interest reserve are established when a loan is originated, although we generally have the option to demand payment if the credit profile of the borrower changes. We evaluate the viability and appropriateness of the construction project based on the project's complexity and feasibility, the timeline, as well as the creditworthiness of the borrowers, sponsors and/or guarantors, and the value of the collateral.

In the event that unfavorable circumstances alter the original project schedule (e.g., cost overruns, project delays, etc.), our policy is to evaluate whether or not it is appropriate to maintain interest capitalization or demand payment of interest in cash and we will work with the borrower to explore various restructuring options, which may include obtaining additional equity and/or requiring additional collateral. We may also require borrowers to directly pay scheduled interest payments.

Our process for determining that construction projects are moving as planned are detailed in our lending policies and guidelines. Prior to approving a loan, the Company and borrower generally agree on a construction budget, a proforma monthly disbursement schedule, and sales/leaseback assumptions. As each project progresses, the projections are measured against actual disbursements and sales/lease results to determine if the project is on schedule and performing as planned.

The specific monitoring requirements for each loan vary depending on the size and complexity of the project and the experience and financial strength of the borrower, sponsor and/or guarantor. At a minimum, to ensure that loan proceeds are properly disbursed and to assess whether it is appropriate to capitalize interest or demand cash payment of interest, our monitoring process generally includes:

•Physical inspection of the project to ensure work has progressed to the stage for which payment is being requested;

•Verification that the work completed is in conformance with plans and specifications and items for which disbursement is requested are within budget; and

•Determination that there continues to be satisfactory project progress.

In certain rare circumstances, we may decide to extend, renew, and/or restructure the terms of a construction loan. Reasons for the restructure can range from cost overruns to project delays and the restructuring can result in additional funds being advanced or an extension of the maturity date of the loan. Prior to the loan being restructured, our policy is to perform a detailed analysis to ensure that the economics of the project remain feasible and that the risks to the Company are within acceptable lending guidelines.

Real Estate—Mortgage

The following table sets forth information with respect to the composition of the Real Estate—Mortgage loan portfolio as of the dates indicated.

Table 8. Mortgage Loan Portfolio Composition

December 31,

(Dollars in thousands) Amount Percent Amount Percent

Residential:

Residential

Residential mortgage loans include fixed-rate and adjustable-rate loans primarily secured by single-family owner-occupied primary residences in Hawaii. Maximum loan-to-value ratios of 80% are typically required for fixed-rate and adjustable-rate loans secured by single-family owner-occupied residences, although higher levels are permitted with accompanying mortgage insurance. First mortgage loans secured by residential properties generally carry a moderate level of credit risk. With an average loan size of approximately $0.5 million, marketable collateral and a stable Hawaii residential real estate market, credit losses on residential mortgage loans have been minimal during the past several years. However, economic conditions including unemployment levels, future changes in interest rates and other market factors can impact the marketability and value of collateral and thus the level of credit risk inherent in the portfolio.

Closed-end residential mortgage loan balances as of December 31, 2021 totaled $1.88 billion, increasing by $185.8 million, or 11.0%, from the $1.69 billion held at year-end 2020, which increased by $90.4 million, or 5.7%, from the $1.60 billion held at year-end 2019. The increase in closed-end residential mortgage loan balances in 2021 was primarily due to increased demand from both new and existing customers.

Residential mortgage loans held for sale at December 31, 2021 totaled $3.5 million, a decrease of $13.2 million, or 78.8%, from the December 31, 2020 balance of $16.7 million, which increased by $7.6 million, or 83.7%, from the December 31, 2019 balance of $9.1 million. We did not securitize any residential mortgage loans in 2021, 2020 and 2019.

Home Equity

Home equity lines of credit ("HELOCs"), which typically carry floating or fixed interest rates, are underwritten according to policy and guidelines reviewed and approved by the Board of Directors. All HELOCs originated since early 2011 have a ten-year draw period followed by a 20-year repayment period during which the principal balance will be fully amortized. HELOCs are underwritten using a qualifying payment which assumes the line is fully drawn and is amortizing as if it was in the repayment period. Underwriting criteria include a minimum FICO score, maximum debt-to-income ratio ("DTI"), and maximum combined loan-to-value ratio ("CLTV"). HELOCs are monitored based on default, delinquency, end of draw period, and maturity.

HELOC balances as of December 31, 2021 totaled $637.2 million, increasing by $86.0 million, or 15.6%, from the $551.3 million held at December 31, 2020, which increased by $60.5 million, or 12.3%, from the $490.7 million held at December 31, 2019.

Commercial Mortgage

Real estate mortgage loans secured by commercial properties continue to represent a sizable portion of our loan portfolio. Our policy with respect to commercial mortgages is that loans be made for sound purposes, have a definite source and/or plan of repayment established at inception, and be backed up by reliable secondary sources of repayment and satisfactory collateral with good marketability. Loans secured by commercial property carry a greater risk than loans secured by residential property due to operating income risk. Operating income risk is the risk that the borrower will be unable to generate sufficient cash flow from the operation of the property. The commercial real estate market and interest rate conditions through economic cycles will impact risk levels.

Commercial mortgage balances as of December 31, 2021 totaled $1.22 billion, increasing by $63.9 million, or 5.5%, from the $1.16 billion held at December 31, 2020, which increased by $32.9 million, or 2.9%, from the $1.12 billion held at December 31, 2019. The increase in commercial mortgage balances in 2021 was primarily due to increased demand from both new and existing customers.

Consumer Loans

The following table sets forth the major components of our consumer loan portfolio as of the dates indicated.

Table 9. Consumer Loan Portfolio Composition

December 31,

(Dollars in thousands) Amount Percent Amount Percent

For consumer loans, credit risk is managed on a pooled basis. Considerations include an evaluation of the quality, character and inherent risks in the loan portfolio, current and projected economic conditions and past loan loss experience. Consumer loans represent a moderate credit risk. Loans in this category are generally either unsecured or secured by personal assets such as automobiles. The average loan size is generally small and risk is diversified among many borrowers. Our policy is to utilize credit-scoring systems for most of our consumer loans, which offer the ability to modify credit exposure based on our risk tolerance and loss experience. From time to time, we will tactically deploy funds, which are not utilized in our current short-term core lending markets, by purchasing certain consumer loan portfolios.

Consumer loans totaled $623.9 million at December 31, 2021, increasing by $144.5 million, or 30.1%, from December 31, 2020 of $479.4 million, which decreased by $90.0 million, or 15.8%, compared to the $569.4 million held at December 31, 2019.

At December 31, 2021, automobile loans, primarily indirect dealer loans, comprised 47.8% of consumer loans outstanding. Total automobile loans of $298.4 million at December 31, 2021 increased by $47.7 million, or 19.0%, from December 31, 2020 of $250.7 million, which decreased by $46.5 million, or 15.6%, from $297.2 million at December 31, 2019.

In 2021, we purchased $76.5 million in U.S. Mainland automobile portfolios, which included a $5.1 million premium over the $71.4 million outstanding balance. We did not purchase any U.S. Mainland automobile loan portfolios in 2020. In 2019, we purchased a U.S. Mainland automobile loan portfolio totaling $30.2 million, which included a $0.6 million premium over the $29.6 million outstanding balance.

Purchased unsecured consumer loans of $205.6 million at December 31, 2021 increased by $108.4 million, or 111.6%, from December 31, 2020 of $97.2 million, which decreased by $12.9 million, or 11.7%, from $110.1 million at December 31, 2019.

In 2021, we purchased $190.2 million in U.S. Mainland unsecured consumer loans under forward flow purchase agreements with outstanding balances totaling $199.8 million, reflecting a net discount of $-9.6 million In 2020, we purchased U.S. Mainland unsecured consumer loans under forward flow purchase agreements with outstanding balances totaling $54.8 million for $53.2 million, reflecting a net discount of $1.6 million.

Other revolving credit plans loans include extensions of credit to individuals and totaled $78.7 million at December 31, 2021, which increased by $3.7 million, or 4.9%, from December 31, 2020 of $75.0 million, which decreased by $7.1 million, or 8.6%, from $82.1 million at December 31, 2019.

Total student loans of $1.9 million at December 31, 2021 decreased by $1.2 million, or 38.5%, from December 31, 2020 of $3.0 million, which decreased by $2.2 million, or 41.6%, from $5.2 million at December 31, 2019, primarily due to run-off.

Other consumer loans of $39.4 million at December 31, 2021 decreased by $14.2 million, or 26.5%, from December 31, 2020 of $53.5 million, which decreased by $21.4 million, or 28.5%, from $74.9 million at December 31, 2019.

Concentrations of Credit Risk

As of December 31, 2021, approximately $3.86 billion, or 75.6% of loans outstanding were real estate-related, including construction loans, residential mortgage loans, home equity loans, and commercial mortgage loans. As of December 31, 2020, approximately $3.52 billion, or 71.0% of loans outstanding were real estate-related, including construction loans, residential mortgage loans, home equity loans, and commercial mortgage loans.

The majority of our loans are made to companies and individuals with headquarters in, or residing in, the state of Hawaii. Consistent with our focus of being a Hawaii-based bank, 86.3% of our loan portfolio was concentrated in the Hawaii market while 13.7% was concentrated in the U.S. Mainland as of December 31, 2021. As of December 31, 2020, 88.6% and 11.4% were concentrated in the Hawaii market and U.S. Mainland, respectively.

Our foreign credit exposure as of December 31, 2021 and December 31, 2020 was minimal and did not exceed 1% of total assets.

Maturities and Sensitivities of Loans to Changes in Interest Rates

At December 31, 2021, all PPP loans were fixed-rate. Commercial, financial and agricultural loans, excluding PPP loans, were 56.5% fixed-rate and 43.5% variable-rate. Real estate construction loans were 40.5% fixed-rate and 59.5% variable-rate. Residential mortgage loans were 86.3% fixed-rate and 13.7% variable-rate. Home equity lines and loans were 9.5% fixed-rate and 90.5% variable-rate. Commercial mortgage loans were 51.5% fixed-rate and 48.5% variable-rate. Consumer loans were 74.9% fixed-rate and 25.1% variable-rate.

Commercial loans and commercial mortgage loans with variable interest rates are underwritten at the current market rate of interest. For commercial loans and commercial real estate loans with a fixed-rate period that are not fully amortizing, the loans are underwritten at the current market rate of interest. At the expiration of the fixed-rate period and/or maturity, the projected loan balance at that time is underwritten at an interest rate based on the current interest rate plus two percent per annum (2%).

Qualifying payments for our variable-rate residential mortgage loans with initial fixed-rate periods of five years or less are calculated using the greater of the note rate plus 2% per annum or the fully indexed rate. Payments for our variable-rate loans with a fixed-rate period of greater than five years are calculated using the greater of the note rate or the fully indexed rate. The qualifying payment for our HELOCs is based on the fully indexed rate plus the required principal plus interest payment due during the repayment period assuming the line was fully drawn. Our consumer lines of credit use a qualifying payment based on a percentage of the credit limit that exceeds the actual required fully indexed interest rate payment calculation.

The following table sets forth the maturity distribution and sensitivities of the loan portfolio to changes in interest rates at December 31, 2021. Maturities are based on contractual maturity dates and do not factor in principal amortization. This differs from the assumptions used in Table 20 - Interest Rate Sensitivity.

Table 10. Maturity Distribution and Sensitivities of Loans to Changes in Interest Rates

Maturing

(Dollars in thousands)

Commercial, financial and agricultural - PPP

With variable interest rates — — — — —

Commercial, financial and agricultural - Other

Construction

Residential mortgage

Home equity

Commercial mortgage

Consumer

All loans

Provision and Allowance for Credit Losses

As described above under the "Critical Accounting Policies and Use of Estimates" section, the Provision is determined by management's ongoing evaluation of the loan portfolio and our assessment of the ability of the ACL to cover expected credit losses. Our methodology for determining the adequacy of the ACL and Provision takes into account many factors, including the level and trend of nonperforming and potential problem loans, net charge-off experience, current repayment by borrowers, fair value of collateral securing specific loans, changes in lending and underwriting standards and general economic factors, nationally and in the markets we serve.

The Company maintains its ACL at an appropriate level as of a given balance sheet date to absorb management's best estimate of expected credit losses in its loan portfolios that will likely be realized over the expected life of our loan portfolio. This is based upon management's comprehensive analysis of the risk profiles particular to the respective loan portfolios. Analysis of ACL appropriateness is performed quarterly to coincide with financial disclosure to the public and to the regulatory agencies and is governed by a Board-approved policy and methodology.

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

Table 11. Allowance for Credit Losses

Year Ended December 31,

Allowance for Credit Losses ("ACL")

Charge-offs:

Commercial, financial and agricultural - Other 1,723 3,026 2,478

Real estate:

Residential mortgage — 63 —

Home equity — — 5

Commercial mortgage — 75 —

Recoveries:

Commercial, financial and agricultural - Other 1,004 1,157 1,174

Real estate:

Ratios:

ACL to core loans (or total loans excluding PPP loans) 1.36 % 1.83 % 1.08 %

Net loan charge-offs to average loans outstanding 0.02 % 0.15 % 0.15 %

Our ACL at December 31, 2021 totaled $68.1 million, which decreased by $15.2 million, or 18.2%, from December 31, 2020. When expressed as a percentage of total loans, our ACL decreased to 1.33% at December 31, 2021, from 1.68% at December 31, 2020. Excluding the PPP loan portfolio, our ratio of ACL to core loans was 1.36% at December 31, 2021.

On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. The Company recorded increases of $3.6 million to the ACL for loans

and $0.7 million to the reserve for off-balance sheet credit exposures, included in other liabilities, offset by a net decrease to retained earnings (or a net increase to accumulated deficit) of $3.2 million and a $1.1 million increase to other assets for the related impact to net deferred tax assets as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13.

During the year, we recognized a credit to the Provision of $14.6 million, or $14.3 million excluding the provision for off-balance sheet credit exposures and provision on accrued interest receivable. The credit to the Provision was primarily due to continued improvement in the economic forecast used in our credit loss modeling, combined with improvement in our loan portfolio and lower net charge-offs. We recognized $0.8 million in net charge-offs during the year.

The credit to the Provision and the decrease in our ACL as a percentage of total loans from December 31, 2020 to December 31, 2021 reflects continued improvements in credit quality and the economic forecast used in our credit loss modeling.

Our ACL as a percentage of our nonaccrual loans decreased from 1,344.78% at December 31, 2020 to 1,157.92% at December 31, 2021.

This trend was consistent with the Company's strong credit quality as represented by nonperforming assets of $5.9 million, $6.2 million, and $1.7 million at December 31, 2021, 2020 and 2019, respectively. Net charge-offs were $0.8 million, $7.2 million, and $6.3 million, respectively, for the years ended December 31, 2021, 2020 and 2019.

The following table sets forth the allocation of the ACL by loan category as of the dates indicated. Our practice is to make specific allocations on impaired loans and general allocations to each loan category based on management's risk assessment and estimated loss rate.

Table 12. Allocation of Allowance for Credit Losses

December 31,

Commercial, financial and agricultural:

Real estate:

The ACL allocated to PPP loans totaled $0.1 million, or 0.1%, of total PPP loans at December 31, 2021, compared to $0.3 million, or 0.1% of related loans outstanding at December 31, 2020.

The ACL allocated to other commercial, financial and agricultural loans totaled $10.3 million, or 1.9%, of total other commercial, financial and agricultural loans at December 31, 2021, compared to $18.7 million, or 3.4%, of related loans outstanding at December 31, 2020.

The ACL allocated to construction loans totaled $3.9 million, or 3.2%, of total construction loans at December 31, 2021, compared to $4.3 million, or 3.4%, of related loans outstanding at December 31, 2020.

The ACL allocated to our residential mortgage loans totaled $12.5 million, or 0.7%, of total residential mortgage loans at December 31, 2021, compared to $16.5 million, or 1.0%, of related loans outstanding at December 31, 2020.

The ACL allocated to our home equity loans totaled $4.5 million, or 0.7%, of total home equity loans at December 31, 2021, compared to $5.4 million, or 1.0%, of related loans outstanding at December 31, 2020.

The ACL allocated to commercial mortgage loans totaled $18.4 million, or 1.5%, of total commercial mortgage loans at December 31, 2021, compared to $22.2 million, or 1.9%, of related loans outstanding at December 31, 2020.

The ACL allocated to consumer loans totaled $18.4 million, or 3.0% of total consumer loans at December 31, 2021, compared to $15.9 million, or 3.3% of related loans outstanding at December 31, 2020.

The decreases in the ending ACL amount and the ACL as a percentage loans across all loan categories is primarily due to the continued improvement in credit quality and the economic forecast used in our credit loss modeling.

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

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

The following table sets forth nonperforming assets ("NPAs"), accruing loans delinquent for 90 days or more and restructured loans still accruing interest at the dates indicated.

Table 13. Nonperforming Assets, Past Due and Restructured Loans

December 31,

Nonaccrual loans [1]

Commercial, financial and agricultural - Other $ 183 $ 1,461

Real estate:

Other real estate owned ("OREO")

Real estate:

Residential mortgage — —

Total OREO — —

Accruing loans delinquent for 90 days or more [1]

Commercial, financial and agricultural - Other 945 —

Real estate:

Residential mortgage — 567

Home equity 44 —

Total accruing loans delinquent for 90 days or more 1,363 807

Restructured loans still accruing interest [1]

Commercial, financial and agricultural - Other — 100

Real estate:

Total restructured loans still accruing interest 4,903 7,786

December 31,

Ratios:

Nonaccrual loans as a percentage of loans 0.12 % 0.12 %

Total NPAs as a percentage of loans and OREO 0.12 0.12

Classified assets and OREO to tier 1 capital and ACL 6.42 7.49

Year-to-date changes in NPAs:

Balance at beginning of year $ 6,192 $ 1,719

Reductions:

Return to accrual status (1,358) (671)

Sales of NPAs — (4,447)

Charge-offs, valuation and other adjustments (3,303) (660)

Nonperforming assets, which includes nonaccrual loans, nonperforming loans classified as held for sale, if any, deferrals, and other real estate, totaled $5.9 million, or 0.08% of total assets at December 31, 2021, compared to $6.2 million, or 0.09% of total assets at December 31, 2020. Nonperforming assets at December 31, 2021 were comprised entirely of nonaccrual loans totaling $5.9 million, none of which were loans classified as held for sale.

The decline in 2021 was attributable to $3.1 million in repayments, $1.4 million in loans returned to accrual status and $3.3 million in charge-offs, valuation and other adjustments, partially offset by $7.5 million in gross additions.

Net changes to nonperforming assets by category during 2021 included net decreases in commercial, financial and agricultural loans totaling $1.3 million, partially offset by net increases in Hawaii residential mortgage loans totaling $0.5 million, Hawaii home equity loans of $0.3 million, and consumer loans of $0.2 million.

Loans delinquent for 90 days or more still accruing interest totaled $1.4 million at December 31, 2021, compared to $0.8 million at December 31, 2020.

Troubled debt restructurings ("TDRs") included in nonperforming assets at December 31, 2021 consisted of four Hawaii residential mortgage loans with a combined principal balance of $0.4 million. There were $4.9 million of TDRs still accruing interest at December 31, 2021, none of which were more than 90 days delinquent. At December 31, 2020, there were $7.8 million of TDRs still accruing interest, none of which were more than 90 days delinquent.

Loan balances that remained on loan payment forbearance or deferrals due to the impact of the COVID-19 pandemic totaled $0.4 million, or 0.01% of total loans, as of December 31, 2021, compared to a peak of approximately $605 million in May 2020 and $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 decreased from 7.49% at December 31, 2020 to 6.42% at December 31, 2021.

Investment Portfolio

The following table sets forth the amounts and distribution of investment securities held as of the dates indicated.

Table 14. Distribution of Investment Securities

December 31,

Debt securities:

States and political subdivisions $ 236,828 $ — $ 168,766 $ —

Mortgage-backed securities:

Residential - U.S. government-sponsored entities ("GSEs") 1,198,816 — 778,826 —

Residential - Non-government sponsored entities ("Non-GSEs") 12,213 — 23,423 —

Commercial - U.S. GSEs and agencies 65,849 — 87,469 —

Equity securities — — — 1,351

Investment securities totaled $1.63 billion at December 31, 2021, increasing by $447.7 million, or 37.8%, from the $1.18 billion held at December 31, 2020, which increased by $55.9 million, or 5.0%, from the $1.13 billion at year-end 2019.

In the third quarter of 2021, $104.4 million in available-for-sale securities were sold as part of an investment portfolio rebalancing strategy due to faster than expected prepayments. We received $104.5 million in gross proceeds and reinvested the proceeds in $98.8 million in higher yield investment securities with an average yield of 1.55% and a weighted average life of 6.1 years. The investment securities sold had an average yield of 1.13% and a weighted average life of 2.6 years. Gross realized gains and losses on the sale of the investment securities were $1.1 million and $1.0 million, respectively. The specific identification method was used as the basis for determining the cost of all securities sold.

In the fourth quarter of 2020, $89.9 million in available-for-sale securities were sold as part of an investment portfolio rebalancing strategy due to the large downward shift in interest rates and the change in expected prepayments. We received $90.1 million in gross proceeds and reinvested the proceeds in $105.1 million in higher yield, longer duration investment securities with an average yield of 1.27% and a weighted-average life of 4.6 years. The investment securities sold had an average yield of 0.28% and a weighted-average life of 1.2 years. Gross realized gains and losses on the sale of the investment securities were $0.5 million and $0.3 million, respectively. The specific identification method was used as the basis for determining the cost of all securities sold.

In the third quarter of 2020, $90.4 million in available-for-sale non-agency commercial mortgage-backed securities with retail mall exposure were sold to mitigate credit risk during the pandemic. The investment securities sold had an average yield of 3.44% and a weighted-average life of 14.03 years. Gross realized losses and gains on the sale of the investment securities were $0.6 million and $0.2 million, respectively. The specific identification method was used as the basis for determining the cost of all securities sold.

Maturity Distribution of Investment Portfolio

The following table sets forth the maturity distribution of the investment portfolio and weighted-average yields by investment type and maturity grouping at December 31, 2021.

Table 15. Maturity Distribution of Investment Portfolio

Portfolio Type and Maturity Grouping CarryingValue WeightedAverageYield (1)

(Dollars in thousands)

Available-for-sale portfolio:

Debt securities - States and political subdivisions:

After one but within five years 21,234 3.39

After five but within ten years 24,262 3.43

Total debt securities - States and political subdivisions 236,828 2.52

Debt securities - Corporate:

After one but within five years — —

After five but within ten years 35,631 1.66

After ten years — —

Total debt securities - Corporate 40,646 1.84

Within one year — —

After one but within five years 956 1.75

After five but within ten years 24,519 1.36

Residential mortgage-backed securities - U.S. GSEs:

Within one year — —

After one but within five years — —

After five but within ten years 11,346 2.30

Total residential mortgage-backed securities - U.S. GSEs 1,198,816 1.77

Within one year — —

After one but within five years — —

After five but within ten years — —

Total residential mortgage-backed securities - Non-GSEs 12,213 3.45

Commercial mortgage-backed securities - U.S. GSEs and agencies:

Within one year — —

After one but within five years — —

After five but within ten years 30,155 2.86

Total commercial mortgage-backed securities - U.S. GSEs and agencies 65,849 2.17

Commercial mortgage-backed securities - Non-GSEs:

Within one year — —

After one but within five years — —

After five but within ten years 42,013 2.97

After ten years — —

Total commercial mortgage-backed securities - Non-GSEs 42,013 2.97

Total available-for-sale portfolio $ 1,631,699 1.93 %

(1)Weighted-average yields are computed on an annual basis, and yields on tax-exempt obligations are computed on a taxable-equivalent basis using a federal statutory tax rate of 21%.

As of December 31, 2021, the weighted-average yield of the investment portfolio of 1.93% decreased by 16 bp from 2.09% in the prior year.

Deposits

The primary source of our funding comes from deposits in the state of Hawaii. In this competitive market, we strive to distinguish ourselves by providing exceptional customer service in our branch offices and through digital channels, and establishing long-term relationships with businesses and their principals. Our focus has been to develop a large, stable base of core deposits, which are comprised of non-interest bearing and interest-bearing demand deposits, savings and money market deposits, and time deposits less than $250,000. Time deposits in amounts of $250,000 and greater are generally considered to be more price-sensitive than relationship-based and are thus given less focus in our marketing and sales efforts.

The following table sets forth the composition of our deposits by category as of the dates indicated.

Table 16. Deposits by Categories

December 31,

Total deposits of $6.64 billion at December 31, 2021 increased by $843.0 million, or 14.5%, from total deposits of $5.80 billion at December 31, 2020. Total deposits at December 31, 2020 increased by $676.1 million, or 13.2%, over the year-end 2019 balance of $5.12 billion. The increase in deposits in 2021 reflects net increases in noninterest-bearing demand deposits of $501.0 million, savings and money market deposits of $293.9 million, interest-bearing demand deposits of $240.4 million and other time deposits greater than $250,000 (excluding government time deposits) of $107.0 million. The net increases were partially offset by decreases in government time deposits of $285.4 million and other time deposits up to $250,000 totaling $13.8 million. The deposit of funds from PPP and other stimulus programs into new and existing deposit accounts, combined with an increase in the rate of personal savings largely contributed to the increases in deposits in 2020 and 2021. In addition, the Company's RISE2020 and rebranding efforts have driven more relationships to the bank, and off-balance sheet investment funds from several large clients were brought back into deposit accounts. The addition of funds from PPP and other stimulus programs may be temporary as PPP funds 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 totaled $6.16 billion at December 31, 2021 and increased by $1.02 billion, or 19.9%, from December 31, 2020, which increased by $769.5 million or 17.6% from December 31, 2019. Core deposits as a percentage of total deposits was 92.8% at December 31, 2021, compared to 88.6% at December 31, 2020 and 85.3% at December 31, 2019. For additional information regarding the contractual maturities of our time deposits, See Note 10 - Deposits to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data."

The table below sets forth information regarding the average balances and average rates paid for certain deposit categories for each of the years indicated. Average balances are computed using daily average balances. The average rate on time deposits, which are most sensitive to changes in market rates, decreased by 53 bp in 2021, while savings and money market deposit rates decreased by 7 bp. The average rate paid on all deposits decreased 13 bp to 0.06% in 2021 from 0.19% in 2020, which decreased from 0.48% in 2019.

Table 17. Average Balances and Average Rates on Deposits

Year Ended December 31,

We expect overall deposit rates to slightly increase in 2022 based on the Federal Open Market Committee's recent statements and the expectation of interest rate increases in 2022. In addition to the external interest rate environment, the overall direction and magnitude of rate movements in our deposit base will largely depend on the level of deposit growth we need to maintain adequate liquidity and competitive pricing considerations.

Contractual Obligations

The following table sets forth our material contractual obligations (excluding deposit liabilities) as of December 31, 2021.

Table 18. Contractual Obligations

Payments Due By Period

(Dollars in thousands) Less Than One Year Greater Than One Year Total

Components of short-term borrowings and long-term debt are discussed in Note 11 - Short-Term Borrowings and Note 12 - Long-Term Debt, respectively, to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data." Pension plan obligations include obligations under our defined benefit retirement plan and Supplemental Executive Retirement Plans, which are discussed in Note 17 - Pension Plans to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data." Operating leases represent leases on bank premises as discussed in Note 19 - Operating Leases to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data." Purchase obligations represent other contractual obligations to purchase goods or services at specified terms including, but not limited to, software licensing agreements, equipment maintenance contracts and professional service contracts. Other long-term liabilities represent expected payments for unfunded commitments related to our investments in LIHTC partnerships and other unconsolidated entities.

In January 2021, the Board of Directors approved termination of, and authorized Company management to commence taking actions to terminate, the Company's defined benefit retirement plan. Final settlement is expected to occur in 2022.

Contractual obligations in Table 18 - Contractual Obligations do not include off-balance sheet arrangements. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees written, forward foreign exchange contracts, forward interest rate contracts and interest rate swaps and options. These instruments and the related off-balance sheet exposures are discussed in detail in Note 24 - Financial Instruments With Off-Balance Sheet Risk to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data."

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, the need for raising additional capital (whether debt and/or equity) or returning capital to our shareholders, including the ability to declare cash dividends or repurchase our securities.

Common and Preferred Equity

Shareholders' equity totaled $558.2 million at December 31, 2021, an increase of $11.5 million, or 2.1%, from the $546.7 million at December 31, 2020, which increased by $18.2 million, or 3.4%, from December 31, 2019. When expressed as a percentage of total assets, shareholders' equity was 7.5% at December 31, 2021, compared to 8.3% at December 31, 2020 and 8.8% at December 31, 2019. The decline in our ratio of shareholders' equity to total assets from 2019 to 2020 to 2021 was primarily attributable to the significant increases in total assets in 2020 and 2021.

Our book value per share was $20.14, $19.40, and $18.68 at year-end 2021, 2020 and 2019, respectively. The increase in our book value per share from 2020 was primarily attributable to the increase in shareholders' equity from December 31, 2019 to December 31, 2020 as described above.

The increase in shareholders' equity from December 31, 2020 to December 31, 2021 was primarily attributable to net income of $79.9 million, partially offset by other comprehensive loss of $28.1 million, cash dividends paid of $27.0 million and the repurchase of 696,894 shares of our common stock for a total cost of $18.7 million, under our stock repurchase program. During 2021 we repurchased approximately 2.5% of our common stock outstanding at December 31, 2020.

The increase in shareholders' equity from December 31, 2019 to December 31, 2020 was primarily attributable to: net income of $37.3 million and accumulated other comprehensive income of $11.7 million, partially offset by the repurchase of 206,802 shares of our common stock for a total cost of $4.7 million, under our stock repurchase program and cash dividends paid of $25.9 million. During 2020 we repurchased approximately 0.7% of our common stock outstanding at December 31, 2019.

Trust Preferred Securities

As of December 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 $30.0 million in floating rate trust preferred securities of Trust IV bear an interest rate of three-month LIBOR plus 2.45% and the $20.0 million in floating rate trust preferred securities of Trust V bear an interest rate of three-month LIBOR plus 1.87%. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of the trusts' 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.

We also previously had CPB Capital Trust I ("Trust I"), which was canceled in August 2014, and CPB Capital Trust II ("Trust II") and CPB Statutory Trust III ("Trust III"), which were both canceled in January 2019.

Subordinated Notes

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, as published by the Federal Reserve Bank of New York, plus 456 basis points. The notes are redeemable at our option on any interest payment date on or after November 1, 2025. The subordinated notes totaled $54.1 million as of December 31, 2021, and includes $0.9 million in debt issuance costs, which are being amortized over the expected life.

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 subordinated notes.

CPF relies on the bank to pay dividends to it to fund its obligations. As of December 31, 2021, on a stand-alone basis, CPF had an available cash balance of approximately $20.1 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 December 31, 2021, the bank had Statutory Retained Earnings of $114.0 million.

Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. Our ability to pay cash dividends to our shareholders is subject to restrictions under federal and Hawaii law, including restrictions imposed by the FRB and covenants set forth in various agreements we are a party to, including covenants set forth in our subordinated debentures. For further information, see the "Dividends — Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities" section.

Share Repurchases

We repurchase shares of our common stock when we believe such repurchases are in the best interests of the Company and our shareholders.

In June 2019, the Company’s Board of Directors authorized the repurchase of up to $30 million of its common stock from time to time in the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase program (the "2019 Repurchase Plan"). The 2019 Repurchase Plan replaced and superseded in its entirety the share repurchase program previously approved by the Company's Board of Directors, which had $6.8 million in remaining repurchase authority.

In 2019, 797,003 shares of common stock, at a cost of $22.8 million, were repurchased under the previous share repurchase plan and the 2019 Repurchase Plan combined.

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 "2020 Repurchase Plan"). The 2020 Repurchase Plan replaced and superseded in its entirety the 2019 Repurchase Plan, which had $19.8 million in remaining repurchase authority.

During the first quarter of 2020, 206,802 shares of common stock, at a cost of $4.7 million, were repurchased under the 2019 and 2020 Repurchase Plans combined.

In March 2020, the Company temporarily suspended the 2020 Repurchase Plan due to uncertainty during the current COVID-19 pandemic.

In January 2021, the Company’s Board of Directors approved a new authorization to resume repurchases of up to $25 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 "2021 Repurchase Plan"). The new repurchase plan replaced and superseded in its entirety the 2020 Repurchase Plan, which had $26.6 million in remaining repurchase authority.

In 2021, 696,894 shares of common stock, at a cost of $18.7 million, were repurchased under the 2021 Repurchase Plan. A total of $6.3 million remained available for repurchase under the 2021 Repurchase Plan at December 31, 2021.

In January 2022, the Company’s Board of Directors approved a new authorization to resume repurchases 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 new repurchase plan replaces and supersedes in its entirety the 2021 Repurchase Plan. Our ability to repurchase shares is subject to the discretion of our Board of Directors and approval of our regulators, and there can be no assurance that the Board will repurchase shares of our common stock in the future.

Cybersecurity

In recent years, cybersecurity has gained prominence within the financial services industry due to increases in the quantity and sophistication of cyber-attacks, which include significant distributed denial-of-service and credential validation attacks, malicious code and viruses and attempts to breach the security of systems, which, in certain instances, have resulted in unauthorized access to customer account data.

The bank has a number of complex information systems used for a variety of functions by customers, employees and vendors. In addition, third parties with which the bank does business or that facilitate business activities (e.g., vendors, exchanges, clearing houses, central depositories and financial intermediaries) could also be sources of cybersecurity risk to the bank, including with respect to breakdowns or failures of their systems, misconduct by the employees of such parties, or cyber-attacks which could affect their ability to deliver a product or service to the bank.

As a regulated financial institution, we must adhere to the security requirements and expectations of the applicable regulatory agencies, which include requirements related to data privacy, systems availability and business continuity planning, among others. The regulatory agencies have established guidelines for the responsibilities of the Board of Directors and senior management, which include establishing policy, appointing and training personnel, implementing review and testing functions and ensuring an appropriate frequency of updates.

The Board of Directors overall, and its Board Compliance Committee more specifically, oversees cybersecurity risk. The Executive Committee overall, and our Chief Legal Officer, our Chief Technology Officer and our Chief Information Officer more specifically, manages the cybersecurity risk at the operational level. Various reports on cybersecurity are provided to our Executive Committee and a quarterly update is provided to the Board Compliance Committee and the Board of Directors.

As a complement to the overall cybersecurity infrastructure, the bank utilizes a number of internal training methods, both formally through mandatory courses and informally through written communications and other updates. Internal policies and procedures have been implemented to require the reporting of potential phishing attacks or other security risks. The bank also uses third party services as part of its cybersecurity framework, and any such third parties are required to comply with the bank’s policies regarding information security and confidentiality. In addition, the bank retains third party groups to assess and supplement the bank’s cybersecurity needs. These cyber-attacks have not, to date, resulted in any material disruption to the bank’s operations or harm to its customers and have not had a material adverse effect on the bank’s results of operations; however, there can be no assurance that a sophisticated cyber-attack can be detected or thwarted.

Transaction Risk

Transaction risk is the risk to earnings or capital arising from problems in service, activity or product delivery. This risk is significant within any bank and is interconnected with other risk categories in most activities throughout the Company. Transaction risk is a function of internal controls, information systems, associate integrity, and operating processes. It arises daily throughout the Company as transactions are processed. It pervades all divisions, departments and centers and is inherent in all products and services we offer.

In general, transaction risk by major area is categorized as high, medium or low by the Company. The audit plan ensures that high risk areas are reviewed annually. We utilize internal auditors and independent audit firms to test key controls of operational processes and to audit information systems, compliance management programs, loan programs and trust services.

The key to managing transaction risk is in the design, documentation and implementation of well-defined procedures and controls. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, but not absolute, assurances of the effectiveness of these systems and controls, and that the objectives of these controls have been met.

Compliance Risk

Compliance risk is the risk to earnings or capital arising from violations of, or non-conformance with, laws, rules, regulations, prescribed practices, or ethical standards. Compliance risk also arises in situations where the laws or rules governing certain products or activities of the bank’s customers may be ambiguous or untested. Compliance risk exposes us to fines, civil money penalties, payment of damages, and the voiding of contracts. Compliance risk can also lead to a diminished reputation, reduced business value, limited business opportunities, lessened expansion potential, and lack of contract enforceability. The Company utilizes independent external firms to conduct compliance audits as a means of identifying weaknesses in the compliance program.

There is no single or primary source of compliance risk. It is inherent in every activity. Frequently, it blends into operational risk and transaction risk. A portion of this risk is sometimes referred to as legal risk. This is not limited solely to risk from failure to comply with consumer protection laws; it encompasses all laws, as well as prudent ethical standards and contractual obligations. It also includes the exposure to litigation from all aspects of banking, traditional and non-traditional.

Our risk management policies and codes of ethical conduct are cornerstones for controlling compliance risk. An integral part of controlling this risk is the proper training and development of employees. The Director of Compliance is responsible for developing and executing a comprehensive compliance training program. The Director of Compliance, in consultation with our internal and external legal counsel, seeks to provide our employees with adequate training commensurate to their job functions to ensure compliance with banking laws and regulations.

Our risk management policies and programs includes a risk-based audit program aimed at identifying internal control deficiencies and weaknesses. We have in-depth audits performed by an independent audit firm under the direction of the Director of Internal Audit and supplemented by independent external firms, and periodic monitoring performed by our risk management personnel. Annually, an Audit Plan for the Company is developed and presented for approval to the Audit Committee.

Our risk management team conducts periodic monitoring of our compliance efforts with a special focus on those areas that expose us to compliance risk. The purpose of the periodic monitoring is to verify whether our employees are adhering to established policies and procedures. Any material exceptions identified are brought forward to the appropriate department head, the Audit Committee and the Board Compliance Committee.

We recognize that customer complaints can often identify weaknesses in our compliance program which could expose us to risk. Therefore, we attempt to ensure that all complaints are given prompt attention. The Director of Compliance reviews formal complaints to determine if a significant compliance risk exists and communicates those findings to our Board Compliance Committee.

Strategic Risk

Strategic risk is the risk to earnings or capital arising from adverse decisions or improper implementation of strategic decisions. This risk is a function of the compatibility between an organization’s goals, the resources deployed against those goals and the quality of implementation.

Strategic risks are identified as part of the strategic planning process. Offsite strategic planning sessions, with members of the Board of Directors and Executive Committee, are held annually. The strategic review consists of an economic assessment, competitive analysis, industry outlook and risk and regulatory review.

A primary measurement of strategic risk is peer group analysis. Key performance ratios are compared to peer groups consisting of U.S. banks of comparable size and complexity and banks in the Hawaii market to identify any sign of weakness and potential opportunities.

Another measure is the comparison of the actual results of previous strategic initiatives against the expected results established prior to implementation of each strategy.

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.

Interest rate risk can be analyzed by monitoring an institution's interest rate sensitivity gap and changes in the gap over time. An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets and the amount of interest-bearing liabilities maturing or repricing within a specified time period.

The following table sets forth information regarding our interest rate sensitivity gap at December 31, 2021. The assumptions used in determining interest rate sensitivity of various asset and liability products had a significant impact on the resulting table. For purposes of this presentation, assets and liabilities are classified by the earliest repricing date or maturity. All interest-bearing demand and savings balances are included in the three-months-or-less category, even though repricing of these accounts is not contractually required and may not actually occur during that period. Since all interest rates and yields do not adjust at the same velocity or magnitude, and since volatility is subject to change, the interest rate sensitivity gap is only a general indicator of interest rate risk.

Table 19. Rate Sensitivity of Assets, Liabilities and Equity

Assets

Loans held for sale 3,531 — — — — — 3,531

Liabilities and Equity

Noninterest-bearing deposits $ 2,291,246 $ — $ — $ — $ — $ — $ 2,291,246

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

The following reflects our net interest income sensitivity analysis as of December 31, 2021, over a one-year horizon, assuming no balance sheet growth and given both a 100 bp upward and 100 bp downward parallel shift in interest rates.

Rate Change Estimated Net Interest Income Sensitivity

The table below presents information on financial instruments held that are sensitive to changes in interest rates. For purposes of this presentation, expected maturities of interest-sensitive assets and liabilities are contractual maturities. Interest-bearing demand and savings deposits, which have indeterminate maturities, are included in the earliest maturity category. The resulting table is based on numerous assumptions including prepayment rates on mortgage-related assets and forecasted market interest rates. This differs from the assumptions used in Table 10 - Maturity Distribution and Sensitivities of Loans to Changes in Interest Rates. See Note 25 - Fair Value of Financial Assets and Financial Liabilities to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data" for a discussion of the calculation of fair values.

Maturities and fair values of interest-sensitive assets and liabilities may vary from expectation if actual experience differs from the assumptions used.

Table 20. Interest Rate Sensitivity

Expected Maturity Within

Interest-sensitive assets

Interest-sensitive liabilities

The preceding sensitivity analysis does not represent our forecast and should not be relied upon as being indicative of expected operating results. These estimates are based upon numerous assumptions including: the magnitude and timing of interest rate changes, prepayments on loans and investment securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment of asset and liability cash flows and others.

Liquidity

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 assure maximum utilization, maintenance of an adequate level of readily marketable assets and access to short-term funding sources. Our loan-to-deposit ratio at December 31, 2021 was 76.8% compared to 85.6% at December 31, 2020. Our liquidity may be negatively impacted by unforeseen demands on cash or if our deposit customers withdraw funds due to uncertainties surrounding our financial condition or prospects.

The consolidated statements of cash flows identify the three major categories of sources and uses of cash as operating, investing and financing activities. As presented in the consolidated statements of cash flows, cash provided by operating activities has provided a significant source of funds during the past three years. Cash provided by operating activities totaled $110.5 million in 2021, $76.8 million in 2020, and $72.2 million in 2019. The primary source of cash provided by operating activities continues to be our net operating income, exclusive of non-cash items such as the Provision and asset impairments.

Net cash used in investing activities amounted to $662.3 million, $596.9 million and $129.0 million in 2021, 2020 and 2019, respectively. Investment securities and lending activities generally comprise the largest components of investing activities, although the level of investment securities activities are impacted by the relationship of loan and deposit growth during the period. The Company received net loans payments of $128.6 million in 2021. In 2020 and 2019, net loan originations accounted for $479.6 million and $237.5 million, respectively, of cash used in investing activities. In addition, purchases of portfolio loans totaled $266.7 million, $53.2 million and $140.1 million in 2021, 2020 and 2019, respectively. Net purchases of investment securities totaled $498.4 million and $49.7 million in 2021 and 2020, respectively, compared to net proceeds received from sales and maturities of investment securities of $253.6 million in 2019. Net purchases of premises and equipment totaled $22.2 million, $26.0 million and $7.2 million in 2021, 2020 and 2019, respectively. Investing activities included proceeds from sales of loans originated for investment in 2020 totaled $10.7 million. We did not sell any loans originated for investment in 2021 and 2019. Proceeds from sales of foreclosed loans and other real estate of $0.2 million, and $0.1 million in 2020 and 2019, respectively. We did not sell any foreclosed loans or other real estate in 2021.

Cash provided by financing activities totaled $776.6 million, $521.2 million, and $57.6 million in 2021, 2020 and 2019, respectively. Deposit activities, borrowings and capital transactions represent the major components of financing activities. In 2021, 2020 and 2019, deposits increased by $843.0 million, $676.1 million, and $173.5 million, respectively. Net cash outflows of FHLB advances and short-term borrowings totaled $22.0 million in 2021, $128.0 million in 2020, and $47.0 million in 2019. Repayments of long-term debt totaled $115.9 million and $20.6 million in 2020 and 2019, respectively. We did not repay any long-term debts in 2021. We received $119.8 million in proceeds from long-term debt in 2020. We did not receive any proceeds from long-term debt totaled 2021 and 2019. As with investment securities, the level of net borrowings is impacted by the levels of loan and deposit growth or contraction during the period. Capital transactions, primarily cash dividends and stock repurchases, totaled $44.4 million, $30.7 million and $48.3 million of cash used in 2021, 2020 and 2019, respectively.

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, continued access to these sources may not be guaranteed and can be restricted in the future as a result of market conditions or the Company's and bank's financial position.

The bank is a member of and maintained a $1.83 billion line of credit with the FHLB as of December 31, 2021, of which $1.80 billion remained available as of December 31, 2021. There were no short-term advances outstanding under this arrangement as of December 31, 2021. Short-term advances outstanding under this arrangement totaled $22.0 million at December 31, 2020. There were no long-term advances with the FHLB outstanding at December 31, 2021 and 2020. FHLB advances outstanding at December 31, 2020 were secured by certain real estate loans with a carrying value of $2.75 billion in accordance with the collateral provisions of the Advances Pledge and Security Agreement with the FHLB.

The FHLB provides standby letters of credit on behalf of the bank to secure certain public deposits. If the FHLB is required to make a payment on a standby letter of credit, the payment amount is converted to an advance at the FHLB. The standby letters of credit issued on our behalf by the FHLB totaled $32.2 million and $268.0 million at December 31, 2021 and 2020, respectively.

The bank also maintained a line of credit with the Federal Reserve discount window of $55.4 million and $64.5 million as of December 31, 2021 and 2020, respectively. There were no advances outstanding under this arrangement at December 31, 2021 and 2020. Advances under this arrangement would have been secured by certain commercial and commercial real estate loans with a carrying value totaling $131.0 million. The Federal Reserve does not have the right to sell or repledge these loans. See Note 11 - Short-Term Borrowings and Note 12 - Long-Term Debt to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data" for additional information regarding our borrowings.

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.

Holding Company Liquidity

For the holding company on a stand-alone basis, in 2021, net cash provided by operating activities amounted to $51.6 million. The primary source of funds in operating activities included dividends received from the bank of $54.0 million. Net cash used in financing activities amounted to $44.4 million, which included cash dividends of $27.0 million paid to our common shareholders and repurchases of common stock totaling $18.7 million.

In 2020, net cash provided by operating activities amounted to $24.1 million. The primary source of funds in operating activities included dividends received from the bank of $24.0 million. Net cash provided by financing activities amounted to $23.2 million. During the fourth quarter of 2020, the Company completed a $55 million private placement of ten-year fixed-to-floating rate subordinated notes, which was partially offset by $1.2 million in debt issuance costs, repurchases of common stock totaling $4.7 million and cash dividends of $25.9 million paid to our common shareholders. Cash used in investing activities included a $46.8 million contribution to the bank from the proceeds received from the private placement.

In 2019, net cash provided by operating activities amounted to $62.2 million. The primary source of funds in operating activities included dividends received from the bank of $63.0 million. Net cash used in financing activities amounted to $69.0 million. The primary use of funds in financing activities included the repurchases of common stock totaling $22.8 million and cash dividends of $25.7 million paid to our common shareholders. In addition, junior subordinated debentures issued by Trust II totaling $20.6 million were repaid in 2019.

Off-Balance Sheet Arrangements

In the normal course of business, we enter into off-balance sheet arrangements to meet the financing needs of our banking customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees written, forward foreign exchange contracts, forward interest rate contracts, interest rate swaps and options, and risk participation agreements. These instruments and the related off-balance sheet exposures are discussed in detail in Note 24 - Financial Instruments With Off-Balance Sheet Risk to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data." In the unlikely event that we must satisfy a significant amount of outstanding commitments to extend credit, liquidity will be adversely impacted, as will credit risk. The remaining components of off-balance sheet arrangements, primarily interest rate options and forward interest rate contracts related to our mortgage banking activities, are not expected to have a material impact on our consolidated financial position or results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and qualitative disclosures about market risk is set forth under "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Asset/Liability Management and Interest Rate Risk" and in Note 25 - Fair Value of Financial Assets and Financial Liabilities to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data."

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index

Page

Report of Independent Registered Public Accounting Firm (PCAOB ID: 173) 81

Consolidated Balance Sheets 83

Consolidated Statements of Income 84

Consolidated Statements of Comprehensive Income 85

Consolidated Statements of Changes in Equity 86

Consolidated Statements of Cash Flows 87

Note 1 - Summary of Significant Accounting Policies 88

Note 2 - Reserve Requirements 99

Note 3 - Investment Securities 100

Note 6 - Premises and Equipment 111

Note 7 - Investments in Unconsolidated Entities 111

Note 8 - Mortgage Servicing Rights 112

Note 9 - Derivatives 113

Note 11 - Short-Term Borrowings 115

Note 12 - Long-Term Debt 116

Note 14 - Revenue from Contracts with Customers 118

Note 15 - Mortgage Banking Income 120

Note 16 - Share-Based Compensation 120

Note 17 - Pension Plans 123

Note 18 - 401(k) Retirement Savings Plan 127

Note 19 - Operating Leases 127

Note 20 - Income Taxes 129

Note 21 - Accumulated Other Comprehensive Income (Loss) 131

Note 22 - Earnings Per Share 134

Note 23 - Contingent Liabilities and Other Commitments 134

Note 24- Financial Instruments with Off-Balance Sheet Risk 134

Note 25 - Fair Value of Financial Assets and Financial Liabilities 136

Note 26 - Parent Company and Regulatory Restrictions 141

Note 27 - Unaudited Quarterly Financial Information 146

Note 28 - Subsequent Events 147

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and the Board of Directors of

Central Pacific Financial Corp.

Honolulu, Hawaii

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Central Pacific Financial Corp. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of Financial Accounting Standard Board (FASB) Accounting Standards Codification No. 326, Financial Instruments – Credit Losses (ASC 326). The Company adopted the new credit loss standard using the modified retrospective method provided in Accounting Standards Update No. 2016-13 such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit

preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses on Loans – Reasonable and Supportable Forecasts - Refer to Notes 1 and 5 to the financial statements

The allowance for credit losses on loans is an accounting estimate of expected credit losses over the estimated life of the Company’s loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected. The provision for credit losses on loans for the year ended December 31, 2021 was a credit of $14,323,000 and the allowance for credit losses on loans as of December 31, 2021 was $68,097,000.

The allowance for credit losses on loans under the current expected credit loss methodology required by ASC 326, Financial Instruments – Credit Losses, is based on 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. Historical credit loss experience provides the basis for the Company’s expected credit loss estimate. The economic forecast used in the current expected credit loss methodology includes both National and Hawaii specific economic indicators. The Company performed a loss driver analysis to determine relevant economic indicators with a strong correlation to the historical loss experience used as the basis for the expected credit loss estimate. Significant management judgments are required in the development and application of reasonable and supportable forecasts.

CPF US Equity

CPF · 10-K · period ended 2021-12-31

ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CPF US Equity☆

CPF · 10-K · period ended 2021-12-31

ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CPF US Equity