UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, ~~2021~~2022

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

For the transition period from to

Commission File Number: 001-31567

CENTRAL PACIFIC FINANCIAL CORP.

(Exact name of registrant as specified in its charter)


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

220 South King Street, Honolulu, Hawaii 96813

(Address of principal executive offices) (Zip Code)

(808) 544-0500

(Registrant's telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, No Par Value

CPF

New York Stock Exchange

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

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

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


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

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

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

The number of shares outstanding of registrant's common stock, no par value, on July ~~21, 2021~~22, 2022 was ~~28,218,860~~27,382,562 shares.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

Form 10-Q

Table of Contents


		Page

Part I.	Financial Information	3

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets - June 30, ~~2021~~2022 and December 31, ~~2020~~2021	5

	Consolidated Statements of Income - Three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021	6

	Consolidated Statements of Comprehensive Income - Three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021	7

	Consolidated Statements of Changes in Equity - Three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021	8

	Consolidated Statements of Cash Flows - Six months ended June 30, ~~2021~~2022 and ~~2020~~2021	9

	Notes to Consolidated Financial Statements (Unaudited)	10

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4853

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	7580

Item 4.	Controls and Procedures	7580

Part II.	Other Information	7681

Item 1.	Legal Proceedings	81

Item 1A.	Risk Factors	7681

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7681

Item 6.	Exhibits	7782

Signatures		7883

PART I. FINANCIAL INFORMATION

Forward-Looking Statements and Factors that Could Affect Future Results

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

While we believe that our forward-looking statements and the assumptions underlying them are reasonably based, such statements and assumptions are by their nature subject to risks and uncertainties, and thus could later prove to be inaccurate or incorrect. Accordingly, actual results could differ materially from those statements or projections for a variety of reasons, including, but not limited to: the adverse effects of the COVID-19 pandemic virus (and ongoing pandemic variants) on local, national and international economies, including, but not limited to, the adverse impact on tourism and construction in the State of Hawaii, our borrowers, customers, third-party contractors, vendors and employees as well as the effects of government programs and initiatives in response to COVID-19; the impact of our participation in the Paycheck Protection Program ("PPP") and fulfillment of government guarantees on our PPP loans; the increase in inventory or adverse conditions in the real estate market and deterioration in the construction industry; adverse changes in the financial performance and/or condition of our borrowers and, as a result, increased loan delinquency rates, deterioration in asset quality, and losses in our loan portfolio; our ability to achieve the objectives of our RISE2020 initiative; our ability to successfully implement and achieve the objectives of our ~~RISE2020~~Banking-as-a-Service ("BaaS") initiatives, including adoption of the initiatives by customers and ~~other business initiatives;~~risks faced by any of our bank collaborations including reputational and regulatory risk; the impact of local, national, and international economies and events (including natural disasters such as wildfires, volcanic eruptions, hurricanes, tsunamis, storms, earthquakes and pandemic ~~virus~~viruses and ~~disease,~~diseases, including COVID-19) on the Company's business and operations and on tourism, the military, and other major industries operating within the Hawaii market and any other markets in which the Company does business; deterioration or malaise in domestic economic conditions, including any destabilization in the financial industry and deterioration of the real estate market, as well as the impact of declining levels of consumer and business confidence in the state of the economy in general and in financial institutions in particular; changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), changes in capital standards, other regulatory reform and federal and state legislation, including but not limited to regulations promulgated by the Consumer Financial Protection Bureau (the "CFPB"), government-sponsored enterprise reform, and any related rules and regulations which affect our business operations and competitiveness; the costs and effects of legal and regulatory developments, including legal proceedings or regulatory or other governmental inquiries and proceedings and the resolution thereof, the results of regulatory examinations or reviews and the effect of, and our ability to comply with, any regulations or regulatory orders or actions we are or may become subject to; ability to successfully implement our initiatives to lower our efficiency ratio; the effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System (the "FRB" or the "Federal Reserve"); inflation, interest rate, securities market and monetary fluctuations, including the anticipated replacement of the London Interbank Offered Rate ("LIBOR") Index and the impact on our loans and debt which are tied to that ~~index;~~index and uncertainties regarding potential alternative reference rates, including the Secured Overnight Financing Rate ("SOFR"); negative trends in our market capitalization and adverse changes in the price of the Company's common stock; political instability; acts of war or terrorism; pandemic virus and disease, including COVID-19; changes in consumer spending, borrowings and savings habits; failure to maintain effective internal control over financial reporting or disclosure controls and procedures; cybersecurity and data privacy breaches and the consequence therefrom; the ability to address deficiencies in our internal controls over financial reporting or disclosure controls and procedures; technological changes and developments; changes in the competitive environment among financial holding companies and other financial service providers; the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board ("PCAOB"), the Financial Accounting Standards Board ("FASB") and other accounting standard setters and the cost and resources required to implement such changes; our ability to attract and retain key personnel; changes in our personnel, organization, compensation and benefit plans; and our success at managing the risks involved in the foregoing items.

For further information with respect to factors that could cause actual results to materially differ from the expectations or projections stated in the forward-looking statements, please see the Company's publicly available Securities and Exchange Commission filings, including the Company's Form 10-K for the last fiscal year and, in particular, the discussion of "Risk Factors" set forth therein and herein. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Form 10-Q. Forward-looking statements speak only as of the date on which such

statements are made. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events except as required by law.

Item 1. Financial Statements

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)


(dollars in thousands)	(dollars in thousands)	June 30, 2021		December 31, 2020		(dollars in thousands)	June 30, 2022		December 31, 2021
Assets	Assets					Assets
Cash and due from banks	Cash and due from banks	$	116,009	$	97,546	Cash and due from banks	$	108,389	$	81,506
Interest-bearing deposits in other banks	Interest-bearing deposits in other banks	224,469		6,521		Interest-bearing deposits in other banks	22,741		247,401
Investment securities:	Investment securities:					Investment securities:
Available-for-sale debt securities, at fair value	Available-for-sale debt securities, at fair value	1,407,340		1,182,609		Available-for-sale debt securities, at fair value	787,373		1,631,699
Held-to-maturity debt securities, at amortized cost; fair value of: 635,565 at June 30, 2022 and none at December 31, 2021						Held-to-maturity debt securities, at amortized cost; fair value of: 635,565 at June 30, 2022 and none at December 31, 2021	663,365		—

Equity securities, at fair value		1,578		1,351
Total investment securities	Total investment securities	1,408,918		1,183,960		Total investment securities	1,450,738		1,631,699

Loans held for sale	Loans held for sale	5,361		16,687		Loans held for sale	535		3,531

Loans	Loans	5,077,318		4,964,113		Loans	5,301,633		5,101,649
Allowance for credit losses	Allowance for credit losses	(77,781)		(83,269)		Allowance for credit losses	(65,211)		(68,097)
Loans, net of allowance for credit losses	Loans, net of allowance for credit losses	4,999,537		4,880,844		Loans, net of allowance for credit losses	5,236,422		5,033,552

Premises and equipment, net	Premises and equipment, net	76,740		65,278		Premises and equipment, net	88,664		80,354
Accrued interest receivable	Accrued interest receivable	19,014		20,224		Accrued interest receivable	17,146		16,709
Investment in unconsolidated subsidiaries		31,052		29,968
Investment in unconsolidated entities						Investment in unconsolidated entities	37,341		29,679

Mortgage servicing rights	Mortgage servicing rights	10,500		11,865		Mortgage servicing rights	9,369		9,738

Bank-owned life insurance	Bank-owned life insurance	167,289		163,161		Bank-owned life insurance	167,202		169,148
Federal Home Loan Bank stock	Federal Home Loan Bank stock	8,149		8,237		Federal Home Loan Bank stock	8,943		7,964
Right-of-use lease asset	Right-of-use lease asset	41,890		45,857		Right-of-use lease asset	36,978		39,441
Other assets	Other assets	69,553		64,435		Other assets	114,710		68,367
Total assets	Total assets	$	7,178,481	$	6,594,583	Total assets	$	7,299,178	$	7,419,089

Liabilities	Liabilities					Liabilities
Deposits:	Deposits:					Deposits:
Noninterest-bearing demand	Noninterest-bearing demand	$	2,203,806	$	1,790,269	Noninterest-bearing demand	$	2,282,967	$	2,291,246
Interest-bearing demand	Interest-bearing demand	1,341,280		1,174,888		Interest-bearing demand	1,444,566		1,415,277
Savings and money market	Savings and money market	2,048,945		1,932,043		Savings and money market	2,214,146		2,225,903
Time	Time	803,128		898,918		Time	680,382		706,732
Total deposits	Total deposits	6,397,159		5,796,118		Total deposits	6,622,061		6,639,158

Short-term borrowings		0		22,000
Long-term debt	Long-term debt	105,495		105,385		Long-term debt	105,738		105,616
Lease liability	Lease liability	43,112		47,191		Lease liability	38,037		40,731

Other liabilities	Other liabilities	79,874		77,156		Other liabilities	78,242		75,317
Total liabilities	Total liabilities	6,625,640		6,047,850		Total liabilities	6,844,078		6,860,822

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

Contingent liabilities and other commitments (see Notes 8, 16 and 17)						Contingent liabilities and other commitments (see Notes 8, 16 and 17)
Equity	Equity					Equity
Preferred stock, 0 par value, authorized 1,000,000 shares; issued and outstanding: NaN at June 30, 2021 and December 31, 2020		0		0
Common stock, 0 par value, authorized 185,000,000 shares; issued and outstanding: 28,218,860 at June 30, 2021 and 28,183,340 at December 31, 2020		440,854		442,635
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding: none at June 30, 2022 and December 31, 2021						Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding: none at June 30, 2022 and December 31, 2021	—		—
Common stock, no par value, authorized 185,000,000 shares; issued and outstanding: 27,463,562 at June 30, 2022 and 27,714,071 at December 31, 2021						Common stock, no par value, authorized 185,000,000 shares; issued and outstanding: 27,463,562 at June 30, 2022 and 27,714,071 at December 31, 2021	417,862		426,091
Additional paid-in capital	Additional paid-in capital	96,182		94,842		Additional paid-in capital	98,977		98,073
Retained earnings (Accumulated deficit)		10,831		(10,920)
Accumulated other comprehensive income		4,926		20,128
Retained earnings						Retained earnings	64,693		42,015
Accumulated other comprehensive loss						Accumulated other comprehensive loss	(126,432)		(7,960)
Total shareholders' equity	Total shareholders' equity	552,793		546,685		Total shareholders' equity	455,100		558,219
Non-controlling interest	Non-controlling interest	48		48		Non-controlling interest	—		48
Total equity	Total equity	552,841		546,733		Total equity	455,100		558,267
Total liabilities and equity	Total liabilities and equity	$	7,178,481	$	6,594,583	Total liabilities and equity	$	7,299,178	$	7,419,089

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands, except per share data)	(dollars in thousands, except per share data)	2021		2020		2021		2020		(dollars in thousands, except per share data)	2022		2021		2022		2021
Interest income:	Interest income:									Interest income:
Interest and fees on loans	Interest and fees on loans	$	49,024	$	45,915	$	95,098	$	92,119	Interest and fees on loans	$	46,963	$	49,024	$	91,912	$	95,098
Interest and dividends on investment securities:	Interest and dividends on investment securities:									Interest and dividends on investment securities:
Taxable interest	Taxable interest	4,447		6,310		9,553		13,067		Taxable interest	7,200		4,447		14,334		9,553
Tax-exempt interest	Tax-exempt interest	346		599		860		1,267		Tax-exempt interest	642		346		1,293		860
Dividends	Dividends	18		17		36		34		Dividends	—		18		21		36
Interest on deposits in other banks	Interest on deposits in other banks	61		3		71		39		Interest on deposits in other banks	191		61		263		71
Dividends on Federal Home Loan Bank stock	Dividends on Federal Home Loan Bank stock	63		106		122		238		Dividends on Federal Home Loan Bank stock	68		63		127		122
Total interest income	Total interest income	53,959		52,950		105,740		106,764		Total interest income	55,064		53,959		107,950		105,740
Interest expense:	Interest expense:									Interest expense:
Interest on deposits:	Interest on deposits:									Interest on deposits:
Demand	Demand	93		114		179		290		Demand	144		93		256		179
Savings and money market	Savings and money market	282		567		556		1,685		Savings and money market	317		282		646		556
Time	Time	498		2,124		1,086		5,392		Time	490		498		959		1,086
Interest on short-term borrowings	Interest on short-term borrowings	0		74		2		582		Interest on short-term borrowings	2		—		2		2
Interest on long-term debt	Interest on long-term debt	1,025		812		2,052		1,726		Interest on long-term debt	1,133		1,025		2,174		2,052
Total interest expense	Total interest expense	1,898		3,691		3,875		9,675		Total interest expense	2,086		1,898		4,037		3,875
Net interest income	Net interest income	52,061		49,259		101,865		97,089		Net interest income	52,978		52,061		103,913		101,865
(Credit) provision for credit losses		(3,443)		11,213		(4,264)		22,340
Net interest income after provision for credit losses		55,504		38,046		106,129		74,749
Provision (credit) for credit losses										Provision (credit) for credit losses	989		(3,443)		(2,206)		(4,264)
Net interest income after provision (credit) for credit losses										Net interest income after provision (credit) for credit losses	51,989		55,504		106,119		106,129
Other operating income:	Other operating income:									Other operating income:
Mortgage banking income	Mortgage banking income	1,533		3,566		4,503		3,903		Mortgage banking income	1,140		1,533		2,312		4,503
Service charges on deposit accounts	Service charges on deposit accounts	1,443		1,149		2,921		3,199		Service charges on deposit accounts	2,026		1,443		3,887		2,921
Other service charges and fees	Other service charges and fees	4,619		2,916		8,409		7,813		Other service charges and fees	4,610		4,619		9,098		8,409
Income from fiduciary activities	Income from fiduciary activities	1,269		1,270		2,500		2,567		Income from fiduciary activities	1,188		1,269		2,342		2,500

Investment securities gains (losses)		50		0		50		0
Net gain on sales of investment securities										Net gain on sales of investment securities	8,506		50		8,506		50
Income from bank-owned life insurance	Income from bank-owned life insurance	1,210		1,424		2,007		1,405		Income from bank-owned life insurance	(1,028)		1,210		(489)		2,007

Other	Other	406		367		851		691		Other	696		406		1,033		851
Total other operating income	Total other operating income	10,530		10,692		21,241		19,578		Total other operating income	17,138		10,530		26,689		21,241
Other operating expense:	Other operating expense:									Other operating expense:
Salaries and employee benefits	Salaries and employee benefits	23,790		20,329		43,617		40,383		Salaries and employee benefits	22,369		23,790		43,311		43,617
Net occupancy	Net occupancy	4,055		3,645		7,819		7,317		Net occupancy	4,448		4,055		8,222		7,819
Equipment	Equipment	1,048		1,043		2,048		2,140		Equipment	1,075		1,048		2,157		2,048

Communication expense		756		774		1,525		1,611
Communication										Communication	744		756		1,550		1,525
Legal and professional services	Legal and professional services	2,572		2,238		4,949		4,266		Legal and professional services	2,916		2,572		5,542		4,949
Computer software expense		3,398		3,035		7,181		5,978
Advertising expense		1,329		923		2,987		2,015
Computer software										Computer software	3,624		3,398		6,706		7,181
Advertising										Advertising	1,150		1,329		2,300		2,987

Other	Other	4,485		3,867		9,153		6,586		Other	9,023		4,485		13,766		9,153
Total other operating expense	Total other operating expense	41,433		35,854		79,279		70,296		Total other operating expense	45,349		41,433		83,554		79,279
Income before income taxes	Income before income taxes	24,601		12,884		48,091		24,031		Income before income taxes	23,778		24,601		49,254		48,091
Income tax expense	Income tax expense	5,887		2,967		11,339		5,788		Income tax expense	6,184		5,887		12,222		11,339
Net income	Net income	$	18,714	$	9,917	$	36,752	$	18,243	Net income	$	17,594	$	18,714	$	37,032	$	36,752
Per common share data:	Per common share data:									Per common share data:
Basic earnings per common share	Basic earnings per common share	$	0.66	$	0.35	$	1.31	$	0.65	Basic earnings per common share	$	0.64	$	0.66	$	1.34	$	1.31
Diluted earnings per common share	Diluted earnings per common share	$	0.66	$	0.35	$	1.29	$	0.65	Diluted earnings per common share	$	0.64	$	0.66	$	1.33	$	1.29
Cash dividends declared	Cash dividends declared	$	0.24	$	0.23	$	0.47	$	0.46	Cash dividends declared	$	0.26	$	0.24	$	0.52	$	0.47
Weighted average common shares outstanding used in computation:
Basic shares		28,173,710		28,040,802		28,141,360		28,083,602
Diluted shares		28,456,624		28,095,230		28,407,479		28,190,132
Basic weighted average shares outstanding										Basic weighted average shares outstanding	27,516,284		28,173,710		27,553,629		28,141,360
Diluted weighted average shares outstanding										Diluted weighted average shares outstanding	27,676,619		28,456,624		27,759,187		28,407,479

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

Three Months Ended
June 30, Six Months Ended
June 30,
(dollars in thousands) 2021 2020 2021 2020
Net income $ 18,714 $ 9,917 $ 36,752 $ 18,243
Other comprehensive income, net of tax:
Net change in unrealized gain (loss) on investment securities 1,727 6,275 (15,574) 16,422
Defined benefit plans 188 204 372 720
Total other comprehensive income (loss), net of tax 1,915 6,479 (15,202) 17,142
Comprehensive income $ 20,629 $ 16,396 $ 21,550 $ 35,385


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2022		2021		2022		2021
Net income	$	17,594	$	18,714	$	37,032	$	36,752
Other comprehensive (loss) income, net of tax:
Net change in fair value of available-for-sale investment securities	(45,150)		1,727		(124,600)		(15,574)
Amortization of unrealized losses on investment securities transferred to held-to-maturity	1,448		—		1,448		—
Net change in fair value of derivatives	2,147		—		2,110		—
Defined benefit retirement plan and SERPs	2,470		188		2,570		372
Total other comprehensive (loss) income, net of tax	(39,085)		1,915		(118,472)		(15,202)
Comprehensive (loss) income	$	(21,491)	$	20,629	$	(81,440)	$	21,550

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)

Common
Shares
Outstanding Preferred
Stock Common
Stock Additional Paid-In Capital Retained Earnings (Accum.
Deficit) Accum.
Other
Comp.
Income
(Loss) Non-
Controlling
Interest Total
(dollars in thousands, except per share data)
Balance at December 31, 2020 28,183,340 $ — $ 442,635 $ 94,842 $ (10,920) $ 20,128 $ 48 $ 546,733
Net income — — — — 18,038 — — 18,038
Other comprehensive loss — — — — — (17,117) — (17,117)
Cash dividends declared ($0.23 per share) — — — — (6,490) — — (6,490)
Share-based compensation 99,190 — 870 879 — — — 1,749
Balance at March 31, 2021 28,282,530 $ — $ 443,505 $ 95,721 $ 628 $ 3,011 $ 48 $ 542,913
Net income — — — — 18,714 — — 18,714
Other comprehensive income — — — — — 1,915 — 1,915
Cash dividends declared ($0.24 per share) — — — — (6,787) — — (6,787)
Common stock purchased by directors' deferred compensation plan (6,900 shares, net) — — (191) — — — — (191)
Common stock repurchased and retired and other related costs (156,600) — (2,603) — (1,724) — — (4,327)
Share-based compensation 92,930 — 143 461 — — — 604
Balance at June 30, 2021 28,218,860 $ — $ 440,854 $ 96,182 $ 10,831 $ 4,926 $ 48 $ 552,841


	Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings		Accum. Other Comp. Loss		Non- Controlling Interest		Total
	(dollars in thousands, except per share data)
Balance at December 31, 2021	27,714,071	$	—	$	426,091	$	98,073	$	42,015	$	(7,960)	$	48	$	558,267


Net income	—	—		—		—		19,438		—		—		19,438
Other comprehensive loss	—	—		—		—		—		(79,387)		—		(79,387)
Cash dividends declared ($0.26 per share)	—	—		—		—		(7,201)		—		—		(7,201)
Common stock sold by directors' deferred compensation plan (40,670 shares, net)	—	—		1,114		—		—		—		—		1,114
Common stock repurchased and retired and other related costs	(234,981)	—		(6,731)		—		—		—		—		(6,731)
Share-based compensation	105,839	—		679		197		—		—		—		876
Non-controlling interest	—	—		—		—		—		—		2		2
Balance at March 31, 2022	27,584,929	—		421,153		98,270		54,252		(87,347)		50		486,378
Net income	—	—		—		—		17,594		—		—		17,594
Other comprehensive loss	—	—		—		—		—		(39,085)		—		(39,085)
Cash dividends declared ($0.26 per share)	—	—		—		—		(7,153)		—		—		(7,153)
Common stock sold by directors' deferred compensation plan (38,000 shares, net)	—	—		927		—		—		—		—		927
Common stock repurchased and retired and other related costs	(174,429)	—		(4,218)		—		—		—		—		(4,218)
Share-based compensation	53,062	—		—		707		—		—		—		707
Non-controlling interest	—	—		—		—		—		—		(50)		(50)
Balance at June 30, 2022	27,463,562	$	—	$	417,862	$	98,977	$	64,693	$	(126,432)	$	—	$	455,100


		Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-In Capital		Accum. Deficit		Accum. Other Comp. Income (Loss)		Non- Controlling Interest		Total			Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-In Capital		(Accum. Deficit) Retained Earnings		Accum. Other Comp. Income		Non- Controlling Interest		Total
		(dollars in thousands, except per share data)																(dollars in thousands, except per share data)
Balance at December 31, 2019		28,289,257	$	—	$	447,602	$	91,611	$	(19,102)	$	8,409	$	0	$	528,520
Impact of the adoption of new accounting standards (1)		—	—		—		—		(3,156)		—		—		(3,156)
Adjusted balance at January 1, 2020		28,289,257	—		447,602		91,611		(22,258)		8,409		0		525,364
Balance at December 31, 2020																	Balance at December 31, 2020	28,183,340	$	—	$	442,635	$	94,842	$	(10,920)	$	20,128	$	48	$	546,733

Net income	Net income	—	—		—		—		8,326		—		—		8,326		Net income	—	—		—		—		18,038		—		—		18,038
Other comprehensive income		—	—		—		—		—		10,663		—		10,663
Other comprehensive loss																	Other comprehensive loss	—	—		—		—		—		(17,117)		—		(17,117)
Cash dividends declared ($0.23 per share)	Cash dividends declared ($0.23 per share)	—	—		—		—		(6,496)		—		—		(6,496)		Cash dividends declared ($0.23 per share)	—	—		—		—		(6,490)		—		—		(6,490)

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

Balance at March 31, 2021																	Balance at March 31, 2021	28,282,530	—		443,505		95,721		628		3,011		48		542,913
Net income																	Net income	—	—		—		—		18,714		—		—		18,714
Other comprehensive income																	Other comprehensive income	—	—		—		—		—		1,915		—		1,915
Cash dividends declared ($0.24 per share)																	Cash dividends declared ($0.24 per share)	—	—		—		—		(6,787)		—		—		(6,787)
Common stock purchased by directors' deferred compensation plan (6,900 shares, net)																	Common stock purchased by directors' deferred compensation plan (6,900 shares, net)	—	—		(191)		—		—		—		—		(191)
Common stock repurchased and retired and other related costs	Common stock repurchased and retired and other related costs	(206,802)	—		(4,749)		—		—		—		—		(4,749)		Common stock repurchased and retired and other related costs	(156,600)	—		(2,603)		—		(1,724)		—		—		(4,327)
Share-based compensation	Share-based compensation	32,898	—		—		673		—		—		—		673		Share-based compensation	92,930	—				461		—		—		—		604
Noncontrolling interest		—	—		—		—		—		—		49		49
Balance at March 31, 2020		28,115,353	$	—	$	442,853	$	92,284	$	(20,428)	$	19,072	$	49	$	533,830
Net income		—	—		—		—		9,917		—		—		9,917
Other comprehensive income		—	—		—		—		—		6,479		—		6,479
Cash dividends declared ($0.23 per share)		—	—		—		—		(6,475)		—		—		(6,475)
Common stock purchased by directors' deferred compensation plan (8,800 shares, net)		—	—		(154)		—		—		—		—		(154)
Common stock repurchased and retired and other related costs		—	—		0		—		—		—		—		0
Share-based compensation		38,806	—				723		—		—		0		723
Noncontrolling interest		—	—		—		—		—		—		(14)		(14)
Balance at June 30, 2020		28,154,159	$	—	$	442,699	$	93,007	$	(16,986)	$	25,551	$	35	$	544,306

Balance at June 30, 2021																	Balance at June 30, 2021	28,218,860	$	—	$	440,854	$	96,182	$	10,831	$	4,926	$	48	$	552,841

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

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


		Six Months Ended June 30,					Six Months Ended June 30,
(dollars in thousands)	(dollars in thousands)	2021		2020		(dollars in thousands)	2022		2021
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	36,752	$	18,243	Net income	$	37,032	$	36,752
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
(Credit) provision for credit losses	(Credit) provision for credit losses	(4,264)		22,340		(Credit) provision for credit losses	(2,206)		(4,264)
Depreciation and amortization of premises and equipment	Depreciation and amortization of premises and equipment	3,293		3,010		Depreciation and amortization of premises and equipment	3,507		3,293
Non-cash lease (benefit) expense		(34)		117
Non-cash lease expense (benefit)						Non-cash lease expense (benefit)	1,337		(34)
Cash flows from operating leases	Cash flows from operating leases	(3,325)		(3,189)		Cash flows from operating leases	(3,021)		(3,325)
Loss on disposal of fixed assets	Loss on disposal of fixed assets	37		0		Loss on disposal of fixed assets	2		37
Loss on sale of other real estate, net of write-downs		0		70

Amortization of mortgage servicing rights	Amortization of mortgage servicing rights	2,082		3,217		Amortization of mortgage servicing rights	863		2,082
Net amortization and accretion of premium/discounts on investment securities	Net amortization and accretion of premium/discounts on investment securities	5,715		4,327		Net amortization and accretion of premium/discounts on investment securities	2,518		5,715
Share-based compensation expense	Share-based compensation expense	1,340		1,396		Share-based compensation expense	904		1,340
Net gain on sales of investment securities	Net gain on sales of investment securities	(50)		0		Net gain on sales of investment securities	(8,506)		(50)
Net gain on sales of residential mortgage loans	Net gain on sales of residential mortgage loans	(3,654)		(5,273)		Net gain on sales of residential mortgage loans	(1,339)		(3,654)
Proceeds from sales of loans held for sale	Proceeds from sales of loans held for sale	89,016		167,643		Proceeds from sales of loans held for sale	61,903		89,016
Originations of loans held for sale	Originations of loans held for sale	(74,036)		(163,730)		Originations of loans held for sale	(57,568)		(74,036)
Equity in earnings of unconsolidated subsidiaries		(187)		(130)
Distributions from unconsolidated subsidiaries		288		121
Net increase in cash surrender value of bank-owned life insurance		(2,685)		(2,268)
Equity in earnings of unconsolidated entities						Equity in earnings of unconsolidated entities	(113)		(187)
Distributions from unconsolidated entities						Distributions from unconsolidated entities	157		288
Net decrease (increase) in cash surrender value of bank-owned life insurance						Net decrease (increase) in cash surrender value of bank-owned life insurance	1,946		(2,685)
Deferred income taxes	Deferred income taxes	(8,612)		(2,129)		Deferred income taxes	(34,300)		(8,612)
Net tax benefit (expense) from share-based compensation		252		(134)
Net tax benefit from share-based compensation						Net tax benefit from share-based compensation	198		252
Net change in other assets and liabilities	Net change in other assets and liabilities	17,212		13,427		Net change in other assets and liabilities	44,237		17,212
Net cash provided by operating activities	Net cash provided by operating activities	59,140		57,058		Net cash provided by operating activities	47,551		59,140
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Proceeds from maturities of and calls on investment securities available-for-sale	Proceeds from maturities of and calls on investment securities available-for-sale	169,385		123,720		Proceeds from maturities of and calls on investment securities available-for-sale	88,229		169,385
Proceeds from sales of investment securities available-for-sale	Proceeds from sales of investment securities available-for-sale	174,971		0		Proceeds from sales of investment securities available-for-sale	—		174,971
Purchases of investment securities available-for-sale	Purchases of investment securities available-for-sale	(596,140)		(147,359)		Purchases of investment securities available-for-sale	(89,069)		(596,140)
Proceeds from maturities of and calls on investment securities held-to-maturity						Proceeds from maturities of and calls on investment securities held-to-maturity	11,184		—

Proceeds from sale of Visa Class B common stock						Proceeds from sale of Visa Class B common stock	8,506		—
Net loan (originations) repayments						Net loan (originations) repayments	(34,961)		3,765
Purchases of loan portfolios						Purchases of loan portfolios	(165,703)		(118,194)

Net loan repayments (originations)		3,765		(524,869)
Purchases of loan portfolios		(118,194)		(33,196)

Proceeds from sale of foreclosed loans/other real estate owned		0		94
Purchases of bank-owned life insurance	Purchases of bank-owned life insurance	(3,550)		0		Purchases of bank-owned life insurance	—		(3,550)
Proceeds from bank-owned life insurance	Proceeds from bank-owned life insurance	2,107		166		Proceeds from bank-owned life insurance	—		2,107

Net purchases of premises, equipment and land	Net purchases of premises, equipment and land	(14,792)		(11,699)		Net purchases of premises, equipment and land	(11,819)		(14,792)

Contributions to unconsolidated subsidiaries		(2,819)		(2,194)
Net proceeds from redemption of FHLB stock		88		5,754
Contributions to unconsolidated entities						Contributions to unconsolidated entities	(8,995)		(2,819)
Net (purchases) proceeds from redemption of FHLB stock						Net (purchases) proceeds from redemption of FHLB stock	(979)		88
Net cash used in investing activities	Net cash used in investing activities	(385,179)		(589,583)		Net cash used in investing activities	(203,607)		(385,179)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Net increase in deposits		601,041		674,662
Proceeds from long-term debt		0		65,944
Net (decrease) increase in deposits						Net (decrease) increase in deposits	(17,097)		601,041

Net decrease in short-term borrowings	Net decrease in short-term borrowings	(22,000)		(150,000)		Net decrease in short-term borrowings	—		(22,000)
Cash dividends paid on common stock	Cash dividends paid on common stock	(13,277)		(12,971)		Cash dividends paid on common stock	(14,354)		(13,277)
Repurchases of common stock and other related costs	Repurchases of common stock and other related costs	(4,327)		(4,749)		Repurchases of common stock and other related costs	(10,949)		(4,327)
Net proceeds from issuance of common stock and stock option exercises	Net proceeds from issuance of common stock and stock option exercises	1,013		0		Net proceeds from issuance of common stock and stock option exercises	679		1,013
Net cash provided by financing activities		562,450		572,886
Net increase in cash and cash equivalents		236,411		40,361
Net cash (used in) provided by financing activities						Net cash (used in) provided by financing activities	(41,721)		562,450
Net (decrease) increase in cash and cash equivalents						Net (decrease) increase in cash and cash equivalents	(197,777)		236,411
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	104,067		102,972		Cash and cash equivalents at beginning of period	328,907		104,067
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	340,478	$	143,333	Cash and cash equivalents at end of period	$	131,130	$	340,478

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	4,460	$	11,069
Income taxes		14,358		185

Supplemental disclosure of non-cash information:
Net change in common stock held by directors’ deferred compensation plan		191		154




Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	4,037	$	4,460
Income taxes	5,569		14,358


Supplemental disclosure of non-cash information:
Net change in common stock held by directors’ deferred compensation plan	(2,041)		191



Net transfer of investment securities available-for-sale to held-to-maturity	762,738		—
Amortization of unrealized losses on investment securities transferred to held-to-maturity	1,976		—
Other intangible assets and services provided in exchange for Swell common stock	1,500		—

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

These interim condensed consolidated financial statements and notes should be read in conjunction with the Company's consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended December 31, ~~2020.~~2021. In the opinion of management, all adjustments necessary for a fair presentation have been made and include all normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.

~~Reclassifications~~

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

Principles of Consolidation

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

In January 2020, we acquired a 50% ownership interest in a mortgage loan origination and brokerage company, Oahu HomeLoans, LLC. The bank concluded that the entity met the definition of a variable interest entity ("VIE") and that the Bank was the primary beneficiary of the VIE. As a result, the investment ~~meets~~met the consolidation requirements under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 810, "Consolidation." ~~The bank concluded that the entity meets the definition of a variable interest entity and that we are the primary beneficiary of the variable interest entity.~~ Accordingly, the investment has been consolidated into our financial statements. In March 2022, Oahu HomeLoans, LLC was terminated.

We have 50% ownership interests in three other mortgage loan origination and brokerage companies which are accounted for using the equity method and are included in investment in unconsolidated entities: Gentry HomeLoans, LLC, Haseko HomeLoans, LLC and Island Pacific HomeLoans, LLC.

We have low income housing tax credit partnership investments that are accounted for under the proportional amortization method and are included in investment in unconsolidated entities.

During the first quarter of 2022, the Company invested $2.0 million in Swell Financial, Inc. ("Swell"), which included $1.5 million in other intangible assets and services provided in exchange for Swell common stock and $0.5 million in cash in exchange for Swell preferred stock. Swell intends to launch an integrated checking and line-of-credit account in the second half of 2022, with Central Pacific Bank serving as the bank sponsor. The Company does not have the ability to exercise significant influence over Swell and the investment does not have a readily determinable fair value. As a result, the Company determined that the cost method of accounting for the investment was appropriate. The investment is included in investments in unconsolidated entities.

During the second quarter of 2021, the Company committed $2.0 million to the JAM FINTOP Banktech Fund, L.P., an investment fund designed to help develop and accelerate technology adoption at community banks across the United States. The investment is accounted for under the cost method and is also included in investment in unconsolidated entities. The Company had $1.7 million in unfunded commitments related to the investment as of June 30, 2022.

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

Our investments in unconsolidated ~~subsidiaries~~entities accounted for under the equity, proportional amortization and cost methods were $0.1 million, $31.6 million and $5.6 million, respectively, at June 30, 2022 and $0.2 million, ~~$27.3~~$25.9 million and $3.6 million, respectively, at ~~June 30, 2021 and $0.3 million, $28.1 million and $1.6 million, respectively, at~~ December 31, ~~2020.~~2021. Our policy for determining impairment of these investments includes an evaluation of whether a loss in value of an investment is other than temporary. Evidence of a loss in value includes absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. We perform impairment tests whenever indicators of impairment are present. If

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

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

~~Risks and Uncertainties~~

~~COVID-19 Pandemic~~

In December 2019, a novel strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China, and has since spread across the globe. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has severely impacted the level of economic activity in the local, national and global economies and financial markets. The pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. ~~The Company and its customers have been adversely affected by the COVID-19 pandemic. The full extent to which the~~

~~COVID~~-19 pandemic negatively impacts the Company's business, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, remains uncertain and will depend on future developments, including the scope and duration of the pandemic, the success of the continued COVID-19 vaccine rollout, and other actions taken by governmental authorities and other third parties in response to the pandemic. If the pandemic continues to be sustained, it may further adversely impact the Company and the State of Hawaii and impair the ability of the Company's customers to fulfill their contractual obligations to the Company. This could cause the Company to experience a material adverse effect on its business operations, asset valuations, financial condition, and results of operations. Material adverse effects may include all or a combination of losses in operations, loan defaults, higher provisions for credit losses and valuation impairments on the Company's investments, loans, mortgage servicing rights, deferred tax assets, or counter-party risk derivatives.

Investment Securities

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

Transfers of investment securities from AFS to HTM are accounted for at fair value as of the date of the transfer. The difference between the fair value and the par value at the date of transfer is considered a premium or discount and is accounted for accordingly. Any unrealized gain or loss at the date of the transfer is reported in AOCI, and is amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount, and will offset or mitigate the effect on interest income of the amortization of the premium or discount for that HTM security.

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

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

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

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

A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days delinquent. Interest accrued but not received for a security placed on non-accrual status is reversed against current period interest income. There were no investment securities on nonaccrual status as of June 30, ~~2021~~2022 and the Company did not reverse any accrued interest against interest income during the three and six months ended June 30, ~~2021.~~2022.

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

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

For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In conducting this assessment for debt securities in an unrealized loss position, management evaluates the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the investment security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost

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

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

As of June 30, ~~2021,~~2022, the ~~declines~~decline in market values of our AFS debt securities ~~were~~was primarily attributable to changes in interest rates and volatility in the financial markets. Because we have no intent to sell securities in an unrealized loss position and it is not more likely than not that we will be required to sell such securities before recovery of its amortized cost basis, we do not believe a credit loss exists and an ACL was not recorded.

The Company has made a policy election to exclude accrued interest receivable from the amortized cost basis of debt securities and report accrued interest receivable together with accrued interest on loans in the consolidated balance sheets. Accrued interest receivable on AFS debt securities totaled ~~$4.2~~$3.2 million and $4.6 million as of June 30, ~~2021.~~2022 and December 31, 2021, respectively. Accrued interest receivable on AFS debt securities is excluded from the estimate of credit losses.

ACL for HTM Debt Securities

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

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

Securities in the HTM portfolio are issued by or contain collateral issued by U.S. government sponsored enterprises ("GSEs") and carry implicit guarantees from the U.S. government. Due to the implicit guarantee and the long history of no credit losses, no allowance for credit losses was recorded for these securities.

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

Accrued interest receivable on HTM debt securities totaled $1.2 million as of June 30, 2022. The Company did not have any accrued interest receivable on HTM debt securities as of ~~June 30,~~December 31, 2021.

Federal Home Loan Bank Stock

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

Loans

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

Interest income on loans is accrued at the contractual rate of interest on the unpaid principal balance. Accrued interest receivable on loans totaled ~~$14.8~~$12.8 million and $12.1 million at June 30, 2022 and December 31, 2021, respectively, and is reported together with accrued interest on HTM and AFS debt securities on the consolidated balance sheets. Upon adoption of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,”

the Company made the accounting policy election to not measure an estimate of credit losses on accrued interest receivable as the Company writes off any uncollectible accrued interest receivable in a timely manner. The Company believes ~~COVID-19~~ modified loans due to the novel coronavirus disease ("COVID-19") pandemic have distinct risk characteristics that cause them to be monitored and assessed for credit risk differently than their unmodified counterparts. Thus, in the third quarter of 2020, the Company elected to measure a reserve on the accrued interest receivable for loans on active payment forbearance or deferral of $0.2 million, with the offset recorded to provision for credit losses. 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 June 30, ~~2021.~~

2022.

Nonaccrual Loans

The Company determines delinquency status by considering the number of days full payments required by the contractual terms of the loan are past due. ~~Loans~~Commercial, scored small business, automobile and other consumer loans are generally placed on nonaccrual status when principal and/or interest payments are 90 days past due, or earlier should management determine that the borrowers will be unable to meet contractual principal and/or interest obligations, unless the loans are well-secured and in the process of collection. Residential mortgage and home equity loans, are generally placed on nonaccrual status when principal and/or interest payments are 120 days past due, or earlier should management determine that the borrowers will be unable to meet contractual principal and/or interest obligations, unless the loans are well-secured and in the process of collection. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income should management determine that the collectability of such accrued interest is doubtful. All subsequent receipts are applied to principal outstanding and no interest income is recognized unless the financial condition and payment record of the borrowers warrant such recognition and the loan is restored to accrual status. A nonaccrual loan may be restored to an accrual basis when principal and interest payments are current for a predetermined period, normally at least six months, and full payment of principal and interest is reasonably assured.

Troubled Debt Restructuring (“TDR”)

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

TDRs that are performing and on accrual status as of the date of the modification remain on accrual status. TDRs that are nonperforming as of the date of modification generally remain as nonaccrual until the prospect of future payments in accordance with the modified loan agreement is reasonably assured, generally demonstrated when the borrower maintains compliance with the restructured terms for a predetermined period, normally at least six months. TDRs with temporary below-market concessions remain designated as a TDR regardless of the accrual or performance status until the loan is paid off.

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

In April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued a revised interagency statement encouraging financial institutions to work with customers affected by the COVID-19 pandemic and providing additional information regarding loan modifications. The revised interagency statement clarifies the interaction between the interagency statement issued on March 22, 2020 and the temporary relief provided by Section 4013 of the Coronavirus Aid, Relief and Economic Security ("CARES") Act. Section 4013 allows financial institutions to suspend the requirements to classify certain loan modifications as TDRs. The revised statement also provides supervisory interpretations on past due and nonaccrual regulatory reporting of loan modification

programs and regulatory capital. Section 4013 and the interagency guidance ~~are being~~were applied by the Company to loan modifications made related to the COVID-19 pandemic as eligible and appropriate. The application of the guidance reduced the number of TDRs that were reported. In December 2020, the Consolidated Appropriations Act, 2021 was signed into law. Section 541 of this legislation, “Extension of Temporary Relief From Troubled Debt Restructurings and Insurer Clarification,” ~~extends~~extended Section 4013 of the CARES Act to the earlier of January 1, 2022 or 60 days after the termination of the national emergency declared relating to COVID-19. This relief ended on January 1, 2022.

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

ACL for Loans

Under the current expected credit loss methodology, the ACL for loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Our policy is to charge off a loan in the period in which the loan is deemed to be uncollectible and all interest previously accrued but not collected is reversed against current period interest income. We consider a loan to be uncollectible when it is probable that a loss has been incurred and the Company can make a reasonable estimate of the loss. In these instances, the likelihood of and/or timeframe for recovery of the amount due is uncertain, weak, or protracted. Subsequent receipts, if any, are credited first to the remaining principal, then to the ACL for loans as recoveries, and finally to unaccrued interest.

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

The Company's methodologies incorporate a reasonable and supportable forecast period of one year and revert to historical loss information on a straight-line basis over a one year reversion period.

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

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

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

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

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

The Company relies on a third-party platform which offers multiple methodologies to measure historical life-of-loan losses. The Company has also developed statistical models internally to incorporate future economic conditions and forecast expected

credit losses based on various macro-economic indicators such as unemployment, income levels, Hawaii home prices, gross state product, and ~~income levels.~~the Consumer Confidence Index.

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

Loan Segment

Historical Lifetime Loss Method

Historical
Lookback
Period

Economic
Forecast
Length

Reversion Method

Construction

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

2008-Present

One Year

One Year (straight-line basis)

Commercial real estate

PD/LGD

2008-Present

Multi-family mortgage

PD/LGD

2008-Present

Commercial, financial and agricultural

PD/LGD

2008-Present

Home equity lines of credit

Loss-Rate Migration

2008-Present

Residential mortgage

Loss-Rate Migration

2008-Present

Consumer - other revolving

Loss-Rate Migration

2008-Present

Consumer - non-revolving

Loss-Rate Migration

2008-Present

Purchased Mainland portfolios (Dealer, Other consumer)

Weighted-Average Remaining Maturity ("WARM")

2008-Present

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

Construction loans

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

Commercial real estate loans

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

Multi-family mortgage loans

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

Commercial, financial and agricultural loans

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

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

Home equity lines of credit

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

Residential mortgage loans

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

Consumer loans - other revolving

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

Consumer loans - non-revolving

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

Purchased consumer portfolios

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

Below is a description of the methodologies mentioned above:

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

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

Loss-Rate Migration

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

Weighted-Average Remaining Maturity ("WARM")

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

Other

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

Determining the Term

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

Reserve for Off-Balance Sheet Credit Exposures

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

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

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

Purchased Credit Deteriorated (“PCD”) Financial Assets

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

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

2. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Adopted in ~~2021~~2022

In ~~December 2019,~~May 2021, the FASB issued ASU ~~2019-12,~~No. 2021-04, "~~Income Taxes~~Earnings Per Share (Topic ~~740)."~~ 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options"~~This~~. ASU ~~simplifies the~~2021-04 addresses issuer’s accounting for ~~income taxes by removing~~ certain ~~exceptions to the general principles in Topic 740. It also improves consistent application~~modifications or exchanges of ~~GAAP~~freestanding equity-classified written call options. ASU 2021-04 is effective for ~~other areas of Topic 740 by clarifying~~fiscal years beginning after December 15, 2021 and ~~amending existing guidance.~~interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU ~~2019-12~~2021-04 effective January 1, ~~2021~~2022 and it did not have a material impact on our consolidated financial statements.

In ~~October 2020,~~July 2021, the FASB issued ASU ~~2020-10,~~No. 2021-05, "~~Codification Improvements."~~ Leases (Topic 842), Lessors—Certain Leases with Variable Lease Payments"~~This~~. ASU ~~issues improvements~~2021-05 updates guidance in Topic 842, to ~~the codification by ensuring that all guidance that requires or provides an option~~restore long-standing accounting practice for ~~an entity to provide information in the notes to the financial statements~~certain sales-type leases with variable payments. ASU 2021-05 is ~~codified, reducing the likelihood that disclosure requirements would be missed.~~effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company adopted ASU ~~2020-10~~2021-05 effective January 1, ~~2021~~2022 and it did not have ~~a material~~an impact on our consolidated financial ~~statements.~~statements as the Company does not have sale-type leases with variable payments.

Impact of Other Recently Issued Accounting Pronouncements on Future Filings

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

(2) elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. Finally, entities can (3) make a one-time election to sell and/or reclassify held-to-maturity (“HTM”) debt securities that reference an interest rate affected by reference rate reform. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848)," which clarifies that all derivative instruments affected by the changes to interest rates used for discounting, margining or contract price alignment, regardless of whether they reference LIBOR or another rate expected to be discontinued as a result of reference rate reform, an entity may apply certain practical expedients in Topic 848. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company will elect ~~(1)~~optional expedients above for ~~all~~applicable contract modifications and hedge accounting for hedging relationships that meet the stated criteria. ~~As the Company currently does not utilize hedge accounting, (2) above is currently not applicable.~~ The Company ~~currently does not have HTM debt securities and therefore, (3) above~~ is ~~currently not applicable.~~in the process of evaluating the impact of this pronouncement on the consolidated financial statements.

In ~~May 2021,~~March 2022, the FASB issued ASU No. ~~2021-04,~~ 2022-01,~~"Earnings Per Share~~ "Derivatives and Hedging (Topic ~~260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and~~815): Fair Value Hedging—~~Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options"~~Portfolio Layer Method". ASU ~~2021-04 addresses issuer’s accounting~~2022-01 updates guidance in Topic 815, to expand the current last-of-layer method, which will allow multiple hedged layers to be designated for ~~certain modifications~~a single closed portfolio of financial assets or ~~exchanges~~one or more beneficial interests secured by a portfolio of ~~freestanding equity-classified written call options.~~financial instruments on a prospective basis. ASU ~~2021-04~~2022-01 is effective for fiscal years beginning after December 15, ~~2021~~2022, with early adoption permitted. The Company is in the process of evaluating the provisions of this ASU and its effects on our consolidated financial statements, however we currently do not use the last-of-layer hedge accounting method.

In March 2022, the FASB issued ASU No. 2022-02, "Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures". ASU 2022-02 updates guidance in Topic 326, to eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty and to require entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is in the process of evaluating the provisions of this ASU and its effects on our consolidated financial statements and plans on making the adoption for the upcoming effective fiscal period.

In June 2022, the FASB issued ASU 2022-03, "Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions". ASU 2022-03, (1) clarifies the guidance in Topic 820 when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) amends a related illustrative example, and (3) introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. ASU 2022-03 is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years, with early adoption permitted. ~~We do not expect adoption~~The Company is in the process of evaluating the ~~new guidance to have a significant~~ impact of this pronouncement on ~~our~~the consolidated financial statements.

~~In July 2021, the FASB issued ASU No. 2021-05,~~ ~~"Leases (Topic 842), Lessors—Certain Leases with Variable Lease Payments"~~. ASU 2021-05 updates guidance in Topic 842, to restore long-standing accounting practice for certain sales-type leases with variable payments. ASU 2021-05 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. We do not expect adoption of the new guidance to have a significant impact on our financial statements.

3. INVESTMENT SECURITIES

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


(dollars in thousands)	(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		ACL		(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		ACL
June 30, 2021
June 30, 2022												June 30, 2022
Held-to-maturity:												Held-to-maturity:
Debt securities:												Debt securities:
States and political subdivisions												States and political subdivisions	$	41,769	$	—	$	(2,855)	$	38,914	$	—

Mortgage-backed securities:												Mortgage-backed securities:
Residential - U.S. Government-sponsored entities												Residential - U.S. Government-sponsored entities	621,596		120		(25,065)		596,651		—

Total held-to-maturity securities												Total held-to-maturity securities	$	663,365	$	120	$	(27,920)	$	635,565	$	—

Available-for-sale:	Available-for-sale:											Available-for-sale:
Debt securities:	Debt securities:											Debt securities:
States and political subdivisions	States and political subdivisions	$	193,919	$	3,833	$	(988)	$	196,764	$	0	States and political subdivisions	$	177,182	$	165	$	(28,234)	$	149,113	$	—
Corporate securities	Corporate securities	46,999		194		(515)		46,678		0		Corporate securities	36,443		—		(5,299)		31,144		—
U.S. Treasury obligations and direct obligations of U.S Government agencies		39,977		134		(377)		39,734		0
U.S. Treasury obligations and direct obligations of U.S. Government agencies												U.S. Treasury obligations and direct obligations of U.S. Government agencies	31,398		12		(1,725)		29,685		—
Mortgage-backed securities:	Mortgage-backed securities:											Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	Residential - U.S. Government-sponsored entities	984,750		8,613		(8,685)		984,678		0		Residential - U.S. Government-sponsored entities	525,996		55		(53,955)		472,096		—
Commercial - U.S. Government agencies and sponsored entities		79,970		2,094		(598)		81,466		0
Residential - Non-government agencies	Residential - Non-government agencies	15,091		428		(73)		15,446		0		Residential - Non-government agencies	10,499		—		(616)		9,883		—
Commercial - U.S. Government-sponsored entities												Commercial - U.S. Government-sponsored entities	59,918		—		(5,756)		54,162		—
Commercial - Non-government agencies	Commercial - Non-government agencies	41,318		1,256		0		42,574		0		Commercial - Non-government agencies	41,337		3		(50)		41,290		—
Total available-for-sale securities	Total available-for-sale securities	$	1,402,024	$	16,552	$	(11,236)	$	1,407,340	$	0	Total available-for-sale securities	$	882,773	$	235	$	(95,635)	$	787,373	$	—


(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		ACL
December 31, 2021






Available-for-sale:
Debt securities:
States and political subdivisions	$	235,521	$	3,156	$	(1,849)	$	236,828	$	—
Corporate securities	41,687		24		(1,065)		40,646		—
U.S. Treasury obligations and direct obligations of U.S. Government agencies	35,833		69		(568)		35,334		—
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	1,213,910		4,899		(19,993)		1,198,816		—
Residential - Non-government agencies	11,942		335		(64)		12,213		—
Commercial - U.S. Government-sponsored entities	66,287		756		(1,194)		65,849		—
Commercial - Non-government agencies	41,328		685		—		42,013		—
Total available-for-sale securities	$	1,646,508	$	9,924	$	(24,733)	$	1,631,699	$	—

In March 2022, the Company transferred 41 investment securities that were classified as AFS to HTM. The investment securities had an amortized cost basis of $361.8 million and a fair market value of $329.5 million. On the date of transfer, these securities had a total net unrealized loss of $32.3 million. There was no impact to net income as a result of the reclassification.

In May 2022, the Company transferred 40 investment securities that were classified as AFS to HTM. The investment securities had an amortized cost basis of $400.9 million and a fair market value of $343.7 million. On the date of transfer, these securities had a total net unrealized loss of $57.2 million. There was no impact to net income as a result of the reclassification.

1819

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

~~The amortized cost~~These transfers were executed to mitigate the potential future impact to capital through accumulated other comprehensive loss in consideration of a rising interest rate environment and ~~fair~~the impact of rising rates on the market value of ~~our equity~~the investment securities. The Company believes that it maintains sufficient liquidity for future business needs and it has the positive intent and ability to hold these securities ~~is as follows:~~

(dollars in thousands) Amortized Cost Fair Value
June 30, 2021
Equity securities $ 1,194 $ 1,578
December 31, 2020
Equity securities 1,068 1,351
to maturity.

The amortized cost and estimated fair value of our HTM and AFS debt securities at June 30, ~~2021~~2022 are shown below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.


		June 30, 2021					June 30, 2022
(dollars in thousands)	(dollars in thousands)	Amortized Cost		Fair Value		(dollars in thousands)	Amortized Cost		Fair Value
Held-to-maturity:						Held-to-maturity:
Debt securities:						Debt securities:
Due after ten years						Due after ten years	$	41,769	$	38,914

Mortgage-backed securities:						Mortgage-backed securities:
Residential - U.S. Government-sponsored entities						Residential - U.S. Government-sponsored entities	621,596		596,651

Total held-to-maturity securities						Total held-to-maturity securities	$	663,365	$	635,565

Available-for-sale:	Available-for-sale:					Available-for-sale:
Debt securities:						Debt securities:
Due in one year or less	Due in one year or less	$	23,390	$	23,497	Due in one year or less	$	5,696	$	5,702
Due after one year through five years	Due after one year through five years	27,513		28,430		Due after one year through five years	20,068		20,062
Due after five years through ten years	Due after five years through ten years	90,757		91,326		Due after five years through ten years	81,722		74,303
Due after ten years	Due after ten years	139,235		139,923		Due after ten years	137,537		109,875

Mortgage-backed securities:	Mortgage-backed securities:					Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	Residential - U.S. Government-sponsored entities	984,750		984,678		Residential - U.S. Government-sponsored entities	525,996		472,096
Commercial - U.S. Government agencies and sponsored entities		79,970		81,466
Residential - Non-government agencies	Residential - Non-government agencies	15,091		15,446		Residential - Non-government agencies	10,499		9,883
Commercial - U.S. Government-sponsored entities						Commercial - U.S. Government-sponsored entities	59,918		54,162
Commercial - Non-government agencies	Commercial - Non-government agencies	41,318		42,574		Commercial - Non-government agencies	41,337		41,290

Total available-for-sale securities	Total available-for-sale securities	$	1,402,024	$	1,407,340	Total available-for-sale securities	$	882,773	$	787,373

FoDuring the three months ended June 30, 2022, the Company sold all of its shares of Visa Class B common stock. Details of the transaction will be discussed later in this footnote. The Company did not sell any other investment securities during the ~~r three and~~ six months ended June 30, ~~2021, proceeds from the sale of available-for-sale investment securities were $175.0 million~~2022 and ~~resulted in a gross realized gain of $50 thousand. We did 0t sell any available-for-sale securities during the three and six months ended June 30, 2020.~~2021.

Investment securities with fair value of ~~$518.6~~$416.3 million and ~~$483.6~~$455.8 million at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, were pledged to secure public funds on deposit and other short-term borrowings.

At June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, there were no holdings of investment securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders' equity.

There were a total of ~~100~~237 and ~~37 AFS~~153 debt securities which were in an unrealized loss position, without an ACL, at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. The following tables summarize AFS debt securities which were in an unrealized loss position at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, aggregated by major security type and length of time in a continuous unrealized loss position.


		Less Than 12 Months				12 Months or Longer				Total					Less Than 12 Months				12 Months or Longer				Total
(dollars in thousands)	(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2021
June 30, 2022														June 30, 2022
Debt securities:	Debt securities:													Debt securities:
States and political subdivisions	States and political subdivisions	$	48,529	$	(988)	$	0	$	0	$	48,529	$	(988)	States and political subdivisions	$	114,446	$	(24,159)	$	12,088	$	(4,075)	$	126,534	$	(28,234)
Corporate securities	Corporate securities	31,376		(515)		0		0		31,376		(515)		Corporate securities	4,460		(560)		26,684		(4,739)		31,144		(5,299)
U.S. Treasury obligations and direct obligations of U.S Government agencies	U.S. Treasury obligations and direct obligations of U.S Government agencies	16,694		(236)		12,858		(141)		29,552		(377)		U.S. Treasury obligations and direct obligations of U.S Government agencies	8,914		(109)		17,874		(1,616)		26,788		(1,725)
Mortgage-backed securities:	Mortgage-backed securities:													Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	Residential - U.S. Government-sponsored entities	666,130		(8,685)		0		0		666,130		(8,685)		Residential - U.S. Government-sponsored entities	447,161		(51,051)		14,439		(2,904)		461,600		(53,955)
Residential - Non-government agencies	Residential - Non-government agencies	521		(41)		419		(32)		940		(73)		Residential - Non-government agencies	9,100		(408)		782		(208)		9,882		(616)
Commercial - U.S. Government agencies and sponsored entities		23,336		(598)		0		0		23,336		(598)

Commercial - U.S. Government-sponsored entities														Commercial - U.S. Government-sponsored entities	40,647		(2,128)		13,515		(3,628)		54,162		(5,756)
Commercial - Non-government agencies														Commercial - Non-government agencies	36,292		(50)		—		—		36,292		(50)
Total temporarily impaired securities	Total temporarily impaired securities	$	786,586	$	(11,063)	$	13,277	$	(173)	$	799,863	$	(11,236)	Total temporarily impaired securities	$	661,020	$	(78,465)	$	85,382	$	(17,170)	$	746,402	$	(95,635)


		Less Than 12 Months				12 Months or Longer				Total					Less Than 12 Months				12 Months or Longer				Total
(dollars in thousands)	(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2020
December 31, 2021														December 31, 2021
Debt securities:	Debt securities:													Debt securities:
States and political subdivisions	States and political subdivisions	$	21,313	$	(177)	$	0	$	0	$	21,313	$	(177)	States and political subdivisions	$	79,360	$	(1,252)	$	10,864	$	(597)	$	90,224	$	(1,849)
Corporate securities	Corporate securities	4,869		(131)		0		0		4,869		(131)		Corporate securities	8,633		(235)		21,960		(830)		30,593		(1,065)
U.S. Treasury obligations and direct obligations of U.S Government agencies	U.S. Treasury obligations and direct obligations of U.S Government agencies	5,980		(24)		20,925		(262)		26,905		(286)		U.S. Treasury obligations and direct obligations of U.S Government agencies	16,103		(415)		10,891		(153)		26,994		(568)
Mortgage-backed securities:	Mortgage-backed securities:													Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	Residential - U.S. Government-sponsored entities	76,402		(299)		0		0		76,402		(299)		Residential - U.S. Government-sponsored entities	926,570		(15,883)		114,747		(4,110)		1,041,317		(19,993)
Residential - Non-government agencies	Residential - Non-government agencies	989		(34)		0		0		989		(34)		Residential - Non-government agencies	—		—		938		(64)		938		(64)
Commercial - U.S. Government-sponsored entities	Commercial - U.S. Government-sponsored entities	16,977		(500)		0		0		16,977		(500)		Commercial - U.S. Government-sponsored entities	6,313		(205)		16,281		(989)		22,594		(1,194)

Total temporarily impaired securities	Total temporarily impaired securities	$	126,530	$	(1,165)	$	20,925	$	(262)	$	147,455	$	(1,427)	Total temporarily impaired securities	$	1,036,979	$	(17,990)	$	175,681	$	(6,743)	$	1,212,660	$	(24,733)

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

Visa Class B Common Stock

~~As of~~During the three months ended June 30, ~~2021,~~2022, the Company ~~owns~~sold its 34,631 shares of Class B common stock of Visa, Inc. ("Visa")~~. These~~ and received net proceeds of $8.5 million. As of June 30, 2022, the Company no longer owns any shares ~~were~~of Class B common stock of Visa.

The Company received these shares in 2008 as part of Visa's initial public offering ("IPO"). These shares ~~are~~were transferable only under limited circumstances until they can be converted into shares of the publicly traded Class A common stock. This conversion will not occur until the

resolution of certain litigation, which is indemnified by Visa members. Since its IPO, Visa has funded a litigation reserve to settle these litigation claims. At its discretion, Visa may continue to increase the litigation reserve based upon a change in the conversion ratio of each member bank’s restricted Class B common stock to unrestricted Class A common stock.

Due to the existing transfer restriction and the uncertainty of the outcome of the Visa litigation, the Company ~~has~~ determined that the Visa Class B common stock ~~does~~did not have a readily determinable fair value and ~~chooses~~chose to carry the shares on the Company's consolidated balance sheets at zero cost basis. As a result, the entire net proceeds of $8.5 million were recognized as a pre-tax gain and included in net gain on sales of investment securities in the Company's consolidated statements of income.

4. LOANS AND CREDIT QUALITY

Loans, excluding loans held for sale, net of ACL under ASC 326 as of June 30, ~~2021~~2022 and December 31, ~~2020~~2021 consisted of the following:


(dollars in thousands)	(dollars in thousands)	June 30, 2021		December 31, 2020		(dollars in thousands)	June 30, 2022		December 31, 2021
Commercial, financial and agricultural:	Commercial, financial and agricultural:					Commercial, financial and agricultural:
Small Business Administration Paycheck Protection Program	Small Business Administration Paycheck Protection Program	$	450,471	$	425,993	Small Business Administration Paycheck Protection Program	$	21,058	$	94,850
Other	Other	486,331		545,136		Other	524,613		530,383
Real estate:	Real estate:					Real estate:
Construction	Construction	133,808		125,625		Construction	145,698		123,351
Residential mortgage	Residential mortgage	1,709,885		1,687,251		Residential mortgage	1,890,337		1,875,200
Home equity	Home equity	582,143		550,216		Home equity	696,370		635,721
Commercial mortgage	Commercial mortgage	1,188,244		1,158,203		Commercial mortgage	1,305,564		1,222,138
Consumer	Consumer	541,491		479,580		Consumer	719,720		624,115

Gross loans	Gross loans	5,092,373		4,972,004		Gross loans	5,303,360		5,105,758
Net deferred fees	Net deferred fees	(15,055)		(7,891)		Net deferred fees	(1,727)		(4,109)
Total loans, net of deferred fees and costs	Total loans, net of deferred fees and costs	5,077,318		4,964,113		Total loans, net of deferred fees and costs	5,301,633		5,101,649
Allowance for credit losses	Allowance for credit losses	(77,781)		(83,269)		Allowance for credit losses	(65,211)		(68,097)
Total loans, net of allowance for credit losses	Total loans, net of allowance for credit losses	$	4,999,537	$	4,880,844	Total loans, net of allowance for credit losses	$	5,236,422	$	5,033,552

There are different types of risk characteristics for the loans in each portfolio segment. The construction and real estate segment's predominant risk characteristics are the financial strength of the borrower, likelihood of project completion, collateral and geographic location of the collateral, and cash flows from operations. The commercial, financial, and agricultural segment's predominant risk characteristics are the cash flows of the business we lend to, the global cash flows and liquidity of the guarantors, as well as economic and market conditions. The consumer segment's predominant risk characteristics are economic conditions, as well as employment and income levels attributed to the borrower.

The bank is a Small Business Administration ("SBA") approved lender and actively participated in assisting customers with loan applications for the SBA’s Paycheck Protection Program, or PPP, which was part of the CARES Act. PPP loans have a two or five-year term and earn interest at 1%. The SBA ~~pays~~paid 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 ~~over $558~~$558.9 million and received gross processing fees of ~~over~~ $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 ~~the six months ended June 30,~~ 2021, the Company funded over 4,600 loans totaling ~~over~~ $320.9 million in the third round, ~~earning~~which ended on May 31, 2021, and received additional gross processing fees of ~~over~~ $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 from the SBA and ~~repayments~~paydowns from borrowers totaling over ~~$416.3~~$846.8 million as of June 30, ~~2021.~~2022. A total outstanding balance of ~~$450.5~~$21.1 million and net deferred fees of ~~$15.9~~$0.9 million remain as of June 30, ~~2021.~~2022.

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

The Company did 0tnot transfer any loans to the held-for-sale category during the six months ended June 30, ~~2021~~2022 and ~~2020.~~2021.

The Company did 0tnot sell any loans originally held for investment during the six months ended June 30, ~~2021~~2022 and ~~2020.~~2021.

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

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


(dollars in thousands)	(dollars in thousands)	U.S. Mainland Consumer - Unsecured		U.S. Mainland Consumer - Automobile		Total		(dollars in thousands)	U.S. Mainland Consumer - Unsecured		U.S. Mainland Consumer - Automobile		Total
Three Months Ended June 30, 2022								Three Months Ended June 30, 2022
Purchases:								Purchases:
Outstanding balance								Outstanding balance	$	56,624	$	30,866	$	87,490
(Discount) premium								(Discount) premium	(3,043)		1,543		(1,500)
Purchase price								Purchase price	$	53,581	$	32,409	$	85,990

Six Months Ended June 30, 2022								Six Months Ended June 30, 2022
Purchases:								Purchases:
Outstanding balance								Outstanding balance	$	104,766	$	64,890	$	169,656
(Discount) premium								(Discount) premium	(7,410)		3,457		(3,953)
Purchase price								Purchase price	$	97,356	$	68,347	$	165,703

Three Months Ended June 30, 2021	Three Months Ended June 30, 2021							Three Months Ended June 30, 2021
Purchases:	Purchases:							Purchases:
Outstanding balance	Outstanding balance	$	45,482	$	36,381	$	81,863	Outstanding balance	$	45,482	$	36,381	$	81,863
Purchase (discount) premium		(2,632)		3,063		431
(Discount) premium								(Discount) premium	(2,632)		3,063		431
Purchase price	Purchase price	$	42,850	$	39,444	$	82,294	Purchase price	$	42,850	$	39,444	$	82,294

Six Months Ended June 30, 2021	Six Months Ended June 30, 2021							Six Months Ended June 30, 2021
Purchases:	Purchases:							Purchases:
Outstanding balance	Outstanding balance	$	68,016	$	49,371	$	117,387	Outstanding balance	$	68,016	$	49,371	$	117,387
Purchase (discount) premium		(2,763)		3,729		966
Purchase price		$	65,253	$	53,100	$	118,353

Three Months Ended June 30, 2020
Purchases:
Outstanding balance		$	11,359	$	0	$	11,359
Purchase discount		(503)		0		(503)
Purchase price		$	10,856	$	0	$	10,856

Six Months Ended June 30, 2020
Purchases:
Outstanding balance		$	34,312	$	0	$	34,312
Purchase discount		(1,116)		0		(1,116)
(Discount) premium								(Discount) premium	(2,763)		3,729		966
Purchase price	Purchase price	$	33,196	$	0	$	33,196	Purchase price	$	65,253	$	53,100	$	118,353

Collateral-Dependent Loans

In accordance with ASC 326, a loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table presents the amortized cost basis of collateral-dependent loans by class, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans as of June 30, ~~2021~~2022 and December 31, ~~2020:~~

(dollars in thousands) Secured by
1-4 Family
Residential
Properties Secured by
Nonfarm
Nonresidential
Properties Secured by
Real Estate
and Business
Assets Total Allocated
ACL
June 30, 2021
Commercial, financial and agricultural $ 0 $ 0 $ 558 $ 558 $ 68
Real estate:
Residential mortgage 9,784 0 0 9,784 0
Home equity 434 0 0 434 0
Commercial mortgage 0 543 0 543 0
Total $ 10,218 $ 543 $ 558 $ 11,319 $ 68

2021:

2223


(dollars in thousands)	(dollars in thousands)	Secured by 1-4 Family Residential Properties		Secured by Nonfarm Nonresidential Properties		Secured by Real Estate and Business Assets		Total		Allocated ACL		(dollars in thousands)	Secured by 1-4 Family Residential Properties		Secured by Nonfarm Nonresidential Properties		Secured by Real Estate and Business Assets		Total		Allocated ACL
December 31, 2020
Commercial, financial and agricultural		$	0	$	0	$	676	$	676	$	209
June 30, 2022												June 30, 2022

Real estate:	Real estate:											Real estate:

Residential mortgage	Residential mortgage	9,833		0		0		9,833		0		Residential mortgage	$	5,495	$	—	$	—	$	5,495	$	—
Home equity	Home equity	524		0		0		524		0		Home equity	592		—		—		592		—
Commercial mortgage		0		626		0		626		0

Total	Total	$	10,357	$	626	$	676	$	11,659	$	209	Total	$	6,087	$	—	$	—	$	6,087	$	—


(dollars in thousands)	Secured by 1-4 Family Residential Properties		Secured by Nonfarm Nonresidential Properties		Secured by Real Estate and Business Assets		Total		Allocated ACL
December 31, 2021

Real estate:

Residential mortgage	$	8,391	$	—	$	—	$	8,391	$	—
Home equity	786		—		—		786		—



Total	$	9,177	$	—	$	—	$	9,177	$	—

Foreclosure Proceedings

The Company had ~~$1.0~~$1.7 million and ~~$1.6~~$0.7 million of residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

The Company ~~foreclosed on 1 loan totaling $0.2 million during the three and six months ended June 30, 2021. The Company~~ did 0tnot foreclose on any loans during the three and six months ended June 30, ~~2020.~~2022 and 2021.

The Company did 0tnot sell any foreclosed properties during the three and six months ended June 30, ~~2021. During the~~ ~~three~~2022 and ~~six months ended~~ ~~June 30, 2020, the Company received proceeds of $0.1 million on the sale of one foreclosed property at a loss of $6 thousand.~~2021.

Nonaccrual and Past Due Loans

For all loan types, the Company determines delinquency status by considering the number of days full payments required by the contractual terms of the loan are past due. The following tables present by class, the aging of the recorded investment in past due loans as of June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. The following tables also present the amortized cost of loans on nonaccrual status for which there was no related ACL under ASC 326 as of June 30, ~~2021~~2022 and December 31, ~~2020.~~2021.


(dollars in thousands)	(dollars in thousands)	Accruing Loans 30 - 59 Days Past Due		Accruing Loans 60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due and Nonaccrual		Loans and Leases Not Past Due		Total		Nonaccrual Loans With No ACL		(dollars in thousands)	Accruing Loans 30 - 59 Days Past Due		Accruing Loans 60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due and Nonaccrual		Loans and Leases Not Past Due		Total		Nonaccrual Loans With No ACL
June 30, 2021
June 30, 2022																		June 30, 2022
Commercial, financial and agricultural:	Commercial, financial and agricultural:																	Commercial, financial and agricultural:
SBA PPP	SBA PPP	$	0	$	0	$	0	$	0	$	0	$	434,610	$	434,610	$	0	SBA PPP	$	—	$	—	$	272	$	—	$	272	$	19,909	$	20,181	$	—
Other	Other	517		67		29		699		1,312		484,913		486,225		220		Other	564		342		37		333		1,276		522,967		524,243		—
Real estate:	Real estate:																	Real estate:
Construction	Construction	0		0		0		0		0		133,457		133,457		0		Construction	—		—		—		—		—		145,038		145,038		—
Residential mortgage	Residential mortgage	0		1,003		1,438		5,280		7,721		1,704,080		1,711,801		5,284		Residential mortgage	—		1,125		—		3,490		4,615		1,886,168		1,890,783		3,490
Home equity	Home equity	331		73		0		434		838		582,592		583,430		434		Home equity	1,140		104		—		592		1,836		696,373		698,209		592
Commercial mortgage	Commercial mortgage	0		0		0		0		0		1,186,430		1,186,430		0		Commercial mortgage	—		—		—		—		—		1,303,635		1,303,635		—

Consumer	Consumer	1,345		501		100		332		2,278		539,087		541,365		0		Consumer	3,743		935		842		568		6,088		713,456		719,544		—

Total	Total	$	2,193	$	1,644	$	1,567	$	6,745	$	12,149	$	5,065,169	$	5,077,318	$	5,938	Total	$	5,447	$	2,506	$	1,151	$	4,983	$	14,087	$	5,287,546	$	5,301,633	$	4,082

2324


(dollars in thousands)	(dollars in thousands)	Accruing Loans 30 - 59 Days Past Due		Accruing Loans 60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due and Nonaccrual		Loans and Leases Not Past Due		Total		Nonaccrual Loans With No ACL		(dollars in thousands)	Accruing Loans 30 - 59 Days Past Due		Accruing Loans 60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due and Nonaccrual		Loans and Leases Not Past Due		Total		Nonaccrual Loans With No ACL
December 31, 2020
December 31, 2021																		December 31, 2021
Commercial, financial and agricultural:	Commercial, financial and agricultural:																	Commercial, financial and agricultural:
SBA PPP	SBA PPP	$	0	$	0	$	0	$	0	$	0	$	416,375	$	416,375	$	0	SBA PPP	$	—	$	—	$	—	$	—	$	—	$	91,327	$	91,327	$	—
Other	Other	613		350		0		1,461		2,424		542,667		545,091		0		Other	970		604		945		183		2,702		527,419		530,121		—
Real estate:	Real estate:																	Real estate:
Construction	Construction	0		0		0		0		0		125,407		125,407		0		Construction	638		—		—		—		638		122,229		122,867		—
Residential mortgage	Residential mortgage	2,832		689		567		4,115		8,203		1,682,009		1,690,212		4,115		Residential mortgage	5,315		—		—		4,623		9,938		1,866,042		1,875,980		4,623
Home equity	Home equity	273		3		0		524		800		550,466		551,266		524		Home equity	234		—		44		786		1,064		636,185		637,249		786
Commercial mortgage	Commercial mortgage	0		0		0		0		0		1,156,328		1,156,328		0		Commercial mortgage	—		—		—		—		—		1,220,204		1,220,204		—

Consumer	Consumer	2,725		906		240		92		3,963		475,471		479,434		0		Consumer	2,444		712		374		289		3,819		620,082		623,901		—

Total	Total	$	6,443	$	1,948	$	807	$	6,192	$	15,390	$	4,948,723	$	4,964,113	$	4,639	Total	$	9,601	$	1,316	$	1,363	$	5,881	$	18,161	$	5,083,488	$	5,101,649	$	5,409

In accordance with the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" issued in April 2020, loans with deferrals granted because of COVID-19 ~~are~~were not considered past due and/or reported as nonaccrual if deemed collectible during the deferral period. This relief ended on January 1, 2022.

Troubled Debt Restructurings

Troubled debt restructurings ("TDRs") included in nonperforming assets at June 30, ~~2021~~2022 consisted of 36 Hawaii residential mortgage loans with a principal balance of ~~$0.4~~$1.2 million. There were ~~$6.3~~$3.0 million of TDRs still accruing interest at June 30, ~~2021,~~2022, none of which ~~2 loans totaling $0.2 million~~ were more than 90 days delinquent. At December 31, ~~2020,~~2021, there were ~~$7.8~~$4.9 million of TDRs still accruing interest, none of which ~~1 loan totaling $0.7 million was~~were more than 90 days delinquent.

The Company offers various types of concessions when modifying a loan. Concessions made to the original contractual terms of the loan typically consists of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial ~~condition.~~condition. In these cases, the principal balance on the TDR had matured and/or was in default at the time of restructure, and there were no commitments to lend additional funds to the borrower during the three and six months ended June 30, ~~2021~~2022 and ~~2020.~~

~~As discussed in Note 1 to these financial statements, Section 4013 of CARES Act and the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)"~~ provided banks an optional TDR election for certain loan modifications related to COVID-19 as long as the borrowers were not more than 30 days past due as of December 31, 2019 or at the time of modification program implementation, respectively, and meets other applicable criteria. The Company did not identify any loans in the first half of 2021 that were modified and did not meet the criteria under Section 4013 of CARES Act or the "~~Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)".~~ The Company had active loan deferrals with outstanding balances of approximately $3.5 million and $120.2 million resulting from the COVID-19 pandemic as of June 30, 2021 and December 31, 2020, respectively, of which $2.8 million and $119.3 million were not classified as a TDR at June 30, 2021 and December 31, 2020, respectively, 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)".

2021.

24The Company did not modify any loans during the three and six months ended June 30, 2022.

~~NaN~~The Company did not modify any loans ~~were modified~~ during the three months ended June 30, 2021. The Company modified one commercial, financial and agricultural loan totaling $0.6 million during the three months ended March 31,2021. The loan was paid off during the three months ended June 30, 2021.

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

(dollars in thousands) Number of
Contracts Recorded
Investment
(as of Period End) Increase in the
ACL
Three Months Ended June 30, 2020
Real estate: Commercial mortgage 1 $ 285 $ 0
Consumer 9 145 0
Total 10 $ 430 $ 0
Six Months Ended June 30, 2020
Real estate: Commercial mortgage 1 $ 285 $ 0
Consumer 9 145 0
Total 10 $ 430 $ 0

~~NaN~~No loans were modified as a TDR within the previous twelve months that subsequently defaulted during the three and six months ended June 30, ~~2021~~2022 and ~~2020.~~2021.

Credit Quality Indicators

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

Special Mention. Loans classified as special mention, while still adequately protected by the borrower's capital adequacy and payment capability, exhibit distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment. These exposures require management's close attention so as to avoid becoming undue or unwarranted credit exposures.

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

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

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

The following ~~table presents~~tables present the amortized cost basis of the Company's loans by class, credit quality indicator and origination year as of June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. Revolving loans converted to term as of and during the three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021 were not material to the total loan portfolio.

Amortized Cost of Term Loans by Origination Year
(dollars in thousands) 2021 2020 2019 2018 2017 Prior Amortized Cost of Revolving Loans Total
June 30, 2021
Commercial, financial and agricultural - SBA PPP:
Risk Rating
Pass $ 274,947 $ 159,663 $ 0 $ 0 $ 0 $ 0 $ 0 $ 434,610
Subtotal 274,947 159,663 0 0 0 0 0 434,610
Commercial, financial and agricultural - Other:
Risk Rating
Pass 42,540 65,657 51,256 59,386 44,416 110,922 65,432 439,609
Special Mention 946 6,466 11,638 3,344 11,442 7,744 0 41,580
Substandard 200 89 739 974 347 2,687 0 5,036
Subtotal 43,686 72,212 63,633 63,704 56,205 121,353 65,432 486,225
Construction:
Risk Rating
Pass 6,806 26,915 33,143 34,288 6,262 20,765 4,349 132,528
Special Mention 0 0 0 929 0 0 0 929
Subtotal 6,806 26,915 33,143 35,217 6,262 20,765 4,349 133,457
Residential mortgage:
Risk Rating
Pass 300,519 521,905 215,065 97,573 114,308 454,665 0 1,704,035
Special Mention 0 985 0 0 0 0 0 985
Substandard 0 0 698 1,110 753 4,220 0 6,781
Subtotal 300,519 522,890 215,763 98,683 115,061 458,885 0 1,711,801
Home equity:
Risk Rating
Pass 11,579 15,258 12,325 13,048 502 27,637 502,011 582,360
Special Mention 0 250 0 0 0 0 386 636
Substandard 0 0 0 0 0 434 0 434
Subtotal 11,579 15,508 12,325 13,048 502 28,071 502,397 583,430
Commercial mortgage:
Risk Rating
Pass 46,626 143,824 149,049 136,564 161,017 448,019 15,071 1,100,170
Special Mention 0 0 7,627 20,552 4,007 24,586 0 56,772
Substandard 0 0 1,771 11,500 1,809 14,408 0 29,488
Subtotal 46,626 143,824 158,447 168,616 166,833 487,013 15,071 1,186,430
Consumer:
Risk Rating
Pass 112,023 121,960 122,660 59,031 31,465 19,816 73,976 540,931
Substandard 0 75 123 72 19 142 0 431
Loss 0 0 0 0 0 3 0 3
Subtotal 112,023 122,035 122,783 59,103 31,484 19,961 73,976 541,365
Total $ 796,186 $ 1,063,047 $ 606,094 $ 438,371 $ 376,347 $ 1,136,048 $ 661,225 $ 5,077,318


		Amortized Cost of Term Loans by Origination Year																	Amortized Cost of Term Loans by Origination Year
(dollars in thousands)	(dollars in thousands)	2020		2019		2018		2017		2016		Prior		Amortized Cost of Revolving Loans		Total		(dollars in thousands)	2022		2021		2020		2019		2018		Prior		Amortized Cost of Revolving Loans		Total
December 31, 2020
June 30, 2022																		June 30, 2022
Commercial, financial and agricultural - SBA PPP:	Commercial, financial and agricultural - SBA PPP:																	Commercial, financial and agricultural - SBA PPP:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	$	416,375	$	0	$	0	$	0	$	0	$	0	$	0	$	416,375	Pass	$	—	$	19,607	$	574	$	—	$	—	$	—	$	—	$	20,181

Subtotal	Subtotal	416,375		0		0		0		0		0		0		416,375		Subtotal	—		19,607		574		—		—		—		—		20,181
Commercial, financial and agricultural - Other:	Commercial, financial and agricultural - Other:																	Commercial, financial and agricultural - Other:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	$	86,456	$	55,660	$	61,314	$	47,672	$	39,337	$	98,136	$	82,465	$	471,040	Pass	45,181		104,671		47,314		54,475		36,037		124,122		88,025		499,825
Special Mention	Special Mention	9,690		16,120		6,293		26,109		1,556		6,989		420		67,177		Special Mention	2,057		583		242		2,421		510		14,352		750		20,915
Substandard	Substandard	200		839		1,043		1,045		2,570		1,177		0		6,874		Substandard	—		—		1,233		231		576		1,391		72		3,503

Subtotal	Subtotal	96,346		72,619		68,650		74,826		43,463		106,302		82,885		545,091		Subtotal	47,238		105,254		48,789		57,127		37,123		139,865		88,847		524,243
Construction:	Construction:																	Construction:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	22,491		29,518		36,790		9,365		2,163		19,138		3,099		122,564		Pass	11,358		48,869		34,319		3,146		26,524		18,834		1,082		144,132
Special Mention	Special Mention	0		0		2,843		0		0		0		0		2,843		Special Mention	—		—		—		—		906		—		—		906

Subtotal	Subtotal	22,491		29,518		39,633		9,365		2,163		19,138		3,099		125,407		Subtotal	11,358		48,869		34,319		3,146		27,430		18,834		1,082		145,038
Residential mortgage:	Residential mortgage:																	Residential mortgage:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	556,479		276,645		127,490		136,307		180,782		406,020		0		1,683,723		Pass	152,888		653,965		448,393		162,543		63,935		404,609		—		1,886,333
Special Mention		997		0		0		597		142		0		0		1,736

Substandard	Substandard	0		0		537		785		1,381		2,050		0		4,753		Substandard	—		—		961		—		—		3,489		—		4,450

Subtotal	Subtotal	557,476		276,645		128,027		137,689		182,305		408,070		0		1,690,212		Subtotal	152,888		653,965		449,354		162,543		63,935		408,098		—		1,890,783
Home equity:	Home equity:																	Home equity:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	17,582		15,851		15,567		679		1,023		4,592		494,741		550,035		Pass	27,050		24,737		12,965		7,937		7,660		10,784		606,287		697,420
Special Mention	Special Mention	0		0		0		0		0		0		707		707		Special Mention	—		—		—		—		—		—		197		197
Substandard	Substandard	0		0		0		0		200		324		0		524		Substandard	—		—		—		—		78		514		—		592

Subtotal	Subtotal	17,582		15,851		15,567		679		1,223		4,916		495,448		551,266		Subtotal	27,050		24,737		12,965		7,937		7,738		11,298		606,484		698,209
Commercial mortgage:	Commercial mortgage:																	Commercial mortgage:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	130,448		144,244		123,519		166,618		104,381		363,837		16,200		1,049,247		Pass	128,529		224,352		121,754		129,686		134,198		494,827		9,683		1,243,029
Special Mention	Special Mention	0		2,021		31,647		2,919		13,546		19,653		0		69,786		Special Mention	—		1,166		—		17,523		9,063		18,160		—		45,912
Substandard	Substandard	0		1,791		19,000		1,934		0		14,570		0		37,295		Substandard	—		—		—		1,721		2,163		10,810		—		14,694

Subtotal	Subtotal	130,448		148,056		174,166		171,471		117,927		398,060		16,200		1,156,328		Subtotal	128,529		225,518		121,754		148,930		145,424		523,797		9,683		1,303,635
Consumer:	Consumer:																	Consumer:
Risk Rating	Risk Rating																	Risk Rating
Pass	Pass	112,955		147,940		78,486		44,571		17,445		4,032		73,423		478,852		Pass	189,764		286,308		75,080		67,196		29,113		18,214		52,314		717,989
Special Mention	Special Mention	0		0		0		0		0		0		250		250		Special Mention	—		—		—		145		—		—		—		145
Substandard	Substandard	0		138		102		22		0		22		0		284		Substandard	15		151		22		247		107		498		10		1,050
Loss	Loss	0		16		0		26		2		4		0		48		Loss	—		—		—		—		—		360		—		360
Subtotal	Subtotal	112,955		148,094		78,588		44,619		17,447		4,058		73,673		479,434		Subtotal	189,779		286,459		75,102		67,588		29,220		19,072		52,324		719,544
Total	Total	$	1,353,673	$	690,783	$	504,631	$	438,649	$	364,528	$	940,544	$	671,305	$	4,964,113	Total	$	556,842	$	1,364,409	$	742,857	$	447,271	$	310,870	$	1,120,964	$	758,420	$	5,301,633


	Amortized Cost of Term Loans by Origination Year
(dollars in thousands)	2021		2020		2019		2018		2017		Prior		Amortized Cost of Revolving Loans		Total
December 31, 2021
Commercial, financial and agricultural - SBA PPP:
Risk Rating
Pass	$	84,254	$	7,073	$	—	$	—	$	—	$	—	$	—	$	91,327



Subtotal	84,254		7,073		—		—		—		—		—		91,327
Commercial, financial and agricultural - Other:
Risk Rating
Pass	$	122,729	$	68,021	$	56,531	$	52,375	$	31,817	$	93,957	$	79,131	$	504,561
Special Mention	1,441		1,278		2,443		96		8,671		354		—		14,283
Substandard	—		982		393		682		6,623		1,847		750		11,277

Subtotal	124,170		70,281		59,367		53,153		47,111		96,158		79,881		530,121
Construction:
Risk Rating
Pass	35,236		25,430		3,196		28,333		288		20,090		9,376		121,949

Substandard	—		—		—		918		—		—		—		918

Subtotal	35,236		25,430		3,196		29,251		288		20,090		9,376		122,867
Residential mortgage:
Risk Rating
Pass	670,011		478,891		180,687		75,820		92,394		372,539		42		1,870,384
Special Mention	—		973		—		—		—		—		—		973
Substandard	—		—		—		577		881		3,165		—		4,623

Subtotal	670,011		479,864		180,687		76,397		93,275		375,704		42		1,875,980
Home equity:
Risk Rating
Pass	26,479		13,008		10,329		10,593		480		7,743		567,600		636,232
Special Mention	—		—		—		—		—		—		187		187
Substandard	—		176		—		79		—		575		—		830

Subtotal	26,479		13,184		10,329		10,672		480		8,318		567,787		637,249
Commercial mortgage:
Risk Rating
Pass	229,108		126,169		146,584		126,014		153,041		387,751		9,472		1,178,139
Special Mention	—		—		3,106		3,219		283		9,455		—		16,063
Substandard	—		—		1,760		8,050		1,784		14,408		—		26,002

Subtotal	229,108		126,169		151,450		137,283		155,108		411,614		9,472		1,220,204
Consumer:
Risk Rating
Pass	308,326		96,066		91,194		41,995		20,719		9,446		55,311		623,057
Special Mention	—		—		181		—		10		7		—		198
Substandard	10		35		128		80		19		221		—		493
Loss	—		—		—		—		—		153		—		153
Subtotal	308,336		96,101		91,503		42,075		20,748		9,827		55,311		623,901
Total	$	1,477,594	$	818,102	$	496,532	$	348,831	$	317,010	$	921,711	$	721,869	$	5,101,649

2728

The following tables present the Company's loans by class and credit quality indicator as of June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:


(dollars in thousands)	(dollars in thousands)	Pass		Special Mention		Substandard		Loss		Subtotal		Net Deferred Costs (Income)		Total		(dollars in thousands)	Pass		Special Mention		Substandard		Loss		Subtotal		Net Deferred Fees and Costs		Total
June 30, 2021
June 30, 2022																June 30, 2022
Commercial, financial and agricultural: SBA PPP	Commercial, financial and agricultural: SBA PPP	$	450,471	$	0	$	0	$	0	$	450,471	$	(15,861)	$	434,610	Commercial, financial and agricultural: SBA PPP	$	21,058	$	—	$	—	$	—	$	21,058	$	(877)	$	20,181
Commercial, financial and agricultural: Other	Commercial, financial and agricultural: Other	439,715		41,580		5,036		0		486,331		(106)		486,225		Commercial, financial and agricultural: Other	500,195		20,915		3,503		—		524,613		(370)		524,243
Real estate:	Real estate:															Real estate:
Construction	Construction	132,879		929		0		0		133,808		(351)		133,457		Construction	144,792		906		—		—		145,698		(660)		145,038
Residential mortgage	Residential mortgage	1,702,119		985		6,781		0		1,709,885		1,916		1,711,801		Residential mortgage	1,885,887		—		4,450		—		1,890,337		446		1,890,783
Home equity	Home equity	581,073		636		434		0		582,143		1,287		583,430		Home equity	695,581		197		592		—		696,370		1,839		698,209
Commercial mortgage	Commercial mortgage	1,101,984		56,772		29,488		0		1,188,244		(1,814)		1,186,430		Commercial mortgage	1,244,958		45,912		14,694		—		1,305,564		(1,929)		1,303,635

Consumer	Consumer	541,057		0		431		3		541,491		(126)		541,365		Consumer	718,165		145		1,050		360		719,720		(176)		719,544

Total	Total	$	4,949,298	$	100,902	$	42,170	$	3	$	5,092,373	$	(15,055)	$	5,077,318	Total	$	5,210,636	$	68,075	$	24,289	$	360	$	5,303,360	$	(1,727)	$	5,301,633


(dollars in thousands)	(dollars in thousands)	Pass		Special Mention		Substandard		Loss		Subtotal		Net Deferred Costs (Income)		Total		(dollars in thousands)	Pass		Special Mention		Substandard		Loss		Subtotal		Net Deferred Fees and Costs		Total
December 31, 2020
December 31, 2021																December 31, 2021
Commercial, financial and agricultural: SBA PPP	Commercial, financial and agricultural: SBA PPP	$	425,993	$	0	$	0	$	0	$	425,993	$	(9,618)	$	416,375	Commercial, financial and agricultural: SBA PPP	$	94,850	$	—	$	—	$	—	$	94,850	$	(3,523)	$	91,327
Commercial, financial and agricultural: Other	Commercial, financial and agricultural: Other	471,085		67,177		6,874		0		545,136		(45)		545,091		Commercial, financial and agricultural: Other	504,823		14,283		11,277		—		530,383		(262)		530,121
Real estate:	Real estate:															Real estate:
Construction	Construction	122,782		2,843		0		0		125,625		(218)		125,407		Construction	122,433		—		918		—		123,351		(484)		122,867
Residential mortgage	Residential mortgage	1,680,762		1,736		4,753		0		1,687,251		2,961		1,690,212		Residential mortgage	1,869,604		973		4,623		—		1,875,200		780		1,875,980
Home equity	Home equity	548,985		707		524		0		550,216		1,050		551,266		Home equity	634,704		187		830		—		635,721		1,528		637,249
Commercial mortgage	Commercial mortgage	1,051,122		69,786		37,295		0		1,158,203		(1,875)		1,156,328		Commercial mortgage	1,180,074		16,062		26,002		—		1,222,138		(1,934)		1,220,204

Consumer	Consumer	478,998		250		284		48		479,580		(146)		479,434		Consumer	623,271		181		510		153		624,115		(214)		623,901

Total	Total	$	4,779,727	$	142,499	$	49,730	$	48	$	4,972,004	$	(7,891)	$	4,964,113	Total	$	5,029,759	$	31,686	$	44,160	$	153	$	5,105,758	$	(4,109)	$	5,101,649

2829

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

The following table presents by class, the activity in the ACL for loans under ASC 326 during the three and six months ended June 30, ~~2021~~2022 and June 30, ~~2020:~~2021:


		Commercial, Financial and Agricultural				Real Estate															Commercial, Financial and Agricultural						Real Estate
(dollars in thousands)	(dollars in thousands)	SBA PPP		Other		Construction		Residential Mortgage		Home Equity		Commercial Mortgage		Consumer		Total			(dollars in thousands)		SBA PPP			Other			Construction			Residential Mortgage			Home Equity			Commercial Mortgage			Consumer			Total
Three Months Ended June 30, 2021
Three Months Ended June 30, 2022																		Three Months Ended June 30, 2022
Beginning balance	Beginning balance	$	489	$	15,464	$	5,047	$	15,357	$	5,251	$	22,734	$	17,211	$	81,553		Beginning balance		$	36		$	9,562		$	3,836		$	11,043		$	4,641		$	16,055		$	19,581		$	64,754

(Credit) provision for credit losses on loans		(133)		(1,925)		(354)		1,368		1,058		(3,265)		288		(2,963)

		356		13,539		4,693		16,725		6,309		19,469		17,499		78,590
Provision (credit) for credit losses on loans																		Provision (credit) for credit losses on loans		(21)			(1,565)			(833)			1,688			(596)			1,803			980			1,456
Subtotal																		Subtotal		15			7,997			3,003			12,731			4,045			17,858			20,561			66,210
Charge-offs	Charge-offs	0		401		0		0		0		0		1,523		1,924			Charge-offs		—			487			—			—			—			—			1,390			1,877
Recoveries	Recoveries	0		276		0		186		0		65		588		1,115			Recoveries		—			215			62			36			—			—			565			878
Net charge-offs (recoveries)	Net charge-offs (recoveries)	0		125		0		(186)		0		(65)		935		809			Net charge-offs (recoveries)		—			272			(62)			(36)			—			—			825			999
Ending balance	Ending balance	$	356	$	13,414	$	4,693	$	16,911	$	6,309	$	19,534	$	16,564	$	77,781		Ending balance		$	15		$	7,725		$	3,065		$	12,767		$	4,045		$	17,858		$	19,736		$	65,211

Three Months Ended June 30, 2020
Three Months Ended June 30, 2021																		Three Months Ended June 30, 2021
Beginning balance	Beginning balance	$	0	$	8,645	$	3,057	$	13,181	$	2,309	$	19,518	$	12,935	$	59,645		Beginning balance		$	489		$	15,464		$	5,047		$	15,357		$	5,251		$	22,734		$	17,211		$	81,553

(Credit) provision for credit losses on loans		388		7,660		217		1,876		1,342		(3,371)		2,528		10,640
		388		16,305		3,274		15,057		3,651		16,147		15,463		70,285
Provision (credit) for credit losses on loans																		Provision (credit) for credit losses on loans		(133)			(1,925)			(354)			1,368			1,058			(3,265)			288			(2,963)
Subtotal																		Subtotal		356			13,539			4,693			16,725			6,309			19,469			17,499			78,590
Charge-offs	Charge-offs	0		1,103		0		52		0		0		2,626		3,781			Charge-offs		—			401			—			—			—			—			1,523			1,924
Recoveries	Recoveries	0		305		0		20		0		1		509		835			Recoveries		—			276			—			186			—			65			588			1,115
Net charge-offs (recoveries)	Net charge-offs (recoveries)	0		798		0		32		0		(1)		2,117		2,946			Net charge-offs (recoveries)		—			125			—			(186)			—			(65)			935			809
Ending balance	Ending balance	$	388	$	15,507	$	3,274	$	15,025	$	3,651	$	16,148	$	13,346	$	67,339		Ending balance		$	356		$	13,414		$	4,693		$	16,911		$	6,309		$	19,534		$	16,564		$	77,781


		Commercial, Financial and Agricultural				Real Estate																Commercial, Financial and Agricultural						Real Estate
(dollars in thousands)	(dollars in thousands)	SBA PPP		Other		Construction		Residential Mortgage		Home Equity		Commercial Mortgage		Consumer			Total			(dollars in thousands)		SBA PPP			Other			Construction			Residential Mortgage			Home Equity			Commercial Mortgage			Consumer			Total
Six Months Ended June 30, 2022																			Six Months Ended June 30, 2022
Beginning balance																			Beginning balance		$	77		$	10,314		$	3,908		$	12,463		$	4,509		$	18,411		$	18,415		$	68,097

Provision (credit) for credit losses on loans																			Provision (credit) for credit losses on loans		(62)			(2,413)			(905)			156			(464)			(553)			2,766			(1,475)
Subtotal																			Subtotal		15			7,901			3,003			12,619			4,045			17,858			21,181			66,622
Charge-offs																			Charge-offs		—			741			—			—			—			—			2,606			3,347
Recoveries																			Recoveries		—			565			62			148			—			—			1,161			1,936
Net charge-offs (recoveries)																			Net charge-offs (recoveries)		—			176			(62)			(148)			—			—			1,445			1,411
Ending balance																			Ending balance		$	15		$	7,725		$	3,065		$	12,767		$	4,045		$	17,858		$	19,736		$	65,211

Six Months Ended June 30, 2021	Six Months Ended June 30, 2021															Six Months Ended June 30, 2021
Beginning balance	Beginning balance	$	304	$	18,717	$	4,277	$	16,484	$	5,449	$	22,163	$	15,875		$	83,269		Beginning balance		$	304		$	18,717		$	4,277		$	16,484		$	5,449		$	22,163		$	15,875		$	83,269

(Credit) provision for credit losses on loans [1]		52		(4,658)		416		135		851		(2,702)		1,969			(3,937)
		356		14,059		4,693		16,619		6,300		19,461		17,844			79,332
Provision (credit) for credit losses on loans																			Provision (credit) for credit losses on loans		52			(4,658)			416			135			851			(2,702)			1,969			(3,937)
Subtotal																			Subtotal		356			14,059			4,693			16,619			6,300			19,461			17,844			79,332
Charge-offs	Charge-offs	0		1,010		0		0		0		0		2,621			3,631			Charge-offs		—			1,010			—			—			—			—			2,621			3,631
Recoveries	Recoveries	0		365		0		292		9		73		1,341			2,080			Recoveries		—			365			—			292			9			73			1,341			2,080
Net charge-offs (recoveries)	Net charge-offs (recoveries)	0		645		0		(292)		(9)		(73)		1,280			1,551			Net charge-offs (recoveries)		—			645			—			(292)			(9)			(73)			1,280			1,551
Ending balance	Ending balance	$	356	$	13,414	$	4,693	$	16,911	$	6,309	$	19,534	$	16,564		$	77,781		Ending balance		$	356		$	13,414		$	4,693		$	16,911		$	6,309		$	19,534		$	16,564		$	77,781

Six Months Ended June 30, 2020
Beginning balance prior to ASC 326		$	0	$	8,136	$	1,792	$	13,327	$	4,206	$	11,113	$	9,397		$	47,971
Impact of adoption of ASC 326		0		(627)		479		608		(1,614)		2,624		2,096			3,566
Balance after adoption of ASC 326		0		7,509		2,271		13,935		2,592		13,737		11,493			51,537
(Credit) provision for credit losses on loans		388		8,891		872		941		1,028		2,408		5,441			19,969
		388		16,400		3,143		14,876		3,620		16,145		16,934			71,506
Charge-offs		0		1,540		0		52		0		0		4,843			6,435
Recoveries		0		647		131		201		31		3		1,255			2,268
Net charge-offs (recoveries)		0		893		(131)		(149)		(31)		(3)		3,588			4,167
Ending balance		$	388	$	15,507	$	3,274	$	15,025	$	3,651	$	16,148	$	13,346		$	67,339

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

2930

The following table presents the activity in the reserve for off-balance sheet credit exposures, included in other liabilities, during the three and six months ended June 30, ~~2021~~2022 and June 30, ~~2020.~~

2021.


(dollars in thousands)
Three Months Ended June 30, ~~2021~~2022


Beginning balance	$	4,540
(Credit) provision for off-balance sheet credit exposures	(467)
Ending balance	$	4,073

Three Months Ended June 30, 2021
Beginning balance	$	5,037


~~Provision~~(Credit) provision for off-balance sheet credit exposures	(293)
Ending balance	$	4,744

~~Three~~Six Months Ended June 30, ~~2020~~2022
Beginning balance ~~prior to ASC 326~~	$	~~3,810~~4,804
~~Impact of adoption of ASC 326~~	0

~~Balance after adoption of ASC 326~~	~~3,810~~
~~Provision~~(Credit) provision for off-balance sheet credit exposures	~~573~~ (731)
Ending balance	$	~~4,383~~4,073

Six Months Ended June 30, 2021


Beginning balance	$	4,884


~~Provision~~(Credit) provision for off-balance sheet credit exposures	(140)
Ending balance	$	4,744

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

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

In the three months ended June 30, 2022, our provision for credit losses was a debit of $1.0 million, which consisted of a debit to the provision for credit losses on loans of $1.5 million, offset by a credit to the provision for credit losses on off-balance sheet credit exposures of $0.5 million.

In the six months ended June 30, 2022, our provision for credit losses was a credit of $2.2 million, which consisted of a credit to the provision for credit losses on loans of $1.5 million and a credit to the provision for credit losses on off-balance sheet credit exposures of $0.7 million.

In the three months ended June 30, 2021, our provision for credit ~~losses~~loss was a credit of $3.4 million, which consisted of a credit to the provision for credit losses on loans of $3.0 million, a credit to the provision for credit losses on off-balance sheet credit exposures of $0.2 million, and a credit to the provision for ~~credit losses on~~ accrued interest receivable of $0.2 million.

In the six months ended June 30, 2021, our provision for credit ~~losses~~loss was a credit of $4.3 million, which consisted of a credit to the provision for credit losses on loans of $3.9 million, a credit to the provision for credit losses on off-balance sheet credit exposures of ~~$0.1~~$0.2 million, and a credit to the provision for ~~credit losses on~~ accrued interest receivable of ~~$0.3~~$0.2 million.

In the three months ended June 30, 2020, our provision for credit loss was a debit of $11.2 million, which consisted of a debit to the provision for credit losses on loans of $10.6 million and a debit to the provision for credit losses on off-balance sheet credit exposures of $0.6 million.

In the six months ended June 30, 2020, our provision for credit loss was a debit of $22.3 million, which consisted of a debit to the provision for credit losses on loans of $20.0 million and a debit to the provision for credit losses on off-balance sheet credit exposures of $2.4 million.

6. INVESTMENTS IN UNCONSOLIDATED ~~SUBSIDIARIES~~ENTITIES

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


(dollars in thousands)	(dollars in thousands)	June 30, 2021		December 31, 2020		(dollars in thousands)	June 30, 2022		December 31, 2021
Investments in low income housing tax credit partnerships		$	27,276	$	28,090
Investments in low income housing tax credit partnerships, net of amortization						Investments in low income housing tax credit partnerships, net of amortization	$	31,626	$	25,916
Investments in common securities of statutory trusts	Investments in common securities of statutory trusts	1,547		1,547		Investments in common securities of statutory trusts	1,547		1,547
Investments in affiliates	Investments in affiliates	176		277		Investments in affiliates	119		162
Other	Other	2,053		54		Other	4,049		2,054
Total	Total	$	31,052	$	29,968	Total	$	37,341	$	29,679

The Company invests in low-income housing tax credit ("LIHTC") and other partnerships. AsDuring the second quarter of 2022, the Company committed $6.9 million in a new LIHTC partnership. The Company had commitments to fund LIHTC

partnerships totaling $37.2 million and $30.3 million as of June 30, ~~2021~~2022 and December 31, ~~2020, the Company had~~2021, respectively. Unfunded commitments related to LIHTC partnerships of ~~$14.4~~$14.2 million and ~~$17.2~~$14.3 million as of June 30, 2022 and December 31, 2021, respectively, are recorded in other liabilities in the Company's consolidated balance sheets. The investments are accounted for under the proportional amortization method and are included in investments in unconsolidated entities in the Company's consolidated balance sheets.

During the second quarter of 2021, the Company committed $2.0 million to the JAM FINTOP Banktech Fund, L.P., an investment fund designed to help develop and accelerate technology adoption at community banks across the United States. The Company had $1.7 million in unfunded commitments related to the ~~LIHTC partnerships~~investment as of ~~$1.9~~June 30, 2022, which is recorded in other liabilities and remained unchanged from $1.7 million as of December 31, 2021. The investment is accounted for under the cost method and ~~NaN, respectively, related to other partnerships.~~ is included in investment in unconsolidated entities.

The expected payments for the unfunded commitments as of June 30, ~~2021~~2022 for the remainder of fiscal year ~~2021,~~2022, the next five succeeding fiscal years and all years thereafter are as follows:


(dollars in thousands)	(dollars in thousands)							(dollars in thousands)
Year Ending December 31,	Year Ending December 31,	LIHTC partnerships		Other partnerships		Total		Year Ending December 31,	LIHTC partnerships		Other partnerships		Total
2021 (remainder)		$	8,299	$	1,920	$	10,219
2022		5,980		0		5,980
2022 (remainder)								2022 (remainder)	$	137	$	1,653	$	1,790
2023	2023	10		0		10		2023	8,138		—		8,138
2024	2024	26		0		26		2024	1,503		—		1,503
2025	2025	6		0		6		2025	4,238		—		4,238
2026	2026	6		0		6		2026	16		—		16
2027								2027	16		—		16
Thereafter	Thereafter	37		0		37		Thereafter	151		—		151
Total unfunded commitments	Total unfunded commitments	$	14,364	$	1,920	$	16,284	Total unfunded commitments	$	14,199	$	1,653	$	15,852

The following table presents amortization and tax credits recognized associated with our investments in LIHTC partnerships for the three and six months ended June 30, ~~2021~~2022 and June 30, ~~2020:~~2021:


(dollars in thousands)	(dollars in thousands)	Three Months Ended June 30, 2021		Three Months Ended June 30, 2020		Six Months Ended June 30, 2021		Six Months Ended June 30, 2020		(dollars in thousands)	Three Months Ended June 30, 2022		Three Months Ended June 30, 2021		Six Months Ended June 30, 2022		Six Months Ended June 30, 2021
Proportional amortization method:	Proportional amortization method:									Proportional amortization method:
Amortization expense recognized in income tax expense	Amortization expense recognized in income tax expense	$	407	$	348	$	814	$	696	Amortization expense recognized in income tax expense	$	607	$	407	$	1,214	$	814
Tax credits recognized in income tax expense	Tax credits recognized in income tax expense	474		400		948		800		Tax credits recognized in income tax expense	709		474		1,418		948

7. MORTGAGE SERVICING RIGHTS

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


(dollars in thousands)	Mortgage Servicing Rights
Balance ~~January 1,~~at December 31, 2021	$	9,738
Additions	494
Amortization	(863)
Balance at June 30, 2022	$	9,369

Balance at December 31, 2020	$	11,865
Additions	717
Amortization	(2,082)
Balance at June 30, 2021	$	10,500

~~Balance, January 1, 2020~~	$	~~14,718~~
~~Additions~~	~~1,270~~
~~Amortization~~	~~(3,217)~~
~~Balance, June 30, 2020~~	$	~~12,771~~

Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans and totaled~~$0.3~~ $0.2 million and $0.5 million for the three and six months ended June 30, 2022, respectively, compared to $0.3 million and $0.7 millionfor the three and six months ended June 30, 2021, ~~respectively, compared to $1.1 million and $1.3 million for the three and six months ended June 30, 2020,~~ respectively.

Amortization of mortgage servicing rights totaled ~~$0.9~~$0.3 million and ~~$2.1~~$0.9 million for the three and six months ended June 30, ~~2021,~~2022, respectively, compared to ~~$1.7~~$0.9 million and ~~$3.2~~$2.1 million for the three and six months ended June 30, ~~2020,~~2021, respectively.

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


		Six Months Ended			Six Months Ended				Six Months Ended			Six Months Ended
(dollars in thousands)	(dollars in thousands)	June 30, 2021			June 30, 2020			(dollars in thousands)	June 30, 2022			June 30, 2021
Fair market value, beginning of period	Fair market value, beginning of period	$	12,003		$	15,820		Fair market value, beginning of period	$	10,504		$	12,003
Fair market value, end of period	Fair market value, end of period	10,755			13,060			Fair market value, end of period	12,047			10,755
Weighted average discount rate	Weighted average discount rate	9.6		%	9.6		%	Weighted average discount rate	9.5		%	9.6		%
Weighted average prepayment speed assumption	Weighted average prepayment speed assumption	18.0		%	21.7		%	Weighted average prepayment speed assumption	7.5		%	18.0		%

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


		June 30, 2021						December 31, 2020							June 30, 2022						December 31, 2021
(dollars in thousands)	(dollars in thousands)	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Gross Carrying Value		Accumulated Amortization		Net Carrying Value		(dollars in thousands)	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Gross Carrying Value		Accumulated Amortization		Net Carrying Value

Mortgage servicing rights	Mortgage servicing rights	$	71,626	$	(61,126)	$	10,500	$	70,909	$	(59,044)	$	11,865	Mortgage servicing rights	$	72,744	$	(63,375)	$	9,369	$	72,250	$	(62,512)	$	9,738

Based on the mortgage servicing rights held as of June 30, ~~2021,~~2022, estimated amortization expense for the remainder of fiscal year ~~2021,~~2022, the next five succeeding fiscal years and all years thereafter are as follows:


(dollars in thousands)	(dollars in thousands)			(dollars in thousands)
Year Ending December 31,	Year Ending December 31,			Year Ending December 31,
2021 (remainder)		$	1,432
2022		2,446
2022 (remainder)				2022 (remainder)	$	731
2023	2023	1,974		2023	1,301
2024	2024	1,596		2024	1,063
2025	2025	1,316		2025	868
2026	2026	1,092		2026	709
2027				2027	579
Thereafter	Thereafter	644		Thereafter	4,118
Total	Total	$	10,500	Total	$	9,369

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

8. DERIVATIVES

We utilize various designated and undesignated derivative financial instruments to reduce our exposure to movements in interest ~~rates including interest rate lock commitments and forward sale commitments.~~rates. We measure all derivatives at fair value on our consolidated balance sheet. In each reporting period, we record the derivative instruments in other assets or other liabilities depending on whether the derivatives are in an asset or liability position. For derivative instruments that are designated as cash flow hedging instruments, we record the effective portion of the changes in the fair value of the derivative in AOCI, net of tax, until earnings are affected by the variability of cash flows of the hedged transaction. We immediately recognize the portion of the gain or loss in the fair value of the derivative that represents hedge ineffectiveness in current period earnings. For derivative instruments that are not designated as hedging instruments, changes in the fair value of the derivative are included in current period earnings. ~~At June 30, 2021 and December 31, 2020, we were not party to any derivatives designated as part of a fair value or cash flow hedge.~~

Interest Rate Lock and Forward Sale Commitments

We may enter into interest rate lock commitments on certain mortgage loans that are intended to be sold. To manage interest rate risk on interest rate lock commitments, we may also enter into forward loan sale commitments. The interest rate locks and forward loan sale commitments are accounted for as undesignated derivatives and are recorded at their respective fair values in other assets orand other liabilities, with changes in fair value recorded in current period earnings. These instruments serve to reduce our exposure to movements in interest rates. At June 30, ~~2021,~~2022, we were a party to ~~interest rate lock and~~ forward sale commitments on ~~$0.8 million and $4.9~~$0.5 million of mortgage ~~loans, respectively.~~loans. At June 30, 2022, we were not a party to any interest rate lock commitments.

Risk Participation Agreements

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

Back-to-Back Swap Agreements

The Company established a program whereby it originates a variable rate loan and enters into a variable-to-fixed interest rate swap with the customer. The Company also enters into an equal and offsetting swap with a highly rated third-party financial institution. These "back-to-back swap agreements"are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. These back-to-back swap agreements are free-standing derivatives and are recorded at fair value on our consolidated balance sheet in other assets or other liabilities. As of June 30, 2022, the Company had swap agreements with its borrowers with a total notional amount of $32.7 million, offset by swap agreements with third party financial institutions with the same total notional amount of $32.7 million. As of June 30, 2022, the Company held $7.3 million in counter-party collateral related to the back-to-back swap agreements.

Interest Rate Swaps

During the first quarter of 2022, the Company entered into a forward starting interest rate swap, with an effective date of March 31, 2024. This transaction had a notional amount totaling $115.5 million as of June 30, 2022, and was designated as a fair value hedge of certain municipal debt securities. The Company will pay the counterparty a fixed rate of 2.095% and will receive a floating rate based on the Federal Funds effective rate. The fair value hedge has a maturity date of March 31, 2029.

The interest rate swap is carried on the Company’s consolidated balance sheet at its fair value in other assets (when the fair value is positive) or in other liabilities (when the fair value is negative). The changes in the fair value of the interest rate swap are recorded in interest income. The unrealized gains or losses due to changes in fair value of the hedged debt securities due to changes in benchmark interest rates are recorded as an adjustment to the hedged debt securities and offset in the same interest income line item.

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

Derivatives Financial Instruments Not Designated as Hedging Instruments Asset Derivatives Liability Derivatives
Fair Value at Fair Value at
(dollars in thousands) Balance Sheet Location June 30,
2021 December 31,
2020 June 30,
2021 December 31,
2020
Interest rate lock, forward sale commitments and risk participation agreements Other assets / other liabilities $ 14 $ 18 $ 36 $ 163


Derivative Financial Instruments Not Designated as Hedging Instruments		Asset Derivatives				Liability Derivatives
		Fair Value at				Fair Value at
(dollars in thousands)	Balance Sheet Location	June 30, 2022		December 31, 2021		June 30, 2022		December 31, 2021
Interest rate lock and forward sale commitments	Other assets / other liabilities	$	—	$	5	$	—	$	4
Risk participation agreements	Other assets / other liabilities	—		—		—		16
Back-to-back swap agreements	Other assets / other liabilities	2,958		435		2,958		435

Derivative Financial Instruments Designated as Hedging Instruments		Asset Derivatives				Liability Derivatives
		Fair Value at				Fair Value at
(dollars in thousands)	Balance Sheet Location	June 30, 2022		December 31, 2021		June 30, 2022		December 31, 2021
Interest rate swap	Other assets / other liabilities	$	2,724	$	—	$	—	$	—

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

~~Derivatives~~Derivative Financial Instruments
Not Designated as Hedging Instruments

Location of Gain (Loss)
Recognized in
Earnings on Derivatives

Amount of Gain (Loss)
Recognized in
Earnings on Derivatives

(dollars in thousands)

Three Months Ended June 30, ~~2021~~2022

Interest rate lock and forward sale commitments

Mortgage banking income

~~(84)~~(143)

Loans held for sale

Other income

Risk participation agreements

Other service charges and fees

~~(4)~~—

Back-to-back swap agreements

Other service charges and fees

—

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

Interest rate lock and forward sale commitments

Mortgage banking income

~~(149)~~(84)

Loans held for sale

Other income

—

Risk participation agreements

Other service charges and fees

0(4)

Back-to-back swap agreements

Other service charges and fees

—

Six Months Ended June 30, 2022

Interest rate lock and forward sale commitments

Mortgage banking income

—

Loans held for sale

Other income

(1)

Risk participation agreements

Other service charges and fees

Back-to-back swap agreements

Other service charges and fees

—

Six Months Ended June 30, 2021

Interest rate lock and forward sale commitments

Mortgage banking income

Loans held for sale

Other income

—

Risk participation agreements

Other service charges and fees

~~Six Months Ended June 30, 2020~~

~~Interest rate lock and forward sale commitments~~

~~Mortgage banking income~~

~~(50)~~

~~Risk participation~~Back-to-back swap agreements

Other service charges and fees

~~1,288~~—

Derivative Financial Instruments
Designated as Hedging Instruments

Location of Gain (Loss)
Recognized in
Earnings on Derivatives

Amount of Gain (Loss)
Recognized in
Earnings on Derivatives

(dollars in thousands)

Three Months Ended June 30, 2022

Interest rate swap

Interest income

—

Three Months Ended June 30, 2021

Interest rate swap

Interest income

—

Six Months Ended June 30, 2022

Interest rate swap

Interest income

(157)

Six Months Ended June 30, 2021

Interest rate swap

Interest income

—

9. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Federal Home Loan Bank Advances and Other Borrowings

The bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB") and maintained a ~~$1.81~~$1.93 billion line of credit as of June 30, ~~2021,~~2022, compared to ~~$1.81~~$1.83 billion at December 31, ~~2020.~~2021. At June 30, ~~2021, $1.58~~2022, $1.90 billion was undrawn under this arrangement, compared to ~~$1.52~~$1.80 billion at December 31, ~~2020.~~2021. There were no short-term borrowings under this

arrangement at June 30, ~~2021, compared to $22.0 million~~2022 and at December 31, ~~2020.~~2021. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled ~~$230.8~~$32.2 million atas of June 30, ~~2021, compared to $268.0~~2022, and remained unchanged at $32.2 million at

as of December 31, ~~2020.~~2021. There were no long-term borrowings under this arrangement at June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. FHLB advances and standby letters of credit available at June 30, ~~2021~~2022 were secured by certain real estate loans with a carrying value of ~~$2.67~~$2.80 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB.

At June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, our bank had additional unused borrowings available at the Federal Reserve discount window of ~~$64.4~~$81.8 million and ~~$64.5~~$55.4 million, respectively. As of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, certain commercial and commercial real estate loans with a carrying value totaling ~~$130.6~~$127.7 million and ~~$136.9~~$131.0 million, respectively, were pledged as collateral on our line of credit with the Federal Reserve discount window. The Federal Reserve does not have the right to sell or repledge these loans.

To bolster the effectiveness of the SBA's PPP, the Federal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The Paycheck Protection Program Liquidity Facility ("PPPLF") will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. At June 30, 2021 and December 31, 2020, there were no funds drawn from the Federal Reserve Bank under the PPPLF and no PPP loans were pledged to the Federal Reserve Bank. The PPPLF expires on July 30, 2021.

Subordinated Debentures

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

In September 2004, we created a wholly-owned statutory trust, CPB Capital Trust IV ("Trust IV"). Trust IV issued $30.0 million in floating rate trust preferred securities bearing an interest rate of three-month LIBOR plus 2.45% and maturing on December 15, 2034. The principal assets of Trust IV are $30.9 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust IV trust preferred securities. Trust IV issued $0.9 million of common securities to the Company.

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

At June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had the following junior subordinated debentures outstanding, which is recorded in long-term debt on the Company's consolidated balance sheets:


(dollars in thousands)	June 30, ~~2021~~2022
Name of Trust	Subordinated Debentures		Interest Rate
Trust IV	$	30,928	Three month LIBOR + 2.45%
Trust V	20,619		Three month LIBOR + 1.87%
Total	$	51,547

	December 31, ~~2020~~2021
Name of Trust	Subordinated Debentures		Interest Rate

Trust IV	$	30,928	Three month LIBOR + 2.45%
Trust V	20,619		Three month LIBOR + 1.87%
Total	$	51,547

The Company is not considered the primary beneficiary of Trusts IV and V, therefore the trusts are not considered a variable interest entity and are not consolidated in the Company's financial statements. Rather the subordinated debentures are shown as a liability on the Company's consolidated balance sheets. The Company's investment in the common securities of the trusts are included in investment in unconsolidated entities in the Company's consolidated balance sheets.

The floating trust preferred securities, the junior subordinated debentures that are the assets of Trusts IV and V and the common securities issued by Trusts IV and V are redeemable in whole or in part on any interest payment date on or after December 15, 2009 for Trust IV and V, or at any time in whole but not in part within 90 days following the occurrence of certain events. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from time to time to defer interest payments on the subordinated debentures, which would result in a deferral of

distribution payments on the related trust preferred securities, for up to 20 consecutive quarterly periods without default or penalty.

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

Subordinated Notes

As of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had the following subordinated notes outstanding:


(Dollars in thousands)	June 30, ~~2021~~2022
Name	Amount of Subordinated Notes		Interest Rate
October 2020 Private Placement	$	55,000	4.75% for the first five years. Resets quarterly thereafter to the then current three-month SOFR plus 456 basis points.

(Dollars in thousands)	December 31, ~~2020~~2021
Name of Trust	Amount of Subordinated Debentures		Interest Rate
October 2020 Private Placement	$	55,000	4.75% for the first five years. Resets quarterly thereafter to the then current three-month SOFR plus 456 basis points.

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

The subordinated notes may be included in Tier 2 capital, with certain limitations applicable, under current regulatory guidelines and interpretations. The subordinated notes had a carrying value of ~~$53.9~~$54.2 million, net of unamortized debt issuance costs of ~~$1.1~~$0.8 million, at June 30, ~~2021.~~2022.

10. REVENUE FROM CONTRACTS WITH CUSTOMERS

The following presents the Company's other operating income, segregated by revenue streams that are in-scope and out-of-scope of ASC 606, "Revenue from Contracts with Customers" for the three and six months ended June 30, ~~2021~~2022 and ~~2020:~~2021:


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	(dollars in thousands)	2021		2020		2021		2020		(dollars in thousands)	2022		2021		2022		2021
Other operating income:	Other operating income:									Other operating income:
In-scope of ASC 606	In-scope of ASC 606									In-scope of ASC 606
Mortgage banking income	Mortgage banking income	$	522	$	189	$	1,360	$	418	Mortgage banking income	$	500	$	522	$	735	$	1,360
Service charges on deposit accounts	Service charges on deposit accounts	1,443		1,149		2,921		3,199		Service charges on deposit accounts	2,026		1,443		3,887		2,921
Other service charges and fees	Other service charges and fees	3,925		2,589		7,103		5,585		Other service charges and fees	4,089		3,925		7,952		7,103
Income on fiduciary activities	Income on fiduciary activities	1,269		1,270		2,500		2,567		Income on fiduciary activities	1,188		1,269		2,342		2,500

Net loss on sales of foreclosed assets		0		(6)		0		(6)

In-scope other operating income	In-scope other operating income	7,159		5,191		13,884		11,763		In-scope other operating income	7,803		7,159		14,916		13,884
Out-of-scope other operating income	Out-of-scope other operating income	3,371		5,501		7,357		7,815		Out-of-scope other operating income	9,335		3,371		11,773		7,357
Total other operating income	Total other operating income	$	10,530	$	10,692	$	21,241	$	19,578	Total other operating income	$	17,138	$	10,530	$	26,689	$	21,241

11. SHARE-BASED COMPENSATION

Restricted Stock Units

Under the Company's 2013 Stock Compensation Plan, we award restricted and performance stock awards and units to our non-officer directors and certain senior management personnel. The awards typically vest over a three or five year period from the date of grant and are subject to forfeiture until performance and employment targets are achieved. Compensation expense is typically measured as the market price of the stock awards on the grant date, and is recognized over the specified vesting periods.

~~11. SHARE-BASED COMPENSATION~~

~~Restricted Stock Units~~

The table below presents the activity of restricted stock units for the six months ended June 30, ~~2021:~~2022:


		Shares	Weighted Average Grant Date Fair Value
(dollars in thousands, except per share data)					(dollars in thousands, except per share data)	Shares	Weighted Average Grant Date Fair Value		Fair Value of Restricted Stock Awards and Units That Vested During the Period
Non-vested restricted stock units, beginning of period	Non-vested restricted stock units, beginning of period	532,374	$	22.49	Non-vested restricted stock units, beginning of period	485,339	$	21.95
Changes during the period:	Changes during the period:				Changes during the period:
Granted	Granted	210,566	21.67		Granted	95,155	29.38
Vested	Vested	(121,922)	25.40		Vested	(170,256)	21.59		$	4,595
Forfeited	Forfeited	(9,443)	17.03		Forfeited	(45,664)	26.45
Non-vested restricted stock units, end of period	Non-vested restricted stock units, end of period	611,575	21.71		Non-vested restricted stock units, end of period	364,574	23.50

12. PENSION AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS

Defined Benefit Retirement Plan

The Central Pacific Bank had a defined benefit retirement plan that covered substantially all of its employees who were employed during the period that the plan was in effect. The plan was initially curtailed in 1986, and accordingly, plan benefits were fixed as of that date. Effective January 1, 1991, the bank reactivated its defined benefit retirement plan. As a result of the reactivation, employees for whom benefits were fixed in 1986 began to accrue additional benefits under a new formula that became effective January 1, 1991. Employees who were not participants at curtailment, but who were subsequently eligible to join, became participants effective January 1, 1991. Under the reactivated plan, benefits are based upon the employees' years of service and their highest average annual salaries in a 60-consecutive-month period of service, reduced by benefits provided from the bank's terminated money purchase pension plan. The reactivation of the defined benefit retirement plan resulted in an increase of $5.9 million in the unrecognized prior service cost, which was amortized over a period of 13 years. Effective December 31, 2002, the bank curtailed its defined benefit retirement plan, and accordingly, plan benefits were fixed as of that date.

In January 2021, the Board of Directors approved termination of, and authorized Company management to commence taking action to terminate, the defined benefit retirement plan. The Company received a favorable determination letter from the IRS and no objection from the Pension Benefit Guaranty Corporation on the Form 500 standard termination notice in January 2022. The Company completed the termination and settlement of the defined benefit retirement plan in the second quarter of 2022. Upon final plan termination and settlement, the Company recognized a one-time noncash settlement charge of $4.9 million which was recorded in other operating expense. As of June 30, 2022, the Company has no further defined benefit retirement plan liability or ongoing pension expense recognition.

The following table sets forth the components of net periodic benefit cost for the defined benefit retirement plan for the periods indicated:


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2022		2021		2022		2021
Interest cost	$	212	$	242	$	212	$	242
Expected return on plan assets	(195)		(204)		(207)		(274)
Amortization of net actuarial loss	112		188		224		351
Settlement	4,884		—		4,884		—
Net periodic benefit cost	$	5,013	$	226	$	5,113	$	319

Supplemental Executive Retirement Plans

In 1995, 2001, 2004 and 2006, our bank also established Supplemental Executive Retirement Plans ("SERPs"), which provide certain (current and former) officers of our bank with supplemental retirement benefits. On December 31, 2002, the 1995 and 2001 SERP were curtailed.

The following table sets forth the components of net periodic benefit cost for the SERPs for the periods indicated:


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2022		2021		2022		2021
Interest cost	$	75	$	66	$	150	$	132
Amortization of net actuarial loss	21		84		42		167
Amortization of net transition obligation	4		4		8		9


Net periodic benefit cost	$	100	$	154	$	200	$	308

All components of net periodic benefit cost are included in other operating expenses in the Company's consolidated statements of income.

13. OPERATING LEASES

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

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


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	(dollars in thousands)	2021			2020			2021			2020			(dollars in thousands)	2022			2021			2022			2021
Lease cost:	Lease cost:													Lease cost:
Operating lease cost	Operating lease cost	$	1,720		$	1,653		$	3,291		$	3,306		Operating lease cost	$	1,386		$	1,720		$	2,776		$	3,291
Variable lease cost	Variable lease cost	470			688			1,190			1,366			Variable lease cost	834			470			1,664			1,190
Less: sublease income	Less: sublease income	0			(3)			0			(15)			Less: sublease income	(12)			—			(24)			—
Total lease cost	Total lease cost	$	2,190		$	2,338		$	4,481		$	4,657		Total lease cost	$	2,208		$	2,190		$	4,416		$	4,481

Other information:	Other information:													Other information:
Operating cash flows from operating leases	Operating cash flows from operating leases	$	(1,726)		$	(1,595)		$	(3,325)		$	(3,189)		Operating cash flows from operating leases	$	(1,515)		$	(1,726)		$	(3,021)		$	(3,325)
Weighted-average remaining lease term - operating leases	Weighted-average remaining lease term - operating leases	11.80 years			13.23 years			11.80 years			13.23 years			Weighted-average remaining lease term - operating leases	11.42 years			11.80 years			11.42 years			11.80 years
Weighted-average discount rate - operating leases	Weighted-average discount rate - operating leases	3.91		%	3.93		%	3.91		%	3.93		%	Weighted-average discount rate - operating leases	3.94		%	3.91		%	3.94		%	3.91		%

3640

The following is a schedule of annual undiscounted cash flows for our operating leases and a reconciliation of those cash flows to the operating lease liabilities for the remainder of fiscal year ~~2021,~~2022, the next five succeeding fiscal years and all years thereafter:


(dollars in thousands)	(dollars in thousands)							(dollars in thousands)
Year Ending December 31,	Year Ending December 31,	Undiscounted Cash Flows		Lease Liability Expense		Lease Liability Reduction		Year Ending December 31,	Undiscounted Cash Flows		Lease Liability Expense		Lease Liability Reduction
2021 (remainder)		$	3,208	$	818	$	2,390
2022		5,925		1,497		4,428
2022 (remainder)								2022 (remainder)	$	2,875	$	726	$	2,149
2023	2023	5,183		1,343		3,840		2023	5,100		1,328		3,772
2024	2024	4,508		1,214		3,294		2024	4,439		1,203		3,236
2025	2025	4,195		1,088		3,107		2025	4,152		1,078		3,074
2026	2026	4,133		968		3,165		2026	4,089		958		3,131
2027								2027	4,080		835		3,245
Thereafter	Thereafter	27,350		4,462		22,888		Thereafter	23,047		3,617		19,430
Total	Total	$	54,502	$	11,390	$	43,112	Total	$	47,782	$	9,745	$	38,037

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	(dollars in thousands)	2021		2020		2021		2020		(dollars in thousands)	2022		2021		2022		2021
Total rental income recognized	Total rental income recognized	$	521	$	534	$	1,041	$	1,067	Total rental income recognized	$	378	$	521	$	1,329	$	1,041

Based on the Company's leases as lessor as of June 30, ~~2021,~~2022, estimated lease payments for the remainder of fiscal year ~~2021,~~2022, the next five succeeding fiscal years and all years thereafter are as follows:


(dollars in thousands)	(dollars in thousands)			(dollars in thousands)
Year Ending December 31,	Year Ending December 31,			Year Ending December 31,
2021 (remainder)		$	1,062
2022		1,756
2022 (remainder)				2022 (remainder)	$	682
2023	2023	777		2023	1,096
2024	2024	253		2024	816
2025	2025	137		2025	660
2026	2026	73		2026	516
2027				2027	493
Thereafter	Thereafter	117		Thereafter	2,293
Total	Total	$	4,175	Total	$	6,556

3741

~~13.~~14. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the components of other comprehensive ~~income~~loss for the three and six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, by component:

(dollars in thousands) Before Tax Tax Effect Net of Tax
Three Months Ended June 30, 2021
Net unrealized gains on investment securities:
Net unrealized gains arising during the period $ 2,407 $ 643 $ 1,764
Less: Reclassification adjustments from AOCI realized in net income (50) (13) (37)
Net unrealized gains on investment securities 2,357 630 1,727
Defined benefit plans:
Amortization of net actuarial loss 272 87 185
Amortization of net transition obligation 4 1 3
Defined benefit plans, net 276 88 188
Other comprehensive income $ 2,633 $ 718 $ 1,915


(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Three Months Ended June 30, 2022
Net change in fair value of available-for-sale investment securities:
Net unrealized losses arising during the period	$	(61,628)	$	(16,478)	$	(45,150)

Less: Amortization of unrealized losses on investment securities transferred to held-to-maturity	1,976		528		1,448
Net change in fair value of available-for-sale investment securities	(59,652)		(15,950)		(43,702)

Net change in fair value of derivatives:
Net unrealized gains arising during the period	2,930		783		2,147

Net change in fair value of derivatives	2,930		783		2,147

Defined benefit retirement plan and SERPs:
Net actuarial losses arising during the period	(952)		(255)		(697)
Amortization of net actuarial loss	131		35		96
Amortization of net transition obligation	5		1		4

Settlement	4,884		1,817		3,067
Defined benefit retirement plan and SERPs	4,068		1,598		2,470

Other comprehensive loss	$	(52,654)	$	(13,569)	$	(39,085)

(dollars in thousands) Before Tax Tax Effect Net of Tax
Three Months Ended June 30, 2020
Net unrealized gains on investment securities:
Net unrealized gains arising during the period $ 8,570 $ 2,295 $ 6,275
Less: Reclassification adjustments from AOCI realized in net income 0 0 0
Net unrealized gains on investment securities 8,570 2,295 6,275
Defined benefit plans:
Amortization of net actuarial loss 269 70 199
Amortization of net transition obligation 4 1 3
Amortization of prior service cost 3 1 2
Defined benefit plans, net 276 72 204
Other comprehensive income $ 8,846 $ 2,367 $ 6,479

(dollars in thousands) Before Tax Tax Effect Net of Tax
Six Months Ended June 30, 2021
Net unrealized losses on investment securities:
Net unrealized losses arising during the period $ (21,212) $ (5,675) $ (15,537)
Less: Reclassification adjustments from AOCI realized in net income (50) (13) (37)
Net unrealized losses on investment securities (21,262) (5,688) (15,574)
Defined benefit plans:
Amortization of net actuarial loss 518 153 365
Amortization of net transition obligation 9 2 7
Defined benefit plans, net 527 155 372
Other comprehensive loss $ (20,735) $ (5,533) $ (15,202)


(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Three Months Ended June 30, 2021
Net change in fair value of available-for-sale investment securities:
Net unrealized gains arising during the period	$	2,407	$	643	$	1,764
Less: Reclassification adjustments from AOCI realized in net income	(50)		(13)		(37)

Net change in fair value of available-for-sale investment securities	2,357		630		1,727

Defined benefit retirement plan and SERPs:

Amortization of net actuarial loss	272		87		185
Amortization of net transition obligation	4		1		3


Defined benefit retirement plan and SERPs	276		88		188

Other comprehensive income	$	2,633	$	718	$	1,915

3842

(dollars in thousands) Before Tax Tax Effect Net of Tax
Six Months Ended June 30, 2020
Net unrealized gains on investment securities:
Net unrealized gains arising during the period $ 22,428 $ 6,006 $ 16,422
Less: Reclassification adjustments from AOCI realized in net income 0 0 0
Net unrealized gains on investment securities 22,428 6,006 16,422
Defined benefit plans:
Net actuarial gains arising during the period 427 114 313
Amortization of net actuarial loss 537 142 395
Amortization of net transition obligation 9 2 7
Amortization of prior service cost 7 2 5
Defined benefit plans, net 980 260 720
Other comprehensive income $ 23,408 $ 6,266 $ 17,142


(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Six Months Ended June 30, 2022
Net change in fair value of available-for-sale investment securities:
Net unrealized losses arising during the period	$	(170,076)	$	(45,476)	$	(124,600)

Less: Amortization of unrealized losses on investment securities transferred to held-to-maturity	1,976		528		1,448
Net change in fair value of available-for-sale investment securities	(168,100)		(44,948)		(123,152)

Net change in fair value of derivatives:
Net unrealized gains arising during the period	2,880		770		2,110

Net change in fair value of derivatives	2,880		770		2,110

Defined benefit retirement plan and SERPs:
Net actuarial losses arising during the period	(952)		(255)		(697)
Amortization of net actuarial loss	264		71		193
Amortization of net transition obligation	9		2		7

Settlement	4,884		1,817		3,067
Defined benefit retirement plan and SERPs	4,205		1,635		2,570

Other comprehensive loss	$	(161,015)	$	(42,543)	$	(118,472)


(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Six Months Ended June 30, 2021
Net change in fair value of available-for-sale investment securities:
Net unrealized losses arising during the period	$	(21,212)	$	(5,675)	$	(15,537)
Less: Reclassification adjustments from AOCI realized in net income	(50)		(13)		(37)

Net change in fair value of available-for-sale investment securities	(21,262)		(5,688)		(15,574)

Defined benefit retirement plan and SERPs:

Amortization of net actuarial loss	518		153		365
Amortization of net transition obligation	9		2		7


Defined benefit retirement plan and SERPs	527		155		372

Other comprehensive loss	$	(20,735)	$	(5,533)	$	(15,202)

The following tables present the changes in each component of AOCI, net of tax, for the three and six months ended June 30, ~~2021~~2022 and ~~2020:~~2021:

(dollars in thousands) Investment
Securities Defined
Benefit
Plans AOCI
Three Months Ended June 30, 2021
Balance at beginning of period $ 9,350 $ (6,339) $ 3,011
Other comprehensive income before reclassifications 1,764 0 1,764
Reclassification adjustments from AOCI (37) 188 151
Total other comprehensive income 1,727 188 1,915
Balance at end of period $ 11,077 $ (6,151) $ 4,926


(dollars in thousands)	(dollars in thousands)	Investment Securities		Defined Benefit Plans		AOCI		(dollars in thousands)	Investment Securities		Derivatives		Defined Benefit Retirement Plan and SERPs [1]		AOCI
Three Months Ended June 30, 2020
Three Months Ended June 30, 2022								Three Months Ended June 30, 2022
Balance at beginning of period	Balance at beginning of period	$	24,972	$	(5,900)	$	19,072	Balance at beginning of period	$	(83,116)	$	(37)	$	(4,194)	$	(87,347)

Other comprehensive income before reclassifications		6,275		0		6,275
Other comprehensive (loss) income before reclassifications								Other comprehensive (loss) income before reclassifications	(45,150)		2,147		(697)		(43,700)
Reclassification adjustments from AOCI	Reclassification adjustments from AOCI	0		204		204		Reclassification adjustments from AOCI	1,448		—		3,167		4,615
Total other comprehensive income		6,275		204		6,479
Total other comprehensive (loss) income								Total other comprehensive (loss) income	(43,702)		2,147		2,470		(39,085)

Balance at end of period	Balance at end of period	$	31,247	$	(5,696)	$	25,551	Balance at end of period	$	(126,818)	$	2,110	$	(1,724)	$	(126,432)

3943


(dollars in thousands)	(dollars in thousands)	Investment Securities		Defined Benefit Plans		AOCI		(dollars in thousands)	Investment Securities		Derivatives		Defined Benefit Retirement Plan and SERPs [1]		AOCI
Six Months Ended June 30, 2021
Three Months Ended June 30, 2021								Three Months Ended June 30, 2021
Balance at beginning of period	Balance at beginning of period	$	26,651	$	(6,523)	$	20,128	Balance at beginning of period	$	9,350	$	—	$	(6,339)	$	3,011

Other comprehensive income before reclassifications	Other comprehensive income before reclassifications	(15,537)		0		(15,537)		Other comprehensive income before reclassifications	1,764		—		—		1,764
Reclassification adjustments from AOCI	Reclassification adjustments from AOCI	(37)		372		335		Reclassification adjustments from AOCI	(37)		—		188		151
Total other comprehensive income (loss)		(15,574)		372		(15,202)
Total other comprehensive income								Total other comprehensive income	1,727		—		188		1,915

Balance at end of period	Balance at end of period	$	11,077	$	(6,151)	$	4,926	Balance at end of period	$	11,077	$	—	$	(6,151)	$	4,926


(dollars in thousands)	(dollars in thousands)	Investment Securities		Defined Benefit Plans		AOCI		(dollars in thousands)	Investment Securities		Derivatives		Defined Benefit Retirement Plan and SERPs [1]		AOCI
Six Months Ended June 30, 2020
Six Months Ended June 30, 2022								Six Months Ended June 30, 2022
Balance at beginning of period	Balance at beginning of period	$	14,825	$	(6,416)	$	8,409	Balance at beginning of period	$	(3,666)	$	—	$	(4,294)	$	(7,960)

Other comprehensive loss before reclassifications		16,422		313		16,735
Other comprehensive (loss) income before reclassifications								Other comprehensive (loss) income before reclassifications	(124,600)		2,110		(697)		(123,187)
Reclassification adjustments from AOCI	Reclassification adjustments from AOCI	0		407		407		Reclassification adjustments from AOCI	1,448		—		3,267		4,715
Total other comprehensive income (loss)		16,422		720		17,142
Total other comprehensive (loss) income								Total other comprehensive (loss) income	(123,152)		2,110		2,570		(118,472)

Balance at end of period	Balance at end of period	$	31,247	$	(5,696)	$	25,551	Balance at end of period	$	(126,818)	$	2,110	$	(1,724)	$	(126,432)


(dollars in thousands)	Investment Securities		Derivatives		Defined Benefit Retirement Plan and SERPs [1]		AOCI
Six Months Ended June 30, 2021
Balance at beginning of period	$	26,651	$	—	$	(6,523)	$	20,128





Other comprehensive loss before reclassifications	(15,537)		—		—		(15,537)
Reclassification adjustments from AOCI	(37)		—		372		335
Total other comprehensive (loss) income	(15,574)		—		372		(15,202)

Balance at end of period	$	11,077	$	—	$	(6,151)	$	4,926

[1] During the second quarter of 2022, the Company settled all obligations related to its defined benefit retirement plan. As a result, the AOCI balance in the defined benefit retirement plan and SERPs column as of June 30, 2022 relates entirely to the SERPs.

4044

The following table presents the amounts reclassified out of each component of AOCI for the three and six months ended June 30, ~~2021~~2022 and ~~2020:~~2021:


		Amount Reclassified from AOCI				Affected Line Item in the Statement Where Net Income is Presented		Amount Reclassified from AOCI				Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI Components	Details about AOCI Components	Three months ended June 30,					Details about AOCI Components	Three months ended June 30,
(dollars in thousands)		2021		2020

(dollars in thousands)							(dollars in thousands)	2022		2021			Affected Line Item in the Statement Where Net Income is Presented
Sale of available-for-sale investment securities:							Sale of available-for-sale investment securities:
Realized gain on sales of available-for-sale investment securities							Realized gain on sales of available-for-sale investment securities	$	—	$	50
Tax effect							Tax effect	—		(13)
Net of tax							Net of tax	$	—	$	37

Amortization of unrealized losses on investment securities transferred to held-to-maturity:							Amortization of unrealized losses on investment securities transferred to held-to-maturity:
Amortization							Amortization	$	(1,976)	$	—
Tax effect							Tax effect	528		—
Net of tax							Net of tax	$	(1,448)	$	—

Defined benefit retirement and supplemental executive retirement plan items:	Defined benefit retirement and supplemental executive retirement plan items:						Defined benefit retirement and supplemental executive retirement plan items:
Amortization of net actuarial loss	Amortization of net actuarial loss	$	(272)	$	(269)	Other operating expense - other	Amortization of net actuarial loss	$	(131)	$	(272)	Other operating expense - other
Amortization of net transition obligation	Amortization of net transition obligation	(4)		(4)		Other operating expense - other	Amortization of net transition obligation	(5)		(4)		Other operating expense - other
Amortization of prior service cost	Amortization of prior service cost	0		(3)		Other operating expense - other	Amortization of prior service cost	—		—		Other operating expense - other

Settlement							Settlement	(4,884)		—		Other operating expense - other
Total before tax	Total before tax	(276)		(276)			Total before tax	(5,020)		(276)
Tax effect	Tax effect	88		72		Income tax benefit (expense)	Tax effect	1,853		88		Income tax benefit (expense)
Net of tax	Net of tax	$	(188)	$	(204)		Net of tax	$	(3,167)	$	(188)

Total reclassification adjustments from AOCI for the period, net of tax	Total reclassification adjustments from AOCI for the period, net of tax	$	(151)	$	(204)		Total reclassification adjustments from AOCI for the period, net of tax	$	(4,615)	$	(151)

Amount Reclassified from AOCI Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI Components Six months ended June 30,
(dollars in thousands) 2021 2020
Defined benefit retirement and supplemental executive retirement plan items:
Amortization of net actuarial loss $ (518) $ (537) Other operating expense - other
Amortization of net transition obligation (9) (9) Other operating expense - other
Amortization of prior service cost 0 (7) Other operating expense - other
Total before tax (527) (553)
Tax effect 155 146 Income tax benefit (expense)
Net of tax $ (372) $ (407)
Total reclassification adjustments from AOCI for the period, net of tax $ (335) $ (407)


	Amount Reclassified from AOCI				Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI Components	Six months ended June 30,
(dollars in thousands)	2022		2021
Sale of available-for-sale investment securities:
Realized gain on sales of available-for-sale investment securities	$	—	$	50	Net gain on sales of investment securities
Tax effect	—		(13)		Income tax benefit (expense)
Net of tax	$	—	$	37

Amortization of unrealized losses on investment securities transferred to held-to-maturity:
Amortization	$	(1,976)	$	—
Tax effect	528		—
Net of tax	$	(1,448)	$	—

Defined benefit retirement and supplemental executive retirement plan items:
Amortization of net actuarial loss	$	(264)	$	(518)	Other operating expense - other
Amortization of net transition obligation	(9)		(9)		Other operating expense - other
Amortization of prior service cost	—		—		Other operating expense - other
Settlement	(4,884)		—		Other operating expense - other
Total before tax	(5,157)		(527)
Tax effect	1,890		155		Income tax benefit (expense)
Net of tax	$	(3,267)	$	(372)

Total reclassification adjustments from AOCI for the period, net of tax	$	(4,715)	$	(335)

~~14.~~15. EARNINGS PER SHARE

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands, except per share data)	(dollars in thousands, except per share data)	2021		2020		2021		2020		(dollars in thousands, except per share data)	2022		2021		2022		2021
Net income	Net income	$	18,714	$	9,917	$	36,752	$	18,243	Net income	$	17,594	$	18,714	$	37,032	$	36,752

Weighted average common shares outstanding - basic	Weighted average common shares outstanding - basic	28,173,710		28,040,802		28,141,360		28,083,602		Weighted average common shares outstanding - basic	27,516,284		28,173,710		27,553,629		28,141,360
Dilutive effect of employee stock options and awards	Dilutive effect of employee stock options and awards	282,914		54,428		266,119		106,530		Dilutive effect of employee stock options and awards	160,335		282,914		205,558		266,119
Weighted average common shares outstanding - diluted	Weighted average common shares outstanding - diluted	28,456,624		28,095,230		28,407,479		28,190,132		Weighted average common shares outstanding - diluted	27,676,619		28,456,624		27,759,187		28,407,479

Basic earnings per common share	Basic earnings per common share	$	0.66	$	0.35	$	1.31	$	0.65	Basic earnings per common share	$	0.64	$	0.66	$	1.34	$	1.31
Diluted earnings per common share	Diluted earnings per common share	$	0.66	$	0.35	$	1.29	$	0.65	Diluted earnings per common share	$	0.64	$	0.66	$	1.33	$	1.29

4146

~~15.~~16. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

Disclosures about Fair Value of Financial Instruments

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

Short-Term Financial Instruments

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

Investment Securities

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

Loans

Fair values of loans are estimated based on discounted cash flows of portfolios of loans with similar financial characteristics including the type of loan, interest terms and repayment history. Fair values are calculated by discounting scheduled cash flows through estimated maturities using estimated market discount rates. Estimated market discount rates are reflective of credit and ~~interest~~interest rate risks inherent in the Company's various loan types and are derived from available market information, as well as specific borrower information. As of June 30, ~~2021,~~2022, the weighted average discount rate used in the valuation of loans was ~~4.53%~~7.26%. In accordance with ASU 2016-01, the fair value of loans are measured based on the notion of exit price.

Loans Held for Sale

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

Deposit Liabilities

The fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits and interest-bearing demand and savings accounts, are equal to the amount payable on demand. The fair value of time deposits is estimated using discounted cash flow analyses. As of June 30, ~~2021,~~2022, the weighted average discount rate used in the valuation of time deposits was ~~0.31%~~2.56%. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Long-Term Debt

The fair value of our long-term debt is estimated by discounting scheduled cash flows over the contractual borrowing period at the estimated market rate for similar borrowing arrangements. As of June 30, ~~2021,~~2022, the weighted average discount rate used in the valuation of long-term debt was ~~5.82%~~6.32%.

Derivatives

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

Off-Balance Sheet Financial Instruments

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

4247

Limitations

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

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


						Fair Value Measurement Using											Fair Value Measurement Using
(dollars in thousands)	(dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2021
June 30, 2022												June 30, 2022
Financial assets:	Financial assets:											Financial assets:
Cash and due from banks	Cash and due from banks	$	116,009	$	116,009	$	116,009	$	0	$	0	Cash and due from banks	$	108,389	$	108,389	$	108,389	$	—	$	—
Interest-bearing deposits in other banks	Interest-bearing deposits in other banks	224,469		224,469		224,469		0		0		Interest-bearing deposits in other banks	22,741		22,741		22,741		—		—
Investment securities	Investment securities	1,408,918		1,408,918		1,578		1,398,430		8,910		Investment securities	1,450,738		1,422,938		—		1,415,158		7,780
Loans held for sale	Loans held for sale	5,361		5,361		0		5,361		0		Loans held for sale	535		535		—		535		—
Net loans		4,999,537		4,882,130		0		0		4,882,130
Loans, net of ACL												Loans, net of ACL	5,236,422		4,689,510		—		—		4,689,510

Accrued interest receivable	Accrued interest receivable	19,014		19,014		19,014		0		0		Accrued interest receivable	17,146		17,146		17,146		—		—

Financial liabilities:	Financial liabilities:											Financial liabilities:
Deposits:	Deposits:											Deposits:
Noninterest-bearing demand	Noninterest-bearing demand	2,203,806		2,203,806		2,203,806		0		0		Noninterest-bearing demand	2,282,967		2,282,967		2,282,967		—		—
Interest-bearing demand and savings and money market	Interest-bearing demand and savings and money market	3,390,225		3,390,225		3,390,225		0		0		Interest-bearing demand and savings and money market	3,658,712		3,658,712		3,658,712		—		—
Time	Time	803,128		802,904		0		0		802,904		Time	680,382		671,198		—		—		671,198

Long-term debt	Long-term debt	105,495		90,309		0		0		90,309		Long-term debt	105,738		96,798		—		—		96,798
Accrued interest payable (included in other liabilities)	Accrued interest payable (included in other liabilities)	1,142		1,142		1,142		0		0		Accrued interest payable (included in other liabilities)	1,185		1,185		1,185		—		—

Fair Value Measurement Using
(dollars in thousands) Notional
Amount Carrying
Amount Estimated
Fair Value Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
June 30, 2021
Derivatives:
Interest rate lock commitments $ 779 $ 14 $ 14 $ 0 $ 14 $ 0
Forward sale commitments 4,945 (14) (14) 0 (14) 0
Risk participation agreement 37,647 (22) (22) 0 0 (22)
Off-balance sheet financial instruments:
Commitments to extend credit 1,308,203 0 1,620 0 1,620 0
Standby letters of credit and financial guarantees written 11,456 0 172 0 172 0


							Fair Value Measurement Using
(dollars in thousands)	Notional Amount		Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2022
Derivatives:

Forward sale commitments	$	532	$	—	$	—	$	—	$	—	$	—
Risk participation agreements	37,229		—		—		—		—		—
Back-to-back swap agreements:
Assets	32,727		2,958		2,958		—		—		2,958
Liabilities	(32,727)		(2,958)		(2,958)		—		—		(2,958)
Interest rate swap agreements	115,545		2,724		2,724		—		2,724		—

Off-balance sheet financial instruments:
Commitments to extend credit	1,376,686		—		1,378		—		1,378		—
Standby letters of credit and financial guarantees written	5,228		—		78		—		78		—

4348


						Fair Value Measurement Using											Fair Value Measurement Using
(dollars in thousands)	(dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2020
December 31, 2021												December 31, 2021
Financial assets:	Financial assets:											Financial assets:
Cash and due from banks	Cash and due from banks	$	97,546	$	97,546	$	97,546	$	0	$	0	Cash and due from banks	$	81,506	$	81,506	$	81,506	$	—	$	—
Interest-bearing deposits in other banks	Interest-bearing deposits in other banks	6,521		6,521		6,521		0		0		Interest-bearing deposits in other banks	247,401		247,401		247,401		—		—
Investment securities	Investment securities	1,183,960		1,183,960		1,351		1,170,283		12,326		Investment securities	1,631,699		1,631,699		—		1,623,080		8,619
Loans held for sale	Loans held for sale	16,687		16,687		0		16,687		0		Loans held for sale	3,531		3,531		—		3,531		—
Net loans		4,880,844		4,795,776		0		0		4,795,776
Loans, net of ACL												Loans, net of ACL	5,033,552		4,741,379		—		—		4,741,379

Accrued interest receivable	Accrued interest receivable	20,224		20,224		20,224		0		0		Accrued interest receivable	16,709		16,709		16,709		—		—

Financial liabilities:	Financial liabilities:											Financial liabilities:
Deposits:	Deposits:											Deposits:
Noninterest-bearing demand	Noninterest-bearing demand	1,790,269		1,790,269		1,790,269		0		0		Noninterest-bearing demand	2,291,246		2,291,246		2,291,246		—		—
Interest-bearing demand and savings and money market	Interest-bearing demand and savings and money market	3,106,931		3,106,931		3,106,931		0		0		Interest-bearing demand and savings and money market	3,641,180		3,641,180		3,641,180		—		—
Time	Time	898,918		899,562		0		0		899,562		Time	706,732		704,645		—		—		704,645
Short-term borrowings		22,000		22,000		0		22,000		0

Long-term debt	Long-term debt	105,385		92,488		0		0		92,488		Long-term debt	105,616		94,588		—		—		94,588
Accrued interest payable (included in other liabilities)	Accrued interest payable (included in other liabilities)	1,727		1,727		1,727		0		0		Accrued interest payable (included in other liabilities)	1,122		1,122		1,122		—		—


								Fair Value Measurement Using													Fair Value Measurement Using
(dollars in thousands)	(dollars in thousands)	Notional Amount		Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(dollars in thousands)	Notional Amount		Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2020
December 31, 2021														December 31, 2021
Derivatives:	Derivatives:													Derivatives:
Interest rate lock commitments		$	714	$	18	$	18	$	0	$	18	$	0

Forward sale commitments	Forward sale commitments	16,603		(115)		(115)		0		(115)		0		Forward sale commitments	$	3,525	$	1	$	1	$	—	$	1	$	—
Risk participation agreements	Risk participation agreements	37,762		(48)		(48)		0		0		(48)		Risk participation agreements	37,531		(16)		(16)		—		—		(16)
Back-to-back swap agreements:														Back-to-back swap agreements:
Assets														Assets	33,112		435		435		—		—		435
Liabilities														Liabilities	33,112		(435)		(435)		—		—		(435)

Off-balance sheet financial instruments:	Off-balance sheet financial instruments:													Off-balance sheet financial instruments:
Commitments to extend credit	Commitments to extend credit	1,176,065		0		1,313		0		1,313		0		Commitments to extend credit	1,266,596		—		1,347		—		1,347		—
Standby letters of credit and financial guarantees written	Standby letters of credit and financial guarantees written	10,544		0		158		0		158		0		Standby letters of credit and financial guarantees written	6,634		—		100		—		100		—

Fair Value Measurements

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

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

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

•Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in

pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques that requires the use of significant judgment or estimation.

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

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

As discussed in Note 8 - Derivatives, during the first quarter of 2022, the Company entered into a forward starting interest rate swap which was measured at fair value using Level 3 inputs. There were 0no other transfers of financial assets and liabilities into or out of Level 3 of the fair value hierarchy during the three and six months ended June 30, ~~2021.~~2022.

The following tables present the fair value of assets and liabilities measured on a recurring basis as of June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:

Fair Value at Reporting Date Using
(dollars in thousands) Fair Value Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
June 30, 2021
Available-for-sale securities:
Debt securities:
States and political subdivisions $ 196,764 $ 0 $ 188,794 $ 7,970
Corporate securities 46,678 0 46,678 0
U.S. Treasury obligations and direct obligations of U.S Government agencies 39,734 0 39,734 0
Mortgage-backed securities:
Residential - U.S. Government sponsored entities 984,678 0 984,678 0
Commercial - U.S. Government agencies and sponsored entities 81,466 0 81,466 0
Residential - Non-government agencies 15,446 0 14,506 940
Commercial - Non-government agencies 42,574 0 42,574 0
Total available-for-sale securities 1,407,340 0 1,398,430 8,910
Equity securities 1,578 1,578 0 0
Derivatives: Interest rate lock, forward sale commitments and risk participation agreements (22) 0 0 (22)
Total $ 1,408,896 $ 1,578 $ 1,398,430 $ 8,888


				Fair Value at Reporting Date Using									Fair Value at Reporting Date Using
(dollars in thousands)	(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2020
June 30, 2022										June 30, 2022

Available-for-sale securities:	Available-for-sale securities:									Available-for-sale securities:
Debt securities:	Debt securities:									Debt securities:
States and political subdivisions	States and political subdivisions	$	168,766	$	0	$	157,429	$	11,337	States and political subdivisions	$	149,113	$	—	$	142,115	$	6,998
Corporate securities	Corporate securities	48,008		0		48,008		0		Corporate securities	31,144		—		31,144		—
U.S. Treasury obligations and direct obligations of U.S Government agencies		33,145		0		33,145		0
U.S. Treasury obligations and direct obligations of U.S. Government agencies										U.S. Treasury obligations and direct obligations of U.S. Government agencies	29,685		—		29,685		—
Mortgage-backed securities:	Mortgage-backed securities:									Mortgage-backed securities:
Residential - U.S. Government sponsored entities		778,826		0		778,826		0
Commercial - U.S. Government agencies and sponsored entities		87,469		0		87,469		0
Residential - U.S. Government-sponsored entities										Residential - U.S. Government-sponsored entities	472,096		—		472,096		—
Residential - Non-government agencies	Residential - Non-government agencies	23,423		0		22,434		989		Residential - Non-government agencies	9,883		—		9,101		782
Commercial - U.S. Government-sponsored entities										Commercial - U.S. Government-sponsored entities	54,162		—		54,162		—
Commercial - Non-government agencies	Commercial - Non-government agencies	42,972		0		42,972		0		Commercial - Non-government agencies	41,290		—		41,290		—

Total available-for-sale securities	Total available-for-sale securities	1,182,609		0		1,170,283		12,326		Total available-for-sale securities	787,373		—		779,593		7,780

Equity securities		1,351		1,351		0		0

Derivatives: Interest rate lock, forward sale commitments and risk participation agreements		(145)		0		(97)		(48)

Derivatives:										Derivatives:

Forward sale commitments										Forward sale commitments	—		—		—		—
Risk participation agreements										Risk participation agreements	—		—		—		—
Back-to-back swap agreements										Back-to-back swap agreements	—		—		—		—
Interest rate swap agreements										Interest rate swap agreements	2,724		—		2,724		—
Total	Total	$	1,183,815	$	1,351	$	1,170,186	$	12,278	Total	$	790,097	$	—	$	782,317	$	7,780

4650


			Fair Value at Reporting Date Using
(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2021
Available-for-sale securities:
Debt securities:
States and political subdivisions	$	236,828	$	—	$	229,147	$	7,681
Corporate securities	40,646		—		40,646		—
U.S. Treasury obligations and direct obligations of U.S. Government agencies	35,334		—		35,334		—
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	1,198,816		—		1,198,816		—
Residential - Non-government agencies	12,213		—		11,275		938
Commercial - U.S. Government-sponsored entities	65,849		—		65,849		—
Commercial - Non-government agencies	42,013		—		42,013		—

Total available-for-sale securities	1,631,699		—		1,623,080		8,619



Derivatives:
Interest rate lock commitments	1		—		1		—
Forward sale commitments	(16)		—		—		(16)
Risk participation agreements	—		—		—		—
Back-to-back swap agreements	—		—		—		—
Interest rate swap agreements	—		—		—		—
Total	$	1,631,684	$	—	$	1,623,081	$	8,603

For the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:


		Available-For-Sale Debt Securities:							Available-For-Sale Debt Securities:
(dollars in thousands)	(dollars in thousands)	States and Political Subdivisions		Residential - Non-Government Agencies		Total		(dollars in thousands)	States and Political Subdivisions		Residential - Non-Government Agencies		Total
Balance at December 31, 2021								Balance at December 31, 2021	$	7,681	$	938	$	8,619
Principal payments received								Principal payments received	(88)		(11)		(99)
Unrealized net loss included in other comprehensive income								Unrealized net loss included in other comprehensive income	(595)		(145)		(740)

Balance at June 30, 2022								Balance at June 30, 2022	$	6,998	$	782	$	7,780

Balance at December 31, 2020	Balance at December 31, 2020	$	11,337	$	989	$	12,326	Balance at December 31, 2020	$	11,337	$	989	$	12,326
Principal payments received	Principal payments received	(2,734)		(11)		(2,745)		Principal payments received	(2,734)		(11)		(2,745)
Unrealized net loss included in other comprehensive income	Unrealized net loss included in other comprehensive income	(633)		(38)		(671)		Unrealized net loss included in other comprehensive income	(633)		(38)		(671)

Balance at June 30, 2021	Balance at June 30, 2021	$	7,970	$	940	$	8,910	Balance at June 30, 2021	$	7,970	$	940	$	8,910

Balance at December 31, 2019		$	11,255	$	0	$	11,255
Principal payments received		(212)		0		(212)
Unrealized net gain included in other comprehensive income		628		0		628

Balance at June 30, 2020		$	11,671	$	0	$	11,671

Within the states and political subdivisions available-for-sale debt securities category, the Company ~~holds~~held 2 mortgage revenue bonds issued by the City & County of Honolulu ~~with~~had an aggregate fair value of ~~$8.0~~$7.0 million and ~~$11.7~~$7.7 million at June 30, 2022 and December 31, 2021, ~~and June 30, 2020,~~ respectively.

Within the other MBS non-agency category, the Company ~~holds~~held 2 mortgage backed bonds issued by Habitat for Humanity with aan aggregate fair value of $0.8 million and $0.9 million at June 30, ~~2021.~~ 2022 and December 31, 2021, respectively.

The Company estimates the aggregate fair value of ~~$8.9~~$7.8 million and $8.6 million as of June 30, 2022 and December 31, 2021, respectively, by using a discounted cash flow model to calculate the present value of estimated future principal and interest payments.

The significant unobservable input used in the fair value measurement of the Company's City & County of Honolulu mortgage revenue bonds and Habitat for Humanity mortgage backed bonds is the weighted average discount rate. As of June 30, ~~2021,~~2022, the weighted average discount rate utilized was ~~3.19%~~5.25%, compared to ~~2.82% at June 30, 2020~~ ~~and 2.83%~~3.46% at December 31, ~~2020,~~2021, which was derived by incorporating a credit spread over the FHLB Fixed-Rate Advance curve. Significant increases (decreases) in the weighted average discount rate could result in a significantly lower (higher) fair value measurement.

~~The following table presents the fair value of~~There were no assets measured on a nonrecurring basis ~~and the level of valuation assumptions used to determine the respective fair values~~ as of June 30, ~~2021~~2022 and December 31, ~~2020:~~2021.

Fair Value Measurements Using
(dollars in thousands) Fair Value Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
June 30, 2021
Other real estate (1)
$ 0 $ 0 $ 0 $ 0
December 31, 2020
Other real estate (1)
$ 0 $ 0 $ 0 $ 0

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

~~16.~~17. LEGAL PROCEEDINGS

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

4752

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

Overview

Central Pacific Financial Corp. ("CPF") is a Hawaii corporation and a bank holding company. Our principal business is to serve as a holding company for our bank subsidiary, Central Pacific Bank. We refer to Central Pacific Bank herein as "our bank" or "the bank," and when we say "the Company," "we," "us" or "our," we mean the holding company on a consolidated basis with the bank and our other consolidated subsidiaries.

Central Pacific Bank is a full-service community bank with 3128 branches and 7065 ATMs located throughout the state of Hawaii as of June 30, ~~2021.~~2022.

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

Basis of Presentation

Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements under "Part I, Item 1. Financial Statements (Unaudited)." The following discussion should also be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 filed with the U.S. Securities and Exchange Commission (the "SEC") on February 23, ~~2021,~~2022, including the

“Risk Factors” set forth therein.

Critical Accounting Policies and Use of Estimates

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

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

The Company identified a significant accounting policy which involves a higher degree of judgment and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial statements. At June 30, 2022 and December 31, ~~2019,~~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 ~~loan and lease losses.~~credit losses on loans. This is further described in Note 1 - Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements in our ~~2019~~2021 Form 10-K.

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

Allowance for Credit Losses on Loans

Management considers the policies related to the allowance for credit losses ("ACL") on loans as the most critical to the financial statement presentation. The total ACL on loans includes activity related to allowances calculated in accordance with Accounting Standards Codification (“ASC”) 326, "Financial Instruments – Credit Losses". The ACL is established through the provision for credit losses on loans charged to current earnings. The amount maintained in the ACL reflects management’s continuing evaluation of the estimated loan losses expected to be recognized over the life of the loans in our loan portfolio at the balance sheet date. The ACL is comprised of specific reserves assigned to certain loans that do not share general risk characteristics and general reserves on pools of loans that do share general risk characteristics. Factors contributing to the determination of specific reserves include the creditworthiness of the borrower, and more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. A reserve is recorded when the

carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. For purposes of establishing the general reserve, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and calculate the net amount expected to be collected over the life of the loans to estimate the expected credit losses in the loan portfolio. The Company’s

methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. Refer to Note 1 - Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements in this report for further discussion of the risk factors considered by management in establishing the ACL.

Financial Summary

Net income for the three months ended June 30, ~~2021~~2022 was ~~$18.7~~$17.6 million, or ~~$0.66~~$0.64 per diluted share, compared to net income of ~~$9.9~~$18.7 million, or ~~$0.35~~$0.66 per diluted share for the three months ended June 30, ~~2020.~~2021. Net income for the six months ended June 30, ~~2021~~2022 was ~~$36.8~~$37.0 million, or ~~$1.29~~$1.33 per diluted share, compared to net income of ~~$18.2~~$36.8 million, or ~~$0.65~~$1.29 per diluted share for the six months ended June 30, ~~2020.~~2021.

~~During~~Net income for the three and six months ended June 30, 2022 included PPP net interest income and net loan fees of $0.9 million and $2.8 million, respectively, compared to $7.9 million and $13.1 million for the three and six months ended June 30, 2021, ~~the Company recorded credits to the provision~~respectively. Net income for ~~credit losses of $3.4 million and $4.3 million, respectively, compared to debits to the provision of $11.2 million and $22.3 million during~~ the three and six months ended June 30, ~~2020, respectively.~~2022, also included an $8.5 million gain on the sale of the Company's Class B common stock of Visa, Inc., partially offset by a $4.9 million non-cash settlement charge related to the termination and settlement of the Company's defined benefit retirement plan.

During the three months ended June 30, 2022, the Company recorded a debit to the provision for credit losses of $1.0 million, compared to a credit to the provision of $3.4 million during the three months ended June 30, 2021. During the six months ended June 30, 2022, the Company recorded a credit to the provision for credit losses of $2.2 million, compared to a credit to the provision of $4.3 million during the six months ended June 30, 2021.

Excluding the provision for credit losses and income tax expense, the Company's pre-tax, pre-provision income for the three ~~and~~months ended June 30, 2022 was $24.8 million, compared to $21.2 million for the three months ended June 30, 2021. The Company's pre-tax, pre-provision income for the six months ended June 30, ~~2021~~2022 was ~~$21.2~~$47.0 million, ~~and~~compared to $43.8 million ~~respectively, compared to $24.1 million and $46.4 million~~ for the ~~three and~~ six months ended June 30, ~~2020, respectively.~~2021.

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


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,						Six Months Ended June 30,
		2021			2020			2021			2020				2022			2021			2022			2021
Return on average assets	Return on average assets	1.06		%	0.61		%	1.07		%	0.58		%	Return on average assets	0.96		%	1.06		%	1.01		%	1.07		%
Return on average shareholders’ equity	Return on average shareholders’ equity	13.56			7.34			13.31			6.77			Return on average shareholders’ equity	14.93			13.56			14.67			13.31

Basic earnings per common share	Basic earnings per common share	$	0.66		$	0.35		$	1.31		$	0.65		Basic earnings per common share	$	0.64		$	0.66		$	1.34		$	1.31
Diluted earnings per common share	Diluted earnings per common share	0.66			0.35			1.29			0.65			Diluted earnings per common share	0.64			0.66			1.33			1.29

Non-GAAP Financial Measures

To supplement our consolidated financial statements presented in accordance with GAAP, the Company also uses non-GAAP financial measures in addition to our GAAP results. The Company believes non-GAAP financial measures may provide useful information for evaluating our cash operating performance, ability to service debt, compliance with debt covenants and measurement against competitors. This information should be considered as supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be comparable to similarly entitled measures reported by other companies.

The following table presents the Company's pre-tax pre-provision income for the periods indicated:


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2022		2021		2022		2021
Net income	$	17,594	$	18,714	$	37,032	$	36,752
Add:
Provision (credit) for credit losses	989		(3,443)		(2,206)		(4,264)
Income tax expense	6,184		5,887		12,222		11,339
Pre-tax pre-provision income	$	24,767	$	21,158	$	47,048	$	43,827

COVID-19 Pandemic

The ongoing novel coronavirus ~~pandemic~~disease ("COVID-19") ~~has~~pandemic caused significant disruption in the local, national and global economies and financial ~~markets.~~ ~~The pandemic has resulted~~markets in ~~temporary~~2020. While the economy now appears to be on track for recovery and ~~permanent closures of many businesses and the institution of social distancing, mask mandates and gathering and travel restrictions in many states and communities. While many of these~~most COVID-19 related restrictions have ~~since loosened,~~been lifted, continuation and ~~further spread~~worsening of COVID-19 ~~including COVID-19 variants,~~ could cause ~~additional quarantines, shutdowns,~~ reductions in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability.

In response to the anticipated economic effects of COVID-19, the Board of Governors of the Federal Reserve System (the "FRB") ~~has taken~~took a number of actions that have significantly affected the financial markets in the United States, including actions intended to result in substantial decreases in market interest rates. ~~On March 3, 2020,~~While interest rates remained low from the ~~10-year Treasury yield fell below 1.00% for~~start of the ~~first time, and~~pandemic through the ~~FRB reduced~~end of 2021, the target federal funds range by 50 basis points to 1.00% to 1.25%. On March 15, 2020, the FRB further reduced the target federal funds range by 100 basis points to 0% to 0.25% and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by COVID-19. On March 22, 2020, the FRB announced that it would continue its quantitative easing program in amounts necessary to support the smooth functioning of markets for Treasury securities and agency MBS.Federal Reserve has begun increasing interest rates as inflation concerns have significantly increased. We expect ~~that these reductions~~additional increases in interest rates ~~among other actions of~~to moderate inflation, which in effect may adversely impact the ~~FRB~~Company's loan origination and sales and pressure funding costs but may positively impact the ~~Federal government generally, especially if prolonged, could adversely~~Company's net interest income and net interest margin. 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. InTherefore, we control the ~~June 2021 meeting, the FRB elected~~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 hold the target federal funds rate at 0% to 0.25% and officials expect it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with their assessments of maximum employment and inflation has risen to 2.00% and is on track to moderately

~~exceed 2.00% for some time.~~

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

~~In December 2020, Congress passed another $900 billion aid package, or the Consolidated Appropriations Act, 2021, which extends certain relief provisions under the CARES Act.~~

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

Hawaii's economy continues to be impacted by COVID-19, but is most recently improving. On March 4, 2020, Hawaii Governor David Ige issued a Proclamation declaring a state of emergency to support ongoing State and county responses to COVID-19. Since then, Governor Ige issued twenty-one supplemental emergency proclamations which includes travel restrictions and other measures.

Although most of the imposed restrictions have been loosened, some are slated to maintain until 70% of the Hawaii population is fully vaccinated. As a result of these restrictions and vaccinations administered, the spread of COVID-19 has been relatively contained. As of June 30, 2021 the Centers for Disease Control and Prevention reported there were 36,387 cases (7-day moving average of 43 new infections) and 497 COVID-19-related deaths in Hawaii. Over 58% of Hawaii's population has been fully vaccinated as of June 30, 2021.performance.

Our operations, like those of other financial institutions that operate in our market, are significantly influenced by economic conditions in Hawaii, including the strength of the real estate market and the tourism industry. ~~The~~Hawaii's economy which was significantly impacted by COVID-19, ~~pandemic and the mandatory 10-day self quarantine resulted in a significant decline in tourism~~appears to be on track for recovery. On March 26, 2022, the state of Hawaii. As a result, many customers and businesses across the state have been significantly impacted by the COVID-19 pandemic. However the state is making progress towards economic recovery. Beginning October 15, 2020, passengers arriving from out-of-state and traveling inter-county could bypass the mandatory 14-day self-quarantine with a valid negative COVID-19 Nucleic Acid Amplification Test ("NAAT") test result from a Trusted Testing and Travel Partner through the state’sHawaii's mask mandate, Safe Travels ~~program. On December 10, 2020, the mandatory quarantine was reduced from 14~~Program, and Emergency Proclamation on COVID-19 ended, effectively ending all government-imposed restrictions related to 10 days in accordance with the U.S. Centers for Disease Control and Prevention’s ("CDC") guidelines. On June 15, 2021, travelers who were fully vaccinated in the state of Hawaii may bypass the quarantine without a pretravel test. On July 8, 2021, travelers who were fully vaccinated in the U.S. may bypass the quarantine without a pretravel test.

Visitor arrivals have recently been exceeding 30,000 per day in July 2021, or approximately 90% of pre-pandemic levels. While still elevated, Hawaii's unemployment rate of 7.7% during the month of June 2021 is significantly down from its peak of 21.9%in April and May of last year.

~~Financial position and results of operations~~COVID-19.

Through guidance from regulatory agencies, the Company has prudently worked with its borrowers impacted by COVID-19 to defer principal payments, interest, and fees. ~~The Company is currently working on returning borrowers to payment as the economy begins to recover.~~ Loans on active payment forbearance or deferrals granted to borrowers impacted by the COVID-19 pandemic ~~declined significantly from $120.2~~peaked at $605 million ~~or, 2.4% of the total loan portfolio as of December 31, 2020, to $3.5 million, or 0.1% of the total loan portfolio as~~in May 2020. As of June 30, ~~2021, as many borrowers resumed payments.~~

~~During the third quarter of 2020, the Company recorded a reserve on the accrued interest receivable for~~2022, there were no loans remaining that are on active payment forbearance or deferral totaling $0.2 million. This reserve balance was reversed during the second quarter of 2021 due to the significant decline in loans on active forbearance or deferral and the Company no longer has a reserve on accrued interest receivable as of June 30, 2021.deferral.

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~~as well as 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. 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 purposes for the bank.

The Company relies on cash on hand as well as dividends from its subsidiary bank to service its debt. If the Company’s capital deteriorates such that its subsidiary bank is unable to pay dividends to it for an extended period of time or the bank is otherwise

~~restricted in its ability to pay dividends to the Company, the Company may not be able to service its debt or pay dividends to its shareholders.~~

~~The Company’s liquidity risk related to loan principal and interest payment deferrals that were granted for certain customers due to COVID-19, is currently low as a significant number of~~loan payment deferrals ended in the first half of 2021. Additionally, requests for loan payment deferrals continued to decline significantly in the first half of 2021. Further, during 2020 and the first half of 2021, we experienced a significant inflow of deposits due to government stimulus and general market uncertainty. However, this may not continue.

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

The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile. The Company has access to thePaycheck Protection Program Liquidity Facility (“PPPLF”), which is an extension of credit to eligible financial institutions that originate Paycheck Protection Program (“PPP”) loans that takes the PPP loans as collateral at face value. However, the PPPLF expires on July 30, 2021.

In March 2020, we decided to suspend our share repurchase program ~~as a result~~in light of ~~the uncertainty posed by~~ the pandemic. In January 2021, our Board of Directors approved a new authorization to repurchase up to $25 million in common stock 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") which replaced and wesuperseded the previous share repurchase program. The Company resumed repurchases ~~in May~~during the second quarter of 2021. ~~We can provide no assurance on how many shares in the aggregate we may repurchase under this repurchase program.~~

Asset valuation

COVID-19 has not affected the Company's ability to account timely for the assets on its balance sheet. The Company also has 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, the Hawaii real estate market continues to be extremely strong and real estate collateral values have remained relatively stable, but we cannot ~~provide any assurance as to future levels of stability.~~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 is developing a gradual, phased-in return-to-office plan that includes a portion of the workforce continuing with flexible, remote work schedules.~~ The Company 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. ~~As an essential service provider,~~The Company is developing a gradual, phased-in return-to-office plan that includes a portion of the ~~COVID-19 vaccine became available to our employees in March 2021. Most~~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 ~~at this point.~~as of June 30, 2022.

Lending operations and accommodations to borrowers

To support its customers during this difficult time, the Company moved quickly to put in place a number of COVID-19 relief programs for its consumer and business customers affected by the pandemic. For its customers, the Company offered an employment disruption loan as well as consumer, commercial, commercial mortgage, and residential mortgage payment deferral programs. In addition, as previously mentioned, we waived non-CPB ATM fees and early withdrawal fees on our time deposits throughout the second quarter of 2020 and increased spending cap limits on debit cards and mobile deposit limits to

~~$10,000 daily. Beginning July 1, 2020, the previously waived fees have been reinstated but the increased spending cap limits will remain in place temporarily.~~

The bank is a Small Business Administration ("SBA") approved lender and actively participated in assisting customers with loan applications for the SBA’s Paycheck Protection Program, or PPP, which was part of the CARES Act. PPP loans have a two or five-year term and earn interest at 1%. The SBA ~~pays~~paid the originating bank a processing fee ranging from 1% to 5% based on the size of the loan, which the Company is recognizing over the life of the loan. The Company saw tremendous interest in the PPP. With the significant increase in volume of PPP loan requests, the Company redeployed staff to handle and assist with loan processing. Additionally, the Company brought on some outside resources to assist with the PPP.

In December 2020, the Consolidated Appropriations Act, 2021 was passed which among other things, included a third round of funding and a new simplified forgiveness procedure for PPP loans of $150,000 or less. During ~~the first half of~~ 2021, the Company funded over 4,600 loans totaling ~~over~~ $320.9 million in the third round, ~~earning~~which ended on May 31, 2021, and received additional gross processing fees of ~~over~~ $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 from the SBA and repayments from borrowers totaling over ~~$416.3~~$846.8 million as of June 30, ~~2021.~~2022. A total outstanding balance of ~~$450.5~~$21.1 million and net deferred fees of ~~$15.9~~$0.9 million remain as of June 30, ~~2021.~~2022. Although the Company believes that the majority of the remaining loans will ultimately be forgiven by the SBA or repaid by the borrower 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 has become aware of two PPP loans that it originated for $10.0 million and $3.0 million, in which they are under investigation for borrower fraud and/or misrepresentations. We believe we originated both PPP loans in accordance with all SBA PPP requirements, therefore we expect that the SBA guarantee remains in effect. Based on current facts and circumstances, we expect to be fully repaid on both loans through SBA forgiveness, borrower paydowns, SBA guarantee, or a combination of such methods. Therefore, we continue to hold both loans on our balance sheet as performing assets as of June 30, 2021.

The Company is staying in close contact with its customers and has increased its client outreach efforts. The Company is monitoring its client’s financial health and is providing guidance to help them through the pandemic. Further, the Company believes it has prudently made loan modifications for certain borrowers to allow deferral of loan principal and/or interest for a limited-term period.

The Company provided initial three-month principal and interest payment forbearance for our residential mortgage customers, and three-month principal and interest payment deferrals for our consumer customers. Both residential mortgage and consumer customers were granted extensions to their forbearance or deferral, if needed. The Company deferred 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, financial and ~~industrial~~agricultural loan customers on a case-by-case basis depending on need. ~~The majority of loans that were granted forbearance or deferral have returned to payment.~~ As of June 30, ~~2021~~2022, the Company had ~~loan~~no loans remaining on active payment forbearance or ~~deferrals on outstanding balances of $3.5 million,~~ ~~or 0.1% of total loans~~.deferral.

In accordance with the revised interagency guidance issued in April 2020 and Section 4013 of the CARES Act, banks ~~are~~were 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. This relief ended on January 1, 2022. As of June 30, ~~2021, the~~ ~~Company has identified one loan totaling $0.7 million~~2022, there were no loans with modifications that ~~was modified and~~ did not meet the criteria under Section 4013 of ~~the~~ CARES Act or the ~~interagency guidance.~~"

~~During~~Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by 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,~~ Coronavirus (Revised)~~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 and the Company no longer has a reserve on accrued interest receivable as of~~June 30, 2021.~~ ~~The Company anticipates limited new or extended loan deferrals in the second half of 2021 as the Hawaii economic recovery progresses.~~

5256

As part of the CARES Act, the Section 1112 debt relief program authorized the SBA to pay, for a 6-month period, the principal, interest, and associated fees that borrowers owed on covered 7(a) loans, 504 loans, and Microloans reported in regular servicing status (excluding PPP loans). Under Section 325 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) enacted December 29, 2020, Section 1112 was amended and authorized a second round of payments covering the principal, interest, and associated fees that borrowers owed on covered loans for a 3-month period beginning with payments due February 1, 2021, followed by an additional payment for a 2-month period for borrowers with an assigned North American Industry Classification System code beginning with 61, 71, 72, 213, 315, 448, 451, 481, 485, 487, 511, 512, 515, 532, or 812. As of June 30, 2021, the Company had $0.5 million in SBA loans under the SBA Debt Relief Program. During the six months ended June 30, 2021, the Company received $0.9 million in loan payments from the SBA.

~~Credit~~

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

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 $3.5 million, or 0.1% of total loans at June 30, 2021. Most borrowers have resumed payments with the total count on active deferral dropping from a peak of 467 at May 31, 2020 to 54 at June 30, 2021. The Company is providing alternative payment plans on a limited basis following the end of the payment deferral periods. Our consumer loan payment deferrals totaled $0.5 million at June 30, 2021, compared to $2.3 million at December 31, 2020. Our residential mortgage loans on active payment forbearance totaled $3.0 million at June 30, 2021, compared to $70.4 million at December 31, 2020. There were no commercial, commercial real estate and construction loans on payment deferral at June 30, 2021, compared to $47.5 million at December 31, 2020.

In the first half of 2021, we continued our stepped-up credit assessment and monitoring as well as our outreach to our customers. Criticized loans declined by $49.2 million from December 31, 2020 to $143.1 million, or 3.1% of the total loan portfolio excluding PPP loans. Special mention loans declined by $41.6 million to $100.9 million, or 2.2% of the total loan portfolio excluding PPP loans. Classified loans declined by $7.6 million to $42.2 million, or 0.9% of the total loan portfolio excluding PPP loans. The loan improvements were the result of our continued assessment of borrower risk based on the borrower’s performance near-term strategy and outlook. Approximately 21% of special mention balances and 7% of classified balances also received PPP loans.

Material Trends

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

Following the solid performances of our leading economic indicators in 2019, Hawaii's economy was greatly impacted by the COVID-19 pandemic in 2020. Hawaii's visitor industry ~~continues~~continued to be impacted by the COVID-19 pandemic in 2021, however the state ~~is making~~has made significant progress towards economic recovery as ~~travel restrictions~~visitor arrivals have ~~started~~rebounded to ~~loosen.~~approximately 85% of pre-pandemic levels in 2019.

On March 26, 2022, the state of Hawaii's mask mandate, Safe Travels Program, and Emergency Proclamation on COVID-19 ended, effectively ending all government-imposed restrictions related to COVID-19.

Prior to the pandemic, Hawaii experienced record-level visitor arrivals and expenditures in 2019 and in the first two months of 2020. According to preliminary statistics from the Hawaii Tourism Authority ("HTA"), a total of ~~883,063~~3.6 million visitors arrived ~~by air service~~ to the Hawaiian Islands in ~~June 2021,~~the five months ended May 31, 2022, mainly from the U.S. West and U.S. ~~East. In comparison, only 43,587~~East as international travelers to Hawaii have not yet returned in a meaningful way. This was an 83% increase from the 2.0 million visitors ~~arrived by air~~from the same period last year but down 15% from 4.2 million visitors in ~~June 2020 due to~~ the ~~global COVID-19 pandemic and Hawaii’s quarantine requirement for travelers.~~ five months ended May 31, 2019.

Total spending for visitors arriving in the five months ended May ~~2021~~31, 2022 was ~~$1.10 billion. There is no comparative visitor spending data available for May 2020. Prior to the pandemic, Hawaii experienced record-level visitor expenditures and arrivals in 2019 and~~$7.39 billion, up 108.6% from $354.4 billion in the ~~first two~~same period last year, and up by 2.3% from $7.23 billion in the five months of 2020. When compared to 2019, visitor arrivals in June 2021 were down 17.6% from the June 2019 count of 1,071,205 visitors (air and cruise), and visitor spending was down 22.2% from the $1.41 billion spent inended May 31, 2019.

According to ~~projections~~recent data provided by the ~~Hawaii~~Department of Agriculture and the Department of Transportation, the Department of Business, Economic Development and Tourism ("DBEDT") reported as of July 25, 2022, average daily visitors to Hawaii in ~~late~~June 2022 was over 32,000, up 9.2% from June 2021 but down 10.0% from June 2019.

According to a May ~~2021,~~2022 report by The Economic Research Organization at the University of Hawaii ("UHERO"), total visitor arrivals are expected to increase to approximately ~~6.6 million visitors in 2021, an increase of~~

~~144.4% from the 2020 level. Visitor arrivals are projected to increase to 8.6~~8.9 million in 2022 ~~9.5 million in 2023,~~ and ~~10.1 million in 2024. Visitor~~visitor spending is expected to increase to approximately ~~$11.13~~$17.41 billion in ~~2021.~~

Recent statistics provided by DBEDT indicate the tourism industry may be rebounding quicker than initially expected with visitor arrivals exceeding 30,000 per day in July 2021, or approximately 90% of pre-pandemic levels. We believe tourism gains will further increase in the second half of 2021 as vaccinations continue to increase and travel restrictions continue to loosen.2022.

The Department of Labor and Industrial Relations reported that Hawaii's seasonally adjusted annual unemployment rate was ~~7.7%~~4.3% in the month of June ~~2021.~~2022. The unemployment rate of ~~7.7%~~4.3% in June ~~2021 ranked highest in~~2022 is much improved from the ~~nation, above the national seasonally adjusted unemployment rate of 5.9% but has significantly improved compared to a~~ high of 21.9% in the months of April and May ~~2020.~~2020, but remains above the national seasonally adjusted unemployment rate of 3.6%. DBEDT projects Hawaii's seasonally adjusted annual unemployment rate to be around ~~7.7%~~3.7% in ~~2021.~~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, sales of Oahu single-family homes and condominiums were up an impressive 17.9% and 53.1%, respectively, from 2020. The Oahu single-family home annual median price rose 19.3% in 2021, ending the year at $990,000. The Oahu condominium annual median price rose 9.2% in 2021, ending the year at $475,000.

According to the latest data available from the Honolulu Board of Realtors, ~~sales of Oahu single-family homes and condominiums saw significant double-digit growth compared to a year-ago. In~~during the six months ended June 30, ~~2021,~~2022, the median sales price of ~~single family~~single-family homes and condominiums ~~are up 32.9%~~were $1,111,000 and ~~70.7%~~$515,000, respectively, which increased by 17.0% and 13.2%, ~~respectively. For~~respectively from the same year-ago period. Sales of Oahu single-family homes ~~the median days on market declined to eight in~~were down 8.8% during the six months ended June 30, ~~2021 from 21 in the same year ago period. For~~2022, while sales of condominiums ~~the median days on market declined to 13 in~~were up 7.5% during the six months ended June 30, ~~2021 from 31 in~~2022, compared to the same ~~year ago~~year-ago period. The median price for a single-family home in June 2021 set a new record high of $979,000, representing a 27.1% year-over-year increase. The median price for a condominium increased by 9.1% to $460,000, compared to $421,500 in June 2020.

~~RISE2020~~Banking-as-a-Service ("BaaS") Initiative

~~Commencing in the second quarter of 2019,~~In January 2022, the Company launched RISE2020, a multifaceted initiative intended to enhance customer experience, drive stronger long-term growth and profitability, improve shareholder returns and lower our efficiency ratio. RISE2020 includes initiatives in the following key areas of opportunity: Digital Banking, Revenue Enhancements, Branch Transformation and Operational Excellence. RISE2020 is intended to provide Central Pacific Bank with premier products and services in several strategic areas. During 2019, the outsourcing of the Company's residential mortgage loan servicing, the launch of its new website under the cpb.bank domain name and the implementation of its end-to-end commercial loan origination system were completed. During the first quarter of 2020, the Company opened its concept branch, providing its customers a glimpse into the future of Central Pacific Bank. After significant development, the Company's new online and mobile banking platforms for its retail customers launched in August 2020. The rollout of newly upgraded ATMs was completed in the fourth quarter of 2020. Despite several challenges resulting from the impact of the COVID-19 pandemic, the Company completed its RISE2020 initiative culminating with the grand opening of the fully renovated Central Pacific Plaza headquarters building and flagship main branch, andannounced the launch of a new ~~brand design~~BaaS initiative with the goal of expanding the Company both in ~~early January~~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 June 30, 2022, approximately 4,400 Shaka accounts have been opened since the product launch on November 8, 2021.

Beginning in the first quarter of 2022, the Company continued 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. In addition, the Company is also collaborating with Swell and Elevate Credit, Inc. (NYSE:ELVT), a provider of digital lending solutions. Swell intends to launch its first product in the second half of 2022, which plans to be all-digital and available for consumers across most of the U.S. Mainland.

Results of Operations

Net Interest Income

Net interest income, when annualized and expressed as a percentage of average interest earning assets, is referred to as "net interest margin." Interest income, which includes loan fees and resultant yield information, is expressed on a taxable equivalent basis using a federal statutory tax rate of 21% for the three and six months ended June 30, ~~2021~~2022 and ~~2020.~~2021. A comparison of net interest income on a taxable-equivalent basis ~~("net interest income")~~ for the three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021 is set forth below.


(dollars in thousands)	Three Months Ended June 30,
	2022						2021						Variance
	Average Balance		Average Yield/ Rate		Interest Income/ Expense		Average Balance		Average Yield/ Rate		Interest Income/ Expense		Average Balance		Average Yield/ Rate		Interest Income/ Expense
Assets
Interest earning assets:
Interest-bearing deposits in other banks	$	106,083	0.72	%	$	191	$	222,934	0.11	%	$	61	$	(116,851)	0.61	%	$	130
Investment securities, excluding ACL:
Taxable (1)	1,532,282		1.88		7,200		1,172,183		1.52		4,465		360,099		0.36		2,735
Tax-exempt (1)	113,934		2.85		813		92,702		1.89		438		21,232		0.96		375
Total investment securities	1,646,216		1.95		8,013		1,264,885		1.55		4,903		381,331		0.40		3,110
Loans, including loans held for sale (2)	5,221,300		3.60		46,963		5,110,820		3.84		49,024		110,480		(0.24)		(2,061)
Federal Home Loan Bank stock	8,957		3.02		68		8,140		3.11		63		817		(0.09)		5
Total interest earning assets	6,982,556		3.17		55,235		6,606,779		3.28		54,051		375,777		(0.11)		1,184
Noninterest-earning assets	327,383						433,149						(105,766)
Total assets	$	7,309,939					$	7,039,928					$	270,011

Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	1,435,088	0.04	%	$	144	$	1,269,676	0.03	%	$	93	$	165,412	0.01	%	$	51
Savings and money market deposits	2,204,934		0.06		317		2,028,583		0.06		282		176,351		—		35
Time deposits up to $250,000	217,605		0.27		148		231,922		0.34		196		(14,317)		(0.07)		(48)
Time deposits over $250,000	478,483		0.29		342		617,745		0.20		302		(139,262)		0.09		40
Total interest-bearing deposits	4,336,110		0.09		951		4,147,926		0.08		873		188,184		0.01		78

Federal Home Loan Bank advances and other short-term borrowings	363		1.84		2		—		—		—		363		1.84		2
Long-term debt	105,699		4.30		1,133		105,456		3.90		1,025		243		0.40		108
Total interest-bearing liabilities	4,442,172		0.19		2,086		4,253,382		0.18		1,898		188,790		0.01		188
Noninterest-bearing deposits	2,290,352						2,121,590						168,762
Other liabilities	105,979						112,852						(6,873)
Total liabilities	6,838,503						6,487,824						350,679
Shareholders’ equity	471,420						552,102						(80,682)
Non-controlling interest	16						2						14
Total equity	471,436						552,104						(80,668)
Total liabilities and equity	$	7,309,939					$	7,039,928					$	270,011

Net interest income					$	53,149					$	52,153					$	996

Interest rate spread			2.98	%					3.10	%					(0.12)	%

Net interest margin			3.05	%					3.16	%					(0.11)	%

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

Net interest income (expressed on a taxable-equivalent basis) was $53.1 million for the second quarter of 2022, representing an increase of $1.0 million, or 1.9% from $52.2 million in the year-ago quarter. The increase from the year-ago quarter was primarily due to higher average investment securities and loan balances, combined with higher average yields earned on investment securities, partially offset by lower recognition of net interest income and loan fees related to loans originated and forgiven under the SBA Paycheck Protection Program ("PPP").

Net interest income for the second quarter of 2022 included $0.9 million in PPP net interest income and net loan fees, which are accreted into income over the term of the loans and accelerated when the loans are forgiven or paid-off, compared to $7.9 million in the year-ago quarter.During the second quarter of 2022, the Company received $24.9 million in PPP loan forgiveness and repayments, compared to $195.8 million in the year-ago quarter. During the second quarters of 2022 and 2021,

the Company had average PPP loan balances of $33.0 million and $553.0 million, respectively, which earned yields of approximately 10.77% and 5.75%, respectively. As of June 30, 2022, the Company has net deferred fees of $0.9 million remaining.

Interest Income

Taxable-equivalent interest income was $55.2 million for the second quarter of 2022, representing an increase of $1.2 million, or 2.2%, from $54.1 million in the year-ago quarter. The increase was primarily attributable to higher average investment securities balances of $381.3 million during the second quarter of 2022, compared to the year-ago quarter, which increased interest income by approximately $1.5 million, and higher loan balances of $110.5 million, which increased interest income by approximately $1.1 million. In addition, the average yield earned on investment securities increased by 40 bp, which increased interest income by approximately $1.6 million. These increases were partially offset by a 24 bp decrease in the average yield earned on loans during the second quarter of 2022, compared to the year-ago quarter, which decreased interest income by approximately $3.1 million.

Interest Expense

Interest expense was $2.1 million for the second quarter of 2022, representing an increase of $0.2 million, or 9.9%, from $1.9 million in the year-ago quarter. Average rates paid on long-term debt of 4.30% increased by 40 bp from the year-ago quarter and average rates paid on interest-bearing deposits of 0.09% increased by 1 bp from the year-ago quarter.

Net Interest Margin

Our net interest margin of 3.05% for the second quarter of 2022 decreased by 11 bp from 3.16% in the year-ago quarter. As previously discussed, the decrease in net interest margin for the second quarter of 2022 compared to the year-ago quarter was primarily attributable to the lower recognition of net loan fees related to loans originated and forgiven under the PPP, combined with lower yields earned on core loans, or total loans, excluding PPP loans.

During the first quarter of 2022, the Federal Reserve increased the Federal Funds target range by 25 bp for the first time since 2018 to 0.25-0.50%. Due to inflation concerns, during the second quarter of 2022, the Federal Reserve increased the Federal Funds target range by 50 bp (the largest rate hike since 2000) in May and another 75 bp (the largest rate hike since 1994) in June to end the quarter at a target range of 1.50-1.75%. In July 2022, the Federal Reserve hiked rates for the fourth time this year by an additional 75 bp. The latest increase brings the target range to 2.25-2.50%, which is where it was at its most recent high in summer 2019 before the pandemic. Federal Reserve officials have indicated that additional interest rate increases are likely in 2022. The Company anticipates its net interest margin will trend up as the increase in average loan yield outpaces the increase in deposit costs in the rising interest rate environment.


(dollars in thousands)	Six Months Ended June 30,
	2022						2021						Variance
	Average Balance		Average Yield/ Rate		Interest Income/ Expense		Average Balance		Average Yield/ Rate		Interest Income/ Expense		Average Balance		Average Yield/ Rate		Interest Income/ Expense
Assets
Interest earning assets:
Interest-bearing deposits in other banks	$	131,829	0.40	%	$	263	$	133,684	0.11	%	$	71	$	(1,855)	0.29	%	$	192
Investment securities, excluding ACL:
Taxable investment securities (1)	1,533,570		1.87		14,355		1,126,978		1.70		9,589		406,592		0.17		4,766
Tax-exempt investment securities (1)	115,964		2.82		1,637		93,181		2.34		1,089		22,783		0.48		548
Total investment securities	1,649,534		1.94		15,992		1,220,159		1.75		10,678		429,375		0.19		5,314
Loans, including loans held for sale (2)	5,168,076		3.58		91,912		5,095,433		3.75		95,098		72,643		(0.17)		(3,186)
Federal Home Loan Bank stock	8,479		3.00		127		7,839		3.12		122		640		(0.12)		5
Total interest earning assets	6,957,918		3.13		108,294		6,457,115		3.30		105,969		500,803		(0.17)		2,325
Noninterest-earning assets	367,124						433,080						(65,956)
Total assets	$	7,325,042					$	6,890,195					$	434,847

Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	1,430,222	0.04	%	$	256	$	1,228,548	0.03	%	$	179	$	201,674	0.01	%	$	77
Savings and money market deposits	2,208,659		0.06		646		2,000,845		0.06		556		207,814		—		90
Time deposits up to $250,000	220,617		0.28		303		234,361		0.38		437		(13,744)		(0.10)		(134)
Time deposits over $250,000	470,330		0.28		656		637,266		0.21		649		(166,936)		0.07		7
Total interest-bearing deposits	4,329,828		0.09		1,861		4,101,020		0.09		1,821		228,808		—		40

Federal Home Loan Bank advances and other short-term borrowings	182		1.84		2		1,221		0.30		2		(1,039)		1.54		—
Long-term debt	105,668		4.15		2,174		105,429		3.93		2,052		239		0.22		122
Total interest-bearing liabilities	4,435,678		0.18		4,037		4,207,670		0.19		3,875		228,008		(0.01)		162
Noninterest-bearing deposits	2,273,639						2,013,955						259,684
Other liabilities	110,868						116,529						(5,661)
Total liabilities	6,820,185						6,338,154						482,031
Shareholders’ equity	504,825						552,039						(47,214)
Non-controlling interest	32						2						30
Total equity	504,857						552,041						(47,184)
Total liabilities and equity	$	7,325,042					$	6,890,195					$	434,847

Net interest income					$	104,257					$	102,094					$	2,163

Interest rate spread			2.95	%					3.11	%					(0.16)	%

Net interest margin			3.01	%					3.18	%					(0.17)	%

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

Net interest income (expressed on a taxable-equivalent basis) was $104.3 million for the six months ended June 30, 2022, representing an increase of 2.1% from $102.1 million in the six months ended June 30, 2021. The increase from the year-ago period was primarily due to higher average investment securities and loan balances, combined with higher average yields on investment securities, partially offset by lower recognition of net interest income and loan fees related to loans originated and forgiven under the SBA Paycheck Protection Program ("PPP").

Net interest income for the six months ended June 30, 2022 included $2.8 million in PPP net interest income and net loan fees, which are accreted into income over the term of the loans and accelerated when the loans are forgiven or paid-off, compared to $13.1 million in the year-ago period.During the six months ended June 30, 2022, the Company received $73.8 million in PPP loan forgiveness and repayments, compared to $296.5 million in the year-ago period. During the six months ended June 30,

2022 and 2021, the Company had average PPP loan balances of $50.7 million and $540.0 million, respectively, which earned yields of approximately 11.24% and 4.90%, respectively. As of June 30, 2022, the Company has net deferred fees on PPP loans of $0.9 million remaining.

Interest Income

Taxable-equivalent interest income was $108.3 million for the six months ended June 30, 2022, representing an increase of $2.3 million, or 2.2%, from $106.0 million in the year-ago period. The increase was primarily attributable to higher average investment securities balances of $429.4 million during the six months ended June 30, 2022, compared to the year-ago period, which increased interest income by approximately $3.7 million, and higher loan balances of $72.6 million, which increased interest income by approximately $1.3 million. In addition, the average yield earned on investment securities increased by 19 bp, which increased interest income by approximately $1.6 million. These increases were partially offset by a 17 bp decrease in the average yield earned on loans during the six months ended June 30, 2022, compared to the year-ago period, which decreased interest income by approximately $4.5 million.

Interest Expense

Interest expense was $4.0 million for the six months ended June 30, 2022, which increased by $0.2 million, or 4.2%, from $3.9 million in the year-ago period. Average rates paid on interest-bearing deposits of 0.09% remained unchanged from the year-ago period and average rates paid on total interest-bearing liabilities of 0.18% declined by 1 bp from 0.19% in the year-ago period.

Net Interest Margin

Our net interest margin of 3.01% for the six months ended June 30, 2022 decreased by 17 bp from 3.18% in the year-ago period. As previously discussed, the decrease in net interest margin for the six months ended June 30, 2022 compared to the year-ago period was primarily attributable to the lower recognition of net loan fees related to loans originated and forgiven under the PPP, combined with lower yields earned on core loans, or total loans, excluding PPP loans.

Rate-Volume Analysis

For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in ~~volume~~average balances (volume) and (ii) changes in ~~rates.~~weighted average interest rates (rate). 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.

5462

(dollars in thousands) Three Months Ended June 30,
2021 2020 Variance
Average
Balance Average
Yield/
Rate Interest
Income/
Expense Average
Balance Average
Yield/
Rate Interest
Income/
Expense Average
Balance Average
Yield/
Rate Interest
Income/
Expense
Assets
Interest earning assets:
Interest-bearing deposits in other banks $ 222,934 0.11 % 61 $ 15,777 0.10 % 3 $ 207,157 0.01 % 58
Investment securities, excluding ACL:
Taxable (1) 1,172,183 1.52 4,465 1,042,441 2.43 6,327 129,742 (0.91) (1,862)
Tax-exempt (1) 92,702 1.89 438 100,485 3.02 758 (7,783) (1.13) (320)
Total investment securities 1,264,885 1.55 4,903 1,142,926 2.48 7,085 121,959 (0.93) (2,182)
Loans, including loans held for sale (2) 5,110,820 3.84 49,024 4,902,905 3.76 45,915 207,915 0.08 3,109
Federal Home Loan Bank stock 8,140 3.11 63 11,753 3.62 106 (3,613) (0.51) (43)
Total interest earning assets 6,606,779 3.28 54,051 6,073,361 3.51 53,109 533,418 (0.23) 942
Noninterest-earning assets 433,149 394,768 38,381
Total assets $ 7,039,928 $ 6,468,129 $ 571,799
Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 1,269,676 0.03 % 93 $ 1,056,885 0.04 % 114 $ 212,791 (0.01) % (21)
Savings and money market deposits 2,028,583 0.06 282 1,856,621 0.12 567 171,962 (0.06) (285)
Time deposits up to $250,000 231,922 0.34 196 260,319 0.81 525 (28,397) (0.47) (329)
Time deposits over $250,000 617,745 0.20 302 708,831 0.91 1,599 (91,086) (0.71) (1,297)
Total interest-bearing deposits 4,147,926 0.08 873 3,882,656 0.29 2,805 265,270 (0.21) (1,932)
Federal Home Loan Bank advances and other short-term borrowings — — — 63,104 0.48 74 (63,104) (0.48) (74)
Long-term debt 105,456 3.90 1,025 136,939 2.38 812 (31,483) 1.52 213
Total interest-bearing liabilities 4,253,382 0.18 1,898 4,082,699 0.36 3,691 170,683 (0.18) (1,793)
Noninterest-bearing deposits 2,121,590 1,731,939 389,651
Other liabilities 112,852 112,687 165
Total liabilities 6,487,824 5,927,325 560,499
Shareholders’ equity 552,102 540,802 11,300
Non-controlling interest 2 2 —
Total equity 552,104 540,804 11,300
Total liabilities and equity $ 7,039,928 $ 6,468,129 $ 571,799
Net interest income $ 52,153 $ 49,418 $ 2,735
Interest rate spread 3.10 % 3.15 % (0.05) %
Net interest margin 3.16 % 3.26 % (0.10) %
(1) At amortized cost.
(2) Includes nonaccrual loans.


		Three Months Ended June 30, 2021 Compared To Three Months Ended June 30, 2020				Three Months Ended June 30, 2022 Compared To June 30, 2021								Six Months Ended June 30, 2022 Compared To June 30, 2021
		Increase (Decrease) Due to Change In:								Increase (Decrease) Due to:							Increase (Decrease) Due to:
(dollars in thousands)	(dollars in thousands)	Volume		Rate			Net Change		(dollars in thousands)	Volume		Rate			Net Change		Volume		Rate		Net Change

Interest earning assets:	Interest earning assets:								Interest earning assets:
Interest-bearing deposits in other banks	Interest-bearing deposits in other banks	$	52	$	6		$	58	Interest-bearing deposits in other banks	$	(32)	$	162		$	130	$	(1)	$	193	$	192
Investment securities, excluding ACL:	Investment securities, excluding ACL:								Investment securities, excluding ACL:
Taxable (1)		792		(2,654)			(1,862)
Tax-exempt (1)		(59)		(261)			(320)
Taxable investment securities (1)									Taxable investment securities (1)	1,362		1,373			2,735		3,460		1,306		4,766
Tax-exempt investment securities (1)									Tax-exempt investment securities (1)	101		274			375		268		280		548
Total investment securities	Total investment securities	733		(2,915)			(2,182)		Total investment securities	1,463		1,647			3,110		3,728		1,586		5,314
Loans, including loans held for sale (2)	Loans, including loans held for sale (2)	2,041		1,068			3,109		Loans, including loans held for sale (2)	1,064		(3,125)			(2,061)		1,325		(4,511)		(3,186)
Federal Home Loan Bank stock	Federal Home Loan Bank stock	(33)		(10)			(43)		Federal Home Loan Bank stock	7		(2)			5		10		(5)		5
Total interest earning assets	Total interest earning assets	2,793		(1,851)			942		Total interest earning assets	2,502		(1,318)			1,184		5,062		(2,737)		2,325

Interest-bearing liabilities:	Interest-bearing liabilities:								Interest-bearing liabilities:
Interest-bearing demand deposits	Interest-bearing demand deposits	17		(38)			(21)		Interest-bearing demand deposits	13		38			51		23		54		77
Savings and money market deposits	Savings and money market deposits	47		(332)			(285)		Savings and money market deposits	35		—			35		90		—		90
Time deposits up to $250,000	Time deposits up to $250,000	(58)		(271)			(329)		Time deposits up to $250,000	(12)		(36)			(48)		(26)		(108)		(134)
Time deposits over $250,000	Time deposits over $250,000	(206)		(1,091)			(1,297)		Time deposits over $250,000	(69)		109			40		(166)		173		7
Total interest-bearing deposits	Total interest-bearing deposits	(200)		(1,732)			(1,932)		Total interest-bearing deposits	(33)		111			78		(79)		119		40

Federal Home Loan Bank advances and other short-term borrowings	Federal Home Loan Bank advances and other short-term borrowings	(74)		—			(74)		Federal Home Loan Bank advances and other short-term borrowings	—		2			2		(1)		1		—
Long-term debt	Long-term debt	(186)		399			213		Long-term debt	2		106			108		5		117		122
Total interest-bearing liabilities	Total interest-bearing liabilities	(460)		(1,333)			(1,793)		Total interest-bearing liabilities	(31)		219			188		(75)		237		162

Net interest income	Net interest income	$	3,253	$	(518)		$	2,735	Net interest income	$	2,533	$	(1,537)		$	996	$	5,137	$	(2,974)	$	2,163

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

(dollars in thousands) Six Months Ended June 30,
2021 2020 Variance
Average
Balance Average
Yield/
Rate Interest
Income/
Expense Average
Balance Average
Yield/
Rate Interest
Income/
Expense Average
Balance Average
Yield/
Rate Interest
Income/
Expense
Assets
Interest earning assets:
Interest-bearing deposits in other banks $ 133,684 0.11 % 71 $ 13,430 0.59 % 39 $ 120,254 (0.48) % 32
Investment securities, excluding ACL:
Taxable investment securities (1) 1,126,978 1.70 9,589 1,035,068 2.53 13,101 91,910 (0.83) (3,512)
Tax-exempt investment securities (1) 93,181 2.34 1,089 102,907 3.12 1,604 (9,726) (0.78) (515)
Total investment securities 1,220,159 1.75 10,678 1,137,975 2.58 14,705 82,184 (0.83) (4,027)
Loans, including loans held for sale (2) 5,095,433 3.75 95,098 4,682,626 3.95 92,119 412,807 (0.20) 2,979
Federal Home Loan Bank stock 7,839 3.12 122 13,171 3.61 238 (5,332) (0.49) (116)
Total interest earning assets 6,457,115 3.30 105,969 5,847,202 3.67 107,101 609,913 (0.37) (1,132)
Noninterest-earning assets 433,080 390,390 42,690
Total assets $ 6,890,195 $ 6,237,592 $ 652,603
Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 1,228,548 0.03 % 179 $ 1,035,340 0.06 % 290 $ 193,208 (0.03) % (111)
Savings and money market deposits 2,000,845 0.06 556 1,754,186 0.19 1,685 246,659 (0.13) (1,129)
Time deposits up to $250,000 234,361 0.38 437 163,074 1.38 1,116 71,287 (1.00) (679)
Time deposits over $250,000 637,266 0.21 649 826,714 1.04 4,276 (189,448) (0.83) (3,627)
Total interest-bearing deposits 4,101,020 0.09 1,821 3,779,314 0.39 7,367 321,706 (0.30) (5,546)
Federal Home Loan Bank advances and other short-term borrowings 1,221 0.30 2 101,459 1.15 582 (100,238) (0.85) (580)
Long-term debt 105,429 3.93 2,052 119,243 2.91 1,726 (13,814) 1.02 326
Total interest-bearing liabilities 4,207,670 0.19 3,875 4,000,016 0.49 9,675 207,654 (0.30) (5,800)
Noninterest-bearing deposits 2,013,955 1,588,742 425,213
Other liabilities 116,529 110,070 6,459
Total liabilities 6,338,154 5,698,828 639,326
Shareholders’ equity 552,039 538,762 13,277
Non-controlling interest 2 2 —
Total equity 552,041 538,764 13,277
Total liabilities and equity $ 6,890,195 $ 6,237,592 $ 652,603
Net interest income $ 102,094 $ 97,426 $ 4,668
Interest rate spread 3.11 % 3.18 % (0.07) %
Net interest margin 3.18 % 3.34 % (0.16) %
(1) At amortized cost.
(2) Includes nonaccrual loans.

Six Months Ended June 30, 2021 Compared To Six Months Ended June 30, 2020
Increase (Decrease) Due to Change In:
(dollars in thousands) Volume Rate Net Change
Interest earning assets:
Interest-bearing deposits in other banks $ 354 $ (322) $ 32
Investment securities, excluding ACL:
Taxable investment securities (1) 1,163 (4,675) (3,512)
Tax-exempt investment securities (1) (152) (363) (515)
Total investment securities 1,011 (5,038) (4,027)
Loans, including loans held for sale (2) 8,104 (5,125) 2,979
Federal Home Loan Bank stock (97) (19) (116)
Total interest earning assets 9,372 (10,504) (1,132)
Interest-bearing liabilities:
Interest-bearing demand deposits 62 (173) (111)
Savings and money market deposits 225 (1,354) (1,129)
Time deposits up to $250,000 492 (1,171) (679)
Time deposits over $250,000 (984) (2,643) (3,627)
Total interest-bearing deposits (205) (5,341) (5,546)
Federal Home Loan Bank advances and other short-term borrowings (575) (5) (580)
Long-term debt (204) 530 326
Total interest-bearing liabilities (984) (4,816) (5,800)
Net interest income $ 10,356 $ (5,688) $ 4,668

Net interest income (expressed on a taxable-equivalent basis) was $52.2 million for the three months ended June 30, 2021, representing an increase of 5.5% from $49.4 million in the three months ended June 30, 2020. Net interest income (expressed on a taxable-equivalent basis) was $102.1 million for the six months ended June 30, 2021, representing an increase of 4.8% from $97.4 million in the six months ended June 30, 2020. The increase in the three and six months ended June 30, 2021 was primarily due to the recognition of net loan fees related to loans originated and forgiven under the SBA Paycheck Protection Program ("PPP"), combined with lower rates paid on interest-bearing liabilities. These increases were partially offset by decreases in yields earned on interest-earning assets.

Net interest income for the three and six months ended June 30, 2021 included $7.9 million and $13.1 million, respectively, in PPP net interest income and net loan fees, which are accreted into income over the term of the loans and accelerated when the loans are forgiven or paid-off.~~During the three and six months ended June 30, 2021, approximately~~$195.8 million and $296.5 million, respectively, in PPP loans were forgiven. During the three and six months ended June 30, 2021, the Company had an average PPP loan balance of $553.0 million and $540.0 million, respectively, which earned approximately 5.75% and 4.90%, respectively, in net interest income and net loan fees. The decreases in yields earned on interest-earning assets and rates paid on interest-bearing liabilities were primarily attributable to the historically low interest rate environment we are operating in during this pandemic environment.

~~Interest Income~~

Taxable-equivalent interest income was $54.1 million for the second quarter of 2021, representing an increase of 1.8% from $53.1 million in the year-ago quarter. The average loans and investment securities balances increased by $207.9 million and $122.0 million, respectively, during the second quarter of 2021, compared to the year-ago quarter, which increased interest income by approximately $2.0 million and $0.7 million, respectively. The significant increase in average loans was primarily attributable to the origination of the aforementioned PPP loans. In addition, the 8 bp increase in the average yields earned on loans during the second quarter of 2021, compared to the year-ago quarter, increased interest income by approximately $1.1 million. These increases were partially offset by a 93 bp decrease in the average yields earned on investment securities during the second quarter of 2021, compared to the year-ago quarter, which decreased interest income by approximately $2.9 million.

Taxable-equivalent interest income was $106.0 million for the six months ended June 30, 2021, representing a decrease of 1.1% from $107.1 million in the same year-ago period. The average yields earned on loans and investment securities decreased by 20

bp and 83 bp, respectively, during the six months ended June 30, 2021, compared to the same year-ago period, which decreased interest income by $5.1 million and $5.0 million, respectively. These decreases were partially offset by increases in average loans and investment securities balances of $412.8 million and $82.2 million, respectively, during the six months ended June 30, 2021, compared to the same year-ago period, which increased interest income by approximately $8.1 million and $1.0 million, respectively.

~~Interest Expense~~

Interest expense for the second quarter of 2021 was $1.9 million, representing a decrease of 48.6% from $3.7 million in the year-ago quarter. The decrease was primarily attributable to declines in rates paid on deposits, combined with improved deposit composition as noninterest-bearing deposits and lower-cost interest-bearing demand and savings and money market deposits increased significantly from the year-ago quarter. Rates paid on savings and money market deposits and time deposits up to and over $250,000 declined by 6 bp, 47 bp and 71 bp, respectively, which decreased interest expense by approximately $0.3 million, $0.3 million, and $1.1 million, respectively. Time deposits over $250,000 primarily consists of public funds which may be opportunistic sources of funding, but fluctuate more directly with changes in the Federal Funds rate.

Interest expense for the six months ended June 30, 2021 was $3.9 million, representing a decrease of 59.9% from $9.7 million in the same year-ago period. The decrease was primarily attributable to declines in rates paid on deposits, combined with improved deposit composition as noninterest-bearing deposits and lower-cost interest-bearing demand and savings and money market deposits increased significantly from the same year-ago period. Rates paid on savings and money market deposits and time deposits up to and over $250,000 declined by 13 bp, 100 bp and 83 bp, respectively, which decreased interest expense by approximately $1.4 million, $1.2 million, and $2.6 million, respectively. In addition, average time deposits over $250,000 and Federal Home Loan Bank advances and other short-term borrowings decreased by $189.4 million and $100.2 million, respectively, which reduced interest expense by approximately $1.0 million and $0.6 million, respectively.

~~Net Interest Margin~~

Our net interest margin of 3.16% for the second quarter of 2021 decreased by 10 bp from 3.26% in the year-ago quarter. Our net interest margin of 3.18% for the six months ended June 30, 2021 decreased by 16 bp from 3.34% in the same year-ago period.

As previously discussed, the declines in net interest margin for the second quarter of 2021 and six months ended June 30, 2021 compared to the same year-ago periods are primarily due to lower yields earned on interest-earning assets, offset by lower rates paid on interest-bearing liabilities, primarily attributable to the historically low interest rate environment we are currently operating in since the beginning of the COVID-19 pandemic.

Provision for Credit Losses

InDuring the ~~three~~second quarter of 2022, our provision for credit losses was a debit of $1.0 million, which consisted of a debit to the provision for credit losses on loans of $1.5 million, partially offset by a credit to the provision for credit losses on off-balance sheet credit exposures of $0.5 million.

During the six months ended June 30, 2022, our provision for credit losses was a credit of $2.2 million, which consisted of a credit to the provision for credit losses on loans of $1.5 million, and a credit to the provision for credit losses on off-balance sheet credit exposures of $0.7 million.

During the second quarter of 2021, our provision for credit losses was a credit of $3.4 million, which consisted of a credit to the provision for credit losses on loans of $3.0 million, a credit to the provision for credit losses on ~~accrued interest receivable~~off-balance sheet credit exposures of $0.2 million, and a credit to the provision for credit losses on ~~off-balance sheet credit exposures~~accrued interest receivable of $0.2 million. In the three months ended June 30, 2020, our provision for credit loss was a debit of $11.2 million, which consisted of a debit to the provision for credit losses on loans of $10.6 million and a debit to the provision for credit losses on off-balance sheet credit exposures of $0.6 million.

InDuring the six months ended June 30, 2021, our provision for credit losses was a credit of $4.3 million, which consisted of a credit to the provision for credit losses on loans of $3.9 million, a credit to the provision for credit losses on ~~accrued interest receivable~~off-balance sheet credit exposures of ~~$0.3~~$0.2 million, and a credit to the provision for credit losses on ~~off-balance sheet credit exposures~~accrued interest receivable of ~~$0.1~~$0.2 million. In

Our net charge-offs were $1.0 million during the second quarter of 2022, compared to net charge-offs of $0.8 million in the year-ago quarter. Our net charge-offs were $1.4 million during the six months ended June 30, ~~2020, our provision for credit loss was a debit~~2022, compared to net charge-offs of ~~$22.3~~$1.6 million ~~which consisted of a debit to~~in the ~~provision for credit losses on loans of $20.0 million and a debit to the provision for credit losses on off-balance sheet credit exposures of $2.4 million.~~year-ago period.

The ~~provision for credit losses in the year-ago periods were primarily due to adverse economic conditions brought on by the COVID-19 pandemic, while the~~ credits to the provision for credit losses in the ~~current year~~first quarter of 2022 and the three and six months ended June 30, 2021 were primarily due to improved economic forecasts, lower net charge-offs and ~~positive migration of~~ loan ~~grades~~portfolio improvement as the State of Hawaii ~~begins~~continued to recover from the pandemic. The provision for credit losses during the second quarter of 2022 was primarily due to loan portfolio growth and net loan charge-offs during the quarter.

We did not record a provision for credit losses on investment securities during the three and six months ended June 30, ~~2021~~2022 and ~~June 30, 2020.~~

Our net charge-offs were $0.8 million during the second quarter of 2021, compared to net charge-offs of $2.9 million in the year-ago quarter. Our net charge-offs were $1.6 million during the six months ended June 30, 2021, compared to net charge-offs of $4.2 million in the same year-ago period.2021.

Other Operating Income

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


		Three Months Ended									Three Months Ended
(dollars in thousands)	(dollars in thousands)	June 30, 2021		June 30, 2020		$ Change		% Change		(dollars in thousands)	June 30, 2022		June 30, 2021		$ Change		% Change
Other operating income:	Other operating income:									Other operating income:
Mortgage banking income	Mortgage banking income	$	1,533	$	3,566	$	(2,033)	-57.0	%	Mortgage banking income	$	1,140	$	1,533	$	(393)	-25.6	%
Service charges on deposit accounts	Service charges on deposit accounts	1,443		1,149		294		25.6	%	Service charges on deposit accounts	2,026		1,443		583		40.4
Other service charges and fees	Other service charges and fees	4,619		2,916		1,703		58.4	%	Other service charges and fees	4,610		4,619		(9)		-0.2
Income from fiduciary activities	Income from fiduciary activities	1,269		1,270		(1)		-0.1	%	Income from fiduciary activities	1,188		1,269		(81)		-6.4

Investment securities gains (losses)		50		—		50		N.M.
Net gain on sales of investment securities										Net gain on sales of investment securities	8,506		50		8,456		16,912.0
Income from bank-owned life insurance	Income from bank-owned life insurance	1,210		1,424		(214)		-15.0	%	Income from bank-owned life insurance	(1,028)		1,210		(2,238)		-185.0

Other:	Other:									Other:
Equity in earnings of unconsolidated subsidiaries		79		104		(25)		-24.0	%
Net gain (loss) on sales of foreclosed assets		—		(6)		6		-100.0	%
Equity in earnings of unconsolidated entities										Equity in earnings of unconsolidated entities	23		79		(56)		-70.9

Income recovered on nonaccrual loans previously charged-off	Income recovered on nonaccrual loans previously charged-off	37		37		—		—	%	Income recovered on nonaccrual loans previously charged-off	107		37		70		189.2
Other recoveries	Other recoveries	16		26		(10)		-38.5	%	Other recoveries	32		16		16		100.0

Unrealized gains on loans-held-for-sale										Unrealized gains on loans-held-for-sale	62		—		62		N.M.
Commissions on sale of checks	Commissions on sale of checks	80		56		24		42.9	%	Commissions on sale of checks	76		80		(4)		-5.0

Other	Other	194		150		44		29.3	%	Other	396		194		202		104.1
Total other operating income	Total other operating income	$	10,530	$	10,692	$	(162)	-1.5	%	Total other operating income	$	17,138	$	10,530	$	6,608	62.8

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

For the ~~three months ended June 30, 2021,~~second quarter of 2022, total other operating income ~~of $10.5~~was $17.1 million, ~~decreased~~which increased by ~~$0.2~~$6.6 million, or ~~1.5%~~62.8%, from $10.7 million in the year-ago quarter. The decrease from the year-ago quarter was primarily due to lower mortgage banking income of $2.0 million and lower income from bank-owned life insurance of $0.2 million in the second quarter of 2021. These decreases were partially offset by higher other service charges and fees of $1.7 million and higher service charges on deposit accounts of $0.3 million, resulting from higher transactional activity in the second quarter of 2021 as the State of Hawaii begins to recover from the pandemic.

Six Months Ended
(dollars in thousands) June 30, 2021 June 30, 2020 $ Change % Change
Other operating income:
Mortgage banking income $ 4,503 $ 3,903 $ 600 15.4 %
Service charges on deposit accounts 2,921 3,199 (278) -8.7 %
Other service charges and fees 8,409 7,813 596 7.6 %
Income from fiduciary activities 2,500 2,567 (67) -2.6 %
Investment securities gains (losses) 50 — 50 N.M.
Income from bank-owned life insurance 2,007 1,405 602 42.8 %
Other:
Equity in earnings of unconsolidated subsidiaries 186 130 56 43.1 %
Net gain (loss) on sales of foreclosed assets — (6) 6 -100.0 %
Income recovered on nonaccrual loans previously charged-off 72 60 12 20.0 %
Other recoveries 44 66 (22) -33.3 %
Commissions on sale of checks 157 137 20 14.6 %
Other 392 304 88 28.9 %
Total other operating income $ 21,241 $ 19,578 $ 1,663 8.5 %
* Not meaningful ("N.M.")
Note: Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period.

~~For the six months ended June 30, 2021, total other operating income of $21.2 million increased by $1.7 million, or 8.5%, from $19.6~~$10.5 million in the year-ago quarter. The increase from the year-ago quarter was primarily due to the sale of our Visa, Inc. ("Visa") Class B common stock. Due to transfer restrictions on the Visa Class B common stock and the lack of a readily determinable fair value, the investment was carried at the Company's zero cost basis, therefore the entire net proceeds from the sale of $8.5 million were recorded as a gain on sale of investment securities. The increase was partially offset by a loss on bank-owned life insurance ("BOLI") in the second quarter of 2022 resulting in lower income from BOLI of $2.2 million from the year-ago quarter. The lower income from BOLI was primarily attributable to significant market volatility during the second quarter of 2022. The Company has certain company-owned life insurance policies used to hedge its deferred compensation plans, therefore, the Company has also recognized offsetting negative deferred compensation expense in other operating expenses.


	Six Months Ended
(dollars in thousands)	June 30, 2022		June 30, 2021		$ Change		% Change
Other operating income:
Mortgage banking income	$	2,312	$	4,503	$	(2,191)	-48.7	%
Service charges on deposit accounts	3,887		2,921		966		33.1
Other service charges and fees	9,098		8,409		689		8.2
Income from fiduciary activities	2,342		2,500		(158)		-6.3


Net gain on sales of investment securities	8,506		50		8,456		16,912.0
Income from bank-owned life insurance	(489)		2,007		(2,496)		-124.4



Other:
Equity in earnings of unconsolidated entities	116		186		(70)		-37.6

Income recovered on nonaccrual loans previously charged-off	145		72		73		101.4
Other recoveries	57		44		13		29.5
Unrealized losses on loans-held-for-sale	(1)		—		(1)		N.M.
Commissions on sale of checks	153		157		(4)		-2.5

Other	563		392		171		43.6
Total other operating income	$	26,689	$	21,241	$	5,448	25.6

* Not meaningful ("N.M.")

For the six months ended June 30, 2022, total other operating income was $26.7 million, which increased by $5.4 million, or 25.6%, from $21.2 million in the year-ago period. The increase from the year-ago period was primarily due to higher net gain on sales of investment securities of $8.5 million, primarily attributable to the aforementioned one-time net gain on sale of Visa Class B common stock of $8.5 million. The increase was partially offset by lower income from BOLI of $2.5 million and lower mortgage banking income of ~~$0.6 million, higher other service charges and fees of $0.6 million, and higher income from bank-owned life insurance of $0.6~~$2.2 million. The ~~higher~~lower mortgage banking income was primarily attributable to lower amortization of mortgage servicing rights of $1.1 million, combined with higher loan placement fees of $0.9 million, partially offset by lower gains on sales of residential mortgage loans of $1.6 million. The higher income from bank-owned life insurance was primarily attributable to gains in the equity markets. The higher other service charges and fees of $0.6 million was primarilyorigination activity due to ~~higher transactional activity.~~the rising interest rate environment.

6165

Other Operating Expense

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


		Three Months Ended									Three Months Ended
(dollars in thousands)	(dollars in thousands)	June 30, 2021		June 30, 2020		$ Change		% Change		(dollars in thousands)	June 30, 2022		June 30, 2021		$ Change		% Change
Other operating expense:	Other operating expense:									Other operating expense:
Salaries and employee benefits	Salaries and employee benefits	$	23,790	$	20,329	$	3,461	17.0	%	Salaries and employee benefits	$	22,369	$	23,790	$	(1,421)	-6.0	%
Net occupancy	Net occupancy	4,055		3,645		410		11.2	%	Net occupancy	4,448		4,055		393		9.7
Equipment	Equipment	1,048		1,043		5		0.5	%	Equipment	1,075		1,048		27		2.6

Communication expense		756		774		(18)		-2.3	%
Communication										Communication	744		756		(12)		-1.6
Legal and professional services	Legal and professional services	2,572		2,238		334		14.9	%	Legal and professional services	2,916		2,572		344		13.4
Computer software expense		3,398		3,035		363		12.0	%
Advertising expense		1,329		923		406		44.0	%
Computer software										Computer software	3,624		3,398		226		6.7
Advertising										Advertising	1,150		1,329		(179)		-13.5

Other:	Other:									Other:
Pension and SERP expense		380		293		87		29.7	%
Pension plan and SERP expense										Pension plan and SERP expense	5,113		380		4,733		1,245.5
Foreclosed asset expense	Foreclosed asset expense	—		—		—		N.M.		Foreclosed asset expense	1		—		1		N.M.
Charitable contributions	Charitable contributions	51		10		41		410.0	%	Charitable contributions	108		51		57		111.8
FDIC insurance assessment	FDIC insurance assessment	502		475		27		5.7	%	FDIC insurance assessment	576		502		74		14.7
Miscellaneous loan expenses	Miscellaneous loan expenses	379		399		(20)		-5.0	%	Miscellaneous loan expenses	400		379		21		5.5
ATM and debit card expenses	ATM and debit card expenses	1,103		584		519		88.9	%	ATM and debit card expenses	837		1,103		(266)		-24.1

Armored car expenses	Armored car expenses	257		229		28		12.2	%	Armored car expenses	254		257		(3)		-1.2
Entertainment and promotions	Entertainment and promotions	207		165		42		25.5	%	Entertainment and promotions	431		207		224		108.2
Stationery and supplies	Stationery and supplies	214		220		(6)		-2.7	%	Stationery and supplies	46		214		(168)		-78.5
Directors’ fees and expenses	Directors’ fees and expenses	132		196		(64)		-32.7	%	Directors’ fees and expenses	252		132		120		90.9
Directors' deferred compensation plan expense		100		103		(3)		-2.9	%
Directors' deferred compensation plan (credit) expense										Directors' deferred compensation plan (credit) expense	(920)		100		(1,020)		-1,020.0

Branch consolidation costs										Branch consolidation costs	208		—		208		N.M.

Loss on disposal of fixed assets	Loss on disposal of fixed assets	4		—		4		N.M.		Loss on disposal of fixed assets	1		4		(3)		-75.0
Other	Other	1,156		1,193		(37)		-3.1	%	Other	1,716		1,156		560		48.4
Total other operating expense	Total other operating expense	$	41,433	$	35,854	$	5,579	15.6	%	Total other operating expense	$	45,349	$	41,433	$	3,916	9.5

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

For the ~~three months ended June 30, 2021,~~second quarter of 2022, total other operating expense was ~~$41.4~~$45.3 million, ~~and~~which increased by ~~$5.6~~$3.9 million, or ~~15.6%~~9.5%, from ~~$35.9~~$41.4 million in the year-ago quarter. The increase was primarily due to higher pension plan and SERP expense of $4.7 million, partially offset by lower salaries and employee benefits of ~~$3.5 million, higher ATM and debit card expenses of $0.5~~$1.4 million and ~~higher net occupancy, computer software expense and advertising~~lower directors' deferred compensation plan expense of ~~$0.4~~$1.0 million ~~each. The higher salaries and employee benefits are primarily~~ due to ~~annual merit increases effective April 1, higher base salaries due~~market volatility.

In January 2021, the Board of Directors approved commencing action to ~~strategic hires, higher commissions~~terminate the Company’s defined benefit retirement plan (the “Plan”). The Company received a favorable determination letter from the IRS and ~~incentives,~~no objection from the Pension Benefit Guaranty Corporation on Form 500 standard termination notice in January 2022. The Company completed the termination and ~~higher ICP accruals~~settlement of the Plan in the ~~current quarter. The higher ATM~~second quarter of 2022. Upon final plan termination and ~~debit card expenses are primarily due to~~settlement, the ~~issuance~~Company recognized a one-time non-cash settlement charge of ~~new contactless ATM~~$4.9 million (included in pension plan and ~~debit cards to our cardholders.~~SERP expense).

6266


		Six Months Ended									Six Months Ended
(dollars in thousands)	(dollars in thousands)	June 30, 2021		June 30, 2020		$ Change		% Change		(dollars in thousands)	June 30, 2022		June 30, 2021		$ Change		% Change
Other operating expense:	Other operating expense:									Other operating expense:
Salaries and employee benefits	Salaries and employee benefits	$	43,617	$	40,383	$	3,234	8.0	%	Salaries and employee benefits	$	43,311	$	43,617	$	(306)	-0.7	%
Net occupancy	Net occupancy	7,819		7,317		502		6.9	%	Net occupancy	8,222		7,819		403		5.2
Equipment	Equipment	2,048		2,140		(92)		-4.3	%	Equipment	2,157		2,048		109		5.3

Communication expense		1,525		1,611		(86)		-5.3	%
Communication										Communication	1,550		1,525		25		1.6
Legal and professional services	Legal and professional services	4,949		4,266		683		16.0	%	Legal and professional services	5,542		4,949		593		12.0
Computer software expense		7,181		5,978		1,203		20.1	%
Advertising expense		2,987		2,015		972		48.2	%
Computer software										Computer software	6,706		7,181		(475)		-6.6
Advertising										Advertising	2,300		2,987		(687)		-23.0

Other:	Other:									Other:
Pension and SERP expense		627		586		41		7.0	%
Pension plan and SERP expense										Pension plan and SERP expense	5,313		627		4,686		747.4
Foreclosed asset expense	Foreclosed asset expense	3		67		(64)		-95.5	%	Foreclosed asset expense	1		3		(2)		-66.7
Charitable contributions	Charitable contributions	72		197		(125)		-63.5	%	Charitable contributions	203		72		131		181.9
FDIC insurance assessment	FDIC insurance assessment	942		475		467		98.3	%	FDIC insurance assessment	1,207		942		265		28.1
Miscellaneous loan expenses	Miscellaneous loan expenses	749		699		50		7.2	%	Miscellaneous loan expenses	789		749		40		5.3
ATM and debit card expenses	ATM and debit card expenses	1,768		1,218		550		45.2	%	ATM and debit card expenses	1,500		1,768		(268)		-15.2

Armored car expenses	Armored car expenses	449		523		(74)		-14.1	%	Armored car expenses	505		449		56		12.5
Entertainment and promotions	Entertainment and promotions	406		445		(39)		-8.8	%	Entertainment and promotions	758		406		352		86.7
Stationery and supplies	Stationery and supplies	427		468		(41)		-8.8	%	Stationery and supplies	396		427		(31)		-7.3
Directors’ fees and expenses	Directors’ fees and expenses	349		437		(88)		-20.1	%	Directors’ fees and expenses	515		349		166		47.6
Directors’ deferred compensation plan expense		1,002		(1,380)		2,382		-172.6	%
Directors' deferred compensation plan (credit) expense										Directors' deferred compensation plan (credit) expense	(1,000)		1,002		(2,002)		-199.8

Branch consolidation costs										Branch consolidation costs	208		—		208		N.M.

Loss on disposal of fixed assets	Loss on disposal of fixed assets	36		—		36		N.M.		Loss on disposal of fixed assets	2		36		(34)		-94.4
Other	Other	2,323		2,851		(528)		-18.5	%	Other	3,369		2,323		1,046		45.0
Total other operating expense	Total other operating expense	$	79,279	$	70,296	$	8,983	12.8	%	Total other operating expense	$	83,554	$	79,279	$	4,275	5.4

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

For the six months ended June 30, ~~2021,~~2022, total other operating expense was ~~$79.3~~$83.6 million and increased by ~~$9.0~~$4.3 million, or ~~12.8%~~5.4%, from ~~$70.3~~$79.3 million in the year-ago ~~quarter.~~period. The increase was primarily due to higher ~~salaries~~pension plan and employee benefits of $3.2 million, higher computer software expense of $1.2 million, higher advertising expense of $1.0 million, higher legal and professional services of $0.7 million, higher ATM and debit cardSERP expenses of ~~$0.6~~$4.7 million, primarily attributable to the aforementioned $4.9 million one-time non-cash charge related to the termination and ~~higher net occupancy and FDIC insurance assessment~~settlement of ~~$0.5 million each. In addition,~~ the ~~Company recorded~~Company's defined benefit retirement plan. The increase was partially offset by lower directors' deferred compensation plan expenses of ~~$1.0~~$2.0 million ~~during the six months ended June 30, 2021, compared~~due to a credit of $1.4 million in the same year-ago period. These expenses are related to changes in the directors' deferred compensation plan liability and are impacted by fluctuations in the Company's stock price and the equity markets.market volatility.

Efficiency Ratio

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

6367

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


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	(dollars in thousands)	2021			2020			2021			2020			(dollars in thousands)	2022			2021			2022			2021
Total other operating expense	Total other operating expense	$	41,433		$	35,854		$	79,279		$	70,296		Total other operating expense	$	45,349		$	41,433		$	83,554		$	79,279

Net interest income	Net interest income	$	52,061		$	49,259		$	101,865		$	97,089		Net interest income	$	52,978		$	52,061		$	103,913		$	101,865
Total other operating income	Total other operating income	10,530			10,692			21,241			19,578			Total other operating income	17,138			10,530			26,689			21,241
Total revenue before provision for credit losses	Total revenue before provision for credit losses	$	62,591		$	59,951		$	123,106		$	116,667		Total revenue before provision for credit losses	$	70,116		$	62,591		$	130,602		$	123,106

Efficiency ratio	Efficiency ratio	66.20		%	59.81		%	64.40		%	60.25		%	Efficiency ratio	64.68		%	66.20		%	63.98		%	64.40		%

Our efficiency ratio ~~increased~~improved to ~~66.20% in the three months ended June 30, 2021, compared to 59.81% in the year-ago quarter. The efficiency ratio~~64.68% in the second quarter of ~~2021 was negatively impacted by~~2022, compared to 66.20% in the ~~aforementioned higher other operating expenses, offset by an increase in net interest income. Our efficiency ratio increased to 64.40% in~~year-ago quarter. For the six months ended June 30, ~~2021,~~2022, our efficiency ratio improved to 63.98%, compared to ~~60.25%~~64.40% in the ~~same~~ year-ago period. The efficiency ratio in the three and six months ended June 30, ~~2021~~2022 was ~~also negatively~~positively impacted by the aforementioned higher ~~other operating expenses, offset by increases in~~ net interest income and other operating ~~income.~~ income, offset by higher other operating expenses.

The ~~current year increases in our efficiency ratio are reflective of the Company's~~Company continues its strategic investments in ~~the future. Longer term, the Company believes~~digital banking, technology and Banking-as-a-Service and it expects these investments will improve profitability and shareholder returns.

Income Taxes

The Company recorded income tax expense of ~~$5.9 million and $11.3~~$6.2 million for the ~~three and~~second quarter of 2022, compared to $5.9 million in the same year-ago period. The effective tax rate for the second quarter of 2022 was 26.01%, compared to 23.93% in the same year-ago period.

The Company recorded income tax expense of $12.2 million for the six months ended June 30, ~~2021, respectively,~~2022, compared to ~~$3.0 million and $5.8~~$11.3 million in the ~~three and~~same year-ago period. The effective tax rate for the six months ended June 30, ~~2020, respectively.~~2022 was 24.81%, compared to 23.58% in the same year-ago period. The increase in the effective tax rate for the three and six months ended June 30, ~~2021~~2022 was ~~23.93% and 23.58%, respectively,~~primarily attributable to lower tax-exempt BOLI income compared to ~~23.03% and 24.09% in~~ the ~~three and six months ended June 30, 2020, respectively.~~same year-ago periods.

The valuation allowance on our net deferred tax assets ("DTA") ~~totaled $3.4 million at June 30, 2021 and $3.4 million~~ at December 31, ~~2020,~~2021 totaled $3.4 million, of which $3.2 million ~~and $3.2 million, respectively,~~ related to our DTA from net apportioned net operating loss ("NOL") carryforwards for California state income tax purposes, as we do not expect to generate sufficient income in California to utilize the DTA. The remaining valuation allowance of $0.2 million ~~and $0.2 million as of June 30, 2021 and~~at December 31, ~~2020 relates~~2021 related to a Hawaii capital loss carryforward balance that we dodid not expect to be able to utilize. During the second quarter of 2022, we utilized the Hawaii capital loss carryforward balance.

The valuation allowance on our net DTA at June 30, 2022 totaled $3.1 million, which related entirely to our DTA from net apportioned NOL carryforwards for California state income tax purposes. Net of the valuation allowance, the Company's net DTA totaled ~~$35.1~~$60.1 million at June 30, ~~2021,~~2022, compared to a net DTA of ~~$26.4~~$25.8 million as of December 31, ~~2020,~~2021, and is included in other assets on our consolidated balance sheets. The increase in the net DTA was primarily due to significant unrealized losses on available-for-sale investment securities recorded during the current year due to the rising interest rate environment.

Financial Condition

Total assets were $7.30 billion at June 30, ~~2021 of $7.18 billion increased~~2022 and decreased by ~~$583.9~~$119.9 million, or 1.6%, from ~~$6.59~~$7.42 billion at December 31, ~~2020.~~2021.

Investment Securities

Investment securities ~~of $1.41~~totaled $1.45 billion at June 30, ~~2021 increased~~2022, which decreased by ~~$225.0~~$181.0 million, or ~~19.0%~~11.1%, from ~~$1.18~~$1.63 billion at December 31, ~~2020.~~2021. The ~~increase~~decrease in the investment securities portfolio reflects ~~$421.4~~a market valuation decline on the AFS portfolio of $168.1 million ~~in net purchases,~~and principal runoff of $101.9 million, partially offset by ~~a $21.3 million decrease~~purchases of investment securities of $89.1 million.

The significant decline in ~~the~~ market valuation on the ~~available-for-sale~~AFS portfolio ~~and $175.1 million~~was primarily driven by the rising interest rate environment. To mitigate the potential future impact to capital through AOCI, in ~~principal runoff.~~

March 2022, the Company transferred 41 investment

6468

securities that were classified as AFS to HTM. The investment securities had an amortized cost basis of $361.8 million and a fair market value of $329.5 million. On the date of transfer, these securities had a total net unrealized loss of $32.3 million. In May 2022, the Company transferred an additional 40 investment securities that were classified as AFS to HTM. The investment securities had an amortized cost basis of $400.9 million and a fair market value of $343.7 million. On the date of transfer, these securities had a total net unrealized loss of $57.2 million. There was no impact to net income as a result of the reclassifications.

In addition, during the first quarter of 2022, the Company entered into a forward starting interest rate swap on certain municipal debt securities with a notional amount of $115.5 million. The Company will pay the counterparty a fixed rate of 2.095% and will receive a floating rate based on the Federal Funds effective rate. This transaction has an effective date of March 31, 2024 and a maturity date of March 31, 2029.

Loans

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


(dollars in thousands)	(dollars in thousands)	June 30, 2021		December 31, 2020		$ Change		% Change		(dollars in thousands)	June 30, 2022		December 31, 2021		$ Change		% Change
Hawaii:	Hawaii:									Hawaii:
Commercial, financial and agricultural:	Commercial, financial and agricultural:									Commercial, financial and agricultural:
SBA Paycheck Protection Program	SBA Paycheck Protection Program	$	395,352	$	375,879	$	19,473	5.2	%	SBA Paycheck Protection Program	$	19,469	$	87,459	$	(67,990)	(77.7)	%
Other	Other	389,341		426,670		(37,329)		(8.7)		Other	367,676		422,388		(54,712)		(13.0)
Real estate:	Real estate:									Real estate:
Construction	Construction	133,457		125,407		8,050		6.4		Construction	134,103		122,867		11,236		9.1
Residential mortgage	Residential mortgage	1,711,801		1,690,212		21,589		1.3		Residential mortgage	1,890,783		1,875,980		14,803		0.8
Home equity	Home equity	583,430		551,266		32,164		5.8		Home equity	698,209		637,249		60,960		9.6
Commercial mortgage	Commercial mortgage	926,006		898,055		27,951		3.1		Commercial mortgage	994,405		922,146		72,259		7.8
Consumer	Consumer	328,332		332,430		(4,098)		(1.2)		Consumer	341,213		333,843		7,370		2.2
Leases		—		—		—		—

Total loans	Total loans	4,467,719		4,399,919		67,800		1.5		Total loans	4,445,858		4,401,932		43,926		1.0
Allowance for credit losses ("ACL")	Allowance for credit losses ("ACL")	(67,773)		(73,152)		5,379		(7.4)		Allowance for credit losses ("ACL")	(51,374)		(55,808)		4,434		(7.9)
Loans, net of ACL	Loans, net of ACL	$	4,399,946	$	4,326,767	$	73,179	1.7		Loans, net of ACL	$	4,394,484	$	4,346,124	$	48,360	1.1

U.S. Mainland:	U.S. Mainland:									U.S. Mainland:
Commercial, financial and agricultural:	Commercial, financial and agricultural:									Commercial, financial and agricultural:
SBA Paycheck Protection Program	SBA Paycheck Protection Program	$	39,258	$	40,496	$	(1,238)	(3.1)	%	SBA Paycheck Protection Program	$	712	$	3,868	$	(3,156)	(81.6)	%
Other	Other	96,884		118,421		(21,537)		(18.2)		Other	156,567		107,733		48,834		45.3
Real estate:	Real estate:									Real estate:
Construction	Construction	—		—		—		—		Construction	10,935		—		10,935		—
Residential mortgage		—		—		—		—
Home equity		—		—		—		—

Commercial mortgage	Commercial mortgage	260,424		258,273		2,151		0.8		Commercial mortgage	309,230		298,058		11,172		3.7
Consumer	Consumer	213,033		147,004		66,029		44.9		Consumer	378,331		290,058		88,273		30.4
Leases		—		—		—		—

Total loans	Total loans	609,599		564,194		45,405		8.0		Total loans	855,775		699,717		156,058		22.3
ACL	ACL	(10,008)		(10,117)		109		(1.1)		ACL	(13,837)		(12,289)		(1,548)		12.6
Loans, net of ACL	Loans, net of ACL	$	599,591	$	554,077	$	45,514	8.2		Loans, net of ACL	$	841,938	$	687,428	$	154,510	22.5

Total:	Total:									Total:
Commercial, financial and agricultural:	Commercial, financial and agricultural:									Commercial, financial and agricultural:
SBA Paycheck Protection Program	SBA Paycheck Protection Program	$	434,610	$	416,375	$	18,235	4.4	%	SBA Paycheck Protection Program	$	20,181	$	91,327	$	(71,146)	(77.9)	%
Other	Other	486,225		545,091		(58,866)		(10.8)		Other	524,243		530,121		(5,878)		(1.1)
Real estate:	Real estate:									Real estate:
Construction	Construction	133,457		125,407		8,050		6.4		Construction	145,038		122,867		22,171		18.0
Residential mortgage	Residential mortgage	1,711,801		1,690,212		21,589		1.3		Residential mortgage	1,890,783		1,875,980		14,803		0.8
Home equity	Home equity	583,430		551,266		32,164		5.8		Home equity	698,209		637,249		60,960		9.6
Commercial mortgage	Commercial mortgage	1,186,430		1,156,328		30,102		2.6		Commercial mortgage	1,303,635		1,220,204		83,431		6.8
Consumer	Consumer	541,365		479,434		61,931		12.9		Consumer	719,544		623,901		95,643		15.3
Leases		—		—		—		—

Total loans	Total loans	5,077,318		4,964,113		113,205		2.3		Total loans	5,301,633		5,101,649		199,984		3.9
ACL	ACL	(77,781)		(83,269)		5,488		(6.6)		ACL	(65,211)		(68,097)		2,886		(4.2)
Loans, net of ACL	Loans, net of ACL	$	4,999,537	$	4,880,844	$	118,693	2.4		Loans, net of ACL	$	5,236,422	$	5,033,552	$	202,870	4.0

Loans, net of deferred costs, ~~of $5.08~~totaled $5.30 billion at June 30, ~~2021~~2022, which increased by ~~$113.2~~$200.0 million, or ~~2.3%~~3.9%, from ~~$4.96~~$5.10 billion at December 31, ~~2020.~~2021. The increase reflects net increases in the following loan portfolios: ~~SBA Paycheck Protection Program loans~~consumer of ~~$18.2~~$95.6 million, ~~construction of $8.1 million, residential~~commercial mortgage of ~~$21.6~~$83.4 million, home equity of ~~$32.2~~$61.0 million, ~~commercial mortgage~~construction of ~~$30.1~~$22.2 million, and ~~consumer~~residential mortgage loans of ~~$61.9~~$14.8 million. These increases were partially offset by a net ~~decrease~~decreases in

~~the~~ SBA Paycheck Protection Program loans of $71.1 million and other commercial loans of ~~$58.9~~$5.9 million. ~~Excluding~~During the six months ended June 30, 2022, the Company received $73.8 million in PPP loan forgiveness and paydowns. Core loans, or total loans, net of deferred costs, excluding PPP loans, totaled ~~$4.64~~$5.28 billion at June 30, ~~2021~~2022 and increased by ~~$95.0~~$271.1 million, or ~~2.1%~~5.4%, from ~~$4.55~~$5.01 billion at December 31, ~~2020.~~2021.

The Hawaii loan portfolio increased by ~~$67.8~~$43.9 million, or ~~1.5%~~1.0%, from December 31, ~~2020.~~2021. The increase reflects net increases in the following loan portfolios: ~~SBA Paycheck Protection Program loans~~commercial mortgage of ~~$19.5~~$72.3 million, ~~construction~~home equity of ~~$8.1~~$61.0 million, residential mortgage of ~~$21.6~~$14.8 million, ~~home equity~~construction of ~~$32.2~~$11.2 million, and ~~commercial mortgage~~consumer of ~~$28.0 million.These increases were partially offset by net decreases in the other commercial and consumer portfolios of $37.3 million and $4.1 million, respectively.~~$7.4 million. The increases in the portfolios were primarily due to increased demand from both new and existing customers. These increases were partially offset by net decreases in SBA Paycheck Protection Program loans of $68.0 million and other commercial, financial and agricultural loans of $54.7 million.

The U.S. Mainland loan portfolio increased by ~~$45.4~~$156.1 million, or ~~8.0%~~22.3% from December 31, ~~2020.~~2021. The ~~net~~ increase was primarily attributable to a net ~~increase~~increases in ~~the~~ consumer ~~loan portfolio~~loans of ~~$66.0~~$88.3 million, ~~due to loan portfolio purchases,~~other commercial, financial and agricultural loans of $48.8 million, commercial mortgage loans of $11.2 million, and construction loans of $10.9 million, partially offset by a net decrease in ~~the other commercial~~SBA Paycheck Protection Program loans of $3.2 million. The increase in U.S. Mainland consumer loans was primarily attributable to purchases and replenishment of select unsecured consumer and automobile loan ~~portfolio of $21.5 million.~~portfolios from our established vendors to strategically complement and diversify our loan portfolio. Refer to Note 4 - Loans and Credit Quality in the accompanying notes to the consolidated financial statements in this report for information on U.S. Mainland loan portfolio purchases.

6670

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

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


(dollars in thousands)	(dollars in thousands)	June 30, 2021			December 31, 2020			$ Change		% Change		(dollars in thousands)	June 30, 2022			December 31, 2021			$ Change		% Change
Nonperforming Assets ("NPAs") [1]	Nonperforming Assets ("NPAs") [1]											Nonperforming Assets ("NPAs") [1]
Nonaccrual loans:	Nonaccrual loans:											Nonaccrual loans:
Commercial, financial and agricultural - Other	Commercial, financial and agricultural - Other	$	699		$	1,461		$	(762)	(52.2)	%	Commercial, financial and agricultural - Other	$	333		$	183		$	150	82.0	%
Real estate:	Real estate:											Real estate:

Residential mortgage	Residential mortgage	5,280			4,115			1,165		28.3		Residential mortgage	3,490			4,623			(1,133)		(24.5)
Home equity	Home equity	434			524			(90)		(17.2)		Home equity	592			786			(194)		(24.7)

Consumer	Consumer	332			92			240		260.9		Consumer	568			289			279		96.5

Total nonaccrual loans	Total nonaccrual loans	6,745			6,192			553		8.9		Total nonaccrual loans	4,983			5,881			(898)		(15.3)

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

Real estate:	Real estate:											Real estate:

Residential mortgage	Residential mortgage	—			—			—		—		Residential mortgage	—			—			—		—

Total OREO	Total OREO	—			—			—		—		Total OREO	—			—			—		—
Total nonperforming assets	Total nonperforming assets	6,745			6,192			553		8.9		Total nonperforming assets	4,983			5,881			(898)		(15.3)

Accruing Loans Delinquent for 90 Days or More [1]	Accruing Loans Delinquent for 90 Days or More [1]											Accruing Loans Delinquent for 90 Days or More [1]
Commercial, financial and agricultural - Other	Commercial, financial and agricultural - Other	29			—			29		—		Commercial, financial and agricultural - Other	309			945			(636)		(67.3)
Real estate:	Real estate:											Real estate:

Residential mortgage		1,438			567			871		153.6

Home equity												Home equity	—			44			(44)		(100.0)

Consumer	Consumer	100			240			(140)		(58.3)		Consumer	842			374			468		125.1

Total accruing loans delinquent for 90 days or more	Total accruing loans delinquent for 90 days or more	1,567			807			760		94.2		Total accruing loans delinquent for 90 days or more	1,151			1,363			(212)		(15.6)

Restructured Loans Still Accruing Interest [1]	Restructured Loans Still Accruing Interest [1]											Restructured Loans Still Accruing Interest [1]
Commercial, financial and agricultural - Other		26			100			(74)		(74.0)

Real estate:	Real estate:											Real estate:

Residential mortgage	Residential mortgage	4,258			5,718			(1,460)		(25.5)		Residential mortgage	2,006			3,768			(1,762)		(46.8)

Commercial mortgage	Commercial mortgage	1,636			1,761			(125)		(7.1)		Commercial mortgage	965			1,043			(78)		(7.5)
Consumer	Consumer	132			207			(75)		(36.2)		Consumer	76			92			(16)		(17.4)

Total restructured loans still accruing interest	Total restructured loans still accruing interest	6,052			7,786			(1,734)		(22.3)		Total restructured loans still accruing interest	3,047			4,903			(1,856)		(37.9)

Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest	Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest	$	14,364		$	14,785		$	(421)	(2.8)		Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest	$	9,181		$	12,147		$	(2,966)	(24.4)

Ratio of nonaccrual loans to total loans	Ratio of nonaccrual loans to total loans	0.13		%	0.12		%			0.01	%	Ratio of nonaccrual loans to total loans	0.09		%	0.12		%			(0.03)	%
Ratio of NPAs to total loans and OREO	Ratio of NPAs to total loans and OREO	0.13		%	0.12		%			0.01	%	Ratio of NPAs to total loans and OREO	0.09		%	0.12		%			(0.03)	%
Ratio of NPAs and accruing loans delinquent for 90 days or more to total loans and OREO	Ratio of NPAs and accruing loans delinquent for 90 days or more to total loans and OREO	0.16		%	0.14		%			0.02	%	Ratio of NPAs and accruing loans delinquent for 90 days or more to total loans and OREO	0.12		%	0.14		%			(0.02)	%
Ratio of NPAs, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO	Ratio of NPAs, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO	0.28		%	0.30		%			(0.02)	%	Ratio of NPAs, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO	0.17		%	0.24		%			(0.07)	%
Ratio of classified assets and OREO to tier 1 capital and ACL												Ratio of classified assets and OREO to tier 1 capital and ACL	3.52		%	6.42		%			(2.90)	%

[1] Section 4013 of the CARES Act and the revised Interagency Statement are being applied to loan modifications related to the COVID-19 pandemic as eligible and applicable. These loan modifications are not included in the delinquent or restructured loan balances presented above.
[1] Section 4013 of the CARES Act and the revised Interagency Statement were applied to loan modifications related to the COVID-19 pandemic as eligible and applicable. This relief ended on January 1, 2022. These loan modifications are not included in the delinquent or restructured loan balances presented above.												[1] Section 4013 of the CARES Act and the revised Interagency Statement were applied to loan modifications related to the COVID-19 pandemic as eligible and applicable. This relief ended on January 1, 2022. These loan modifications are not included in the delinquent or restructured loan balances presented above.

6771

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


(dollars in thousands)
Balance at December 31, ~~2020~~2021	$	~~6,192~~5,881
Additions	~~4,136~~3,540
Reductions:
Payments	~~(1,412)~~(1,883)
Return to accrual status	~~(183)~~(1,017)
~~Sales of NPAs~~	—
Net charge-offs, valuation and other adjustments	~~(1,988)~~(1,538)
Total reductions	~~(3,583)~~(4,438)
Net ~~increase~~decrease	~~553~~ (898)
Balance at June 30, ~~2021~~2022	$	~~6,745~~4,983

Nonperforming assets, which includes nonaccrual loans and other real estate owned, totaled ~~$6.7~~$5.0 million at June 30, ~~2021,~~2022, compared to ~~$6.2~~$5.9 million at December 31, ~~2020.~~2021. There were no nonperforming loans classified as held for sale at June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. The ~~increase~~decrease in nonperforming assets from December 31, ~~2020~~2021 was primarily attributable to ~~additions to~~$1.9 million in repayments of nonaccrual loans, ~~totaling $4.1~~$1.0 million ~~offset by $2.0~~in loans returned to accrual status, and $1.5 million in net charge-offs, valuation and other adjustments, ~~$1.4 million in repayments of~~partially offset by additions to nonaccrual loans ~~and $0.2 million in loans returned to accrual status.~~totaling $3.5 million.

Troubled debt restructurings ("TDRs") included in nonperforming assets at June 30, ~~2021~~2022 consisted of ~~three~~six Hawaii residential mortgage loans with a combined principal balance of ~~$0.4~~$1.2 million. There were ~~$6.3~~$3.0 million of TDRs still accruing interest at June 30, ~~2021,~~2022, none of which ~~two loans totaling $0.2 million was~~were more than 90 days delinquent. At December 31, ~~2020,~~2021, there were ~~$7.8~~$4.9 million of TDRs still accruing interest, none of which ~~one loan totaling $0.7 million was~~were more than 90 days delinquent.

Loan payment forbearance or deferrals were made for borrowers impacted by the COVID-19 pandemic with loan balances totaling ~~$3.5~~$0.4 million as of December 31, 2021. At June 30, 2022, there were no loan payment forbearance or deferrals for borrowers impacted by the COVID-19 pandemic remaining.

Criticized loans at June 30, 2022 increased by $16.7 million from December 31, 2021 to $92.7 million, or ~~0.1% of total loans as of June 30, 2021, compared to $120.2 million, or 2.4%~~1.7% of the total loan ~~portfolio as~~portfolio. Special mention loans increased by $36.4 million to $68.1 million, or 1.3% of ~~December 31, 2020.~~the total loan portfolio. Classified loans declined by $19.7 million to $24.6 million, or 0.5% of the total loan portfolio.

The Company's ratio of classified assets and other real estate owned to tier 1 capital and the ACL decreased from ~~7.49%~~6.42% at December 31, ~~2020~~2021 to ~~6.20%~~3.52% at June 30, ~~2021.~~2022.

6872

Allowance for Credit Losses

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


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	(dollars in thousands)	2021			2020			2021			2020			(dollars in thousands)	2022			2021			2022			2021
Allowance for Credit Losses:	Allowance for Credit Losses:													Allowance for Credit Losses:
Balance at beginning of period	Balance at beginning of period	$	81,553		$	59,645		$	83,269		$	47,971		Balance at beginning of period	$	64,754		$	81,553		$	68,097		$	83,269
Adoption of ASU 2016-13		—			—			—			3,566
Adjusted balance at beginning of period		81,553			59,645			83,269			51,537

(Credit) provision for credit losses on loans [1] [2]		(2,963)			10,640			(3,937)			19,969

Provision (credit) for credit losses on loans [1] [2]														Provision (credit) for credit losses on loans [1] [2]	1,456			(2,963)			(1,475)			(3,937)

Charge-offs:	Charge-offs:													Charge-offs:
Commercial, financial and agricultural - Other	Commercial, financial and agricultural - Other	401			1,103			1,010			1,540			Commercial, financial and agricultural - Other	487			401			741			1,010

Residential mortgage		—			52			—			52

Consumer	Consumer	1,523			2,626			2,621			4,843			Consumer	1,390			1,523			2,606			2,621

Total charge-offs	Total charge-offs	1,924			3,781			3,631			6,435			Total charge-offs	1,877			1,924			3,347			3,631

Recoveries:	Recoveries:													Recoveries:
Commercial, financial and agricultural - Other	Commercial, financial and agricultural - Other	276			305			365			647			Commercial, financial and agricultural - Other	215			276			565			365
Real estate:
Construction	Construction	—			—			—			131			Construction	62			—			62			—
Residential mortgage	Residential mortgage	186			20			292			201			Residential mortgage	36			186			148			292
Real estate:														Real estate:
Home equity	Home equity	—			—			9			31			Home equity	—			—			—			9
Commercial mortgage	Commercial mortgage	65			1			73			3			Commercial mortgage	—			65			—			73

Consumer	Consumer	588			509			1,341			1,255			Consumer	565			588			1,161			1,341

Total recoveries	Total recoveries	1,115			835			2,080			2,268			Total recoveries	878			1,115			1,936			2,080

Net charge-offs	Net charge-offs	809			2,946			1,551			4,167			Net charge-offs	999			809			1,411			1,551

Balance at end of period	Balance at end of period	$	77,781		$	67,339		$	77,781		$	67,339		Balance at end of period	$	65,211		$	77,781		$	65,211		$	77,781

ACL as a percentage of total loans		1.53		%	1.35		%	1.53		%	1.35		%
ACL as a percentage of total loans, excluding PPP loans		1.68		%	1.50		%	1.68		%	1.50		%
Average loans, net of deferred fees and costs														Average loans, net of deferred fees and costs	$	5,221,300		$	5,110,820		$	5,221,300		$	5,110,820
Annualized ratio of net charge-offs to average loans														Annualized ratio of net charge-offs to average loans	0.08		%	0.06		%	0.05		%	0.06		%
Ratio of ACL to total loans														Ratio of ACL to total loans	1.23		%	1.53		%	1.23		%	1.53		%
Ratio of ACL to total loans, excluding PPP loans														Ratio of ACL to total loans, excluding PPP loans	1.23		%	1.68		%	1.23		%	1.68		%
ACL as a percentage of nonaccrual loans	ACL as a percentage of nonaccrual loans	1153.17		%	1420.35		%	1153.17		%	1420.35		%	ACL as a percentage of nonaccrual loans	1309		%	1153		%	1309		%	1153		%
Annualized ratio of net charge-offs to average loans		0.06		%	0.24		%	0.06		%	0.18		%

[1] The Company recorded a reserve on accrued interest receivable for loans on active payment forbearance or deferral, which were granted to borrowers impacted by the COVID-19 pandemic. This reserve was recorded as a contra-asset against accrued interest receivable with the offset to provision for credit losses. In the second quarter of 2021, the entire reserve was reversed as loans on active payment forbearance or deferral have declined significantly. The provision for credit losses on loans presented in this table excludes the adjustments to the provision for credit losses on accrued interest receivable.	[1] The Company recorded a reserve on accrued interest receivable for loans on active payment forbearance or deferral, which were granted to borrowers impacted by the COVID-19 pandemic. This reserve was recorded as a contra-asset against accrued interest receivable with the offset to provision for credit losses. In the second quarter of 2021, the entire reserve was reversed as loans on active payment forbearance or deferral have declined significantly. The provision for credit losses on loans presented in this table excludes the adjustments to the provision for credit losses on accrued interest receivable.													[1] The Company recorded a reserve on accrued interest receivable for loans on active payment forbearance or deferral, which were granted to borrowers impacted by the COVID-19 pandemic. This reserve was recorded as a contra-asset against accrued interest receivable with the offset to provision for credit losses. In the second quarter of 2021, the entire reserve was reversed as loans on active payment forbearance or deferral have declined significantly. The provision for credit losses on loans presented in this table excludes the adjustments to the provision for credit losses on accrued interest receivable.
[2] As of January 1, 2021, the provision for credit losses on off-balance sheet credit exposures (previously included in other operating expense) is included in the provision for credit losses line on the consolidated statements of income. The allowance for off-balance sheet credit exposures continues to be included in other liabilities. For roll-forward purposes, in this table we exclude the provision for credit losses on off-balance sheet credit exposures.	[2] As of January 1, 2021, the provision for credit losses on off-balance sheet credit exposures (previously included in other operating expense) is included in the provision for credit losses line on the consolidated statements of income. The allowance for off-balance sheet credit exposures continues to be included in other liabilities. For roll-forward purposes, in this table we exclude the provision for credit losses on off-balance sheet credit exposures.													[2] As of January 1, 2021, the provision for credit losses on off-balance sheet credit exposures (previously included in other operating expense) is included in the provision for credit losses line on the consolidated statements of income. The allowance for off-balance sheet credit exposures continues to be included in other liabilities. For roll-forward purposes, in this table we exclude the provision for credit losses on off-balance sheet credit exposures.

Our ACL totaled $65.2 million at June 30, ~~2021 totaled $77.8 million~~2022, compared to ~~$83.3~~$68.1 million at December 31, ~~2020.~~

~~On January 1, 2020, the Company adopted ASU 2016-13,~~ ~~“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,”~~ ~~using the modified retrospective method for all financial assets measured~~2021 and $77.8 million 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.June 30, 2021.

During the ~~three~~second quarter of 2022, we recorded a debit to the provision for credit losses on loans of $1.5 million and net charge-offs of $1.0 million. The provision for credit losses on loans during the current quarter was primarily attributable to loan portfolio growth and net loan charge-offs during the quarter. During the six months ended June 30, ~~2021,~~2022, we recorded a credit to the provision for credit losses on loans of ~~$3.0~~$1.5 million and net charge-offs of ~~$0.8~~$1.4 million. During the six months ended June 30, 2021, we recorded a credit to the provision for credit losses on loans of $3.9 million and net charge-offs of $1.6 million. The credit to the provision is driven by improved economic forecasts and positive migration of loan grades as the State of Hawaii continues to recover from the COVID-19 pandemic.

Our ACL as a percentage of total loans decreased to 1.23% at June 30, 2022 from ~~1.68%~~1.33% at December 31, ~~2020 to~~2021 and 1.53% at June 30, 2021. Excluding the PPP loan portfolio, which is guaranteed by the SBA, our ACL as a percentage of total loans was

1.23% at June 30, 2022, compared to 1.36% at December 31, 2021 and 1.68% at June 30, ~~2021, compared to 1.83% at December 31, 2020.~~2021. Our ACL as a percentage of nonaccrual loans ~~decreased~~increased to 1309% at June 30, 2022 from ~~1344.78%~~1158% at December 31, ~~2020 to 1153.17%~~2021 and 1153% at June 30, 2021.

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

Federal Home Loan Bank Stock

The bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB"). Our FHLB stock balance of ~~$8.1~~$8.9 million at June 30, ~~2021 decreased~~2022 increased by ~~$0.1~~$1.0 million, or ~~1.1%~~12.3%, from the FHLB stock balance of ~~$8.2~~$8.0 million at December 31, ~~2020.~~2021. FHLB stock has an activity-based stock requirement, ~~thus~~such that as borrowings ~~decline,~~increase, so will our holdings of FHLB stock. As a condition of membership in the FHLB, members are required to purchase and hold a minimum number of FHLB stock based on a percentage of total assets even if we have no borrowings outstanding.

Deposits

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


(dollars in thousands)	(dollars in thousands)	June 30, 2021		December 31, 2020		$ Change		% Change		(dollars in thousands)	June 30, 2022		December 31, 2021		$ Change		% Change
Noninterest-bearing demand deposits	Noninterest-bearing demand deposits	$	2,203,806	$	1,790,269	$	413,537	23.1	%	Noninterest-bearing demand deposits	$	2,282,967	$	2,291,246	$	(8,279)	(0.4)	%
Interest-bearing demand deposits	Interest-bearing demand deposits	1,341,280		1,174,888		166,392		14.2		Interest-bearing demand deposits	1,444,566		1,415,277		29,289		2.1
Savings and money market deposits	Savings and money market deposits	2,048,945		1,932,043		116,902		6.1		Savings and money market deposits	2,214,146		2,225,903		(11,757)		(0.5)
Time deposits less than $100,000	Time deposits less than $100,000	141,498		149,063		(7,565)		(5.1)		Time deposits less than $100,000	129,103		136,584		(7,481)		(5.5)
Time deposits $100,000 to $250,000	Time deposits $100,000 to $250,000	89,710		90,149		(439)		(0.5)		Time deposits $100,000 to $250,000	84,840		88,873		(4,033)		(4.5)
Core deposits	Core deposits	5,825,239		5,136,412		688,827		13.4		Core deposits	6,155,622		6,157,883		(2,261)		—

Government time deposits	Government time deposits	403,755		500,344		(96,589)		(19.3)		Government time deposits	165,000		214,950		(49,950)		(23.2)

Other time deposits greater than $250,000	Other time deposits greater than $250,000	168,165		159,362		8,803		5.5		Other time deposits greater than $250,000	301,439		266,325		35,114		13.2
Total time deposits greater than $250,000	Total time deposits greater than $250,000	571,920		659,706		(87,786)		(13.3)		Total time deposits greater than $250,000	466,439		481,275		(14,836)		(3.1)
Total deposits										Total deposits	$	6,622,061	$	6,639,158	$	(17,097)	(0.3)

Total deposits		$	6,397,159	$	5,796,118	$	601,041	10.4

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

~~Total~~Our total deposits of ~~$6.40~~$6.62 billion at June 30, ~~2021 increased~~2022 decreased by ~~$601.0~~$17.1 million, or ~~10.4%~~0.3%, from total deposits of ~~$5.80~~$6.64 billion at December 31, ~~2020.~~2021. Net ~~increases~~decreases in ~~noninterest-bearing demand~~government time deposits of ~~$413.5 million, interest-bearing demand deposits of $166.4~~$50.0 million, savings and money market deposits of ~~$116.9~~$11.8 million, noninterest-bearing demand deposits of $8.3 million, time deposits less than $100,000 of $7.5 million, and time deposits $100,000 to $250,000 of $4.0 million, were offset by net increases in other time deposits greater than $250,000 of ~~$8.8 million were offset by net decreases in time deposits less than $100,000 of $7.6 million, time deposits $100,000 to $250,000 of $0.4~~$35.1 million and ~~government time~~interest-bearing demand deposits of ~~$96.6~~$29.3 million.

~~Core~~After experiencing large increases in core deposits in 2020 and 2021 primarily due to the deposit of PPP funds and other government stimulus into both new and existing deposit accounts, during the six months ended June 30, 2022, the Company experienced a slight run-off of core deposits. Our core deposits, which we define as demand deposits, savings and money market deposits, and time deposits up to $250,000, totaled ~~$5.83~~$6.16 billion at June 30, ~~2021~~2022 and ~~increased~~decreased by ~~$688.8~~$2.3 million, ~~or 13.4%,~~ from ~~$5.14~~$6.16 billion at December 31, 2020. The deposit of PPP funds and other government stimulus into both new and existing deposit accounts largely contributed to the increase in core deposits. The addition of PPP funds may be temporary as the PPP monies are spent by the businesses in accordance with the program. Going forward, the Company is focused on expanding banking relationships with the new

~~businesses we assisted with PPP.~~2021. Core deposits as a percentage of total deposits was ~~91.1%~~93.0% at June 30, ~~2021,~~2022, compared to ~~88.6%~~92.8% at December 31, ~~2020.~~2021. Our average cost of total deposits was 6 bp during the six months ended June 30, 2022.

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)~~pandemic and FRB actions impacting market interest rates and the economy) 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 or the ability to return capital to our shareholders, including the ability to declare cash dividends or repurchase our securities.

Common and Preferred Equity

~~Shareholders'~~Our total shareholders' equity ~~totaled $552.8~~was $455.1 million at June 30, ~~2021,~~2022, compared to ~~$546.7~~$558.2 million at December 31, ~~2020.~~2021. The change in total shareholders' equity was primarily attributable to ~~net income of $36.8 million, partially offset by~~ other comprehensive loss of ~~$15.2~~$118.5 million, cash dividends

declared of ~~$13.3~~$14.4 million, and the repurchase of ~~$4.3~~$10.9 million in shares of our common stock under our stock repurchase ~~program~~programs in the six months ended June 30, ~~2021.~~2022, partially offset by net income of $37.0 million.

Our total shareholders' equity to total assets ratio was ~~7.70%~~6.23% at June 30, ~~2021,~~2022, compared to ~~8.29%~~7.52% at December 31, ~~2020.~~2021. Our book value per share was $16.57 and $20.14 at June 30, 2022 and December 31, 2021, respectively. The ~~decline~~declines in our total shareholders' equity, total shareholders' equity to total assets ratio ~~was~~and book value per share were primarily due to the ~~significant increase~~aforementioned unrealized losses on available-for-sale investment securities recorded in accumulated other comprehensive loss during the ~~total assets denominator attributable to $434.6 million in PPP loans, net of deferred fees and costs. Our book value per share was $19.59 and $19.40 at~~six months ended June 30, ~~2021 and December 31, 2020, respectively.~~2022 due to the rising interest rate environment.

Holding Company Capital Resources

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

CPF relies on the bank to pay dividends to fund its obligations. As of June 30, ~~2021,~~2022, on a stand-alone basis, CPF had an available cash balance of approximately ~~$12.9~~$18.1 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 June 30, ~~2021,~~2022, the bank had Statutory Retained Earnings of ~~$101.7~~$129.5 million. Provisions of federal law also impact the ability of the bank to pay dividends to the Company and the ability of the Company to pay dividends to our shareholders and repurchase our common stock. On July ~~27, 2021,~~26, 2022, the Company's Board of Directors declared a cash dividend of ~~$0.24~~$0.26 per share on the Company's outstanding common stock, which increased by ~~4.3%~~8.3% from ~~the $0.23~~$0.24 per share a year-ago.

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

In January 2020, the Company’s Board of Directors authorized the repurchase of up to $30 million of its common stock from time to time in the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase program (the "Repurchase Plan"). The Repurchase Plan replaced and superseded in its entirety the share repurchase program previously approved by the Company's Board of Directors, which had $26.6 million in remaining repurchase authority. The Company's Repurchase Plan was subject to a one year expiration. In the first quarter of 2020, the Company repurchased 206,802 shares of common stock, at a cost of $4.7 million, under the Company's repurchase plan. In March 2020, the Company temporarily suspended the Repurchase Plan due to uncertainty during the current COVID-19 pandemic.

On January 26, 2021, the Company's Board of Directors approved a new share repurchase authorization of up to $25 million of its common ~~stock. During~~stock (the "2021 Repurchase Plan"), which replaced and superseded the previous share repurchase program. The Company resumed repurchases during the second quarter of 2021. During 2021, the Company ~~resumed repurchases and~~ repurchased ~~156,600~~696,894 shares of common stock, at aan aggregate cost of ~~$4.3 million.~~$18.7 million under the 2021 Repurchase Plan.

On January 25, 2022, the Company's Board of Directors approved a new share repurchase authorization 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 "2022 Repurchase Plan"). The 2022 Repurchase Plan replaces and supersedes in its entirety the 2021 Repurchase Plan, which had $6.3 million in remaining repurchase authority as of December 31, 2021.

During the six months ended June 30, 2022, the Company repurchased 409,410 shares of common stock, at an aggregate cost of $10.9 million under the Company's share repurchase programs (34,100 shares at an aggregate cost of $1.0 million under the 2021 Repurchase Plan and 375,310 shares at an aggregate cost of $9.9 million under the 2022 Repurchase Plan). As of June 30, 2022, $20.1 million remained available for repurchase under the Company's 2022 Repurchase Plan. We cannot provide any assurance whether or not we will continue to repurchase common stock under our share repurchase ~~program..~~program.

Trust Preferred Securities

As of June 30, ~~2021,~~2022, we have two remaining statutory trusts, CPB Capital Trust IV ("Trust IV") and CPB Statutory Trust V ("Trust V"), which issued a total of $50.0 million in floating rate trust preferred securities. The trust preferred securities, the underlying floating rate junior subordinated debentures that are the assets of Trusts IV and V, and the common securities issued by Trusts IV and V are redeemable in whole or in part on any interest payment date on or after December 15, 2009 for Trust IV

and V, or at any time in whole but not in part within 90 days following the occurrence of certain events. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from time to time to defer subordinated debenture interest payments, which would result in a deferral of dividend payments on the related trust preferred securities, for up to 20 consecutive quarterly periods without default or penalty.

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

Subordinated Notes

On October 20, 2020, the Company completed a $55 million private placement of ten-year fixed-to-floating rate subordinated notes, which will be used to support regulatory capital ratios and for general corporate purposes. The Company exchanged the privately placed notes for registered notes with the same terms and in the same aggregate principal amount at the end of the fourth quarter of 2020. The notes bear a fixed interest rate of 4.75% for the first five years and will reset quarterly thereafter for the remaining five years to the then current three-month Secured Overnight Financing Rate, as published by the Federal Reserve Bank of New York, plus 456 basis points. The subordinated notes had a carrying value of ~~$53.9~~$54.2 million, net of unamortized debt issuance costs of ~~$1.1~~$0.8 million, at June 30, ~~2021.~~2022.

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

guidelines and interpretations.

Regulatory Capital Ratios

~~General~~The Company and the bank are subject to various regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, ~~adopted~~involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks ("Basel III rules") became effective for the ~~FRB~~Company on January 1, 2015, and ~~FDIC require an institution to maintain minimum leverage capital, Tier~~were fully phased in on January 1, 2019. Under the Basel III rules, the Company must hold a "capital conservation buffer" above the adequately capitalized risk-based capital ~~total~~ratios. The capital conservation buffer was phased in at the rate of 0.625% per year from 0.625% in 2016 to a fully phased in 2.50% on January 1, 2019.

The final rules allowed community banks to make a one-time election not to include the additional components of accumulated other comprehensive income (“AOCI”) in regulatory capital and instead use the existing treatment under the general risk-based capital ~~and common equity Tier 1 ("CET1") capital ratios. In addition~~rules that excludes most AOCI components from regulatory capital. The Company made the election not to ~~these uniform risk-based capital guidelines and leverage ratios that apply across~~include the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. For a further discussionadditional components of ~~the effect of forthcoming changes~~AOCI in ~~required~~ regulatory ~~capital ratios, see the discussion in the "Business — Supervision and Regulation" sections of our 2020 Form 10-K.~~capital.

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

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

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

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

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

The Company ~~has~~ elected to exercise the option to delay for two years the CECL methodology's effect on regulatory capital.

~~The Company's~~General capital adequacy regulations adopted by the FRB and ~~the bank's~~FDIC require an institution to maintain minimum leverage capital, ~~tier~~Tier 1 risk-based capital, total risk-based capital, and ~~CET1 risk-based~~common equity Tier 1 ("CET1") capital ~~ratios as of June 30, 2021 were above the levels required for a "well capitalized" regulatory designation.~~

ratios. In addition to these

7276

uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. For a further discussion of the effect of forthcoming changes in required regulatory capital ratios, see the discussion in the "Business — Supervision and Regulation" sections of our 2021 Form 10-K.

The following table sets forth the Company's and the bank's capital ratios, as well as the minimum capital adequacy requirements applicable to all financial institutions as of the dates indicated. The Company's and the bank's leverage capital, tier 1 risk-based capital, total risk-based capital, and CET1 risk-based capital ratios as of June 30, 2022 were above the levels required for a "well capitalized" regulatory designation.


	Actual				Minimum Required for Capital Adequacy Purposes				Minimum Required to be Well Capitalized
(dollars in thousands)	Amount		Ratio		Amount		Ratio [1]		Amount		Ratio
Company
At June 30, 2022:
Leverage capital	$	635,995	8.6	%	$	296,278	4.0	%	N/A		N/A
Tier 1 risk-based capital	635,995		11.6		328,573		6.0		N/A		N/A
Total risk-based capital	759,458		13.9		438,097		8.0		N/A		N/A
CET1 risk-based capital	585,995		10.7		246,430		4.5		N/A		N/A

At December 31, 2021:
Leverage capital	$	622,130	8.5	%	$	293,382	4.0	%	N/A		N/A
Tier 1 risk-based capital	622,130		12.2		307,215		6.0		N/A		N/A
Total risk-based capital	741,291		14.5		409,620		8.0		N/A		N/A
CET1 risk-based capital	572,130		11.2		230,411		4.5		N/A		N/A

Central Pacific Bank
At June 30, 2022:
Leverage capital	$	667,011	9.0	%	$	295,699	4.0	%	$	369,623	5.0	%
Tier 1 risk-based capital	667,011		12.2		327,808		6.0		437,078		8.0
Total risk-based capital	735,317		13.5		437,078		8.0		546,347		10.0
CET1 risk-based capital	667,011		12.2		245,856		4.5		355,126		6.5

At December 31, 2021:
Leverage capital	$	652,987	8.9	%	$	292,877	4.0	%	$	366,096	5.0	%
Tier 1 risk-based capital	652,987		12.8		306,497		6.0		408,663		8.0
Total risk-based capital	717,000		14.0		408,663		8.0		510,828		10.0
CET1 risk-based capital	652,987		12.8		229,873		4.5		332,038		6.5

Actual Minimum Required
for Capital Adequacy
Purposes Minimum Required
to be
Well Capitalized
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
Company
At June 30, 2021:
Leverage capital $ 602,668 8.6 % $ 281,587 4.0 % N/A
Tier 1 risk-based capital 602,668 12.7 285,449 6.0 N/A
Total risk-based capital 710,382 14.9 380,599 8.0 N/A
CET1 risk-based capital 552,668 11.6 214,087 4.5 N/A
At December 31, 2020:
Leverage capital $ 581,358 8.8 % $ 263,979 4.0 % N/A
Tier 1 risk-based capital 581,358 12.9 271,027 6.0 N/A
Total risk-based capital 686,130 15.2 361,370 8.0 N/A
CET1 risk-based capital 531,358 11.8 203,270 4.5 N/A
Central Pacific Bank
At June 30, 2021:
Leverage capital $ 639,542 9.1 % $ 281,163 4.0 % $ 351,454 5.0 %
Tier 1 risk-based capital 639,542 13.5 285,065 6.0 380,086 8.0
Total risk-based capital 692,163 14.6 380,086 8.0 475,108 10.0
CET1 risk-based capital 639,542 13.5 213,798 4.5 308,820 6.5
At December 31, 2020:
Leverage capital $ 620,372 9.4 % $ 263,735 4.0 % $ 329,668 5.0 %
Tier 1 risk-based capital 620,372 13.7 270,820 6.0 361,094 8.0
Total risk-based capital 670,087 14.9 361,094 8.0 451,367 10.0
CET1 risk-based capital 620,372 13.7 203,115 4.5 293,389 6.5

[1] Under the Basel III Capital Rules, the Company and the bank must also maintain the required Capital Conservation Buffer ("CCB") to avoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to management. The CCB is calculated as a ratio of CET1 capital to risk-weighted assets, and effectively increases the required minimum risk-based capital ratios. The CCB requirement was phased in over a three-year period that began on January 1, 2016. The phase-in period ended on January 1, 2019, and the CCB is now at its fully phased-in level of 2.5%.

Asset/Liability Management and Interest Rate Risk

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

Our Asset/Liability Management Policy seeks to maximize the risk-adjusted return to shareholders while maintaining consistently acceptable levels of liquidity, interest rate risk and capitalization. Our Asset/Liability Management Committee, or

ALCO, monitors interest rate risk through the use of ~~interest rate sensitivity gap,~~ net interest income ("NII") and ~~market~~economic value of ~~portfolio~~ equity ("EVE") simulation and various hypothetical interest rate ~~shock analyses.~~scenarios that may include gradual, immediate or non-parallel rate changes. This process is designed to measure the impact of future changes in interest rates on ~~net interest income~~NII and ~~market value of portfolio equity.~~EVE. Adverse interest rate risk exposures are managed through the shortening or lengthening of the duration of assets and liabilities.

ALCO utilizes a detailed and dynamic simulation model to measure and manage interest rate risk exposures. The simulation ~~process is designed~~incorporates various assumptions which are believed to ~~measure~~be reasonable but may impact results. Key modeling assumptions are made around the ~~impact~~timing of ~~future~~interest rate changes, the prepayment of mortgage-related assets, pricing spreads of assets and liabilities and the timing and magnitude of deposit rate changes in relation to changes in the overall level of interest ~~rates on net interest income and market value of portfolio equity and to allow ALCO to model alternative balance sheet strategies.~~rates.

The following reflects our net interest income sensitivity analysis as of June 30, ~~2021.~~2022. Net interest income is estimated assuming no balance sheet growth under a flat interest rate scenario. The net interest income sensitivity is measured as the

change in net interest income in alternate interest rate scenarios as a percentage of the flat rate scenario. The alternate rate scenarios typically assume rates move up or down 100 ~~bps~~bp in either a gradual or an instantaneous, parallel fashion. ~~However, due to historically low rates stemming from the COVID-19 pandemic, market rate changes in the down 100 bp scenario were limited.~~


Rate Change (Gradual)	Estimated Net Interest Income Sensitivity
+100 bp	~~4.10~~3.26	%
-100 bp	~~(3.86)~~(1.92)	%

Rate Change (Instantaneous)	Estimated Net Interest Income Sensitivity
+100 bp	4.07	%
-100 bp	(5.77)	%

Liquidity and Borrowing Arrangements

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

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

The bank maintained a ~~$1.81~~$1.93 billion line of credit with the FHLB as of June 30, ~~2021,~~2022, compared to ~~$1.81~~$1.83 billion at December 31, ~~2020.~~2021. There were no short-term borrowings under this arrangement at June 30, ~~2021, compared to $22.0 million~~2022 and at December 31, ~~2020.~~2021. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled ~~$230.8~~$32.2 million at June 30, ~~2021, compared to $268.0~~2022, and remained unchanged from $32.2 million at December 31, ~~2020.~~2021. There were no long-term borrowings under this arrangement at June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. FHLB advances and standby letters of credit available at June 30, ~~2021~~2022 were secured by certain real estate loans with a carrying value of ~~$2.67~~$2.80 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB. At June 30, ~~2021, $1.58~~2022, $1.90 billion was undrawn under this arrangement, compared to ~~$1.52~~$1.80 billion at December 31, ~~2020.~~2021.

To bolster the effectiveness of the PPP, the Federal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The Paycheck Protection Program Liquidity Facility ("PPPLF") will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. At June 30, 2021, there were no funds drawn from the Federal Reserve Bank under the PPPLF and no PPP loans pledged to the Federal Reserve Bank. The PPPLF expires on July 30, 2021.

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

~~Contractual Obligations~~

Information regarding our material contractual obligations is provided in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. There have been no material changes in our cash requirements from known contractual and other obligations since December 31, ~~2020.~~

2021. We believe we will be able to meet our contractual obligations as they come due through the maintenance of adequate liquidity levels. We expect to maintain adequate liquidity levels through profitability, loan payoffs, securities repayments and maturities and continued deposit gathering activities. We also have various borrowing mechanisms in place for both short-term and long-term liquidity needs.

7479

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

The primary analytical tool we use to measure and manage our interest rate risk is a simulation model that projects changes in net interest income ("NII") as market interest rates change. Our ALCO policy requires that simulated changes in NII should be within certain specified ranges, or steps must be taken to reduce interest rate risk. The results of the model indicate that the mix of rate-sensitive assets and liabilities at June 30, ~~2021~~2022 would not result in a fluctuation of NII that would exceed the established policy limits.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

~~As of the end of the period covered by this report, t~~There have been no changes in the Company’s internal control over financial reporting (as defined in Rule ~~13a15(f)~~13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the period covered by this report, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

7580

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes from the Risk Factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, as filed with the SEC on February 23, ~~2021.~~2022.

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

Issuer Purchases of Equity Securities

On January 26, 2021, the Company's Board of Directors approved a ~~new~~ share repurchase authorization of up to $25 million of its common ~~stock.~~ stock (the "2021 Repurchase Plan"). The Company did not repurchase any shares of common stock during the first quarter of 2021 and resumed repurchases under the 2021 Repurchase Plan in the second quarter of 2021.

On January 25, 2022, the Company's Board of Directors approved a new share repurchase authorization 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 "2022 Repurchase Plan"). The 2022 Repurchase Plan replaces and supersedes the 2021 Repurchase Plan, which had $6.3 million in remaining repurchase authority as of December 31, 2021.

During the three months ended June 30, 2022, the Company repurchased 174,429 shares of common stock, at an aggregate cost of $4.2 million under the Company's 2022 Repurchase Plan.

As of June 30, ~~2021, $20.7~~2022, $20.1 million remained available for repurchase asunder the ~~Company repurchased 156,600 shares of common stock, at a cost of $4.3 million, during the second quarter of 2021. We~~Company's 2022 Repurchase Plan.We cannot provide any assurance as to whether or not we will continue to repurchase common stock under our share repurchase program.

Issuer Purchases of Equity Securities
Period Total
Number
of Shares
Purchased Average
Price Paid
per Share Total Shares
Purchased as
Part of Publicly
Announced
Programs Maximum Dollar
Value of
Shares That
May Yet Be
Purchased Under
the Program
April 1-30, 2021 — $ — — $ 25,000,000
May 1-31, 2021 59,500 28.03 59,500 23,332,469
June 1-30, 2021 97,100 27.38 97,100 20,673,628
Total 156,600 $ 27.63 156,600 20,673,628


	Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Shares Purchased as Part of Publicly Announced Programs	Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program
April 1-30, 2022	53,529	$	27.04	53,529	$	22,830,569
May 1-31, 2022	48,500	24.32		48,500	21,650,841
June 1-30, 2022	72,400	21.97		72,400	20,060,293
Total	174,429	$	24.18	174,429	20,060,293

7681

Item 6. Exhibits


Exhibit No.						Document

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

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

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

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

101.INS						XBRL Instance Document*

101.SCH						XBRL Taxonomy Extension Schema Document*

101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB						XBRL Taxonomy Extension Label Linkbase Document*

101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document*

101.DEF						XBRL Taxonomy Extension Definition Linkbase Document*

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


*						Filed herewith.

**						Furnished herewith.

7782

SIGNATURES

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


		CENTRAL PACIFIC FINANCIAL CORP.
		(Registrant)


Date:	~~July 28, 2021~~August 8, 2022	/s/ Paul K. Yonamine
		Paul K. Yonamine
		Chairman and Chief Executive Officer

Date:	~~July 28, 2021~~August 8, 2022	/s/ David S. Morimoto
		David S. Morimoto
		Senior Executive Vice President and Chief Financial Officer

7883


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


Real estate: Commercial mortgage	1	$	285	$	0
Consumer	9	145		0
Total	10	$	430	$	0

Six Months Ended June 30, 2020


Real estate: Commercial mortgage	1	$	285	$	0
Consumer	9	145		0
Total	10	$	430	$	0


			Fair Value Measurements Using
(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2021


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

December 31, 2020


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