CPF 10-Q Quarterly Report Sept. 30, 2022

CENTRAL PACIFIC FINANCIAL CORP

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cpf-20220930

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 September 30, 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 October 14, 2022 was 27,227,879 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 - September 30, 2022 and December 31, 2021	5

	Consolidated Statements of Income - Three and nine months ended September 30, 2022 and 2021	6

	Consolidated Statements of Comprehensive Income - Three and nine months ended September 30, 2022 and 2021	7

	Consolidated Statements of Changes in Equity - Three and nine months ended September 30, 2022 and 2021	8

	Consolidated Statements of Cash Flows - Nine months ended September 30, 2022 and 2021	10

	Notes to Consolidated Financial Statements (Unaudited)	11

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	54

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	79

Item 4.	Controls and Procedures	79

Part II.	Other Information	80

Item 1.	Legal Proceedings	80

Item 1A.	Risk Factors	80

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	80

Item 6.	Exhibits	81

Signatures		82

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 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 effects of inflation and rising interest rates; 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 Banking-as-a-Service ("BaaS") initiatives , including adoption of the initiatives by customers and 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 viruses and 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"); 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 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 document. 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)	September 30, 2022		December 31, 2021
Assets
Cash and due from banks	$	116,365	$	81,506
Interest-bearing deposits in other banks	22,332		247,401
Investment securities:
Available-for-sale debt securities, at fair value	686,681		1,631,699
Held-to-maturity debt securities, at amortized cost; fair value of: $ 590,880 at September 30, 2022 and none at December 31, 2021	662,827		—

Total investment securities	1,349,508		1,631,699
Loans held for sale	1,701		3,531
Loans	5,422,212		5,101,649
Allowance for credit losses	( 64,382 )		( 68,097 )
Loans, net of allowance for credit losses	5,357,830		5,033,552
Premises and equipment, net	89,979		80,354
Accrued interest receivable	18,134		16,709
Investment in unconsolidated entities	36,769		29,679

Mortgage servicing rights	9,216		9,738

Bank-owned life insurance	167,761		169,148
Federal Home Loan Bank stock	13,546		7,964
Right-of-use lease asset	35,978		39,441
Other assets	118,512		68,367
Total assets	$	7,337,631	$	7,419,089
Liabilities
Deposits:
Noninterest-bearing demand	$	2,138,083	$	2,291,246
Interest-bearing demand	1,441,302		1,415,277
Savings and money market	2,194,991		2,225,903
Time	782,058		706,732
Total deposits	6,556,434		6,639,158
FHLB advances and other short-term borrowings	115,000		—
Long-term debt	105,799		105,616
Lease liability	36,941		40,731

Other liabilities	84,989		75,317
Total liabilities	6,899,163		6,860,822
Contingent liabilities and other commitments (see Notes 8, 16 and 17)
Equity
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding: none at September 30, 2022 and December 31, 2021	—		—
Common stock, no par value, authorized 185,000,000 shares; issued and outstanding: 27,262,879 at September 30, 2022 and 27,714,071 at December 31, 2021	412,994		426,091
Additional paid-in capital	100,426		98,073
Retained earnings	74,301		42,015
Accumulated other comprehensive loss	( 149,253 )		( 7,960 )
Total shareholders' equity	438,468		558,219
Non-controlling interest	—		48
Total equity	438,468		558,267
Total liabilities and equity	$	7,337,631	$	7,419,089

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands, except per share data)	2022		2021		2022		2021
Interest income:
Interest and fees on loans	$	51,686	$	51,104	$	143,598	$	146,202
Interest and dividends on investment securities:
Taxable interest	6,933		6,210		20,937		15,763
Tax-exempt interest	805		470		2,428		1,330
Dividends	—		18		21		54
Interest on deposits in other banks	107		105		370		176
Dividends on Federal Home Loan Bank stock	138		62		265		184
Total interest income	59,669		57,969		167,619		163,709
Interest expense:
Interest on deposits:
Demand	217		101		473		280
Savings and money market	1,054		332		1,700		888
Time	1,092		428		2,051		1,514
Interest on short-term borrowings	660		—		662		2
Interest on long-term debt	1,281		1,022		3,455		3,074
Total interest expense	4,304		1,883		8,341		5,758
Net interest income	55,365		56,086		159,278		157,951
Provision (credit) for credit losses	362		( 2,635 )		( 1,844 )		( 6,899 )
Net interest income after provision (credit) for credit losses	55,003		58,721		161,122		164,850
Other operating income:
Mortgage banking income	831		1,327		3,143		5,830
Service charges on deposit accounts	2,138		1,637		6,025		4,558
Other service charges and fees	4,955		4,942		14,053		13,351
Income from fiduciary activities	1,165		1,292		3,507		3,792

Net gain on sales of investment securities	—		100		8,506		150
Income from bank-owned life insurance	167		540		( 322 )		2,547



Other	373		415		1,406		1,266
Total other operating income	9,629		10,253		36,318		31,494
Other operating expense:
Salaries and employee benefits	22,778		23,566		66,089		67,183
Net occupancy	4,743		4,185		12,965		12,004
Equipment	1,085		1,089		3,242		3,137

Communication	712		824		2,262		2,349
Legal and professional services	2,573		2,575		8,115		7,524
Computer software	4,138		2,998		10,844		10,179
Advertising	1,150		1,329		3,450		4,316


Other	4,819		4,779		18,585		13,932
Total other operating expense	41,998		41,345		125,552		120,624
Income before income taxes	22,634		27,629		71,888		75,720
Income tax expense	5,919		6,814		18,141		18,153
Net income	$	16,715	$	20,815	$	53,747	$	57,567
Per common share data:
Basic earnings per common share	$	0.61	$	0.74	$	1.96	$	2.05
Diluted earnings per common share	$	0.61	$	0.74	$	1.94	$	2.03
Cash dividends declared	$	0.26	$	0.24	$	0.78	$	0.71
Basic weighted average shares outstanding	27,356,614		27,967,089		27,487,237		28,082,632
Diluted weighted average shares outstanding	27,501,212		28,175,953		27,666,197		28,316,574

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2022		2021		2022		2021
Net income	$	16,715	$	20,815	$	53,747	$	57,567
Other comprehensive (loss) income, net of tax:
Net change in fair value of available-for-sale investment securities	( 27,732 )		( 6,852 )		( 152,332 )		( 22,426 )
Amortization of unrealized losses on investment securities transferred to held-to-maturity	1,699		—		3,147		—
Net change in fair value of derivatives	3,194		—		5,304		—
Defined benefit retirement plan and SERPs	18		193		2,588		565
Total other comprehensive loss, net of tax	( 22,821 )		( 6,659 )		( 141,293 )		( 21,861 )
Comprehensive (loss) income	$	( 6,106 )	$	14,156	$	( 87,546 )	$	35,706

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. 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
Net income	—	—		—		—		16,715		—		—		16,715
Other comprehensive loss	—	—		—		—		—		( 22,821 )		—		( 22,821 )
Cash dividends declared ($ 0.26 per share)	—	—		—		—		( 7,107 )		—		—		( 7,107 )

Common stock repurchased and retired and other related costs	( 218,000 )	—		( 4,868 )		—		—		—		—		( 4,868 )
Share-based compensation	17,317	—		—		1,449		—		—		—		1,449

Balance at September 30, 2022	27,262,879	$	—	$	412,994	$	100,426	$	74,301	$	( 149,253 )	$	—	$	438,468


	Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-In Capital		(Accum. Deficit) Retained Earnings		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
Net income	—	—		—		—		20,815		—		—		20,815
Other comprehensive loss	—	—		—		—		—		( 6,659 )		—		( 6,659 )
Cash dividends declared ($ 0.24 per share)	—	—		—		—		( 6,733 )		—		—		( 6,733 )

Common stock repurchased and retired and other related costs	( 234,700 )	—		( 3,897 )		—		( 1,997 )		—		—		( 5,894 )
Share-based compensation	15,428	—		—		1,097		—		—		—		1,097

Balance at September 30, 2021	27,999,588	$	—	$	436,957	$	97,279	$	22,916	$	( 1,733 )	$	48	$	555,467

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Nine Months Ended September 30,
(dollars in thousands)	2022		2021
Cash flows from operating activities:
Net income	$	53,747	$	57,567
Adjustments to reconcile net income to net cash provided by operating activities:
(Credit) provision for credit losses	( 1,844 )		( 6,899 )
Depreciation and amortization of premises and equipment	5,217		5,160
Non-cash lease expense (benefit)	( 341 )		( 81 )
Cash flows from operating leases	( 4,485 )		( 4,927 )
Loss on disposal of fixed assets	139		38

Amortization of mortgage servicing rights	1,115		2,800
Net amortization and accretion of premium/discounts on investment securities	3,522		7,557
Share-based compensation expense	2,353		2,437
Net gain on sales of investment securities	( 8,506 )		( 150 )
Net gain on sales of residential mortgage loans	( 1,626 )		( 4,469 )
Proceeds from sales of loans held for sale	73,763		113,094
Originations of loans held for sale	( 70,307 )		( 97,228 )
Equity in earnings of unconsolidated entities	( 171 )		( 299 )
Distributions from unconsolidated entities	180		368
Net decrease (increase) in cash surrender value of bank-owned life insurance	823		( 3,357 )
Deferred income taxes	( 36,447 )		( 2,961 )
Net tax benefit from share-based compensation	196		256
Net change in other assets and liabilities	64,673		6,009
Net cash provided by operating activities	82,001		74,915
Cash flows from investing activities:
Proceeds from maturities of and calls on investment securities available-for-sale	150,319		229,868
Proceeds from sales of investment securities available-for-sale	—		279,539
Purchases of investment securities available-for-sale	( 89,063 )		( 900,427 )
Proceeds from maturities of and calls on investment securities held-to-maturity	23,712		—
Purchases of investment securities held-to-maturity	( 9,934 )		—
Proceeds from sale of Visa Class B common stock	8,506		—
Net loan (originations) repayments	( 70,246 )		126,449
Purchases of loan portfolios	( 252,188 )		( 209,916 )


Purchases of bank-owned life insurance	( 1,300 )		( 3,550 )
Proceeds from bank-owned life insurance	1,864		2,107

Net purchases of premises, equipment and land	( 14,981 )		( 20,110 )

Contributions to unconsolidated entities	( 8,995 )		( 2,912 )
Net (purchases) proceeds from redemption of FHLB stock	( 5,582 )		285
Net cash used in investing activities	( 267,888 )		( 498,667 )
Cash flows from financing activities:
Net (decrease) increase in deposits	( 82,724 )		719,745


Net increase (decrease) in short-term borrowings	115,000		( 22,000 )
Cash dividends paid on common stock	( 21,461 )		( 20,010 )
Repurchases of common stock and other related costs	( 15,817 )		( 10,221 )
Net proceeds from issuance of common stock and stock option exercises	679		1,013
Net cash (used in) provided by financing activities	( 4,323 )		668,527
Net (decrease) increase in cash and cash equivalents	( 190,210 )		244,775
Cash and cash equivalents at beginning of period	328,907		104,067
Cash and cash equivalents at end of period	$	138,697	$	348,842




Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	7,185	$	5,777
Income taxes	5,576		20,377


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	673,254		—
Amortization of unrealized losses on investment securities transferred to held-to-maturity	4,295		—
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," 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, 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.

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 met the consolidation requirements under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 810, "Consolidation." 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 non-voting common stock and $ 0.5 million in cash in exchange for Swell preferred stock. 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. Swell recently launched its alpha pilot, where members off its waitlist are invited to sign up for Swell Cash and Credit. 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., a venture capital 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 September 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 entities.

Our investments in unconsolidated entities accounted for under the equity, proportional amortization and cost methods were $ 0.2 million, $ 31.0 million and $ 5.6 million, respectively, at September 30, 2022 and $ 0.2 million, $ 25.9 million and $ 3.6 million, respectively, at December 31, 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.

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 September 30, 2022 and the Company did not reverse any accrued interest against interest income during the three and nine months ended September 30, 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 September 30, 2022, the decline in market values of our AFS debt securities 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 $ 2.9 million and $ 4.6 million as of September 30, 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 September 30, 2022. The Company did no t have any accrued interest receivable on HTM debt securities as of 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 $ 14.0 million and $ 12.1 million at September 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 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 September 30, 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. 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 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,” 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 economic recovery, market volatility and other actions taken by governmental authorities and other third parties as a result of the pandemic.

ACL for Loans

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

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

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

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

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

The ACL methodology may also consider other adjustments to address changes in conditions, trends, and circumstances such as local industry changes that could have a significant impact on the risk profile of the loan portfolio and provide for 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 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 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 secured by 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 suc h as Risk Rating, 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 days past due, delinquency counters, T DR 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 2022

In May 2021, the FASB issued ASU No. 2021-04, "Earnings Per Share (Topic 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" . ASU 2021-04 addresses issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. ASU 2021-04 is effective for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2021-04 effective January 1, 2022 and it did not have a material impact on our 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. The Company adopted ASU 2021-05 effective January 1, 2022 and it did not have an impact on our consolidated financial 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. ASU 2020-04 and 2021-01 are elective and can be adopted between March 12, 2020 and December 31, 2022. The Company will elect optional expedients above for applicable contract modifications and hedge accounting for hedging relationships that meet the stated criteria. The Company is in the process of evaluating the impact of this pronouncement on the consolidated financial statements.

In March 2022, the FASB issued ASU No. 2022-01, "Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method" . ASU 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 a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments on a prospective basis. ASU 2022-01 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, 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. The Company is in the process of evaluating the impact of this pronouncement on the consolidated 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)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		ACL
September 30, 2022
Held-to-maturity:
Debt securities:
States and political subdivisions	$	41,808	$	—	$	( 5,679 )	$	36,129	$	—

Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	621,019		—		( 66,268 )		554,751		—

Total held-to-maturity securities	$	662,827	$	—	$	( 71,947 )	$	590,880	$	—

Available-for-sale:
Debt securities:
States and political subdivisions	$	176,133	$	11	$	( 36,668 )	$	139,476	$	—
Corporate securities	36,324		—		( 6,826 )		29,498		—
U.S. Treasury obligations and direct obligations of U.S. Government agencies	29,666		15		( 2,173 )		27,508		—
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	511,171		—		( 78,886 )		432,285		—
Residential - Non-government agencies	10,088		—		( 1,155 )		8,933		—
Commercial - U.S. Government-sponsored entities	55,012		—		( 7,550 )		47,462		—
Commercial - Non-government agencies	1,542		—		( 23 )		1,519		—
Total available-for-sale securities	$	819,936	$	26	$	( 133,281 )	$	686,681	$	—


(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.

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 the impact of rising rates on the market value of 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 to maturity.

The amortized cost and estimated fair value of our HTM and AFS debt securities at September 30, 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.


	September 30, 2022
(dollars in thousands)	Amortized Cost		Fair Value
Held-to-maturity:
Debt securities:
Due after ten years	$	41,808	$	36,129


Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	621,019		554,751

Total held-to-maturity securities	$	662,827	$	590,880

Available-for-sale:
Debt securities:
Due in one year or less	$	6,016	$	5,992
Due after one year through five years	19,268		18,786
Due after five years through ten years	80,816		70,528
Due after ten years	136,023		101,176
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	511,171		432,285
Residential - Non-government agencies	10,088		8,933
Commercial - U.S. Government-sponsored entities	55,012		47,462
Commercial - Non-government agencies	1,542		1,519

Total available-for-sale securities	$	819,936	$	686,681

During 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 nine months ended September 30, 2022 and 2021.

Investment securities with fair value of $ 445.4 million and $ 455.8 million at September 30, 2022 and December 31, 2021, respectively, were pledged to secure public funds on deposit and other short-term borrowings.

At September 30, 2022 and December 31, 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 256 and 153 debt securities which were in an unrealized loss position, without an ACL, at September 30, 2022 and December 31, 2021, respectively. Th e following tables summarize AFS debt securities which were in an unrealized loss position at September 30, 2022 and December 31, 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
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2022
Debt securities:
States and political subdivisions	$	102,107	$	( 22,280 )	$	33,382	$	( 14,388 )	$	135,489	$	( 36,668 )
Corporate securities	4,257		( 762 )		25,241		( 6,064 )		29,498		( 6,826 )
U.S. Treasury obligations and direct obligations of U.S Government agencies	6,448		( 93 )		16,037		( 2,080 )		22,485		( 2,173 )
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	224,937		( 30,730 )		207,348		( 48,156 )		432,285		( 78,886 )
Residential - Non-government agencies	8,198		( 906 )		735		( 249 )		8,933		( 1,155 )
Commercial - U.S. Government-sponsored entities	29,489		( 2,137 )		17,972		( 5,413 )		47,461		( 7,550 )
Commercial - Non-government agencies	1,519		( 23 )		—		—		1,519		( 23 )
Total temporarily impaired securities	$	376,955	$	( 56,931 )	$	300,715	$	( 76,350 )	$	677,670	$	( 133,281 )


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

Total temporarily impaired securities	$	1,036,979	$	( 17,990 )	$	175,681	$	( 6,743 )	$	1,212,660	$	( 24,733 )

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.

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. All of the investment securities in an unrealized loss position continue to be rated investment grade by one or more major rating agencies. Because the Company does not intend to sell the AFS securities that are in an unrealized loss position and it is not more likely than not that we will be required to sell these securities before recovery of its amortized cost basis, which may be at maturity, the Company has not recorded an ACL on these securities and the unrealized losses on these securities have not been recognized into income.

Visa Class B Common Stock

During the three months ended June 30, 2022, the Company sold its 34,631 shares of Class B common stock of Visa, Inc. ("Visa") and received net proceeds of $ 8.5 million. As of September 30, 2022, the Company no longer owns any shares 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 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 determined that the Visa Class B common stock did not have a readily determinable fair value and 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 September 30, 2022 and December 31, 2021 consisted of the following:


(dollars in thousands)	September 30, 2022		December 31, 2021
Commercial, financial and agricultural:
Small Business Administration Paycheck Protection Program	$	5,440	$	94,850
Other	517,773		530,383
Real estate:
Construction	152,238		123,351
Residential mortgage	1,922,503		1,875,200
Home equity	717,478		635,721
Commercial mortgage	1,337,685		1,222,138
Consumer	770,075		624,115

Gross loans	5,423,192		5,105,758
Net deferred fees	( 980 )		( 4,109 )
Total loans, net of deferred fees and costs	5,422,212		5,101,649
Allowance for credit losses	( 64,382 )		( 68,097 )
Total loans, net of allowance for credit losses	$	5,357,830	$	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 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.

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

Appropriations Act, 2021 was passed which among other things, included a third round of funding and a new simplified forgiveness procedure for PPP loans of $150,000 or less. During 2021, the Company funded over 4,600 loans totaling $ 320.9 million in the third round, which ended on May 31, 2021, and received additional gross processing fees of $ 18.4 million.

The Company received forgiveness payments from the SBA and paydowns from borrowers totaling over $ 846.8 million as of September 30, 2022. A total outstanding balance of $ 5.4 million and net deferred fees of $ 0.2 million remain as of September 30, 2022.

The Company did no t transfer any loans to the held-for-sale category during the nine months ended September 30, 2022 and 2021.

The Company did no t sell any loans originally held for investment during the nine months ended September 30, 2022 and 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)	U.S. Mainland Consumer - Unsecured		U.S. Mainland Consumer - Automobile		Total
Three Months Ended September 30, 2022
Purchases:
Outstanding balance	$	90,461	$	—	$	90,461
(Discount) premium	( 3,976 )		—		( 3,976 )
Purchase price	$	86,485	$	—	$	86,485

Nine Months Ended September 30, 2022
Purchases:
Outstanding balance	$	195,227	$	64,890	$	260,117
(Discount) premium	( 11,386 )		3,457		( 7,929 )
Purchase price	$	183,841	$	68,347	$	252,188

Three Months Ended September 30, 2021
Purchases:
Outstanding balance	$	70,994	$	22,061	$	93,055
(Discount) premium	( 2,843 )		1,351		( 1,492 )
Purchase price	$	68,151	$	23,412	$	91,563

Nine Months Ended September 30, 2021
Purchases:
Outstanding balance	$	139,010	$	71,432	$	210,442
(Discount) premium	( 5,606 )		5,080		( 526 )
Purchase price	$	133,404	$	76,512	$	209,916

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 September 30, 2022 and December 31, 2021:


(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
September 30, 2022

Real estate:

Residential mortgage	$	4,801	$	—	$	—	$	4,801	$	—
Home equity	584		—		—		584		—



Total	$	5,385	$	—	$	—	$	5,385	$	—


(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 $ 1.9 million and $ 0.7 million of residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure at September 30, 2022 and December 31, 2021, respectively.

The Company did no t foreclose on any loans during the three and nine months ended September 30, 2022 and 2021.

The Company did no t sell any foreclosed properties during the three and nine months ended September 30, 2022 and 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 September 30, 2022 and December 31, 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 September 30, 2022 and December 31, 2021.


(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
September 30, 2022
Commercial, financial and agricultural:
SBA PPP	$	—	$	—	$	—	$	—	$	—	$	5,208	$	5,208	$	—
Other	1,651		453		669		277		3,050		514,229		517,279		—
Real estate:
Construction	902		—		—		—		902		150,694		151,596		—
Residential mortgage	—		2,773		503		2,771		6,047		1,917,021		1,923,068		2,771
Home equity	286		44		—		584		914		718,485		719,399		584
Commercial mortgage	1,611		—		—		—		1,611		1,334,135		1,335,746		—
Consumer	3,378		912		623		588		5,501		764,415		769,916		—

Total	$	7,828	$	4,182	$	1,795	$	4,220	$	18,025	$	5,404,187	$	5,422,212	$	3,355


(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, 2021
Commercial, financial and agricultural:
SBA PPP	$	—	$	—	$	—	$	—	$	—	$	91,327	$	91,327	$	—
Other	970		604		945		183		2,702		527,419		530,121		—
Real estate:
Construction	638		—		—		—		638		122,229		122,867		—
Residential mortgage	5,315		—		—		4,623		9,938		1,866,042		1,875,980		4,623
Home equity	234		—		44		786		1,064		636,185		637,249		786
Commercial mortgage	—		—		—		—		—		1,220,204		1,220,204		—
Consumer	2,444		712		374		289		3,819		620,082		623,901		—

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 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 September 30, 2022 consisted of five Hawaii residential mortgage loans with a principal balance of $ 1.1 million. There were $ 3.0 million of TDRs still accruing interest at September 30, 2022, none of which were more than 90 days delinquent. At December 31, 2021, there were $ 4.9 million of TDRs still accruing interest, none of which 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 . 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 nine months ended September 30, 2022 and 2021.

The Company did not modify any loans during the three and nine months ended September 30, 2022.

The Company did not modify any loans during the three months ended September 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 subsequently paid off during the three months ended June 30, 2021.

No loans were modified as a TDR within the previous twelve months that subsequently defaulted during the three and nine months ended September 30, 2022 and 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 tables present the amortized cost basis of the Company's loans by class, credit quality indicator and origination year as of September 30, 2022 and December 31, 2021. Revolving loans converted to term as of and during the three and nine months ended September 30, 2022 and 2021 were not material to the total loan portfolio.


	Amortized Cost of Term Loans by Origination Year
(dollars in thousands)	2022		2021		2020		2019		2018		Prior		Amortized Cost of Revolving Loans		Total
September 30, 2022
Commercial, financial and agricultural - SBA PPP:
Risk Rating
Pass	$	—	$	5,192	$	16	$	—	$	—	$	—	$	—	$	5,208



Subtotal	—		5,192		16		—		—		—		—		5,208
Commercial, financial and agricultural - Other:
Risk Rating
Pass	53,950		105,121		44,884		51,383		39,990		128,665		78,614		502,607
Special Mention	2,396		400		224		1,148		788		1		82		5,039
Substandard	—		768		903		141		347		7,335		139		9,633

Subtotal	56,346		106,289		46,011		52,672		41,125		136,001		78,835		517,279
Construction:
Risk Rating
Pass	15,554		50,450		22,888		3,115		27,385		18,294		7,737		145,423
Special Mention	—		5,271		—		—		902		—		—		6,173


Subtotal	15,554		55,721		22,888		3,115		28,287		18,294		7,737		151,596
Residential mortgage:
Risk Rating
Pass	231,361		647,157		438,811		157,121		60,820		383,569		—		1,918,839

Substandard	—		—		954		—		503		2,772		—		4,229

Subtotal	231,361		647,157		439,765		157,121		61,323		386,341		—		1,923,068
Home equity:
Risk Rating
Pass	34,310		23,101		10,402		7,572		7,268		11,464		624,505		718,622
Special Mention	—		—		—		—		—		—		193		193
Substandard	—		—		—		—		78		506		—		584

Subtotal	34,310		23,101		10,402		7,572		7,346		11,970		624,698		719,399
Commercial mortgage:
Risk Rating
Pass	183,749		222,117		120,444		131,716		141,356		477,624		10,383		1,287,389
Special Mention	—		—		—		14,233		1,007		19,483		—		34,723
Substandard	—		1,158		—		1,711		2,148		8,617		—		13,634

Subtotal	183,749		223,275		120,444		147,660		144,511		505,724		10,383		1,335,746
Consumer:
Risk Rating
Pass	292,469		259,449		66,240		58,102		24,052		14,306		53,960		768,578
Special Mention	—		—		—		126		—		—		—		126
Substandard	9		116		50		200		62		463		—		900
Loss	—		—		—		—		—		312		—		312
Subtotal	292,478		259,565		66,290		58,428		24,114		15,081		53,960		769,916
Total	$	813,798	$	1,320,300	$	705,816	$	426,568	$	306,706	$	1,073,411	$	775,613	$	5,422,212


	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

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


(dollars in thousands)	Pass		Special Mention		Substandard		Loss		Subtotal		Net Deferred Fees and Costs		Total
September 30, 2022
Commercial, financial and agricultural: SBA PPP	$	5,440	$	—	$	—	$	—	$	5,440	$	( 232 )	$	5,208
Commercial, financial and agricultural: Other	503,101		5,039		9,633		—		517,773		( 494 )		517,279
Real estate:
Construction	146,065		6,173		—		—		152,238		( 642 )		151,596
Residential mortgage	1,918,274		—		4,229		—		1,922,503		565		1,923,068
Home equity	716,701		193		584		—		717,478		1,921		719,399
Commercial mortgage	1,289,328		34,723		13,634		—		1,337,685		( 1,939 )		1,335,746
Consumer	768,737		126		900		312		770,075		( 159 )		769,916

Total	$	5,347,646	$	46,254	$	28,980	$	312	$	5,423,192	$	( 980 )	$	5,422,212


(dollars in thousands)	Pass		Special Mention		Substandard		Loss		Subtotal		Net Deferred Fees and Costs		Total
December 31, 2021
Commercial, financial and agricultural: SBA PPP	$	94,850	$	—	$	—	$	—	$	94,850	$	( 3,523 )	$	91,327
Commercial, financial and agricultural: Other	504,823		14,283		11,277		—		530,383		( 262 )		530,121
Real estate:
Construction	122,433		—		918		—		123,351		( 484 )		122,867
Residential mortgage	1,869,604		973		4,623		—		1,875,200		780		1,875,980
Home equity	634,704		187		830		—		635,721		1,528		637,249
Commercial mortgage	1,180,074		16,062		26,002		—		1,222,138		( 1,934 )		1,220,204
Consumer	623,271		181		510		153		624,115		( 214 )		623,901

Total	$	5,029,759	$	31,686	$	44,160	$	153	$	5,105,758	$	( 4,109 )	$	5,101,649

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 nine months ended September 30, 2022 and September 30, 2021:


	Commercial, Financial and Agricultural				Real Estate
(dollars in thousands)	SBA PPP		Other		Construction		Residential Mortgage		Home Equity		Commercial Mortgage		Consumer		Total
Three Months Ended September 30, 2022
Beginning balance	$	15	$	7,725	$	3,065	$	12,767	$	4,045	$	17,858	$	19,736	$	65,211


Provision (credit) for credit losses on loans	( 11 )		( 483 )		( 452 )		( 1,150 )		( 157 )		( 28 )		3,012		731
Subtotal	4		7,242		2,613		11,617		3,888		17,830		22,748		65,942
Charge-offs	—		550		—		—		—		—		1,912		2,462
Recoveries	—		220		14		14		36		—		618		902
Net charge-offs (recoveries)	—		330		( 14 )		( 14 )		( 36 )		—		1,294		1,560
Ending balance	$	4	$	6,912	$	2,627	$	11,631	$	3,924	$	17,830	$	21,454	$	64,382

Three Months Ended September 30, 2021
Beginning balance	$	356	$	13,414	$	4,693	$	16,911	$	6,309	$	19,534	$	16,564	$	77,781


Provision (credit) for credit losses on loans	( 171 )		( 494 )		( 459 )		( 2,409 )		( 594 )		( 405 )		1,563		( 2,969 )
Subtotal	185		12,920		4,234		14,502		5,715		19,129		18,127		74,812
Charge-offs	—		334		—		—		—		—		829		1,163
Recoveries	—		281		—		53		—		—		604		938
Net charge-offs (recoveries)	—		53		—		( 53 )		—		—		225		225
Ending balance	$	185	$	12,867	$	4,234	$	14,555	$	5,715	$	19,129	$	17,902	$	74,587


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


Provision (credit) for credit losses on loans	( 73 )		( 2,896 )		( 1,357 )		( 994 )		( 621 )		( 581 )		5,778		( 744 )
Subtotal	4		7,418		2,551		11,469		3,888		17,830		24,193		67,353
Charge-offs	—		1,291		—		—		—		—		4,518		5,809
Recoveries	—		785		76		162		36		—		1,779		2,838
Net charge-offs (recoveries)	—		506		( 76 )		( 162 )		( 36 )		—		2,739		2,971
Ending balance	$	4	$	6,912	$	2,627	$	11,631	$	3,924	$	17,830	$	21,454	$	64,382

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


Provision (credit) for credit losses on loans	( 119 )		( 5,152 )		( 43 )		( 2,274 )		257		( 3,107 )		3,532		( 6,906 )
Subtotal	185		13,565		4,234		14,210		5,706		19,056		19,407		76,363
Charge-offs	—		1,344		—		—		—		—		3,450		4,794
Recoveries	—		646		—		345		9		73		1,945		3,018
Net charge-offs (recoveries)	—		698		—		( 345 )		( 9 )		( 73 )		1,505		1,776
Ending balance	$	185	$	12,867	$	4,234	$	14,555	$	5,715	$	19,129	$	17,902	$	74,587

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


(dollars in thousands)
Three Months Ended September 30, 2022


Beginning balance	$	4,073
(Credit) provision for off-balance sheet credit exposures	( 369 )
Ending balance	$	3,704

Three Months Ended September 30, 2021
Beginning balance	$	4,744


Provision for off-balance sheet credit exposures	334
Ending balance	$	5,078

Nine Months Ended September 30, 2022
Beginning balance	$	4,804


(Credit) provision for off-balance sheet credit exposures	( 1,100 )
Ending balance	$	3,704

Nine Months Ended September 30, 2021
Beginning balance	$	4,884


Provision for off-balance sheet credit exposures	194
Ending balance	$	5,078

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

In the three months ended September 30, 2022, our provision for credit losses was a debit of $ 0.4 million, which consisted of a debit to the provision for credit losses on loans of $ 0.7 million, offset by a credit to the provision for credit losses on off-balance sheet credit exposures of $ 0.3 million.

In the nine months ended September 30, 2022, our provision for credit losses was a credit of $ 1.8 million, which consisted of a credit to the provision for credit losses on loans of $ 0.7 million and a credit to the provision for credit losses on off-balance sheet credit exposures of $ 1.1 million.

In the three months ended September 30, 2021, our provision for credit loss was a credit of $ 2.6 million, which consisted of a credit to the provision for credit losses on loans of $ 3.0 million, and a debit to the provision for credit losses on off-balance sheet credit exposures of $ 0.4 million.

In the nine months ended September 30, 2021, our provision for credit loss was a credit of $ 6.9 million, which consisted of a credit to the provision for credit losses on loans of $ 6.9 million, a debit to the provision for credit losses on off-balance sheet credit exposures of $ 0.2 million, and a credit to the provision for accrued interest receivable of $ 0.2 million.

6. INVESTMENTS IN UNCONSOLIDATED ENTITIES

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


(dollars in thousands)	September 30, 2022		December 31, 2021
Investments in low income housing tax credit partnerships, net of amortization	$	31,019	$	25,916
Investments in common securities of statutory trusts	1,547		1,547
Investments in affiliates	154		162
Other	4,049		2,054
Total	$	36,769	$	29,679

The Company invests in low-income housing tax credit ("LIHTC") and other partnerships. The Company had commitments to fund LIHTC partnerships totaling $ 37.2 million and $ 30.3 million as of September 30, 2022 and December 31, 2021,

respectively. Unfunded commitments related to LIHTC partnerships of $ 14.2 million a nd $ 14.3 million as of September 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 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 non-voting common stock and $ 0.5 million in cash in exchange for Swell preferred stock. 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. 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., a venture capital 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 investment as of September 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 is included in investment in unconsolidated entities.

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


(dollars in thousands)
Year Ending December 31,	LIHTC partnerships		Other partnerships		Total
2022 (remainder)	$	137	$	150	$	287
2023	8,138		1,503		9,641
2024	1,503		—		1,503
2025	4,238		—		4,238
2026	16		—		16
2027	16		—		16
Thereafter	151		—		151
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 nine months ended September 30, 2022 and September 30, 2021:


(dollars in thousands)	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021
Proportional amortization method:
Amortization expense recognized in income tax expense	$	606	$	706	$	1,820	$	1,520
Tax credits recognized in income tax expense	709		831		2,127		1,779

7. MORTGAGE SERVICING RIGHTS

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


(dollars in thousands)	Mortgage Servicing Rights
Balance at December 31, 2021	$	9,738
Additions	593
Amortization	( 1,115 )
Balance at September 30, 2022	$	9,216

Balance at December 31, 2020	$	11,865
Additions	911
Amortization	( 2,800 )
Balance at September 30, 2021	$	9,976

Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans and totaled $ 0.1 million and $ 0.6 million for the three and nine months ended September 30, 2022, respectively, compared to $ 0.2 million and $ 0.9 million for the three and nine months ended September 30, 2021, respectively.

Amortization of mortgage servicing rights totaled $ 0.3 million and $ 1.1 million f or the three and nine months ended September 30, 2022, respectively, compared to $ 0.7 million and $ 2.8 million for the three and nine months ended September 30, 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:


	Nine Months Ended			Nine Months Ended
(dollars in thousands)	September 30, 2022			September 30, 2021
Fair market value, beginning of period	$	10,504		$	12,003
Fair market value, end of period	12,289			10,352
Weighted average discount rate	9.5		%	9.6		%
Weighted average prepayment speed assumption	9.9		%	18.0		%

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


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

Mortgage servicing rights	$	72,843	$	( 63,627 )	$	9,216	$	72,250	$	( 62,512 )	$	9,738

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


(dollars in thousands)
Year Ending December 31,
2022 (remainder)	$	287
2023	1,528
2024	1,380
2025	1,114
2026	904
2027	724
Thereafter	3,279
Total	$	9,216

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. 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.

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 and 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 September 30, 2022, we were a party to forward sale commitments on $ 1.8 million of mortgage loans. At September 30, 2022, we were not a party to any interest rate lock commitments.

Risk Participation Agreements

In the first and fourth quarters of 2020, 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 September 30, 2022, the Company had swap agreements with its borrowers with a total notional amount of $ 32.5 million, offset by swap agreements with third party financial institutions with the same total notional amount of $ 32.5 million. As of September 30, 2022, the Company held $ 10.7 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 September 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 tables present the location of all assets and liabilities associated with our derivative instruments within the consolidated balance sheets:


Derivative Financial Instruments Not Designated as Hedging Instruments		Asset Derivatives				Liability Derivatives
		Fair Value at				Fair Value at
(dollars in thousands)	Balance Sheet Location	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Interest rate lock and forward sale commitments	Other assets / other liabilities	$	55	$	5	$	—	$	4
Risk participation agreements	Other assets / other liabilities	—		—		—		16
Back-to-back swap agreements	Other assets / other liabilities	4,611		435		4,611		435

Derivative Financial Instruments Designated as Hedging Instruments		Asset Derivatives				Liability Derivatives
		Fair Value at				Fair Value at
(dollars in thousands)	Balance Sheet Location	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Interest rate swap	Other assets / other liabilities	$	6,916	$	—	$	—	$	—

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

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 September 30, 2022

Interest rate lock and forward sale commitments

Mortgage banking income

Loans held for sale

Other income

( 66 )

Risk participation agreements

Other service charges and fees

—

Back-to-back swap agreements

Other service charges and fees

—

Three Months Ended September 30, 2021

Interest rate lock and forward sale commitments

Mortgage banking income

284

Loans held for sale

Other income

( 9 )

Risk participation agreements

Other service charges and fees

Back-to-back swap agreements

Other service charges and fees

291

Nine Months Ended September 30, 2022

Interest rate lock and forward sale commitments

Mortgage banking income

Loans held for sale

Other income

( 67 )

Risk participation agreements

Other service charges and fees

Back-to-back swap agreements

Other service charges and fees

—

Nine Months Ended September 30, 2021

Interest rate lock and forward sale commitments

Mortgage banking income

380

Loans held for sale

Other income

( 9 )

Risk participation agreements

Other service charges and fees

Back-to-back swap agreements

Other service charges and fees

291

Derivative Financial Instruments
Designated as Hedging Instruments

Location of Loss
Recognized in
Earnings on Derivatives

Amount of Loss
Recognized in
Earnings on Derivatives

(dollars in thousands)

Three Months Ended September 30, 2022

Interest rate swap

Interest income

( 169 )

Three Months Ended September 30, 2021

Interest rate swap

Interest income

—

Nine Months Ended September 30, 2022

Interest rate swap

Interest income

( 326 )

Nine Months Ended September 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 $ 2.18 billion line of credit as of September 30, 2022, compared to $ 1.83 billion at December 31, 2021. At September 30, 2022, $ 2.03 billion was undrawn under this arrangement, compared to $ 1.80 billion at December 31, 2021. There were $ 115.0 million in short-term

borrowings under this arrangement bearing interest rates between 3.21 % and 3.29 % at September 30, 2022, and none at December 31, 2021. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled $ 36.0 million as of September 30, 2022, compared to $ 32.2 million as of December 31, 2021. There were no long-term borrowings under this arrangement at September 30, 2022 and December 31, 2021. FHLB advances and standby letters of credit available at September 30, 2022 were secured by certain real estate loans with a carrying value of $ 3.20 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB.

At September 30, 2022 and December 31, 2021, our bank had additional unused borrowings available at the Federal Reserve discount window of $ 76.9 million and $ 55.4 million, respectively. As of September 30, 2022 and December 31, 2021, certain commercial and commercial real estate loans with a carrying value totaling $ 127.4 million and $ 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.

Subordinated Debentures

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 September 30, 2022 and December 31, 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)	September 30, 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, 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 September 30, 2022 and December 31, 2021, the Company had the following subordinated notes outstanding:


(Dollars in thousands)	September 30, 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, 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 $ 54.3 million, net of unamortized debt issuance costs of $ 0.7 million, at September 30, 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 nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2022		2021		2022		2021
Other operating income:
In-scope of ASC 606
Mortgage banking income	$	155	$	276	$	890	$	1,636
Service charges on deposit accounts	2,138		1,637		6,025		4,558
Other service charges and fees	4,377		4,093		12,329		11,196
Income on fiduciary activities	1,165		1,292		3,507		3,792


In-scope other operating income	7,835		7,298		22,751		21,182
Out-of-scope other operating income	1,794		2,955		13,567		10,312
Total other operating income	$	9,629	$	10,253	$	36,318	$	31,494

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.

The table below presents the activity of restricted stock units for the nine months ended September 30, 2022:


(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	485,339	$	21.95
Changes during the period:
Granted	95,155	29.38
Vested	( 173,762 )	21.69		$	4,681
Forfeited	( 50,681 )	26.28
Non-vested restricted stock units, end of period	356,051	23.45

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 September 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 September 30,				Nine Months Ended September 30,
(dollars in thousands)	2022		2021		2022		2021
Interest cost	$	—	$	121	$	212	$	363
Expected return on plan assets	—		( 137 )		( 207 )		( 411 )
Amortization of net actuarial loss	—		175		224		526
Settlement	—		—		4,884		—
Net periodic benefit cost	$	—	$	159	$	5,113	$	478

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 September 30,				Nine Months Ended September 30,
(dollars in thousands)	2022		2021		2022		2021
Interest cost	$	75	$	65	$	225	$	197
Amortization of net actuarial loss	20		84		62		251
Amortization of net transition obligation	5		5		13		14


Net periodic benefit cost	$	100	$	154	$	300	$	462

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. Renewal options that are likely to be exercised 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 September 30,						Nine Months Ended September 30,
(dollars in thousands)	2022			2021			2022			2021
Lease cost:
Operating lease cost	$	1,368		$	1,555		$	4,144		$	4,846
Variable lease cost	769			654			2,433			1,844
Less: sublease income	( 12 )			—			( 36 )			—
Total lease cost	$	2,125		$	2,209		$	6,541		$	6,690

Other information:
Operating cash flows from operating leases	$	( 1,464 )		$	( 1,602 )		$	( 4,485 )		$	( 4,927 )
Weighted-average remaining lease term - operating leases	11.32 years			11.70 years			11.32 years			11.70 years
Weighted-average discount rate - operating leases	3.94		%	3.92		%	3.94		%	3.92		%

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


(dollars in thousands)
Year Ending December 31,	Undiscounted Cash Flows		Lease Liability Expense		Lease Liability Reduction
2022 (remainder)	$	1,411	$	358	$	1,053
2023	5,100		1,328		3,772
2024	4,438		1,202		3,236
2025	4,152		1,078		3,074
2026	4,089		958		3,131
2027	4,080		835		3,245
Thereafter	23,048		3,618		19,430
Total	$	46,318	$	9,377	$	36,941

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 September 30,				Nine Months Ended September 30,
(dollars in thousands)	2022		2021		2022		2021
Total rental income recognized	$	398	$	524	$	1,727	$	1,565

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


(dollars in thousands)
Year Ending December 31,
2022 (remainder)	$	248
2023	983
2024	840
2025	668
2026	555
2027	533
Thereafter	2,300
Total	$	6,127

14. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the components of other comprehensive loss for the three and nine months ended September 30, 2022 and 2021, by component:


(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Three Months Ended September 30, 2022
Net change in fair value of investment securities:
Net unrealized losses on AFS investment securities arising during the period	$	( 37,854 )	$	( 10,122 )	$	( 27,732 )

Less: Amortization of unrealized losses on investment securities transferred to HTM	2,319		620		1,699
Net change in fair value of investment securities	( 35,535 )		( 9,502 )		( 26,033 )

Net change in fair value of derivatives:
Net unrealized gains arising during the period	4,360		1,166		3,194

Net change in fair value of derivatives	4,360		1,166		3,194

SERPs:

Amortization of net actuarial loss	20		5		15
Amortization of net transition obligation	5		2		3


SERPs	25		7		18

Other comprehensive loss	$	( 31,150 )	$	( 8,329 )	$	( 22,821 )


(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Three Months Ended September 30, 2021
Net change in fair value of investment securities:
Net unrealized losses on AFS investment securities arising during the period	$	( 9,254 )	$	( 2,475 )	$	( 6,779 )
Less: Reclassification adjustments from AOCI realized in net income	( 100 )		( 27 )		( 73 )

Net change in fair value of investment securities	( 9,354 )		( 2,502 )		( 6,852 )

Defined benefit retirement plan and SERPs:

Amortization of net actuarial loss	259		70		189
Amortization of net transition obligation	5		1		4


Defined benefit retirement plan and SERPs	264		71		193

Other comprehensive loss	$	( 9,090 )	$	( 2,431 )	$	( 6,659 )


(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Nine Months Ended September 30, 2022
Net change in fair value of investment securities:
Net unrealized losses on AFS investment securities arising during the period	$	( 207,930 )	$	( 55,598 )	$	( 152,332 )

Less: Amortization of unrealized losses on investment securities transferred to HTM	4,295		1,148		3,147
Net change in fair value of investment securities	( 203,635 )		( 54,450 )		( 149,185 )

Net change in fair value of derivatives:
Net unrealized gains arising during the period	7,240		1,936		5,304

Net change in fair value of derivatives	7,240		1,936		5,304

Defined benefit retirement plan and SERPs:
Net actuarial losses arising during the period	( 952 )		( 255 )		( 697 )
Amortization of net actuarial loss	284		76		208
Amortization of net transition obligation	14		4		10

Settlement	4,884		1,817		3,067
Defined benefit retirement plan and SERPs	4,230		1,642		2,588

Other comprehensive loss	$	( 192,165 )	$	( 50,872 )	$	( 141,293 )


(dollars in thousands)	Before Tax		Tax Effect		Net of Tax
Nine Months Ended September 30, 2021
Net change in fair value of investment securities:
Net unrealized losses on AFS investment securities arising during the period	$	( 30,466 )	$	( 8,150 )	$	( 22,316 )
Less: Reclassification adjustments from AOCI realized in net income	( 150 )		( 40 )		( 110 )

Net change in fair value of investment securities	( 30,616 )		( 8,190 )		( 22,426 )

Defined benefit retirement plan and SERPs:

Amortization of net actuarial loss	777		222		555
Amortization of net transition obligation	14		4		10


Defined benefit retirement plan and SERPs	791		226		565

Other comprehensive loss	$	( 29,825 )	$	( 7,964 )	$	( 21,861 )

The following tables present the changes in each component of AOCI, net of tax, for the three and nine months ended September 30, 2022 and 2021:


(dollars in thousands)	Investment Securities		Derivatives		SERPs [1]		AOCI
Three Months Ended September 30, 2022
Balance at beginning of period	$	( 126,818 )	$	2,110	$	( 1,724 )	$	( 126,432 )





Other comprehensive (loss) income before reclassifications	( 27,732 )		3,194		—		( 24,538 )
Reclassification adjustments from AOCI	1,699		—		18		1,717
Total other comprehensive (loss) income	( 26,033 )		3,194		18		( 22,821 )

Balance at end of period	$	( 152,851 )	$	5,304	$	( 1,706 )	$	( 149,253 )


(dollars in thousands)	Investment Securities		Derivatives		Defined Benefit Retirement Plan and SERPs [1]		AOCI
Three Months Ended September 30, 2021
Balance at beginning of period	$	11,077	$	—	$	( 6,151 )	$	4,926





Other comprehensive loss before reclassifications	( 6,779 )		—		—		( 6,779 )
Reclassification adjustments from AOCI	( 73 )		—		193		120
Total other comprehensive (loss) income	( 6,852 )		—		193		( 6,659 )

Balance at end of period	$	4,225	$	—	$	( 5,958 )	$	( 1,733 )


(dollars in thousands)	Investment Securities		Derivatives		Defined Benefit Retirement Plan and SERPs [1]		AOCI
Nine Months Ended September 30, 2022
Balance at beginning of period	$	( 3,666 )	$	—	$	( 4,294 )	$	( 7,960 )





Other comprehensive (loss) income before reclassifications	( 152,332 )		5,304		( 697 )		( 147,725 )
Reclassification adjustments from AOCI	3,147		—		3,285		6,432
Total other comprehensive (loss) income	( 149,185 )		5,304		2,588		( 141,293 )

Balance at end of period	$	( 152,851 )	$	5,304	$	( 1,706 )	$	( 149,253 )


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





Other comprehensive loss before reclassifications	( 22,316 )				—		( 22,316 )
Reclassification adjustments from AOCI	( 110 )				565		455
Total other comprehensive (loss) income	( 22,426 )		—		565		( 21,861 )

Balance at end of period	$	4,225	$	—	$	( 5,958 )	$	( 1,733 )

[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 September 30, 2022 relates entirely to the SERPs.

The following table presents the amounts reclassified out of each component of AOCI for the three and nine months ended September 30, 2022 and 2021:


	Amount Reclassified from AOCI				Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI Components	Three months ended September 30,







(dollars in thousands)	2022		2021
Sale of available-for-sale investment securities:
Realized gain on sales of available-for-sale investment securities	$	—	$	100	Net gain on sales of investment securities
Tax effect	—		( 27 )		Income tax benefit (expense)
Net of tax	$	—	$	73

Amortization of unrealized losses on investment securities transferred to held-to-maturity:
Amortization	$	( 2,319 )	$	—
Tax effect	620		—
Net of tax	$	( 1,699 )	$	—

Defined benefit retirement and supplemental executive retirement plan items:
Amortization of net actuarial loss	$	( 20 )	$	( 259 )	Other operating expense - other
Amortization of net transition obligation	( 5 )		( 5 )		Other operating expense - other


Total before tax	( 25 )		( 264 )
Tax effect	7		71		Income tax benefit (expense)
Net of tax	$	( 18 )	$	( 193 )

Total reclassification adjustments from AOCI for the period, net of tax	$	( 1,717 )	$	( 120 )


	Amount Reclassified from AOCI				Affected Line Item in the Statement Where Net Income is Presented
Details about AOCI Components	Nine months ended September 30,
(dollars in thousands)	2022		2021
Sale of available-for-sale investment securities:
Realized gain on sales of available-for-sale investment securities	$	—	$	150	Net gain on sales of investment securities
Tax effect	—		( 40 )		Income tax benefit (expense)
Net of tax	$	—	$	110

Amortization of unrealized losses on investment securities transferred to held-to-maturity:
Amortization	$	( 4,295 )	$	—
Tax effect	1,148		—
Net of tax	$	( 3,147 )	$	—

Defined benefit retirement and supplemental executive retirement plan items:
Amortization of net actuarial loss	$	( 284 )	$	( 777 )	Other operating expense - other
Amortization of net transition obligation	( 14 )		( 14 )		Other operating expense - other

Settlement	( 4,884 )		—		Other operating expense - other
Total before tax	( 5,182 )		( 791 )
Tax effect	1,897		226		Income tax benefit (expense)
Net of tax	$	( 3,285 )	$	( 565 )

Total reclassification adjustments from AOCI for the period, net of tax	$	( 6,432 )	$	( 455 )

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 September 30,				Nine Months Ended September 30,
(dollars in thousands, except per share data)	2022		2021		2022		2021
Net income	$	16,715	$	20,815	$	53,747	$	57,567

Weighted average common shares outstanding - basic	27,356,614		27,967,089		27,487,237		28,082,632
Dilutive effect of employee stock options and awards	144,598		208,864		178,960		233,942
Weighted average common shares outstanding - diluted	27,501,212		28,175,953		27,666,197		28,316,574

Basic earnings per common share	$	0.61	$	0.74	$	1.96	$	2.05
Diluted earnings per common share	$	0.61	$	0.74	$	1.94	$	2.03

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 int erest 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 September 30, 2022, the weighted average discount rate used in the valuation of loans was 8.00 %. 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 September 30, 2022, the weighted average discount rate used in the valuation of time deposits was 4.09 %. 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 September 30, 2022, the weighted average discount rate used in the valuation of long-term debt was 7.09 %.

Derivatives

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

Off-Balance Sheet Financial Instruments

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

Limitations

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

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


					Fair Value Measurement Using
(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)
September 30, 2022
Financial assets:
Cash and due from banks	$	116,365	$	116,365	$	116,365	$	—	$	—
Interest-bearing deposits in other banks	22,332		22,332		22,332		—		—
Investment securities	1,349,508		1,277,561		—		1,270,144		7,417
Loans held for sale	1,701		1,701		—		1,701		—
Loans, net of ACL	5,357,830		4,681,743		—		—		4,681,743

Accrued interest receivable	18,134		18,134		18,134		—		—

Financial liabilities:
Deposits:
Noninterest-bearing demand	2,138,083		2,138,083		2,138,083		—		—
Interest-bearing demand and savings and money market	3,636,293		3,636,293		3,636,293		—		—
Time	782,058		767,954		—		—		767,954
FHLB advances and other short-term borrowings	115,000		115,000		—		115,000		—
Long-term debt	105,799		94,793		—		—		94,793
Accrued interest payable (included in other liabilities)	2,341		2,341		2,341		—		—


							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)
September 30, 2022
Derivatives:

Forward sale commitments	$	1,774	$	55	$	55	$	—	$	55	$	—
Risk participation agreements	37,033		—		—		—		—		—
Back-to-back swap agreements:
Assets	32,533		4,611		4,611		—		—		4,611
Liabilities	32,533		( 4,611 )		( 4,611 )		—		—		( 4,611 )
Interest rate swap agreements	115,545		6,916		6,916		—		—		6,916

Off-balance sheet financial instruments:
Commitments to extend credit	1,376,064		—		1,326		—		1,326		—
Standby letters of credit and financial guarantees written	5,347		—		80		—		80		—


					Fair Value Measurement Using
(dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2021
Financial assets:
Cash and due from banks	$	81,506	$	81,506	$	81,506	$	—	$	—
Interest-bearing deposits in other banks	247,401		247,401		247,401		—		—
Investment securities	1,631,699		1,631,699		—		1,623,080		8,619
Loans held for sale	3,531		3,531		—		3,531		—
Loans, net of ACL	5,033,552		4,741,379		—		—		4,741,379

Accrued interest receivable	16,709		16,709		16,709		—		—

Financial liabilities:
Deposits:
Noninterest-bearing demand	2,291,246		2,291,246		2,291,246		—		—
Interest-bearing demand and savings and money market	3,641,180		3,641,180		3,641,180		—		—
Time	706,732		704,645		—		—		704,645

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


							Fair Value Measurement Using
(dollars in thousands)	Notional Amount		Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2021
Derivatives:

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


Off-balance sheet financial instruments:
Commitments to extend credit	1,266,596		—		1,347		—		1,347		—
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 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 no other transfers of financial assets and liabilities into or out of Level 3 of the fair value hierarchy during the three and nine months ended September 30, 2022.

The following tables present the fair value of assets and liabilities measured on a recurring basis as of September 30, 2022 and December 31, 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)
September 30, 2022







Available-for-sale securities:
Debt securities:
States and political subdivisions	$	139,476	$	—	$	132,794	$	6,682
Corporate securities	29,498		—		29,498		—
U.S. Treasury obligations and direct obligations of U.S. Government agencies	27,508		—		27,508		—
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities	432,285		—		432,285		—
Residential - Non-government agencies	8,933		—		8,198		735
Commercial - U.S. Government-sponsored entities	47,462		—		47,462		—
Commercial - Non-government agencies	1,519		—		1,519		—

Total available-for-sale investment securities	686,681		—		679,264		7,417



Derivatives:

Forward sale commitments	55		—		55		—


Interest rate swap agreements	6,916		—		—		6,916
Total derivatives	6,971		—		55		6,916
Total	$	693,652	$	—	$	679,319	$	14,333


			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 investment securities	1,631,699		—		1,623,080		8,619



Derivatives:
Interest rate lock commitments	1		—		1		—
Forward sale commitments	( 16 )		—		—		( 16 )



Total derivatives	( 15 )		—		1		( 16 )
Total	$	1,631,684	$	—	$	1,623,081	$	8,603

For the nine months ended September 30, 2022 and 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:
(dollars in thousands)	States and Political Subdivisions		Residential - Non-Government Agencies		Total
Balance at December 31, 2021	$	7,681	$	938	$	8,619
Principal payments received	( 157 )		( 17 )		( 174 )
Unrealized net loss included in other comprehensive income	( 842 )		( 186 )		( 1,028 )

Balance at September 30, 2022	$	6,682	$	735	$	7,417

Balance at December 31, 2020	$	11,337	$	989	$	12,326
Principal payments received	( 2,787 )		( 16 )		( 2,803 )
Unrealized net loss included in other comprehensive income	( 714 )		( 45 )		( 759 )

Balance at September 30, 2021	$	7,836	$	928	$	8,764

Within the states and political subdivisions available-for-sale debt securities category, the Company held two mortgage revenue bonds issued by the City & County of Honolulu had an aggregate fair value of $ 6.7 million and $ 7.7 million at September 30, 2022 and December 31, 2021, respectively.

Within the other MBS non-agency category, the Company held two mortgage backed bonds issued by Habitat for Humanity with an aggregate fair value of $ 0.7 million and $ 0.9 million at September 30, 2022 and December 31, 2021, respectively.

The Company estimates the aggregate fair value of $ 7.4 million and $ 8.6 million as of September 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 September 30, 2022, the weighted average discount rate utilized wa s 6.19 %, compared to 3.46 % at December 31, 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.

There were no assets measured on a nonrecurring basis as of September 30, 2022 and December 31, 2021.

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.

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 27 branches and 65 ATMs located throughout the state of Hawaii as of September 30, 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, 2021 filed with the U.S. Securities and Exchange Commission (the "SEC") on February 23, 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 September 30, 2022 and December 31, 2021, the significant accounting policy which we believed to be the most critical in preparing our consolidated financial statements is the determination of the allowance for credit losses 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 2021 Form 10-K.

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 September 30, 2022 was $16.7 million, or $0.61 per diluted share, compared to net income of $20.8 million, or $0.74 per diluted share for the three months ended September 30, 2021. Net income for the nine months ended September 30, 2022 was $53.7 million, or $1.94 per diluted share, compared to net income of $57.6 million, or $2.03 per diluted share for the nine months ended September 30, 2021.

Net income for the three and nine months ended September 30, 2022 included PPP net interest income and net loan fees of $0.7 million and $3.5 million, respectively, compared to $8.6 million and $21.7 million for the three and nine months ended September 30, 2021, respectively. Net income for the nine months ended September 30, 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 September 30, 2022, the Company recorded a debit to the provision for credit losses of $0.4 million, compared to a credit to the provision of $2.6 million during the three months ended September 30, 2021. During the nine months ended September 30, 2022, the Company recorded a credit to the provision for credit losses of $1.8 million, compared to a credit to the provision of $6.9 million during the nine months ended September 30, 2021.

Excluding the provision for credit losses and income tax expense, the Company's pre-tax, pre-provision income for the three months ended September 30, 2022 was $23.0 million, compared to $25.0 million for the three months ended September 30, 2021. The Company's pre-tax, pre-provision income for the nine months ended September 30, 2022 was $70.0 million, compared to $68.8 million for the nine months ended September 30, 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. Return on average assets and average shareholders' equity are annualized based on a 30/360 day convention.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Return on average assets	0.91		%	1.15		%	0.98		%	1.10		%
Return on average shareholders’ equity	14.49			14.82			14.62			13.82

Basic earnings per common share	$	0.61		$	0.74		$	1.96		$	2.05
Diluted earnings per common share	0.61			0.74			1.94			2.03

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 September 30,				Nine Months Ended September 30,
(dollars in thousands)	2022		2021		2022		2021
Net income	$	16,715	$	20,815	$	53,747	$	57,567
Add:
Provision (credit) for credit losses	362		(2,635)		(1,844)		(6,899)
Income tax expense	5,919		6,814		18,141		18,153
Pre-tax pre-provision income	$	22,996	$	24,994	$	70,044	$	68,821

The following table presents the Company's net interest income and net interest margin, excluding net interest income and net loan fees from SBA Paycheck Protection Program loans for the periods indicated:


	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2022			2021			2022			2021
Net interest income - PPP	$	667		$	8,552		$	3,498		$	21,667
Net interest income - all others	54,698			47,534			155,780			136,284
Net interest income - total	$	55,365		$	56,086		$	159,278		$	157,951

Net interest margin - Reported	3.17		%	3.31		%	3.06		%	3.22		%
Less: Impact of PPP on net interest margin	(0.04)			(0.35)			(0.05)			(0.23)
Net interest margin, excluding PPP	3.13		%	2.96		%	3.01		%	2.99		%

COVID-19 Pandemic

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 the novel coronavirus disease ("COVID-19"). The Company continues to actively monitor COVID-19 case counts and trends for the safety and protection of our employees and customers. The Company has implemented a gradual, phased-in return-to-office plan that includes a portion of the workforce continuing with flexible, remote work schedules. Over 95% of the Company's employees are fully vaccinated as of September 30, 2022.

The COVID-19 pandemic has caused significant disruption in the local, national and global economies and financial markets. The COVID-19 pandemic led the U.S. government to take unprecedented actions to support individuals, businesses and the broader national economy. In response to the anticipated economic effects of COVID-19, the Board of Governors of the Federal Reserve System (the "FRB") 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.

The Company was actively involved in several of the major government and regulatory programs during the pandemic. Through guidance from regulatory agencies, the Company prudently worked with its borrowers impacted by COVID-19 to defer principal payments, interest, and fees. 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 agricultural loan customers on a case-by-case basis depending on need. Loans on active payment forbearance or deferrals granted to borrowers impacted by the COVID-19 pandemic peaked at $605 million in May 2020. As of September 30, 2022, there were no loans remaining that are on active payment forbearance or deferral.

In accordance with the revised interagency guidance issued in April 2020 and Section 4013 of the CARES Act, banks 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 September 30, 2022, there were no loans with modifications that

did not meet the criteria under Section 4013 of CARES Act or the " Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) ".

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

In December 2020, the Consolidated Appropriations Act, 2021 was passed which among other things, included a third round of funding and a new simplified forgiveness procedure for PPP loans of $150,000 or less. During 2021, the Company funded over 4,600 loans totaling $320.9 million in the third round, which ended on May 31, 2021, and received additional gross processing fees of $18.4 million.

The Company developed a PPP forgiveness portal and, with assistance from a third party vendor, has assisted its customers with applying for forgiveness from the SBA. We have received forgiveness payments from the SBA and repayments from borrowers totaling over $846.8 million as of September 30, 2022. A total outstanding balance of $5.4 million and net deferred fees of $0.2 million remain as of September 30, 2022.

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 continued to be impacted by the COVID-19 pandemic in 2021, however the state has made significant progress towards economic recovery as visitor arrivals have rebounded to approximately 90% 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 6.9 million visitors arrived to the Hawaiian Islands in the eight months ended August 31, 2022, mainly from the U.S. West and U.S. East as international travelers to Hawaii have not yet returned in a meaningful way. This was a 40% increase from the 5.0 million visitors from the same period last year, but down 10% from 7.7 million visitors in the eight months ended August 31, 2019.

Total spending for visitors arriving in the eight months ended August 31, 2022 was $12.87 billion, up 59.9% from $8.05 billion in the same period last year, and up by 6.8% from $12.06 billion in the eight months ended August 31, 2019.

According to recent data provided by the Department of Agriculture and the Department of Transportation, the Department of Business, Economic Development and Tourism ("DBEDT") reported as of October 9, 2022, average daily visitors to Hawaii in September 2022 was over 800,000, up 34.2% from September 2021 but down 4.5% from September 2019.

According to a September 2022 report by The Economic Research Organization at the University of Hawaii ("UHERO"), total visitor arrivals are expected to increase to approximately 9.2 million in 2022 and visitor spending is expected to increase to approximately $18.47 billion in 2022.

The Department of Labor and Industrial Relations reported that Hawaii's seasonally adjusted annual unemployment rate was 3.5% in the month of September 2022. DBEDT projects Hawaii's seasonally adjusted annual unemployment rate to be around 4.2% in 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 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, during the nine months ended September 30, 2022, the median sales price of single-family homes and condominiums were $1,110,500 and $510,000, respectively, which increased by 13.9% and 10.5%, respectively from the same year-ago period. Sales of Oahu single-family homes were down 15.8% during the nine months ended September 30, 2022, while sales of condominiums were down 3.3% during the nine months ended September 30, 2022, compared to the same year-ago period as home sale activity has begun to moderate from the record levels in 2021.

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

In January 2022, the Company announced the launch of a new BaaS initiative with the goal of expanding the Company both in and beyond Hawaii by investing in or collaborating with leading fintech companies. The BaaS initiative is being developed based on the 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 September 30, 2022, the Company has approximately 3,600 personal checking Shaka accounts. The Company is also in the process of developing additional complementary Shaka product and service offerings.

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 recently launched its alpha pilot, where members off its waitlist are invited to sign up for Swell Cash and Credit. Swell did not have a material impact to the Company's financial statements during the nine months ended September 30, 2022.

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 nine months ended September 30, 2022 and 2021. A comparison of net interest income on a taxable-equivalent basis for the three and nine months ended September 30, 2022 and 2021 is set forth below.


(dollars in thousands)	Three Months Ended September 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	$	19,802	2.14	%	$	107	$	273,039	0.15	%	$	105	$	(253,237)	1.99	%	$	2
Investment securities, excluding ACL:
Taxable (1)	1,445,781		1.92		6,934		1,351,272		1.84		6,228		94,509		0.08		706
Tax-exempt (1)	158,052		2.57		1,018		106,333		2.24		595		51,719		0.33		423
Total investment securities	1,603,833		1.98		7,952		1,457,605		1.87		6,823		146,228		0.11		1,129
Loans, including loans held for sale (2)	5,355,088		3.84		51,686		5,022,909		4.05		51,104		332,179		(0.21)		582
Federal Home Loan Bank stock	13,050		4.23		138		8,090		3.09		62		4,960		1.14		76
Total interest earning assets	6,991,773		3.41		59,883		6,761,643		3.42		58,094		230,130		(0.01)		1,789
Noninterest-earning assets	328,978						448,567						(119,589)
Total assets	$	7,320,751					$	7,210,210					$	110,541

Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	1,450,434	0.06	%	$	217	$	1,356,967	0.03	%	$	101	$	93,467	0.03	%	$	116
Savings and money market deposits	2,208,037		0.19		1,054		2,168,055		0.06		332		39,982		0.13		722
Time deposits up to $250,000	228,707		0.42		245		228,762		0.31		181		(55)		0.11		64
Time deposits over $250,000	443,178		0.76		847		467,289		0.21		247		(24,111)		0.55		600
Total interest-bearing deposits	4,330,356		0.22		2,363		4,221,073		0.08		861		109,283		0.14		1,502

Federal Home Loan Bank advances and other short-term borrowings	102,777		2.55		660		—		—		—		102,777		2.55		660
Long-term debt	105,760		4.80		1,281		105,516		3.84		1,022		244		0.96		259
Total interest-bearing liabilities	4,538,893		0.38		4,304		4,326,589		0.17		1,883		212,304		0.21		2,421
Noninterest-bearing deposits	2,204,965						2,203,695						1,270
Other liabilities	115,565						118,272						(2,707)
Total liabilities	6,859,423						6,648,556						210,867
Shareholders’ equity	461,328						561,606						(100,278)
Non-controlling interest	—						48						(48)
Total equity	461,328						561,654						(100,326)
Total liabilities and equity	$	7,320,751					$	7,210,210					$	110,541

Net interest income					$	55,579					$	56,211					$	(632)

Interest rate spread			3.03	%					3.25	%					(0.22)	%

Net interest margin			3.17	%					3.31	%					(0.14)	%

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

Net interest income (expressed on a taxable-equivalent basis) was $55.6 million for the third quarter of 2022, representing a decrease of $0.6 million, or 1.1% from $56.2 million in the year-ago quarter. The decrease from the year-ago quarter was primarily due to lower recognition of net interest income and loan fees related to loans originated and forgiven under the SBA Paycheck Protection Program ("PPP"), combined with higher deposit and borrowing costs, partially offset by higher interest income attributable to higher average investment securities and loan balances.

Net interest income for the third quarter of 2022 included $0.7 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 $8.6 million in the year-ago quarter. During the third quarter of 2022, the Company received $15.6 million in PPP loan forgiveness and repayments, compared to $223.9 million in the year-ago quarter. During the third quarters of 2022 and 2021,

the Company had average PPP loan balances of $12.4 million and $330.4 million, respectively, which earned annualized yields of approximately 21.33% and 10.27%, respectively. As of September 30, 2022, the Company has net deferred PPP fees of $0.2 million remaining.

Interest Income

Taxable-equivalent interest income was $59.9 million for the third quarter of 2022, representing an increase of $1.8 million, or 3.1%, from $58.1 million in the year-ago quarter. The increase was primarily attributable to higher average investment securities balances of $146.2 million during the third quarter of 2022, compared to the year-ago quarter, which increased interest income by approximately $0.7 million, and higher average core loan balances, excluding PPP, of $650.2 million, which increased interest income by approximately $5.9 million. In addition, the average yield earned on investment securities increased by 11 bp, which increased interest income by approximately $0.4 million, and the average yield earned on core loans, excluding PPP, increased 19 bp, which increased interest income by approximately $2.6 million. These increases were partially offset by the aforementioned decline in PPP net interest income and loan fees of $7.9 million from the year-ago quarter.

Interest Expense

Interest expense was $4.3 million for the third quarter of 2022, representing an increase of $2.4 million, or 128.6%, from $1.9 million in the year-ago quarter. Due to the rising interest rate environment, average rates paid on interest-bearing deposits of 0.22% increased by 14 bp from the year-ago quarter, which increased interest expense by approximately $1.5 million. Average FHLB advances and other short-term borrowings totaled $102.8 million for the third quarter of 2022, compared to none in the year-ago quarter, which increased interest expense by approximately $0.7 million. Average rates paid on long-term debt of 4.80% increased by 96 bp from the year-ago quarter, which increased interest expense by approximately $0.3 million.

Net Interest Margin

Our net interest margin of 3.17% for the third quarter of 2022 decreased by 14 bp from 3.31% in the year-ago quarter. As previously discussed, the decrease in net interest margin for the third 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 higher rates paid on interest-bearing deposits and borrowings. Excluding the PPP net interest income and net loan fees of $0.7 million and $8.6 million in the third quarter of 2022 and year-ago quarter, respectively, our net interest margin was 3.13% and 2.96% in the third quarter of 2022 and year-ago quarter, respectively.

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 and September 2022, the Federal Reserve hiked rates for the fourth and fifth time this year by an additional 75 bp each. The latest increase brings the target range to 3.00-3.25%, which is the highest it has been since early 2008. Federal Reserve officials have indicated that additional interest rate increases are likely in 2022 to fight inflation. The Company anticipates its average loan yield will continue to increase in the rising interest rate environment. Deposit and borrowing costs will also increase. The extent will depend on the competitive market environment and the Company's ability to retain and grow lower cost deposits. Such factors will influence the future direction of the net interest margin.


(dollars in thousands)	Nine Months Ended September 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	$	94,076	0.53	%	$	370	$	180,646	0.13	%	$	176	$	(86,570)	0.40	%	$	194
Investment securities, excluding ACL:
Taxable investment securities (1)	1,473,989		1.90		20,958		1,202,564		1.75		15,817		271,425		0.15		5,141
Tax-exempt investment securities (1)	160,144		2.56		3,073		97,613		2.30		1,684		62,531		0.26		1,389
Total investment securities	1,634,133		1.96		24,031		1,300,177		1.79		17,501		333,956		0.17		6,530
Loans, including loans held for sale (2)	5,231,098		3.67		143,598		5,070,993		3.85		146,202		160,105		(0.18)		(2,604)
Federal Home Loan Bank stock	10,019		3.53		265		7,924		3.11		184		2,095		0.42		81
Total interest earning assets	6,969,326		3.22		168,264		6,559,740		3.34		164,063		409,586		(0.12)		4,201
Noninterest-earning assets	354,270						438,294						(84,024)
Total assets	$	7,323,596					$	6,998,034					$	325,562

Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	1,437,034	0.04	%	$	473	$	1,271,825	0.03	%	$	280	$	165,209	0.01	%	$	193
Savings and money market deposits	2,208,449		0.10		1,700		2,057,194		0.06		888		151,255		0.04		812
Time deposits up to $250,000	223,343		0.33		548		232,474		0.36		619		(9,131)		(0.03)		(71)
Time deposits over $250,000	461,180		0.44		1,503		579,984		0.21		895		(118,804)		0.23		608
Total interest-bearing deposits	4,330,006		0.13		4,224		4,141,477		0.09		2,682		188,529		0.04		1,542

Federal Home Loan Bank advances and other short-term borrowings	34,756		2.55		662		810		0.30		2		33,946		2.25		660
Long-term debt	105,699		4.37		3,455		105,458		3.90		3,074		241		0.47		381
Total interest-bearing liabilities	4,470,461		0.25		8,341		4,247,745		0.18		5,758		222,716		0.07		2,583
Noninterest-bearing deposits	2,250,496						2,077,895						172,601
Other liabilities	112,478						117,113						(4,635)
Total liabilities	6,833,435						6,442,753						390,682
Shareholders’ equity	490,140						555,264						(65,124)
Non-controlling interest	21						17						4
Total equity	490,161						555,281						(65,120)
Total liabilities and equity	$	7,323,596					$	6,998,034					$	325,562

Net interest income					$	159,923					$	158,305					$	1,618

Interest rate spread			2.97	%					3.16	%					(0.19)	%

Net interest margin			3.06	%					3.22	%					(0.16)	%

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

Net interest income (expressed on a taxable-equivalent basis) was $159.9 million for the nine months ended September 30, 2022, representing an increase of 1.0% from $158.3 million in the nine months ended September 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"), combined with higher deposit and borrowing costs.

Net interest income for the nine months ended September 30, 2022 included $3.5 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 $21.7 million in the year-ago period. During the nine months ended September 30, 2022, the Company received

$89.4 million in PPP loan forgiveness and repayments, compared to $520.3 million in the year-ago period. During the nine months ended September 30, 2022 and 2021, the Company had average PPP loan balances of $37.8 million and $469.3 million, respectively, which earned annualized yields of approximately 12.37% and 6.17%, respectively. As of September 30, 2022, the Company has net deferred fees on PPP loans of $0.2 million remaining.

Interest Income

Taxable-equivalent interest income was $168.3 million for the nine months ended September 30, 2022, representing an increase of $4.2 million, or 2.6%, from $164.1 million in the year-ago period. The increase was primarily attributable to higher average investment securities balances of $334.0 million during the nine months ended September 30, 2022, compared to the year-ago period, which increased interest income by approximately $4.6 million, and higher average core loan balances, excluding PPP of $591.6 million, which increased interest income by approximately $15.4 million. In addition, the average yield earned on investment securities increased by 17 bp, which increased interest income by approximately $1.9 million. These increases were partially offset by the aforementioned decline in PPP net interest income and loan fees of $18.2 million from the year-ago period.

Interest Expense

Interest expense was $8.3 million for the nine months ended September 30, 2022, which increased by $2.6 million, or 44.9%, from $5.8 million in the year-ago period. Due to the rising interest rate environment, average rates paid on total interest-bearing liabilities of 0.25% increased by 7 bp from 0.18% in the year-ago period, which increased interest expense by approximately $2.6 million.

Net Interest Margin

Our net interest margin of 3.06% for the nine months ended September 30, 2022 decreased by 16 bp from 3.22% in the year-ago period. As previously discussed, the decrease in net interest margin for the nine months ended September 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 higher rates paid on interest-bearing deposits and borrowings. Excluding the PPP net interest income and net loan fees of $3.5 million and $21.7 million in the nine months ended September 30, 2022 and year-ago period, respectively, our net interest margin was 3.01% and 2.99% in the nine months ended September 30, 2022 and year-ago period, respectively.

Rate-Volume Analysis

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


	Three Months Ended September 30, 2022 Compared To September 30, 2021				Nine Months Ended September 30, 2022 Compared To September 30, 2021
	Increase (Decrease) Due to:						Increase (Decrease) Due to:
(dollars in thousands)	Volume		Rate		Net Change		Volume		Rate		Net Change

Interest earning assets:
Interest-bearing deposits in other banks	$	(96)	$	98	$	2	$	(85)	$	279	$	194
Investment securities, excluding ACL:
Taxable investment securities (1)	424		282		706		3,508		1,633		5,141
Tax-exempt investment securities (1)	292		131		423		1,077		312		1,389
Total investment securities	716		413		1,129		4,585		1,945		6,530
Loans, including loans held for sale (2)	3,379		(2,797)		582		4,558		(7,162)		(2,604)
Federal Home Loan Bank stock	39		37		76		49		32		81
Total interest earning assets	4,038		(2,249)		1,789		9,107		(4,906)		4,201




Interest-bearing liabilities:
Interest-bearing demand deposits	7		109		116		49		144		193
Savings and money market deposits	6		716		722		76		736		812
Time deposits up to $250,000	—		64		64		(24)		(47)		(71)
Time deposits over $250,000	(13)		613		600		(187)		795		608
Total interest-bearing deposits	—		1,502		1,502		(86)		1,628		1,542

Federal Home Loan Bank advances and other short-term borrowings	—		660		660		76		584		660
Long-term debt	2		257		259		7		374		381
Total interest-bearing liabilities	2		2,419		2,421		(3)		2,586		2,583

Net interest income	$	4,036	$	(4,668)	$	(632)	$	9,110	$	(7,492)	$	1,618

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

Provision for Credit Losses

During the third quarter of 2022, our provision for credit losses was a debit of $0.4 million, which consisted of a debit to the provision for credit losses on loans of $0.7 million, partially offset by a credit to the provision for credit losses on off-balance sheet credit exposures of $0.3 million.

During the nine months ended September 30, 2022, our provision for credit losses was a credit of $1.8 million, which consisted of a credit to the provision for credit losses on loans of $0.7 million, and a credit to the provision for credit losses on off-balance sheet credit exposures of $1.1 million.

During the third quarter of 2021, our provision for credit losses was a credit of $2.6 million, which consisted of a credit to the provision for credit losses on loans of $3.0 million, offset by a debit to the provision for credit losses on off-balance sheet credit exposures of $0.4 million.

During the nine months ended September 30, 2021, our provision for credit losses was a credit of $6.9 million, which consisted of a credit to the provision for credit losses on loans of $6.9 million and a credit to the provision for credit losses on accrued interest receivable of $0.2 million, offset by a debit to the provision for credit losses on off-balance sheet credit exposures of $0.2 million.

Our net charge-offs were $1.6 million during the third quarter of 2022, compared to net charge-offs of $0.2 million in the year-ago quarter. Our net charge-offs were $3.0 million during the nine months ended September 30, 2022, compared to net charge-offs of $1.8 million in the year-ago period.

We did not record a provision for credit losses on investment securities during the three and nine months ended September 30, 2022 and 2021.

Other Operating Income

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


	Three Months Ended
(dollars in thousands)	September 30, 2022		September 30, 2021		$ Change		% Change
Other operating income:
Mortgage banking income	$	831	$	1,327	$	(496)	-37.4	%
Service charges on deposit accounts	2,138		1,637		501		30.6
Other service charges and fees	4,955		4,942		13		0.3
Income from fiduciary activities	1,165		1,292		(127)		-9.8


Net gain on sales of investment securities	—		100		(100)		-100.0
Income from bank-owned life insurance	167		540		(373)		-69.1



Other:
Equity in earnings of unconsolidated entities	57		112		(55)		-49.1

Income recovered on nonaccrual loans previously charged-off	20		39		(19)		-48.7
Other recoveries	19		20		(1)		-5.0
Unrealized losses on loans-held-for-sale	(66)		—		(66)		N.M.
Commissions on sale of checks	79		78		1		1.3

Other	264		166		98		59.0
Total other operating income	$	9,629	$	10,253	$	(624)	-6.1

Not meaningful ("N.M.")

For the third quarter of 2022, total other operating income was $9.6 million, which decreased by $0.6 million, or 6.1%, from $10.3 million in the year-ago quarter. The decrease from the year-ago quarter was primarily due to lower mortgage banking income of $0.5 million and lower income from bank-owned life insurance ("BOLI") of $0.4 million, partially offset by higher service charges on deposit accounts of $0.5 million.


	Nine Months Ended
(dollars in thousands)	September 30, 2022		September 30, 2021		$ Change		% Change
Other operating income:
Mortgage banking income	$	3,143	$	5,830	$	(2,687)	-46.1	%
Service charges on deposit accounts	6,025		4,558		1,467		32.2
Other service charges and fees	14,053		13,351		702		5.3
Income from fiduciary activities	3,507		3,792		(285)		-7.5


Net gain on sales of investment securities	8,506		150		8,356		5,570.7
Income from bank-owned life insurance	(322)		2,547		(2,869)		-112.6



Other:
Equity in earnings of unconsolidated entities	173		298		(125)		-41.9

Income recovered on nonaccrual loans previously charged-off	165		111		54		48.6
Other recoveries	76		64		12		18.8
Unrealized losses on loans-held-for-sale	(67)		—		(67)		N.M.
Commissions on sale of checks	232		235		(3)		-1.3

Other	827		558		269		48.2
Total other operating income	$	36,318	$	31,494	$	4,824	15.3

Not meaningful ("N.M.")

For the nine months ended September 30, 2022, total other operating income was $36.3 million, which increased by $4.8 million, or 15.3%, from $31.5 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 $8.4 million, primarily attributable to the sale of Visa, Inc. ("Visa") Class B common stock in the second quarter of 2022. 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. In addition, the Company recorded higher service charges on deposits accounts of $1.5 million during the nine months ended September 30, 2022. These increases were partially offset by lower income from BOLI of $2.9 million and lower mortgage banking income of $2.7 million.

The lower income from BOLI during the three and nine months ended September 30, 2022 was primarily attributable to significant market volatility. 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.The lower mortgage banking income during the three and nine months ended September 30, 2022 was primarily attributable to lower origination activity due to the rising interest rate environment.

Other Operating Expense

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


	Three Months Ended
(dollars in thousands)	September 30, 2022		September 30, 2021		$ Change		% Change
Other operating expense:
Salaries and employee benefits	$	22,778	$	23,566	$	(788)	-3.3	%
Net occupancy	4,743		4,185		558		13.3
Equipment	1,085		1,089		(4)		-0.4

Communication	712		824		(112)		-13.6
Legal and professional services	2,573		2,575		(2)		-0.1
Computer software	4,138		2,998		1,140		38.0
Advertising	1,150		1,329		(179)		-13.5


Other:
Pension plan and SERP expense	100		313		(213)		-68.1
Foreclosed asset expense	—		—		—		N.M.
Charitable contributions	185		35		150		428.6
FDIC insurance assessment	518		555		(37)		-6.7
Miscellaneous loan expenses	338		471		(133)		-28.2
ATM and debit card expenses	778		691		87		12.6

Armored car expenses	349		225		124		55.1
Entertainment and promotions	281		226		55		24.3
Stationery and supplies	182		340		(158)		-46.5
Directors’ fees and expenses	389		241		148		61.4
Directors' deferred compensation plan (credit) expense	(83)		(60)		(23)		38.3


Branch consolidation costs	404		—		404		N.M.


Loss on disposal of fixed assets	1		1		—		—
Other	1,377		1,741		(364)		-20.9
Total other operating expense	$	41,998	$	41,345	$	653	1.6

Not meaningful ("N.M.")

For the third quarter of 2022, total other operating expense was $42.0 million, which increased by $0.7 million, or 1.6%, from $41.3 million in the year-ago quarter. The increase was primarily due to higher computer software expense of $1.1 million, higher net occupancy expense of $0.6 million, and branch consolidation costs of $0.4 million, partially offset by lower salaries and employee benefits of $0.8 million.


	Nine Months Ended
(dollars in thousands)	September 30, 2022		September 30, 2021		$ Change		% Change
Other operating expense:
Salaries and employee benefits	$	66,089	$	67,183	$	(1,094)	-1.6	%
Net occupancy	12,965		12,004		961		8.0
Equipment	3,242		3,137		105		3.3

Communication	2,262		2,349		(87)		-3.7
Legal and professional services	8,115		7,524		591		7.9
Computer software	10,844		10,179		665		6.5
Advertising	3,450		4,316		(866)		-20.1


Other:
Pension plan and SERP expense	5,413		940		4,473		475.9
Foreclosed asset expense	1		3		(2)		-66.7
Charitable contributions	388		107		281		262.6
FDIC insurance assessment	1,725		1,497		228		15.2
Miscellaneous loan expenses	1,127		1,220		(93)		-7.6
ATM and debit card expenses	2,278		2,459		(181)		-7.4

Armored car expenses	854		674		180		26.7
Entertainment and promotions	1,039		632		407		64.4
Stationery and supplies	578		767		(189)		-24.6
Directors’ fees and expenses	904		590		314		53.2
Directors' deferred compensation plan (credit) expense	(1,083)		942		(2,025)		-215.0


Branch consolidation costs	612		—		612		N.M.


Loss on disposal of fixed assets	3		37		(34)		-91.9
Other	4,746		4,064		682		16.8
Total other operating expense	$	125,552	$	120,624	$	4,928	4.1

Not meaningful ("N.M.")

For the nine months ended September 30, 2022, total other operating expense was $125.6 million and increased by $4.9 million, or 4.1%, from $120.6 million in the year-ago period. The increase was primarily due to higher pension plan and SERP expenses of $4.5 million and higher net occupancy expense of $1.0 million. The higher pension plan and SERP expense was primarily attributable to a one-time non-cash charge of $4.9 million related to the termination and settlement of the Company's defined benefit retirement plan. These increases were partially offset by lower directors' deferred compensation plan expenses of $2.0 million due to 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.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2022			2021			2022			2021
Total other operating expense	$	41,998		$	41,345		$	125,552		$	120,624

Net interest income	$	55,365		$	56,086		$	159,278		$	157,951
Total other operating income	9,629			10,253			36,318			31,494
Total revenue before provision for credit losses	$	64,994		$	66,339		$	195,596		$	189,445

Efficiency ratio	64.62		%	62.32		%	64.19		%	63.67		%

Our efficiency ratio increased to 64.62% in the third quarter of 2022, compared to 62.32% in the year-ago quarter. The higher efficiency ratio in the third quarter of 2022 was primarily due to the aforementioned lower PPP net interest income and net loan fees, lower mortgage banking income and lower income from BOLI, combined with higher computer software expense.

For the nine months ended September 30, 2022, our efficiency ratio increased to 64.19%, compared to 63.67% in the year-ago period.

The Company continues its strategic investments in digital banking, technology and Banking-as-a-Service and it expects these investments, along with continued business development and relationship-focused banking, will improve profitability and shareholder returns.

Income Taxes

The Company recorded income tax expense of $5.9 million for the third quarter of 2022, compared to $6.8 million in the same year-ago period. The effective tax rate for the third quarter of 2022 was 26.15%, compared to 24.66% in the same year-ago period.

The Company recorded income tax expense of $18.1 million for the nine months ended September 30, 2022, compared to $18.2 million in the same year-ago period. The effective tax rate for the nine months ended September 30, 2022 was 25.24%, compared to 23.97% in the same year-ago period. The increase in the effective tax rate for the three and nine months ended September 30, 2022 was primarily attributable to lower tax-exempt BOLI income compared to the same year-ago periods.

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

The valuation allowance on our net DTA at September 30, 2022 totaled $3.2 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 $62.3 million at September 30, 2022, compared to a net DTA of $25.8 million as of December 31, 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 $7.34 billion at September 30, 2022 and decreased by $81.5 million, or 1.1%, from $7.42 billion at December 31, 2021.

Investment Securities

Investment securities totaled $1.35 billion at September 30, 2022, which decreased by $282.2 million, or 17.3%, from $1.63 billion at December 31, 2021. The decrease in the investment securities portfolio reflects a market valuation decline on

the AFS portfolio of $203.6 million and principal runoff of $177.6 million, partially offset by purchases of investment securities of $99.0 million.

The significant decline in market valuation on the AFS portfolio was primarily driven by the rising interest rate environment. T o mitigate the potential future impact to capital through AOCI, 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. 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)	September 30, 2022		December 31, 2021		$ Change		% Change
Hawaii:
Commercial, financial and agricultural:
SBA Paycheck Protection Program	$	5,208	$	87,459	$	(82,251)	(94.0)	%
Other	358,805		422,388		(63,583)		(15.1)
Real estate:
Construction	138,724		122,867		15,857		12.9
Residential mortgage	1,923,068		1,875,980		47,088		2.5
Home equity	719,399		637,249		82,150		12.9
Commercial mortgage	1,002,874		922,146		80,728		8.8
Consumer	347,388		333,843		13,545		4.1

Total loans	4,495,466		4,401,932		93,534		2.1
Allowance for credit losses ("ACL")	(47,814)		(55,808)		7,994		(14.3)
Loans, net of ACL	$	4,447,652	$	4,346,124	$	101,528	2.3

U.S. Mainland:
Commercial, financial and agricultural:
SBA Paycheck Protection Program	$	—	$	3,868	$	(3,868)	(100.0)	%
Other	158,474		107,733		50,741		47.1
Real estate:
Construction	12,872		—		12,872		—


Commercial mortgage	332,872		298,058		34,814		11.7
Consumer	422,528		290,058		132,470		45.7

Total loans	926,746		699,717		227,029		32.4
ACL	(16,568)		(12,289)		(4,279)		34.8
Loans, net of ACL	$	910,178	$	687,428	$	222,750	32.4

Total:
Commercial, financial and agricultural:
SBA Paycheck Protection Program	$	5,208	$	91,327	$	(86,119)	(94.3)	%
Other	517,279		530,121		(12,842)		(2.4)
Real estate:
Construction	151,596		122,867		28,729		23.4
Residential mortgage	1,923,068		1,875,980		47,088		2.5
Home equity	719,399		637,249		82,150		12.9
Commercial mortgage	1,335,746		1,220,204		115,542		9.5
Consumer	769,916		623,901		146,015		23.4

Total loans	5,422,212		5,101,649		320,563		6.3
ACL	(64,382)		(68,097)		3,715		(5.5)
Loans, net of ACL	$	5,357,830	$	5,033,552	$	324,278	6.4

Loans, net of deferred costs, totaled $5.42 billion at September 30, 2022, which increased by $320.6 million, or 6.3%, from $5.10 billion at December 31, 2021. The increase reflects net increases in the following loan portfolios: consumer of $146.0 million, commercial mortgage of $115.5 million, home equity of $82.2 million, residential mortgage loans of $47.1 million, and construction of $28.7 million. These increases were partially offset by net decreases in SBA Paycheck Protection Program loans of $86.1 million and other commercial loans of $12.8 million. During the nine months ended September 30, 2022, the Company received $89.4 million in PPP loan forgiveness and paydowns. Core loans, or total loans, net of deferred costs, excluding PPP loans, totaled $5.42 billion at September 30, 2022 and increased by $406.7 million, or 8.1%, from $5.01 billion at December 31, 2021.

The Hawaii loan portfolio increased by $93.5 million, or 2.1%, from December 31, 2021. The increase reflects net increases in the following loan portfolios: home equity of $82.2 million, commercial mortgage of $80.7 million, residential mortgage of $47.1 million, construction of $15.9 million, and consumer of $13.5 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 $82.3 million and other commercial, financial and agricultural loans of $63.6 million.

The U.S. Mainland loan portfolio increased by $227.0 million, or 32.4% from December 31, 2021. The increase was primarily attributable to net increases in consumer loans of $132.5 million, other commercial, financial and agricultural loans of $50.7 million, commercial mortgage loans of $34.8 million, and construction loans of $12.9 million, partially offset by a net decrease in SBA Paycheck Protection Program loans of $3.9 million. The increase in U.S. Mainland consumer loans was primarily attributable to purchases and replenishment of select unsecured consumer and automobile loan 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.

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)	September 30, 2022			December 31, 2021			$ Change		% Change
Nonperforming Assets ("NPAs") [1]
Nonaccrual loans:
Commercial, financial and agricultural - Other	$	277		$	183		$	94	51.4	%
Real estate:

Residential mortgage	2,771			4,623			(1,852)		(40.1)
Home equity	584			786			(202)		(25.7)

Consumer	588			289			299		103.5

Total nonaccrual loans	4,220			5,881			(1,661)		(28.2)

Other real estate owned ("OREO"):

Real estate:

Residential mortgage	—			—			—		—




Total OREO	—			—			—		—
Total nonperforming assets	4,220			5,881			(1,661)		(28.2)

Accruing Loans Delinquent for 90 Days or More [1]
Commercial, financial and agricultural - Other	669			945			(276)		(29.2)
Real estate:

Residential mortgage	503			—			503		—
Home equity	—			44			(44)		(100.0)

Consumer	623			374			249		66.6

Total accruing loans delinquent for 90 days or more	1,795			1,363			432		31.7

Restructured Loans Still Accruing Interest [1]

Real estate:

Residential mortgage	2,030			3,768			(1,738)		(46.1)

Commercial mortgage	925			1,043			(118)		(11.3)
Consumer	69			92			(23)		(25.0)

Total restructured loans still accruing interest	3,024			4,903			(1,879)		(38.3)
Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest	$	9,039		$	12,147		$	(3,108)	(25.6)

Ratio of nonaccrual loans to total loans	0.08		%	0.12		%			(0.04)	%
Ratio of NPAs to total loans and OREO	0.08		%	0.12		%			(0.04)	%
Ratio of NPAs and accruing loans delinquent for 90 days or more to total loans and OREO	0.11		%	0.14		%			(0.03)	%
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	4.15		%	6.42		%			(2.27)	%

[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.

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


(dollars in thousands)
Balance at December 31, 2021	$	5,881
Additions	4,612
Reductions:
Payments	(2,212)
Return to accrual status	(1,633)

Net charge-offs, valuation and other adjustments	(2,428)
Total reductions	(6,273)
Net decrease	(1,661)
Balance at September 30, 2022	$	4,220

Nonperforming assets, which includes nonaccrual loans and other real estate owned, totaled $4.2 million at September 30, 2022, compared to $5.9 million at December 31, 2021. There were no nonperforming loans classified as held for sale at September 30, 2022 and December 31, 2021. The decrease in nonperforming assets from December 31, 2021 was primarily attributable to $2.2 million in repayments of nonaccrual loans, $1.6 million in loans returned to accrual status, and $2.4 million in net charge-offs, valuation and other adjustments, partially offset by additions to nonaccrual loans totaling $4.6 million.

Troubled debt restructurings ("TDRs") included in nonperforming assets at September 30, 2022 consisted of five Hawaii residential mortgage loans with a combined principal balance of $1.1 million. There were $3.0 million of TDRs still accruing interest at September 30, 2022, none of which were more than 90 days delinquent. At December 31, 2021, there were $4.9 million of TDRs still accruing interest, none of which 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 $0.4 million as of December 31, 2021. At September 30, 2022, there were no loan payment forbearance or deferrals for borrowers impacted by the COVID-19 pandemic remaining.

Criticized loans at September 30, 2022 declined by $0.5 million from December 31, 2021 to $75.5 million, or 1.4% of the total loan portfolio. Special mention loans increased by $14.6 million to $46.3 million, or 0.9% of the total loan portfolio. Classified loans declined by $15.0 million to $29.3 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 6.42% at December 31, 2021 to 4.15% at September 30, 2022.

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 September 30,						Nine Months Ended September 30,
(dollars in thousands)	2022			2021			2022			2021
Allowance for Credit Losses:
Balance at beginning of period	$	65,211		$	77,781		$	68,097		$	83,269



Provision (credit) for credit losses on loans [1] [2]	731			(2,969)			(744)			(6,906)

Charge-offs:
Commercial, financial and agricultural - Other	550			334			1,291			1,344







Consumer	1,912			829			4,518			3,450

Total charge-offs	2,462			1,163			5,809			4,794

Recoveries:
Commercial, financial and agricultural - Other	220			281			785			646
Construction	14			—			76			—
Residential mortgage	14			53			162			345
Real estate:
Home equity	36			—			36			9
Commercial mortgage	—			—			—			73


Consumer	618			604			1,779			1,945

Total recoveries	902			938			2,838			3,018
Net charge-offs	1,560			225			2,971			1,776


Balance at end of period	$	64,382		$	74,587		$	64,382		$	74,587

Average loans, net of deferred fees and costs	$	5,355,088		$	5,022,909		$	5,355,088		$	5,022,909
Annualized ratio of net charge-offs to average loans	0.12		%	0.02		%	0.08		%	0.05		%
Ratio of ACL to total loans	1.19		%	1.48		%	1.19		%	1.48		%

ACL as a percentage of nonaccrual loans	1526		%	1031		%	1526		%	1031		%

[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.

Our ACL totaled $64.4 million at September 30, 2022, compared to $68.1 million at December 31, 2021 and $74.6 million at September 30, 2021.

During the third quarter of 2022, we recorded a debit to the provision for credit losses on loans of $0.7 million and net charge-offs of $1.6 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 nine months ended September 30, 2022, we recorded a credit to the provision for credit losses on loans of $0.7 million and net charge-offs of $3.0 million.

Our ACL as a percentage of total loans decreased to 1.19% at September 30, 2022 from 1.33% at December 31, 2021 and 1.48% at September 30, 2021. Our ACL as a percentage of nonaccrual loans increased to 1526% at September 30, 2022 from 1158% at December 31, 2021 and 1031% at September 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 $13.5 million at September 30, 2022 increased by $5.6 million, or 70.1%, from the FHLB stock balance of $8.0 million at December 31, 2021. FHLB stock has an activity-based stock requirement, such that as borrowings 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)	September 30, 2022		December 31, 2021		$ Change		% Change
Noninterest-bearing demand deposits	$	2,138,083	$	2,291,246	$	(153,163)	(6.7)	%
Interest-bearing demand deposits	1,441,302		1,415,277		26,025		1.8
Savings and money market deposits	2,194,991		2,225,903		(30,912)		(1.4)
Time deposits less than $100,000	153,238		136,584		16,654		12.2
Time deposits $100,000 to $250,000	108,723		88,873		19,850		22.3
Core deposits	6,036,337		6,157,883		(121,546)		(2.0)

Government time deposits	195,057		214,950		(19,893)		(9.3)

Other time deposits greater than $250,000	325,040		266,325		58,715		22.0
Total time deposits greater than $250,000	520,097		481,275		38,822		8.1
Total deposits	$	6,556,434	$	6,639,158	$	(82,724)	(1.2)

Our total deposits of $6.56 billion at September 30, 2022 decreased by $82.7 million, or 1.2%, from total deposits of $6.64 billion at December 31, 2021. Net decreases in noninterest-bearing demand deposits of $153.2 million, savings and money market deposits of $30.9 million, and government time deposits of $19.9 million, were offset by net increases in interest-bearing demand deposits of $26.0 million, time deposits less than $100,000 of $16.7 million, time deposits $100,000 to $250,000 of $19.9 million, and other time deposits greater than $250,000 of $58.7 million.

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 nine months ended September 30, 2022, the Company has experienced moderation of core deposit balances. Our core deposits, which we define as demand deposits, savings and money market deposits, and time deposits up to $250,000, totaled $6.04 billion at September 30, 2022 and decreased by $121.5 million, from $6.16 billion at December 31, 2021. Core deposits as a percentage of total deposits was 92.1% at September 30, 2022, compared to 92.8% at December 31, 2021. Our average cost of total deposits was 9 bp during the nine months ended September 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 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

Our total shareholders' equity was $438.5 million at September 30, 2022, compared to $558.2 million at December 31, 2021. The change in total shareholders' equity was primarily attributable to other comprehensive loss of $141.3 million, cash dividends declared of $21.5 million, and the repurchase of $15.8 million in shares of our common stock under our stock repurchase programs in the nine months ended September 30, 2022, partially offset by net income of $53.7 million.

Our total shareholders' equity to total assets ratio was 5.98% at September 30, 2022, compared to 7.52% at December 31, 2021. Our book value per share was $16.08 and $20.14 at September 30, 2022 and December 31, 2021, respectively. The declines in our total shareholders' equity, total shareholders' equity to total assets ratio and book value per share were primarily due to the aforementioned unrealized losses on available-for-sale investment securities recorded in accumulated other comprehensive loss during the nine months ended September 30, 2022 due to market volatility and 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 September 30, 2022, on a stand-alone basis, CPF had an available cash balance of approximately $16.5 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 September 30, 2022, the bank had Statutory Retained Earnings of $137.6 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 October 20, 2022, the Company's Board of Directors declared a cash dividend of $0.26 per share on the Company's outstanding common stock, which increased by 4.0% from $0.25 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.

On January 26, 2021, the Company's Board of Directors approved a new share repurchase authorization of up to $25 million of its common stock (the "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 repurchased 696,894 shares of common stock, at an aggregate cost of $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 nine months ended September 30, 2022, the Company repurchased 627,410 shares of common stock, at an aggregate cost of $15.8 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 593,310 shares at an aggregate cost of $14.8 million under the 2022 Repurchase Plan). As of September 30, 2022, $15.2 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.

Trust Preferred Securities

As of September 30, 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 $54.3 million, net of unamortized debt issuance costs of $0.7 million, at September 30, 2022.

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

Regulatory Capital Ratios

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, 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 Company on January 1, 2015, and 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 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 rules that excludes most AOCI components from regulatory capital. The Company made the election not to include the additional components of AOCI in regulatory 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 Instruments – Credit Losses, Topic 326, Measurement of Credit Losses on Financial Instruments" , before the end of 2020 the option to delay for two years an estimate of the CECL methodology’s effect on regulatory capital, relative to the incurred loss methodology’s effect on capital, followed by a three-year transition period;

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

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

General capital adequacy regulations adopted by the FRB and FDIC require an institution to maintain minimum leverage capital, Tier 1 risk-based capital, total risk-based capital, and common equity Tier 1 ("CET1") capital ratios. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. For a further discussion of the effect of forthcoming changes in required regulatory capital ratios, see the discussion in the "Business — Supervision and Regulation" sections of our 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 September 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 September 30, 2022:
Leverage capital	$	642,184	8.7	%	$	296,845	4.0	%	N/A		N/A
Tier 1 risk-based capital	642,184		11.5		334,089		6.0		N/A		N/A
Total risk-based capital	765,269		13.7		445,452		8.0		N/A		N/A
CET1 risk-based capital	592,184		10.6		250,567		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 September 30, 2022:
Leverage capital	$	675,104	9.1	%	$	296,341	4.0	%	$	370,426	5.0	%
Tier 1 risk-based capital	675,104		12.2		333,341		6.0		444,454		8.0
Total risk-based capital	743,189		13.4		444,454		8.0		555,568		10.0
CET1 risk-based capital	675,104		12.2		250,005		4.5		361,119		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

[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 net interest income ("NII") and economic value of equity ("EVE") simulation and various hypothetical interest rate 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 NII and 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 incorporates various assumptions which are believed to be reasonable but may impact results. Key modeling assumptions are made around the timing of 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.

The following reflects our net interest income sensitivity analysis as of September 30, 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 bp in either a gradual or an instantaneous, parallel fashion.


Rate Change (Gradual)	Estimated Net Interest Income Sensitivity
+100 bp	1.81	%
-100 bp	(0.08)	%

Rate Change (Instantaneous)	Estimated Net Interest Income Sensitivity
+100 bp	2.17	%
-100 bp	(2.07)	%

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 $2.18 billion line of credit with the FHLB as of September 30, 2022, compared to $1.83 billion at December 31, 2021. There were $115.0 million in short-term borrowings under this arrangement at September 30, 2022, and none at December 31, 2021. Letters of credit under this arrangement that are used to collateralize certain government deposits totaled $36.0 million at September 30, 2022, compared to $32.2 million at December 31, 2021. There were no long-term borrowings under this arrangement at September 30, 2022 and December 31, 2021. FHLB advances and standby letters of credit available at September 30, 2022 were secured by certain real estate loans with a carrying value of $3.20 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB. At September 30, 2022, $2.03 billion was undrawn under this arrangement, compared to $1.80 billion at December 31, 2021.

At September 30, 2022 and December 31, 2021, our bank had additional unused borrowings available at the Federal Reserve discount window of $76.9 million and $55.4 million, respectively. As of September 30, 2022 and December 31, 2021, certain commercial and commercial real estate loans with a carrying value totaling $127.4 million and $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.

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.

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, 2021. There have been no material changes in our cash requirements from known contractual and other obligations since December 31, 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.

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 net interest income and economic value of equity simulation, and various interest rate 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 September 30, 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

T here have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) 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.

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, 2021, as filed with the SEC on February 23, 2022.

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

Issuer Purchases of Equity Securities

During the three months ended September 30, 2022, the Company repurchased 218,000 shares of common stock, at an aggregate cost of $4.9 million under the Company's 2022 Repurchase Plan.

As of September 30, 2022, $15.2 million remained available for repurchase under the 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
July 1-31, 2022	86,000	$	21.74	86,000	$	18,190,568
August 1-31, 2022	62,500	23.56		62,500	16,717,902
September 1-30, 2022	69,500	21.96		69,500	15,191,868
Total	218,000	$	22.33	218,000	15,191,868

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.

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:	October 27, 2022	/s/ Paul K. Yonamine
		Paul K. Yonamine
		Chairman and Chief Executive Officer

Date:	October 27, 2022	/s/ David S. Morimoto
		David S. Morimoto
		Senior Executive Vice President and Chief Financial Officer

TABLE OF CONTENTS

Part I. Financial Information Item 1. Financial Statements Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 6. Exhibits

Exhibits

31.1 Rule13a-14(a)Certification of Chief Executive Officer in accordance with Section302 of the Sarbanes-Oxley Act of 2002 * 31.2 Rule13a-14(a)Certification of Chief Financial Officer in accordance with Section302 of the Sarbanes-Oxley Act of 2002 * 32.1 Section1350 Certification of Chief Executive Officer in accordance with Section906 of the Sarbanes-Oxley Act of 2002 ** 32.2 Section1350 Certification of Chief Financial Officer in accordance with Section906 of the Sarbanes-Oxley Act of 2002 **

CPF 10-Q Quarter ended Sept. 30, 2022

Exhibits