# BANK OF HAWAII CORP (BOH) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from BANK OF HAWAII CORP's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/46195/000156459022007841/boh-10k_20211231.htm
Accession: 0001564590-22-007841
Filing date: 2022-03-01
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/BOH/
All MD&A years: /company/BOH/mda/
Next year: /company/BOH/mda/fy2022/ (FY 2022)

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following MD&A is intended to help the reader understand the Company and its operations and is focused on our fiscal 2021 and 2020 financial results, including comparisons of year-to-year performance between these years. Discussion and analysis of our 2019 fiscal year, as well as the year-to-year comparison between fiscal 2020 and 2019, are included "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 1, 2021.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements can be identified by the fact that they do not relate strictly to historical or current facts and may include statements concerning, among other things, the anticipated economic and business environment in our service area and elsewhere, credit quality and other financial and business matters in future periods, our future results of operations and financial position, our business strategy and plans and our objectives and future operations.  We also may make forward-looking statements in our other documents filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”).  In addition, our senior management may make forward-looking statements orally to analysts, investors, representatives of the media and others.  Our forward-looking statements are based on numerous assumptions, any of which could prove to be inaccurate, and actual results may differ materially from those projected because of a variety of risks and uncertainties, including, but not limited to: 1) general economic conditions either nationally, internationally, or locally may be different than expected, and particularly, any event that negatively impacts the tourism industry in Hawaii; 2) the compounding effects of the COVID-19 pandemic, including reduced tourism in Hawaii, the duration and scope of government mandates or other limitations of or restrictions on travel, volatility in the international and national economy and credit markets, inflation, worker absenteeism, quarantines or other travel or health-related restrictions, the length and severity of the COVID-19 pandemic, the pace of recovery following the COVID-19 pandemic, and the effect of government, business and individual actions intended to mitigate the effects of the COVID-19 pandemic; 3) changes in market interest rates that may affect credit markets and our ability to maintain our net interest margin; 4) changes in our credit quality or risk profile that may increase or decrease the required level of our reserve for credit losses; 5) the impact of legislative and regulatory initiatives, particularly the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018; 6) changes to the amount and timing of proposed common stock repurchases; 7) unanticipated changes in the securities markets, public debt markets, and other capital markets in the U.S. and internationally, including, without limitation, the anticipated elimination of the London Interbank Offered Rate (“LIBOR”) as a benchmark interest rate; 8) changes in fiscal and monetary policies of the markets in which we operate; 9) the increased cost of maintaining or the Company’s ability to maintain adequate liquidity and capital, based on the requirements adopted by the Basel Committee on Banking Supervision and U.S. regulators; 10) changes in accounting standards; 11) changes in tax laws or regulations, including Public Law 115-97, commonly known as the Tax Cuts and Jobs Act, or the interpretation of such laws and regulations; 12) any failure in or breach of our operational systems, information systems or infrastructure, or those of our merchants, third party vendors and other service providers; 13) any interruption or breach of security of our information systems resulting in failures or disruptions in customer account management, general ledger processing, and loan or deposit systems; 14) natural disasters, public unrest or adverse weather, public health, disease outbreaks, and other conditions impacting us and our customers’ operations or negatively impacting the tourism industry in Hawaii; 15) competitive pressures in the markets for financial services and products; 16) actual or alleged conduct which could harm our reputation; and 17) the impact of litigation and regulatory investigations of the Company, including costs, expenses, settlements, and judgments. Given these risks and uncertainties, investors should not place undue reliance on any forward-looking statement as a prediction of our actual results.  A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included under the section entitled “Risk Factors” in Part I of this report.  Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.  We undertake no obligation to update forward-looking statements to reflect later events or circumstances, except as may be required by law.

For the reasons described above, we caution you against relying on any forward-looking statements. You should not consider any list of such factors to be an exhaustive statement of all of the risks, uncertainties, or potentially inaccurate assumptions that could cause our current expectations or beliefs to change. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by the federal securities laws.

20

Table of Contents

Critical Accounting Policies

Our Consolidated Financial Statements were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and follow general practices within the industries in which we operate.  The most significant accounting policies we follow are presented in Note 1 to the Consolidated Financial Statements.  Application of these principles requires us to make estimates, assumptions, and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes.  Most accounting policies are not considered by management to be critical accounting policies.  Several factors are considered in determining whether or not a policy is critical in the preparation of the Consolidated Financial Statements.  These factors include among other things, whether the policy requires management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.  The accounting policies which we believe to be most critical in preparing our Consolidated Financial Statements are those that are related to the determination of the reserve for credit losses, fair value estimates, leased asset residual values, and income taxes.

Reserve for Credit Losses

A consequence of lending activities is that we may incur credit losses.  The amount of such losses will vary depending upon the risk characteristics of the loan and lease portfolio as affected by economic conditions such as rising interest rates and the financial performance of borrowers.

The reserve for credit losses consists of the allowance for credit losses (the “Allowance”) and the reserve for unfunded commitments (the “Unfunded Reserve”). The reserve for credit losses also included a reserve for accrued interest receivable related to loans in which interest payment forbearances were granted to borrowers impacted by the COVID-19 pandemic.  As a result of our January 1, 2020, adoption of ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments,” and its related amendments, our methodology for estimating the reserve for credit losses changed significantly from December 31, 2019.  The standard replaced the “incurred loss” approach with an “expected loss” approach known as current expected credit loss (“CECL”).  The CECL approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures).  It removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was “probable” a loss event was “incurred.”

The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts.  Historical loss experience is generally the starting point for estimating expected credit losses.  We then consider whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used.  Finally, we consider forecasts about future economic conditions that are reasonable and supportable.  The Unfunded Reserve represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit.  The Unfunded Reserve is determined by estimating future draws and applying the expected loss rates on those draws. However, a liability is not recognized for commitments unconditionally cancellable by the Company.

Management’s evaluation of the appropriateness of the reserve for credit losses is often the most critical of accounting estimates for a financial institution.  Our determination of the amount of the reserve for credit losses requires significant reliance on the credit risk rating we assign to individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows on criticized loans, significant reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of economic factors, and the reliance on our reasonable and supportable forecasts.  While our methodology in establishing the reserve for credit losses attributes portions of the Allowance and Unfunded Reserve to the commercial and consumer portfolio segments, the entire Allowance and Unfunded Reserve is available to absorb credit losses inherent in the total loan and lease portfolio and total amount of unfunded credit commitments, respectively.  The provision for credit losses reflects our internal calculation and judgment of the appropriate amount of the reserve for credit losses.

The reserve for credit losses related to our commercial portfolio segment is generally most sensitive to the credit risk rating assigned to each borrower.  Commercial loan risk ratings are evaluated based on each situation by experienced senior credit officers and are subject to periodic review by an independent internal team of credit specialists.  The reserve for credit losses related to our consumer portfolio segment is generally most sensitive to economic assumptions and delinquency trends.  The reserve for credit losses attributable to each portfolio segment also includes an amount for inherent risks not reflected in the historical analyses.  Relevant factors include, but are not limited to, concentrations of credit risk (geographic, large borrower, and industry), economic trends and conditions, changes in underwriting standards, experience and depth of lending staff, trends in delinquencies, and the level of criticized loans.

21

Table of Contents

The impact of utilizing the CECL approach to calculate the reserve for credit losses is significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized.  Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings.  See Notes 1 and 4 to the Consolidated Financial Statements and the “Corporate Risk Profile - Credit Risk” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) for more information on the Allowance and the Unfunded Reserve.

Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date.  The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market inputs.  For financial instruments that are traded actively and have quoted market prices or observable market inputs, there is minimal subjectivity involved in measuring fair value.  However, when quoted market prices or observable market inputs are not fully available, significant management judgment may be necessary to estimate fair value.  In developing our fair value measurements, we maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy defines Level 1 valuations as those based on quoted prices, unadjusted, for identical instruments traded in active markets.  Level 2 valuations are those based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-based valuation techniques for which all significant assumptions are observable in the market.  Level 3 valuations are based on model-based techniques that use at least one significant assumption not observable in the market, or significant management judgment or estimation, some of which may be internally developed.

Financial assets that are recorded at fair value on a recurring basis include available-for-sale investment securities, loans held for sale, mortgage servicing rights, investments related to deferred compensation arrangements, and derivative financial instruments.  As of December 31, 2021, and December 31, 2020, $4.0 billion or 20% and $2.7 billion or 15%, respectively, of our total assets consisted of financial assets recorded at fair value on a recurring basis and most of these financial assets consisted of available-for-sale investment securities measured using information from a third party pricing service.  These investments in debt securities and mortgage-backed securities were all classified in either Levels 1 or 2 of the fair value hierarchy.  Financial liabilities that are recorded at fair value on a recurring basis are comprised of derivative financial instruments.  As of December 31, 2021, and December 31, 2020, $17.4 million and $6.4 million, respectively, or less than 1% of our total liabilities consisted of financial liabilities recorded at fair value on a recurring basis.  As of December 31, 2021, and December 31, 2020, Level 3 financial assets recorded at fair value on a recurring basis were $96.2 million and $29.7 million, respectively, or less than 1% of our total assets, and were comprised of mortgage servicing rights and derivative financial instruments.  As of December 31, 2021, and December 31, 2020, Level 3 financial liabilities recorded at fair value on a recurring basis were $17.4 million and $6.1 million, respectively, or less than 1% of our total liabilities, and were comprised of derivative financial instruments.

Our third party pricing service makes no representations or warranties that the pricing data provided to us is complete or free from errors, omissions, or defects.  As a result, we have processes in place to monitor and periodically review the information provided to us by our third party pricing service such as: 1) Our third party pricing service provides us with documentation by asset class of inputs and methodologies used to value securities.  We review this documentation to evaluate the inputs and valuation methodologies used to place securities into the appropriate level of the fair value hierarchy.  This documentation is periodically updated by our third party pricing service.  Accordingly, transfers of securities within the fair value hierarchy are made if deemed necessary.  2) On a quarterly basis, management also selects a sample of securities priced by the Company’s third party pricing service and reviews the significant assumptions and valuation methodologies used by the pricing service with respect to those securities.  The information provided is comprised of market reference data, which may include reported trades; bids, offers, or broker-dealer dealer quotes; benchmark yields and spreads; as well as other reference data as appropriate. Periodically, based on these reviews, management determines whether the current placement of the security in the fair value hierarchy is appropriate or whether transfers may be warranted.  3) On a quarterly basis, management reviews the pricing information received from our third party pricing service.  This review process includes a comparison to a second source.  4) Our third party pricing service has also established processes for us to submit inquiries regarding quoted prices.  Periodically, we will challenge the quoted prices provided by our third party pricing service.  Our third party pricing service will review the inputs to the evaluation in light of the new market data presented by us.  Our third party pricing service may then affirm the original quoted price or may update the evaluation on a going forward basis.  Generally, we do not adjust the price from the third party service provider.  5) On an annual basis, we obtain and review the third party’s most recently issued Service Organization Controls report related to controls placed in operation and tests of operating effectiveness, to update our understanding of the third party pricing service’s control environment.  

See Note 21 to the Consolidated Financial Statements for more information on our fair value measurements.

22

Table of Contents

Income Taxes

We determine our liabilities for income taxes based on current tax regulations and interpretations in tax jurisdictions where our income is subject to taxation.  Currently, we file tax returns for federal, six state and local domestic jurisdictions, and three foreign jurisdictions.  In estimating income taxes payable or receivable, we assess the relative merits and risks of the appropriate tax treatment considering statutory, judicial, and regulatory guidance in the context of each tax position.  Accordingly, previously estimated liabilities are regularly reevaluated and adjusted through the provision for income taxes.  Changes in the estimate of income taxes payable or receivable occur periodically due to changes in tax rates, interpretations of tax law, the status of examinations being conducted by various taxing authorities, and newly enacted statutory, judicial and regulatory guidance that impact the relative merits and risks of each tax position.  These changes, when they occur, may affect the provision for income taxes as well as current and deferred income taxes, and may be significant to our statements of income and condition.

Management's determination of the realization of net deferred tax assets is based upon management's judgment of various future events and uncertainties, including the timing, character and amount of future income, as well as the implementation of various tax planning strategies to maximize realization of the deferred tax assets.  A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized.  As of December 31, 2021, and December 31, 2020, we carried a valuation allowance of $3.2 million and $3.6 million, respectively, related to our deferred tax assets established in connection with our low-income housing investments.

We are also required to record a liability, referred to as an unrecognized tax benefit ("UTB"), for the entire amount of benefit taken in a prior or future income tax return when we determine that a tax position has a less than 50% likelihood of being accepted by the taxing authority.  As of December 31, 2021, and December 31, 2020, our liabilities for UTBs were $4.0 million and $5.4 million, respectively.

In 2021, the Company recognized federal and State of Hawaii investment tax credits from energy investments.  The Company uses the deferral method of accounting for its investment tax credit with the benefit recognized in the provision for income taxes.  These credits reduced the Company's provision for income taxes by $2.1 million, $3.1 million, and $4.1 million in 2021, 2020, and 2019, respectively.

Overview

We are a regional financial services company serving businesses, consumers, and governments in Hawaii, Guam, and other Pacific Islands.  Our principal operating subsidiary, the Bank, was founded in 1897.

Our business strategy is to use our unique market knowledge, prudent management discipline and brand strength to deliver exceptional value to our stakeholders.  Our business plan is balanced between growth and risk management while maintaining flexibility to adjust to economic changes.  We will continue to focus on providing customers with best-in-class service and an innovative mix of products and services.  We will also remain focused on continuing to deliver strong financial results while maintaining prudent risk and capital management strategies as well as our commitment to support our local communities.

Hawaii Economy

The COVID-19 pandemic has had and is continuing to have an impact on the Hawaii economy.  Prior to the COVID-19 pandemic, at risk industries of leisure and hospitality represented 19% of jobs and 10% of Hawaii’s GDP.  Hawaii benefits from a wide range of industries that help to provide stability in the case of economic shocks.  Federal government jobs, primarily military, have historically been a stabilizing part of Hawaii’s economy, supplying about 20% of GDP.  Construction activity, including the Honolulu Rail Project, and other non-visitor-related activities have continued despite the COVID-19 pandemic.  Hawaii’s large retiree population also contributes to a stable economic base.  Hawaii’s unemployment rate was 5.7% in December 2021, while still above the pre-pandemic level, it has fallen substantially since its peak in April and May of 2020.

The volume of single-family home sales on Oahu increased 17.9% in 2021 compared to 2020, while the volume of condominium sales on Oahu increased 53.1% in 2021 compared to 2020. The median price of single-family home sales on Oahu increased by 19.3% in 2021 compared to 2020, while the condominium sales price on Oahu increased by 9.2% in 2021 compared to 2020. As of December 31, 2021, months of inventory of single-family homes and condominiums on Oahu was 0.8 months and 1.6 months, respectively.

23

Table of Contents

Earnings Summary

Net income for 2021 was $253.3 million, an increase of $99.6 million or 65% compared to 2020.  Diluted earnings per common share were $6.25 in 2021, an increase of $2.39 or 62% compared to 2020.  Our return on average assets was 1.14% in 2021, an increase of 35 basis points from 2020, and our return on average shareholders’ equity was 16.94% in 2021, compared to 11.38% in 2020.

Our higher net income in 2021 was primarily due to the following:

[[GREPCENT_TABLE]]
[["\u2022","The provision for credit losses in 2021 was a net benefit of $50.5 million compared to a net expense of $117.8 million in 2020."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","Net occupancy expense was $26.2 million in 2021, a decrease of $13.3 million or 34% compared to 2020. This decrease was primarily due $9.5 million gain on sales of real estate property on the island of Oahu and Guam, and an impairment charge related to the closures of 12 branches and write down of cash-only ATMs in the fourth quarter of 2020."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","Fees, exchange, and other service charges was $55.5 million in 2021, an increase of $8.4 million or 18% compared to 2020. This increase was primarily due to higher fees from ATMs, merchant income, and debit and credit card transaction volume."]]
[[/GREPCENT_TABLE]]

These items were partially offset by the following:

[[GREPCENT_TABLE]]
[["\u2022","The provision for income taxes was $72.2 million in 2021, an increase of $36.9 million or 104% compared to 2020. The effective tax rate was 22.17% in 2021 compared to 18.68% in 2020. This increase was primarily due to a higher pretax income."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","Salaries and benefits expense was $228.3 million in 2021, an increase of $21.0 million or 10% compared to 2020. This increase was primarily due to a $13.6 million increase in incentive compensation coupled with a $5.7 million increase in share-based compensation due to a higher number of restricted stock units being amortized. These increases were partially offset by a $3.0 million decrease in separation expense."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","Net losses on sales of investment securities was $1.3 million in 2021, a decrease of $11.2 million compared to 2020. This decrease was primarily due to gains on sale of 80,214 Visa Class B Shares during the second quarter of 2020."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","Other noninterest expense was $63.6 million in 2021, an increase of $8.6 million or 16% compared to 2020. These increase was primarily due to a total of $7.0 million early termination costs incurred in 2021 related to the prepayment of $150.0 million of repurchase agreements and $50.0 million of FHLB advances."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","Mortgage banking income was $15.0 million in 2021, a decrease of $2.9 million or 16% compared to 2020. This decrease was primarily due to decreased sales and margins on sales of conforming saleable loans from current production. This decrease was offset by valuation allowance recovery to our mortgage serving rights."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","Other noninterest income was $19.6 million in 2021, a decrease of $10.8 million or 36% compared to 2020. This decrease was primarily due to a $9.3 million decrease in fees related to our customer interest rate swap derivatives."]]
[[/GREPCENT_TABLE]]

We maintained a strong balance sheet throughout 2021, with what we believe are adequate reserves for credit losses, and high levels of liquidity and capital.

[[GREPCENT_TABLE]]
[["\u2022","Total assets were $22.8 billion as of December 31, 2021, an increase of $2.2 billion or 11% from December 31, 2020."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","Total loans and leases were $12.3 billion as of December 31, 2021, an increase of $0.3 billion or 3% from December 31, 2020, primarily due to growth in our consumer portfolio, partially offset by a decrease of $0.4 billion in PPP loans."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","The allowance for credit losses (the \u201cAllowance\u201d) was $157.8 million as of December 31, 2021, a decrease of $58.4 million or 27% from December 31, 2020. The ratio of our Allowance to total loans and leases outstanding was 1.29% as of December 31, 2021, compared to 1.81% as of December 31, 2020. The level of our Allowance was commensurate with the Company\u2019s credit risk profile, future economic outlook, and forecasts utilized."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","The total carrying value of our investment securities portfolio was $9.0 billion as of December 31, 2021, an increase of $1.9 billion or 27% from December 31, 2020. Mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac are the largest concentration in our portfolio."]]
[[/GREPCENT_TABLE]]

24

Table of Contents

[[GREPCENT_TABLE]]
[["\u2022","Total deposits were $20.4 billion as of December 31, 2021, an increase of $2.1 billion or 12% from December 31, 2020, primarily due to an increase in consumer and commercial deposits."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","On June 15, 2021, the Company issued and sold 7,200,000 depositary shares, each representing a 1/40th ownership interest in a share of 4.375% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share. Net proceeds after underwriting discounts and expenses were $175.5 million."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","Total shareholders\u2019 equity was $1.6 billion as of December 31, 2021, an increase of $237.1 million or 17% from December 31, 2020. While we continued to return capital to our shareholders in the form of dividends, we suspended share repurchases from March 2020 to July 2021 in light of the COVID-19 pandemic. During 2021, we repurchased 373,240 shares of common stock at a total cost of $31.3 million. We also paid cash dividends of $110.6 million on common shares during 2021."]]
[[/GREPCENT_TABLE]]

25

Table of Contents

Analysis of Statements of Income

Average balances, related income and expenses, and resulting yields and rates, on a taxable-equivalent basis, are presented in Table 1.  An analysis of the change in net interest income, on a taxable-equivalent basis, is presented in Table 2.

[[GREPCENT_TABLE]]
[["Average Balances and Interest Rates \u2013 Taxable-Equivalent Basis","","Table 1"],["","","2021","","","2020"],["(dollars in millions)","","Average Balance","","","Income/ Expense","","","Yield/ Rate","","","Average Balance","","","Income/ Expense","","","Yield/ Rate"],["Earning Assets"],["Interest-Bearing Deposits in Other Banks","","$","2.7","","","$","\u2014","","","","0.36","%","","$","2.2","","","$","\u2014","","","","0.61","%"],["Funds Sold","","","692.4","","","","0.9","","","","0.13","","","","434.1","","","","0.9","","","","0.21"],["Investment Securities"],["Available-for-Sale"],["Taxable","","","4,266.9","","","","64.2","","","","1.50","","","","2,961.9","","","","60.3","","","","2.04"],["Non-Taxable","","","10.1","","","","0.4","","","","4.21","","","","27.6","","","","1.2","","","","4.36"],["Held-to-Maturity"],["Taxable","","","3,988.1","","","","61.0","","","","1.53","","","","3,125.2","","","","65.0","","","","2.08"],["Non-Taxable","","","50.7","","","","1.2","","","","2.41","","","","52.6","","","","1.4","","","","2.66"],["Total Investment Securities","","","8,315.8","","","","126.8","","","","1.53","","","","6,167.3","","","","127.9","","","","2.07"],["Loans Held for Sale","","","24.3","","","","0.7","","","","2.82","","","","19.4","","","","0.6","","","","3.28"],["Loans and Leases 1"],["Commercial and Industrial","","","1,739.0","","","","62.8","","","","3.61","","","","1,797.5","","","","59.3","","","","3.30"],["Commercial Mortgage","","","2,940.0","","","","86.7","","","","2.95","","","","2,666.1","","","","90.9","","","","3.41"],["Construction","","","271.6","","","","9.5","","","","3.50","","","","240.1","","","","9.4","","","","3.92"],["Commercial Lease Financing","","","107.2","","","","1.5","","","","1.42","","","","111.3","","","","(1.0",")","","","(0.88",")"],["Residential Mortgage","","","4,232.4","","","","140.1","","","","3.31","","","","3,978.7","","","","146.0","","","","3.67"],["Home Equity","","","1,637.1","","","","49.6","","","","3.03","","","","1,642.7","","","","56.8","","","","3.46"],["Automobile","","","717.0","","","","24.6","","","","3.43","","","","709.1","","","","25.3","","","","3.57"],["Other 2","","","379.4","","","","23.9","","","","6.30","","","","446.6","","","","30.9","","","","6.91"],["Total Loans and Leases","","","12,023.7","","","","398.7","","","","3.32","","","","11,592.1","","","","417.6","","","","3.60"],["Other","","","32.9","","","","0.7","","","","2.13","","","","33.7","","","","0.7","","","","1.96"],["Total Earning Assets 3","","","21,091.8","","","","527.8","","","","2.50","","","","18,248.8","","","","547.7","","","","3.00"],["Cash and Due from Banks","","","252.5","","","","","","","","","","","","263.8"],["Other Assets","","","882.9","","","","","","","","","","","","875.1"],["Total Assets","","$","22,227.2","","","","","","","","","","","$","19,387.7"],["Interest-Bearing Liabilities"],["Interest-Bearing Deposits"],["Demand","","$","4,509.8","","","$","2.7","","","","0.06","%","","$","3,426.8","","","$","2.5","","","","0.07","%"],["Savings","","","7,421.9","","","","6.2","","","","0.08","","","","6,702.7","","","","12.4","","","","0.19"],["Time","","","1,331.8","","","","6.3","","","","0.47","","","","1,708.1","","","","18.1","","","","1.06"],["Total Interest-Bearing Deposits","","","13,263.5","","","","15.2","","","","0.11","","","","11,837.6","","","","33.0","","","","0.28"],["Short-Term Borrowings","","","5.2","","","","\u2014","","","","0.13","","","","33.5","","","0.2","","","","0.47"],["Securities Sold Under Agreements to Repurchase","","","541.9","","","13.3","","","","2.45","","","","602.7","","","15.2","","","","2.54"],["Other Debt","","","27.7","","","0.9","","","","3.41","","","","62.1","","","1.7","","","","2.73"],["Total Interest-Bearing Liabilities","","","13,838.3","","","","29.4","","","","0.21","","","","12,535.9","","","","50.1","","","","0.40"],["Net Interest Income","","","","","","$","498.4","","","","","","","","","","","$","497.6"],["Interest Rate Spread","","","","","","","","","","","2.29","%","","","","","","","","","","","2.60","%"],["Net Interest Margin","","","","","","","","","","","2.36","%","","","","","","","","","","","2.73","%"],["Noninterest-Bearing Demand Deposits","","","6,507.6","","","","","","","","","","","","5,062.6"],["Other Liabilities","","","385.7","","","","","","","","","","","","437.6"],["Shareholders\u2019 Equity","","","1,495.6","","","","","","","","","","","","1,351.6"],["Total Liabilities and Shareholders\u2019 Equity","","$","22,227.2","","","","","","","","","","","$","19,387.7"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["1","Non-performing loans and leases are included in the respective average loan and lease balances. Income, if any, on such loans and leases is recognized on a cash basis."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["2","Comprised of other consumer revolving credit, installment, and consumer lease financing."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["3","Interest income includes taxable-equivalent basis adjustments, based upon a federal statutory tax rate of 21% of $1.1 million and $1.3 million for the years ended December 31, 2021, and December 31, 2020, respectively."]]
[[/GREPCENT_TABLE]]

26

Table of Contents

[[GREPCENT_TABLE]]
[["Analysis of Change in Net Interest Income \u2013 Taxable-Equivalent Basis","","","Table 2"],["","","Year Ended December 31, 2021 Compared to 2020"],["(dollars in millions)","","Volume 1","","","Rate 1","","","Total"],["Change in Interest Income:"],["Funds Sold","","$","0.4","","","$","(0.4",")","","$","\u2014"],["Investment Securities"],["Available-for-Sale"],["Taxable","","","22.2","","","","(18.3",")","","","3.9"],["Non-Taxable","","","(0.7",")","","","(0.1",")","","","(0.8",")"],["Held-to-Maturity"],["Taxable","","","15.5","","","","(19.5",")","","","(4.0",")"],["Non-Taxable","","","(0.1",")","","","(0.1",")","","","(0.2",")"],["Total Investment Securities","","","36.9","","","","(38.0",")","","","(1.1",")"],["Loans Held for Sale","","","0.2","","","","(0.1",")","","","0.1"],["Loans and Leases"],["Commercial and Industrial","","","1.6","","","","1.9","","","","3.5"],["Commercial Mortgage","","","8.8","","","","(13.0",")","","","(4.2",")"],["Construction","","","1.2","","","","(1.1",")","","","0.1"],["Commercial Lease Financing","","","\u2014","","","","2.5","","","","2.5"],["Residential Mortgage","","","8.9","","","","(14.8",")","","","(5.9",")"],["Home Equity","","","(0.2",")","","","(7.0",")","","","(7.2",")"],["Automobile","","","0.3","","","","(1.0",")","","","(0.7",")"],["Other 2","","","(4.4",")","","","(2.6",")","","","(7.0",")"],["Total Loans and Leases","","","16.2","","","","(35.1",")","","","(18.9",")"],["Total Change in Interest Income","","","53.7","","","","(73.6",")","","","(19.9",")"],["Change in Interest Expense:"],["Interest-Bearing Deposits"],["Demand","","","0.7","","","","(0.5",")","","","0.2"],["Savings","","","1.2","","","","(7.4",")","","","(6.2",")"],["Time","","","(3.4",")","","","(8.4",")","","","(11.8",")"],["Total Interest-Bearing Deposits","","","(1.5",")","","","(16.3",")","","","(17.8",")"],["Short-Term Borrowings","","","(0.1",")","","","(0.1",")","","","(0.2",")"],["Securities Sold Under Agreements to Repurchase","","","(1.5",")","","","(0.4",")","","","(1.9",")"],["Other Debt","","","(1.1",")","","","0.3","","","","(0.8",")"],["Total Change in Interest Expense","","","(4.2",")","","","(16.5",")","","","(20.7",")"],["Change in Net Interest Income","","$","57.9","","","$","(57.1",")","","$","0.8"]]
[[/GREPCENT_TABLE]]

1  The change in interest income and expense are not solely due to changes in volume or rate has been allocated on a pro-rata basis to the volume and rate columns.

2  Comprised of other consumer revolving credit, installment, and consumer lease financing.

Net Interest Income

Net interest income is affected by the size and mix of our balance sheet components as well as the spread between interest earned on assets and interest paid on liabilities. Net interest margin is defined as net interest income, on a taxable-equivalent basis, as a percentage of average earning assets. We experienced lower yields in both our investment securities portfolio and loan portfolio, which were partially offset by lower rates paid on our interest-bearing deposits, a reflection of the lower rate environment.

Yields on our earning assets decreased by 50 basis points in 2021 compared to 2020 primarily due to the lower rate environment. Yields on our commercial and industrial loans increased by 31 points primarily due to accelerated fees as a result of PPP loans forgiveness.  Yields on our commercial mortgage decreased by 46 basis points due to lower yields on floating rate loans, and new loans with lower rates than loans that were paid off.  Yields on our construction loans decreased by 42 basis points due to lower yields on floating-rate loans, and new loans with lower rates in comparison to loans that were paid off or transferred to commercial mortgage upon completion.  Yields on our commercial lease financing increased by 230 basis points primarily due to no leveraged lease residual impairment in 2021 compare to $3.0 million impairment in the residual value of a leveraged lease in 2020.  Yields on our funds sold decreased by 8 basis points primarily due to federal fund rate decreases.  In addition, yields on our investment securities portfolio decreased by 54 basis points primarily due to purchases of lower yielding securities in the current lower rate environment.

27

Table of Contents

Interest rates paid on our interest-bearing liabilities decreased 19 basis points in 2021 compared to 2020. Decreases to our funding costs were primarily due to lower rates paid on our interest-bearing deposits. Interest rates paid on our securities sold under agreements to repurchase decreased by 9 basis points from 2020. In 2021, we terminated four of our repurchase agreements and partially terminated one, with an aggregate total of $150.0 million, with three private institution. These repurchase agreements had a weighted-average interest rate of 2.0% and were scheduled to mature in 2022, 2024, 2025, and 2026.

Average balances of our earning assets increased by $2.8 billion or 16% in 2021 compared to 2020 primarily due to growth in our deposits. In particular, the average balances of our investment securities increased by $2.1 billion. The average balance of total loan and leases increased by $431.6 million.  The average balance of funds sold increased by $258.3 million. The average balance of our commercial and industrial portfolio including PPP loans decreased by $58.5 million in 2021 compared to the same period in 2020. This decrease was primarily due to higher payoff activities, partially offset by an increase of PPP loans. The increase in PPP loans was due to origination of new loans under the PPP in 2021. The average balance of our commercial mortgage portfolio increased by $273.9 million as a result of continued demand from new and existing customers. The average balance of our residential mortgage portfolio increased by $253.7 million primarily due to higher loan originations partially offset by an increase in payoff activity.  The average balance of our automobile loans portfolio increased by $7.9 million primarily due to competitive loan programs and pricing. The average balance of our home equity portfolio decreased by $5.6 million as a result of a slight increase in payoff levels.

Average balances of our interest-bearing liabilities increased by $1.3 billion or 10% in 2021 compared to 2020 primarily due to growth in our demand and savings deposits which increased by $1.1 billion and $719.2 million, respectively. Average balances in other debt decreased by $34.4 million primarily due to the prepayment of FHLB advances totaling $50.0 million in the second quarter of 2021.

Noninterest Income

Table 3 presents the major components of noninterest income for 2021 and 2020.

[[GREPCENT_TABLE]]
[["Noninterest Income","","Table 3"],["","","Year Ended December 31,","","","Dollar Change","","","Percent Change"],["(dollars in thousands)","","2021","","","2020","","","2021 to 2020"],["Trust and Asset Management","","$","46,068","","","$","43,456","","","$","2,612","","","","6","%"],["Mortgage Banking","","","14,964","","","","17,871","","","","(2,907",")","","","(16",")"],["Service Charges on Deposit Accounts","","","25,564","","","","24,910","","","","654","","","","3"],["Fees, Exchange, and Other Service Charges","","","55,457","","","","47,056","","","","8,401","","","","18"],["Investment Securities Gains (Losses), Net","","","(1,297",")","","","9,932","","","","(11,229",")","","n.m."],["Annuity and Insurance","","","3,224","","","","3,362","","","","(138",")","","","(4",")"],["Bank-Owned Life Insurance","","","7,784","","","","7,388","","","","396","","","","5"],["Other","","","19,589","","","","30,434","","","","(10,845",")","","","(36",")"],["Total Noninterest Income","","$","171,353","","","$","184,409","","","$","(13,056",")","","","(7",")%"]]
[[/GREPCENT_TABLE]]

n.m.- not meaningful.

Trust and asset management income is comprised of fees earned from the management and administration of trusts and other customer assets.  These fees are largely based upon the market value of the assets that the Bank manages and the fee rate charged to customers.  Total trust assets under administration were $11.5 billion and $10.5 billion as of December 31, 2021, and December 31, 2020, respectively.  Trust and asset management income increased by $2.6 million or 6% in 2021 compared to 2020 due to increases in trust assets under administration and tax service fees.

Mortgage banking income is highly influenced by mortgage interest rates, the housing market, the amount of our loan sales, and our valuation of mortgage servicing rights.  Mortgage banking income decreased by $2.9 million or 16% in 2021 compared to 2020.  The decrease in 2021 was primarily due to decreased sales of conforming saleable loans from current production, which was partially offset by a valuation allowance recovery to our mortgage servicing rights.

Service charges on deposit accounts increased by $0.7 million or 3% in 2021 compared to 2020.  This increase was primarily due to an increase in account analysis fees.

28

Table of Contents

Fees, exchange, and other service charges are primarily comprised of debit and credit card income, fees from ATMs, merchant service activity, and other loan fees and special charges. Fees, exchange, and other service charges increased by $8.4 million or 18% in 2021 compared to 2020. This increase was primarily due to higher debit and credit card transaction volume, higher merchant sales volume, coupled with the Bank’s suspension of ATM surcharge fees from April 1, 2020, through June 30, 2020.

Net gains (losses) on sales of investment securities totaled ($1.3) million and $9.9 million in 2021 and 2020, respectively.  The net loss in 2021 was primarily due to $5.1 million of the fees paid to the counterparties of our prior Visa Class B share sales transactions.  These net losses in 2021 were offset by $3.8 million net gains on the sales of mortgage-backed securities, corporate, and government debt securities.  The net gain of $9.9 million in 2020 was primarily due to the sale of 80,214 Visa Class B Shares generating net gain of $14.3 million, which was partially offset by $4.3 million of the fees paid to the counterparties of our prior Visa Class B share sales transactions.

Annuity and insurance income decreased by $0.1 million or 4% in 2021 compared to 2020 primarily due to a decrease in annuity and life insurance products.

Bank-owned life insurance increased by $0.4 million or 5% in 2021 compared to 2020 primarily due to higher death benefit received in 2021.

Other noninterest income decreased by $10.8 million or 36% in 2021 compared to 2020.  This decrease was primarily due to a $9.3 million decrease in fees related to our customer interest rate swap derivatives and a $1.5 million decrease in other income.

Noninterest Expense

Table 4 presents the major components of noninterest expense for 2021 and 2020.

[[GREPCENT_TABLE]]
[["Noninterest Expense","","Table 4"],["","","Year Ended December 31,","","","Dollar Change","","","Percent Change"],["(dollars in thousands)","","2021","","","2020","","","2021 to 2020"],["Salaries and Benefits:"],["Salaries","","$","135,416","","","$","134,178","","","$","1,238","","","","1","%"],["Incentive Compensation","","","22,462","","","","9,153","","","","13,309","","","n.m."],["Share-Based Compensation","","","12,489","","","","6,783","","","","5,706","","","","84"],["Commission Expense","","","8,901","","","","6,985","","","","1,916","","","","27"],["Retirement and Other Benefits","","","20,213","","","","18,528","","","","1,685","","","","9"],["Payroll Taxes","","","12,404","","","","12,241","","","","163","","","","1"],["Medical, Dental, and Life Insurance","","","12,831","","","","12,917","","","","(86",")","","","(1",")"],["Separation Expense","","","3,577","","","","6,544","","","","(2,967",")","","","(45",")"],["Total Salaries and Benefits","","","228,293","","","","207,329","","","","20,964","","","","10"],["Net Occupancy","","","26,244","","","","39,533","","","","(13,289",")","","","(34",")"],["Net Equipment","","","35,703","","","","35,448","","","","255","","","","1"],["Data Processing","","","20,297","","","","18,499","","","","1,798","","","","10"],["Professional Fees","","","12,895","","","","12,186","","","","709","","","","6"],["FDIC Insurance","","","6,536","","","","5,780","","","","756","","","","13"],["Other Expense:"],["Delivery and Postage Services","","","6,358","","","","6,975","","","","(617",")","","","(9",")"],["Mileage Program Travel","","","4,948","","","","4,521","","","","427","","","","9"],["Merchant Transaction and Card Processing Fees","","","5,180","","","","4,259","","","","921","","","","22"],["Advertising","","","9,606","","","","8,331","","","","1,275","","","","15"],["Amortization - Solar Energy Partnership Investments","","","2,048","","","","3,678","","","","(1,630",")","","","(44",")"],["Other","","","35,481","","","","27,268","","","","8,213","","","","30"],["Total Other Expense","","","63,621","","","","55,032","","","","8,589","","","","16"],["Total Noninterest Expense","","$","393,589","","","$","373,807","","","$","19,782","","","","5","%"]]
[[/GREPCENT_TABLE]]

n.m.- not meaningful.

29

Table of Contents

Total salaries and benefits increased by $21.0 million or 10% in 2021 compared to 2020 primarily due a $13.3 million increase in incentive compensation coupled with a $5.7 million increase in shared-based compensation due to a higher number of restricted stock units being amortized, which was partially offset by forfeiture of unvested restricted stock grants.  These increases were partially offset by a $3.0 million decrease in separation expense.    

Net occupancy expense decreased by $13.3 million or 34% in 2021 compared to 2020 primarily due to $9.4 million net gain on sales of real estate property on the island of Oahu and Guam, coupled with a decrease in repairs and maintenance in 2021, and an impairment charge related to the closures of 12 branches recorded in 2020.

Net equipment expense increased by $0.3 million or 1% in 2021 compared to 2020 primarily due to an increase in software license fees and maintenance.

Data processing expense increased by $1.8 million or 10% in 2021 compared to 2020 due to ongoing information technology projects coupled with the rollout of contactless debit cards in 2021.

Professional fees expense increased by $0.7 million or 6% in 2021 compared to 2020 due to an increase in professional services primarily in human resources and executive administration.

FDIC insurance increased by $0.8 million or 13% in 2021 compared to 2020 due to an increase in average total assets.

Total other expense increased by $8.6 million or 16% in 2021 compared to 2020 primarily due to $7.0 million early termination costs incurred in 2021 related to the prepayment of $150.0 million of repurchase agreements and $50.0 million FHLB advances.

Income Taxes

Table 5 presents our provision for income taxes and effective tax rates for 2021 and 2020:

[[GREPCENT_TABLE]]
[["Provision for Income Taxes and Effective Tax Rates","Table 5"],["(dollars in thousands)","","Provision for Income Taxes","","","Effective Tax Rates"],["2021","","$","72,182","","","","22.17","%"],["2020","","","35,320","","","","18.68","%"]]
[[/GREPCENT_TABLE]]

The provision for income taxes was $72.2 million in 2021, an increase of $36.9 million compared to 2020.  The higher effective tax rate in 2021 compared to 2020 was primarily due to higher pretax income and fewer energy tax credits. The effective tax rate in 2021 was also negatively impacted by an increase in the disallowance of the compensation deduction under Sec.162 (m). The nondeductible compensation in 2021 was larger than 2020, due to changes in tax law under the Tax Cut and Jobs Act that became effective in 2021.

Analysis of Business Segments

Our business segments are Consumer Banking, Commercial Banking, and Treasury and Other.  Table 6 summarizes net income from our business segments for 2021 and 2020.  Additional information about segment performance is presented in Note 13 to the Consolidated Financial Statements.

[[GREPCENT_TABLE]]
[["Business Segment Net Income","","","","","","Table 6"],["","","Year Ended December 31,"],["(dollars in thousands)","","2021","","","2020"],["Consumer Banking","","$","79,385","","","$","92,370"],["Commercial Banking","","","121,305","","","","120,722"],["Total","","","200,690","","","","213,092"],["Treasury and Other","","","52,682","","","","(59,288",")"],["Consolidated Total","","$","253,372","","","$","153,804"]]
[[/GREPCENT_TABLE]]

30

Table of Contents

Consumer Banking

Net income decreased by $13.0 million or 14% in 2021 compared to 2020 primarily due to an increase in noninterest expense and a decrease in net interest income. This was partly offset by an increase in noninterest income and a decrease in the provision for credit losses. The increase in noninterest expense was primarily due to increases in allocated expense, partly offset by a decrease in net occupancy expense, which was primarily due to $3.1 million net gain on sales of real estate property on the island of Oahu, and an impairment charge related to the closures of 12 branches recorded in 2020. The decrease in net interest income was primarily due to lower average rates in the segment’s deposit portfolio, partly offset by higher average balances in the deposit portfolio, as well as higher average rates and higher average balances in the segment’s loan portfolio. The increase in noninterest income was primarily due to increases in trust and asset management fees and debit card income, partly offset by a decrease in mortgage banking income. The decrease in the provision for credit losses was primarily due to lower net charge-offs in our automobile, residential mortgage, and installment loan portfolios.

Commercial Banking

Net income increased by $0.6 million or 0.5% in 2021 compared to 2020 primarily due to an increase in net interest income, partially offset by a decrease in noninterest income and an increase in noninterest expense.  The increase in net interest income was primarily due to growth in the segment’s loan portfolios and a reduction in the provision for credit losses, partially offset by lower average rates on deposits. Loan growth was primarily driven by increases in the commercial mortgage and construction portfolios. Deposit growth was primarily driven by increases in demand and savings deposits, partially offset by a decrease in time deposits.  The decrease in noninterest income is primarily due to a decrease in customer derivative program revenue, partially offset by increased in loan fees, service charges on deposit accounts, and merchant income. The increase in noninterest expense was primarily due to higher salaries and benefits expenses and merchant transaction and processing fees, partially offset by lower allocated expenses from support units.

Treasury and Other

Net income increased by $112.0 million in 2021 compared to 2020 primarily due to a decrease in provision for credit losses, partially offset by an increase in provision for income taxes and a decrease in noninterest income.  The decrease in provision for credit losses was primarily due to management’s best estimate of losses over the life of loans and leases in our portfolio in accordance with the CECL approach, given the economic outlook, consumer delinquency rates, post deferral consumer payment trends, low commercial delinquency rates post-deferral, strong commercial performance and liquidity levels, and forecasts for COVID-19 pandemic driven market changes, as well as the cumulative impact of the intervention of fiscal, monetary and regulatory programs.  The provision for income taxes in this business segment represents the residual amount to arrive at the total tax expense for the Company. The decrease in noninterest income was due to the sale of Visa Class B Shares during the second quarter of 2020.

31

Table of Contents

Analysis of Statements of Condition

Investment Securities

Table 7 presents the maturity distribution at amortized cost, weighted-average yield to maturity, and fair value of our investment securities.  

[[GREPCENT_TABLE]]
[["Maturities and Average Yield on Securities","","","Table 7"],["(dollars in millions)","","1 Year or Less","","","Weighted Average Yield","","","After 1 Year-5 Years","","","Weighted Average Yield","","","After 5 Years-10 Years","","","Weighted Average Yield","","","Over 10 Years","","","Weighted Average Yield","","","Total","","","Weighted Average Yield","","","Fair Value"],["As of December 31, 2021"],["Available-for-Sale 1"],["Debt Securities Issued by the U.S. Treasury and Government Agencies 2","","$","1.3","","","","1.8","%","","$","202.8","","","","1.2","%","","$","44.8","","","","1.4","%","","$","\u2014","","","\u2014","%","","$","248.9","","","","1.2","%","","$","250.1"],["Debt Securities Issued by States and Political Subdivisions","","","0.7","","","","2.2","","","","1.9","","","","1.8","","","","59.0","","","","2.1","","","","13.1","","","","2.3","","","","74.7","","","","2.1","","","","75.8"],["Debt Securities Issued by U.S. Government-Sponsored Enterprises","","","\u2014","","","","\u2014","","","","1.8","","","","1.4","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","1.8","","","","1.4","","","","1.8"],["Debt Securities Issued by Corporations","","","\u2014","","","","\u2014","","","","141.0","","","","2.1","","","","243.6","","","","2.2","","","","\u2014","","","","\u2014","","","","384.6","","","","2.2","","","","383.1"],["Mortgage-Backed Securities 2"],["Residential - Government Agencies","","","13.7","","","","2.5","","","","1,273.1","","","","1.5","","","","41.2","","","","2.4","","","","\u2014","","","","\u2014","","","","1,328.0","","","","1.5","","","","1,319.1"],["Residential - U.S. Government- Sponsored Enterprises","","","8.0","","","","2.5","","","","1,905.1","","","","1.4","","","","214.7","","","","1.4","","","","\u2014","","","","\u2014","","","","2,127.8","","","","1.4","","","","2,090.3"],["Commercial - Government Agencies","","","2.5","","","","1.8","","","","152.6","","","","2.3","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","155.1","","","","2.3","","","","155.9"],["Total Mortgage-Backed Securities","","","24.2","","","","2.4","","","","3,330.8","","","","1.5","","","","255.9","","","","1.6","","","","\u2014","","","","\u2014","","","","3,610.9","","","","1.5","","","","3,565.3"],["Total Available-for-Sale","","$","26.2","","","","2.4","%","","$","3,678.3","","","","1.5","%","","$","603.3","","","","1.9","%","","$","13.1","","","","2.3","%","","$","4,320.9","","","","1.5","%","","$","4,276.1"],["Held-to-Maturity"],["Debt Securities Issued by the U.S. Treasury and Government Agencies","","$","\u2014","","","\u2014","%","","$","7.5","","","","0.3","%","","$","124.0","","","","1.4","%","","$","\u2014","","","\u2014","%","","$","131.5","","","","1.3","%","","$","131.1"],["Debt Securities Issued by Corporations","","","\u2014","","","","\u2014","","","","9.0","","","","1.6","","","","\u2014","","","","\u2014","","","","11.3","","","","1.6","","","","20.3","","","","1.6","","","","20.1"],["Mortgage-Backed Securities 2"],["Residential - Government Agencies","","","5.4","","","","1.2","","","","1,629.3","","","","1.5","","","","139.7","","","","2.4","","","","\u2014","","","","\u2014","","","","1,774.4","","","","1.6","","","","1,755.9"],["Residential - U.S. Government- Sponsored Enterprises","","","1.6","","","","1.4","","","","1,583.1","","","","1.9","","","","702.2","","","","1.6","","","","\u2014","","","","\u2014","","","","2,286.9","","","","1.8","","","","2,269.8"],["Commercial - Government Agencies","","","\u2014","","","","\u2014","","","","272.7","","","","1.5","","","","163.1","","","","1.4","","","","45.9","","","","1.7","","","","481.7","","","","1.5","","","","469.7"],["Total Mortgage-Backed Securities","","","7.0","","","","1.3","","","","3,485.1","","","","1.7","","","","1,005.0","","","","1.7","","","","45.9","","","","1.7","","","","4,543.0","","","","1.7","","","","4,495.4"],["Total Held-to-Maturity","","$","7.0","","","","1.3","%","","$","3,501.6","","","","1.7","%","","$","1,129.0","","","","1.7","%","","$","57.2","","","","1.7","%","","$","4,694.8","","","","1.7","%","","$","4,646.6"],["Total Investment Securities"],["As of December 31, 2021","","$","33.2","","","","","","","$","7,179.9","","","","","","","$","1,732.3","","","","","","","$","70.3","","","","","","","$","9,015.7","","","","","","","$","8,922.7"],["As of December 31, 2020","","$","118.3","","","","","","","$","5,674.7","","","","","","","$","1,191.3","","","","","","","$","\u2014","","","","","","","$","6,984.3","","","","","","","$","7,140.3"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["1","Weighted-average yields on investment securities available-for-sale are based on amortized cost."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["2","Information for mortgage-backed securities and small business administration securities reflect weighted average life, including anticipated future prepayments."]]
[[/GREPCENT_TABLE]]

As of December 31, 2021, our investment securities portfolio was comprised of securities with an average base duration of approximately 4.43 years.

We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, and the level of interest rate risk to which we are exposed.  These evaluations may cause us to change the level of funds we deploy into investment securities, change the composition of our investment securities portfolio, and change the proportion of investments made into the available-for-sale and held-to-maturity investment categories.

Mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac continue to be the largest concentrations in our portfolio. As of December 31, 2021, these mortgage-backed securities were all AAA-rated, with a low probability of a change in their credit ratings in the near future.  As of December 31, 2021, our available-for-sale investment securities portfolio was comprised of securities with an average base duration of approximately 4.15 years.

Gross unrealized gains in our investment securities portfolio were $49.8 million as of December 31, 2021, and $158.9 million as of December 31, 2020.  Gross unrealized losses on our temporarily impaired investment securities were $142.8 million as of December 31, 2021, and $2.9 million as of December 31, 2020.  The overall increase in net unrealized losses was primarily due to the increase in interest rates during 2021.

32

Table of Contents

The gross unrealized loss positions were primarily related to mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. We do not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that we will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity.

See Note 3 to the Consolidated Financial Statements for more information.

The Company’s corporate bond holdings as of December 31, 2021, had a fair value of $403.3 million.  Of this total, $24.7 million or 6% was fully guaranteed by the Export-Import Bank of the United States, an agency of the U.S. government, and $11.0 million was fully guaranteed by the U.S. government acting through the U.S. Agency for International Development.  Of the remaining $367.5 million of corporate bonds, all were credit-rated A- or better by at least one nationally recognized statistical rating organization.

Loans and Leases

Table 8 presents the composition of our loan and lease portfolio by major categories.

[[GREPCENT_TABLE]]
[["Loans and Leases","","","","","","","","","","","","","","","","","","Table 8"],["","","December 31,"],["(dollars in thousands)","","2021","","","2020","","","2019","","","2018","","","2017"],["Commercial"],["Commercial and Industrial","","$","1,361,921","","","$","1,357,610","","","$","1,379,152","","","$","1,331,149","","","$","1,279,347"],["PPP1","","","126,779","","","","517,683","","","","\u2014","","","","\u2014","","","","\u2014"],["Commercial Mortgage","","","3,152,130","","","","2,854,829","","","","2,518,051","","","","2,302,356","","","","2,103,967"],["Construction","","","220,254","","","","259,798","","","","194,170","","","","170,061","","","","202,253"],["Lease Financing","","","105,108","","","","110,766","","","","122,454","","","","176,226","","","","180,931"],["Total Commercial","","","4,966,192","","","","5,100,686","","","","4,213,827","","","","3,979,792","","","","3,766,498"],["Consumer"],["Residential Mortgage","","","4,309,602","","","","4,130,513","","","","3,891,100","","","","3,673,796","","","","3,466,773"],["Home Equity","","","1,836,588","","","","1,604,538","","","","1,676,073","","","","1,681,442","","","","1,585,455"],["Automobile","","","736,565","","","","708,800","","","","720,286","","","","658,133","","","","528,474"],["Other 2","","","410,129","","","","395,483","","","","489,606","","","","455,611","","","","449,747"],["Total Consumer","","","7,292,884","","","","6,839,334","","","","6,777,065","","","","6,468,982","","","","6,030,449"],["Total Loans and Leases","","$","12,259,076","","","$","11,940,020","","","$","10,990,892","","","$","10,448,774","","","$","9,796,947"]]
[[/GREPCENT_TABLE]]

1   The PPP amounts presented, which are reported net of deferred costs and fees, were previously included as a component of the Commercial and Industrial loan class.

2   Comprised of other revolving credit, installment, and lease financing.

Total loans and leases were $12.3 billion as of December 31, 2021.  This represents a $319.1 million or 3% increase from December 31, 2020, primarily due to growth in our consumer loan and lease portfolio.

33

Table of Contents

The commercial loan and lease portfolio is comprised of commercial and industrial loans, PPP loans, commercial mortgages, construction loans, and lease financing.  Commercial and industrial loans are made primarily to corporations, middle market, and small businesses for the purpose of financing equipment acquisition, expansion, working capital, and other general business purposes.  PPP loans were made to small businesses who were affected by economic conditions as a result of the COVID-19 pandemic to provide cash flow assistance to employers.  Commercial mortgages and construction loans are offered to real estate investors, developers, and builders primarily domiciled in Hawaii.  Commercial mortgages are secured by first mortgages on commercial real estate at loan-to-value ratios generally not exceeding 75%.  The commercial properties are predominantly developments such as retail centers, apartments, industrial properties, and to a lesser extent, specialized properties such as hotels.  The primary source of repayment for investor property is cash flow from the property and for owner-occupied property is the operating cash flow from the business.  Construction loans are made for the purchase or construction of a property for which repayment will be generated by the property.  We classify loans as construction until the completion of the construction phase.  Following construction, if a loan is retained, the loan is reclassified to the commercial mortgage category.  Lease financing consists of sales-type leases and leveraged leases and are used by commercial customers to finance capital purchases.  Although our primary market is Hawaii, the commercial portfolio contains loans to some borrowers based on the U.S. Mainland, including some Shared National Credits.

Commercial loans and leases were $5.0 billion as of December 31, 2021, a decrease of $134.5 million or 3% from December 31, 2020.  Commercial and industrial loans remained relatively unchanged from December 31, 2020.  PPP loans decreased by $390.9 million or 76% from December 31, 2020, primarily due to forgiveness payments received from SBA.  Commercial mortgage loans increased by $297.3 million or 10% from December 31, 2020, primarily due to continued demand from new and existing customers.  Construction loans decreased by $39.5 million or 15% from December 31, 2020, primarily due to paydowns and successful completion of construction projects such as condominiums and low-income housing, partially offset by increased activity in our portfolio. Lease financing decreased by $5.7 million or 5% from December 31, 2020, primarily due to paydowns.

The consumer loan and lease portfolio is comprised of residential mortgage loans, home equity lines and loans, indirect auto loans and leases, and other consumer loans including personal credit lines and direct installment loans.  These products are generally offered in the geographic markets we serve.  Although we offer a variety of products, our residential mortgage loan portfolio is primarily comprised of fixed-rate loans concentrated in Hawaii.  We also offer a variety of home equity lines and loans, usually secured by first mortgages on residential property of the borrower.  Automobile lending activities include loans and leases secured by new or used automobiles.  We originate automobile loans and leases on an indirect basis through selected dealerships.  Direct installment loans are generally unsecured and are often used for personal expenses or for debt consolidation.

Consumer loans and leases were $7.3 billion as of December 31, 2021, an increase of $453.6 million or 7% from December 31, 2020.  Residential mortgage loans increased by $179.1 million or 4% from December 31, 2020, primarily due to continued high origination volume in all channels (retail, wholesale, and direct to consumer). Home equity increased by $232.1 million or 14% from December 31, 2020, as a result of strong increase in new originations, solid facility utilization rates and stable payoff levels.  Automobile loans increased by $27.8 million or 4% from December 31, 2020, primarily driven by competitive loan programs and strong consumer demand.  Other consumer loans increased by $14.6 million or 4% from December 31, 2020, primarily due to growth in our installment loans.

See Note 4 to the Consolidated Financial Statements and the “Corporate Risk Profile – Credit Risk” section of MD&A for more information on our loan and lease portfolio.

34

Table of Contents

Table 9 presents the geographic distribution of our loan and lease portfolio.

[[GREPCENT_TABLE]]
[["Geographic Distribution of Loan and Lease Portfolio","","","","","","","","","","","Table 9"],["","","December 31, 2021"],["(dollars in thousands)","","Hawaii","","","U.S. Mainland 1","","","Guam","","","Other Pacific Islands","","","Total"],["Commercial"],["Commercial and Industrial","","$","1,146,593","","","$","141,643","","","$","68,934","","","$","4,751","","","$","1,361,921"],["PPP","","","111,457","","","","10,842","","","","1,586","","","","2,894","","","","126,779"],["Commercial Mortgage","","","2,758,641","","","","158,192","","","","235,297","","","","\u2014","","","","3,152,130"],["Construction","","","220,254","","","","\u2014","","","","\u2014","","","","\u2014","","","","220,254"],["Lease Financing","","","68,757","","","","32,695","","","","3,656","","","","\u2014","","","","105,108"],["Total Commercial","","","4,305,702","","","","343,372","","","","309,473","","","","7,645","","","","4,966,192"],["Consumer"],["Residential Mortgage","","","4,232,834","","","","\u2014","","","","76,022","","","","746","","","","4,309,602"],["Home Equity","","","1,794,330","","","","58","","","","42,200","","","","\u2014","","","","1,836,588"],["Automobile","","","547,660","","","","\u2014","","","","151,722","","","","37,183","","","","736,565"],["Other 2","","","346,625","","","","\u2014","","","","48,490","","","","15,014","","","","410,129"],["Total Consumer","","","6,921,449","","","","58","","","","318,434","","","","52,943","","","","7,292,884"],["Total Loans and Leases","","$","11,227,151","","","$","343,430","","","$","627,907","","","$","60,588","","","$","12,259,076"],["Percentage of Total Loans and Leases","","","91","%","","","3","%","","","5","%","","","1","%","","","100","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["1","For secured loans and leases, classification as U.S. Mainland is made based on where the collateral is located. For unsecured loans and leases, classification as U.S. Mainland is made based on the location where the majority of the borrower\u2019s business operations are conducted."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["2","Comprised of other revolving credit, installment, and lease financing."]]
[[/GREPCENT_TABLE]]

Our commercial and consumer lending activities are concentrated primarily in Hawaii and the Pacific Islands.  Our commercial loan and lease portfolio to borrowers based on the U.S. Mainland includes leveraged lease financing and participation in Shared National Credits.

Table 10 presents a maturity distribution for selected loan categories.

[[GREPCENT_TABLE]]
[["Maturities for Selected Loan Categories 1","","","","","","Table 10"],["","","December 31, 2021"],["(dollars in thousands)","","Due in One Year or Less","","","Due After One to Five Years 2","","","Due After Five Years 2","","","Total"],["Commercial and Industrial","","$","292,424","","","$","443,853","","","$","625,644","","","$","1,361,921"],["Construction","","","57,849","","","","33,324","","","","129,081","","","","220,254"],["Total","","$","350,273","","","$","477,177","","","$","754,725","","","$","1,582,175"]]
[[/GREPCENT_TABLE]]

1   Based on contractual maturities.

2   As of December 31, 2021, loans maturing after one year consisted of $752.7 million in variable rate loans and $479.2 million in fixed rate loans.

Goodwill

Goodwill was $31.5 million as of December 31, 2021, and December 31, 2020.  As of December 31, 2021, based on our qualitative assessment, there were no reporting units where we believed it was more likely than not that the fair value of a reporting unit was less than its carrying amount, including goodwill.  See Note 1 to the Consolidated Financial Statements for more information on our goodwill impairment policy.

35

Table of Contents

Other Assets

Other assets were $384.7 million as of December 31, 2021, a decrease of $50.6 million or 12% from December 31, 2020.  This decrease was due to a $54.2 million decrease in derivative financial instruments, which was primarily due to fair value decreases of our interest rate swap agreement assets, which are impacted by prevailing interest rates.  Low-income housing and other equity investments decreased by $6.3 million due to amortization and delays in prospective projects that are now expected to close in 2022.  Deferred taxes increased by $25.6 million primarily due to changes in unrealized gains and losses in Other Comprehensive Income, partially offset by changes to the allowance for credit losses.  Deferred compensation plan assets increased by $3.0 million primarily due to an increase in the executive deferred compensation plan.  See Note 7 to the Consolidated Financial Statements for more information on the composition of our other assets.

Deposits

Table 11 presents the components of our deposits by major customer categories as of December 31, 2021, and December 31, 2020.

[[GREPCENT_TABLE]]
[["Deposits","","Table 11"],["","","December 31,"],["(dollars in thousands)","","2021","","","2020"],["Consumer","","$","10,438,844","","","$","9,347,725"],["Commercial","","","8,641,932","","","","7,302,832"],["Public and Other","","","1,279,332","","","","1,561,064"],["Total Deposits","","$","20,360,108","","","$","18,211,621"]]
[[/GREPCENT_TABLE]]

Total deposits were $20.4 billion as of December 31, 2021, a $2.1 billion or 12% increase from December 31, 2020.  This increase was primarily due to an increase in consumer and commercial deposits.  Consumer deposits increased by $1.1 billion due to an increase in core deposits.  Commercial deposits increased by $1.3 billion or 18% due to a $1.3 billion increase in core deposits and $33.1 million increase in time deposits.  In addition, public and other deposits decreased by $281.7 million or 18% due to a decrease in time deposits of $524.6 million offset by a $242.9 million increase in public core deposits.

Table 12 presents the components of our savings deposits as of December 31, 2021, and December 31, 2020.

[[GREPCENT_TABLE]]
[["Savings Deposits","","Table 12"],["","","December 31,"],["(dollars in thousands)","","2021","","","2020"],["Money Market","","$","2,529,985","","","$","2,453,619"],["Regular Savings","","","4,926,180","","","","4,305,594"],["Total Savings Deposits","","$","7,456,165","","","$","6,759,213"]]
[[/GREPCENT_TABLE]]

Table 13 presents the maturity distribution of the estimated uninsured time deposits as of December 31, 2021, and December 31, 2020.

[[GREPCENT_TABLE]]
[["Maturity Distribution of Estimated Uninsured Time Deposits","","Table 13"],["","","December 31,"],["(dollars in thousands)","","2021","","","2020"],["Remaining maturity:"],["Three months or less","","$","220,045","","","$","443,306"],["After three through six months","","","93,514","","","","152,751"],["After six through twelve months","","","137,514","","","","482,113"],["After twelve months","","","74,133","","","","41,621"],["Total","","$","525,206","","","$","1,119,791"]]
[[/GREPCENT_TABLE]]

Estimated uninsured deposits totaled $10.5 billion and $11.0 billion at December 31, 2021, and December 31, 2020, respectively. Uninsured amounts are estimated based on the portion of account balances in excess of FDIC insurance limits.  Estimated uninsured time deposits decreased $594.6 million from December 31, 2020, primarily due to $524.7 million decrease in public time deposits.

36

Table of Contents

Securities Sold Under Agreements to Repurchase

Table 14 presents the composition of our securities sold under agreements to repurchase.

[[GREPCENT_TABLE]]
[["Securities Sold Under Agreements to Repurchase","","","","","","Table 14"],["","","December 31,"],["(dollars in thousands)","","2021","","","2020"],["Private Institutions","","$","450,000","","","$","600,000"],["Government Entities","","","490","","","","590"],["Total Securities Sold Under Agreements to Repurchase","","$","450,490","","","$","600,590"]]
[[/GREPCENT_TABLE]]

Securities sold under agreements to repurchase as of December 31, 2021, decreased by $150.1 million or 25% from December 31, 2020.  As of December 31, 2021, the weighted-average maturity was 2.9 years for our repurchase agreements with government entities and 3.0 years for our repurchase agreements with private institutions.  Some of our repurchase agreements with private institutions may be terminated at earlier specified dates by the private institution or in some cases by either the private institution or the Company.  If all such agreements were to terminate at the earliest possible date, the weighted-average maturity for our repurchase agreements with private institutions would be 2.8 years.  As of December 31, 2021, and December 31, 2020, the weighted-average interest rate for repurchase agreements with government entities were 1.55% and 1.49%, respectively, while the weighted-average interest rate for repurchase agreements with private institutions as of December 31, 2021, and December 31, 2020, were 2.46% and 2.39%, respectively, with all rates being fixed.  Each of our repurchase agreements is accounted for as collateralized financing arrangement (i.e., secured borrowing) and not as a sale and subsequent repurchase of securities.

In 2021, we terminated four and partially terminated one of our repurchase agreements, with an aggregate total of $150.0 million, with three private institutions.  These repurchase agreements had a weighted-average interest rate of 2.0% and were scheduled to mature in 2022, 2024, 2025, and 2026.

Other Debt

Other debt was $10.4 million as of December 31, 2021, a decrease of $50.1 million or 83% from December 31, 2020.  During the second quarter of 2021, we prepaid the FHLB advances totaling $50.0 million with a weighted-average interest rate of 1.19% and maturity dates in May 2024.  As of December 31, 2021, our available capacity under our line of credit with the FHLB was $3.0 billion.

Pension and Postretirement Plan Obligations

Retirement benefits payable were $38.5 million as of December 31, 2021, a $12.7 million or 25% decrease from December 31, 2020.  Our pension and postretirement benefit obligations and net periodic benefit cost are actuarially determined based on a number of key assumptions, including the discount rate, the expected return on plan assets, and the health-care cost trend rate.  The accounting for pension and postretirement benefit plans reflect the long-term nature of the obligations and the investment horizon of the plan assets.  The decrease in retirement benefits payable was primarily due to the change in discount rate, partially offset by an increase in the plan assets.

The discount rate is used to determine the present value of future benefit obligations and the net periodic benefit cost.  The discount rate used to value the present value of future benefit obligations as of each year-end is the rate used to estimate the net periodic benefit cost for the following year.  Table 15 presents a sensitivity analysis of a 25 basis point change in discount rates to the pension and postretirement benefit plan’s net periodic benefit cost and benefit obligations:

[[GREPCENT_TABLE]]
[["Discount Rate Sensitivity Analysis","","","","","","","","","","","","","","","","","","","Table 15"],["","","","","","","","","","","Impact of"],["","","Base Discount Rate","","","Discount Rate 25 Basis Point Increase","","","Discount Rate 25 Basis Point Decrease"],["(dollars in thousands)","","Pension Benefits","","","Postretirement Benefits","","","Pension Benefits","","","Postretirement Benefits","","","Pension Benefits","","","Postretirement Benefits"],["2021 Net Periodic Benefit Cost","","","2.55","%","","","2.66","%","","$","67","","","$","15","","","$","(77",")","","$","(18",")"],["Benefit Plan Obligations as of December 31, 2021","","","2.89","%","","","3.00","%","","","(2,727",")","","","(930",")","","","2,796","","","","961"],["Estimated 2022 Net Periodic Benefit Cost","","","2.89","%","","","3.00","%","","","59","","","","13","","","","(67",")","","","(16",")"]]
[[/GREPCENT_TABLE]]

See Note 14 to the Consolidated Financial Statements for more information on our pension and postretirement benefit plans.

37

Table of Contents

Contractual Obligations

The Company has various contractual obligations that affect its cash flows and liquidity.  Our non-cancelable operating leases and finance lease obligations are primarily related to branch premises, equipment, and a portion of the Company’s headquarters’ building with lease terms extending through 2052. Purchase obligations arise from agreements to purchase goods or services that are enforceable and legally binding. Other contracts included in purchase obligations primarily consist of service agreements for various systems and applications supporting bank operations. Pension and postretirement benefit contributions represent the minimum expected contribution to the unfunded non-qualified pension plan and postretirement benefit plan. Actual contributions may differ from these estimates.  For information regarding material contractual obligations, please see Note 14 Employee Benefits, Note 18 Affordable Housing Projects Tax Credit Partnerships, Note 19 Securities Sold Under Agreements to Repurchase, Note 20 Commitments, Contingencies, and Guarantees, and Note 23 Leases in the Notes to the Consolidated Financial Statements.

Foreign Activities

Cross-border outstandings are defined as loans (including accrued interest), acceptances, interest-bearing deposits with other banks, other interest-bearing investments, and any other monetary assets which are denominated in dollars or other non-local currency.  As of December 31, 2021, December 31, 2020, and December 31, 2019, we did not have cross-border outstandings to any foreign country which exceeded 0.75% of our total assets.

Corporate Risk Profile

Managing risk is an essential part of successfully operating our business.  Management believes that the most prominent risk exposures for the Company are credit risk, market risk, liquidity risk management, capital management, and operational risk.

Credit Risk

Credit risk is the risk that borrowers or counterparties will be unable or unwilling to repay their obligations in accordance with the underlying contractual terms.  We manage and control credit risk in the loan and lease portfolio by adhering to well-defined underwriting criteria and account administration standards established by management.  Written credit policies document underwriting standards, approval levels, exposure limits, and other guidelines deemed necessary and prudent.  Portfolio exposure at the obligor, industry, product, and/or geographic location levels is actively monitored to manage concentration risk.  Furthermore, credit risk management also includes an independent credit review process that assesses compliance with commercial and consumer credit policies, risk ratings, and other critical credit information.  In addition to utilizing risk management practices that are based upon established and sound lending practices, we adhere to Regulatory Safety and Soundness credit standards.  This includes understanding and evaluating our customers’ borrowing needs and capacity to repay, in conjunction with specific risks in their line of business, economic factors, character and history.

Commercial and industrial loans are made primarily for the purpose of financing equipment acquisition, expansion, working capital, and other general business purposes.  Lease financing primarily consists of sales-type leases and leveraged leases that are used by commercial customers to finance capital purchases ranging from computer equipment to transportation equipment.  The credit decisions for these transactions are based upon an assessment of the overall financial capacity of the applicant.  A determination is made as to the applicant’s ability to repay in accordance with the proposed terms as well as an overall assessment of the risks involved.  In addition to an evaluation of the applicant’s financial condition, a determination is made of the probable adequacy of the primary and secondary sources of repayment, such as additional collateral or personal guarantees, to be relied upon in the transaction.  Credit agency reports of the applicant’s credit history supplement the analysis of the applicant’s and/or Guarantor’s creditworthiness.

Commercial mortgages and construction loans are offered to real estate investors, developers, builders, and owner-occupants primarily domiciled in Hawaii.  These loans are secured by first mortgages on real estate at loan-to-value (“LTV”) ratios deemed appropriate based on the property type, location, overall quality, and sponsorship.  Generally, these LTV ratios do not exceed 75%.  The commercial properties are predominantly retail centers, apartments, industrial properties, office properties and, to a lesser extent, more specialized properties such as hotels.  Commercial mortgage and construction loans are substantially secured by properties located in Hawaii.

38

Table of Contents

Commercial mortgage loans are underwritten based on the economic fundamentals of the property and the creditworthiness of the borrower.  In evaluating a proposed commercial mortgage loan, we primarily emphasize the ratio of the property’s projected net cash flows to the loan’s debt servicing requirement.  The debt service coverage ratio normally is not less than 125% and it is computed after deducting for a vacancy factor and property expenses as appropriate.  In addition, a personal guarantee of the loan or a portion thereof is sometimes required from the principal(s) of the borrower.  We typically require title insurance insuring the priority of our lien, fire, and extended coverage casualty insurance, and flood insurance, if appropriate, in order to protect our security interest in the underlying property.  In addition, business interruption insurance or other insurance may be required.  Owner-occupant commercial mortgage loans are underwritten based upon the cash flow of the business provided that the real estate asset is utilized in the operation of the business.  Real estate is evaluated independently as a secondary source of repayment.  As noted above, LTV ratios generally do not exceed 75%, which are based on regulatory-compliant appraisals that we obtain for the underlying properties.

Construction loans are underwritten against projected cash flows derived from rental income, business income from an owner-occupant, or the sale of the property to an end-user.  We may mitigate the risks associated with these types of loans by requiring fixed-price construction contracts, performance and payment bonding, controlled disbursements, and pre-sale contracts or pre-lease agreements.

We offer a variety of first mortgage and junior lien loans to consumers within our markets with residential home mortgages comprising our largest loan category.  These loans are secured by a primary residence, secondary residence, or investor property and are underwritten to assess the credit risks and financial capacity and repayment ability of the applicant.  Decisions are primarily based on LTV ratios, debt-to-income (“DTI”) ratios, liquidity, and credit scores.  LTV ratios generally do not exceed 80%, although higher levels are permitted with mortgage insurance.  We offer variable rate mortgage loans with interest rates that are subject to change every six months after the third, fifth, seventh, or tenth year, depending on the product and are based on the Secured Overnight Financing Rate (“SOFR”).  Variable rate mortgage loans are underwritten at fully-indexed interest rates.  We do not offer payment-option facilities, sub-prime or Alt-A loans, or any product with negative amortization.  We selectively offer interest-only mortgage loans to private banking clients.

Home equity loans are secured by either first or second liens on a primary residence, secondary residence, or investor property. The underwriting terms for the home equity product generally permits borrowing availability, in the aggregate, up to 85% of the value of the collateral property at the time of origination.  We offer fixed and variable rate home equity loans, with variable rate loans underwritten at fully-indexed interest rates.  Our procedures for underwriting home equity loans include an assessment of an applicant’s overall financial capacity and repayment ability.  Decisions are primarily based on LTV ratios, DTI ratios, liquidity and credit scores.  Maximum loan amounts and LTVs are determined by collateral value and channel.

Automobile lending activities include loans and leases secured by new or used automobiles.  We originate automobile loans on an indirect basis through selected dealerships in Hawaii, Guam and Saipan, and we originate automobile leases on an indirect basis through selected dealerships in Hawaii.  Our procedures for underwriting automobile loans and leases include an assessment of an applicant’s overall financial capacity and repayment ability.  Although an applicant’s creditworthiness is the primary consideration, the underwriting process also includes a comparison of the value of the automobile collateral to the proposed loan amount.  We require borrowers to maintain full coverage automobile insurance on automobile loans and leases, with the Bank listed as either the loss payee or additional insured.

39

Table of Contents

Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More

Table 16 presents a five-year history of non-performing assets and accruing loans and leases past due 90 days or more.

[[GREPCENT_TABLE]]
[["Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More","","","Table 16"],["","","December 31,"],["(dollars in thousands)","","2021","","","2020","","","2019","","","2018","","","2017"],["Non-Performing Assets"],["Non-Accrual Loans and Leases"],["Commercial"],["Commercial and Industrial","","$","243","","","$","441","","","$","830","","","$","542","","","$","448"],["Commercial Mortgage","","","8,205","","","","8,527","","","","9,244","","","","2,040","","","","1,398"],["Total Commercial","","","8,448","","","","8,968","","","","10,074","","","","2,582","","","","1,846"],["Consumer"],["Residential Mortgage","","","3,305","","","","3,223","","","","4,125","","","","5,321","","","","9,243"],["Home Equity","","","4,881","","","","3,958","","","","3,181","","","","3,671","","","","3,991"],["Total Consumer","","","8,186","","","","7,181","","","","7,306","","","","8,992","","","","13,234"],["Total Non-Accrual Loans and Leases","","","16,634","","","","16,149","","","","17,380","","","","11,574","","","","15,080"],["Foreclosed Real Estate","","","2,332","","","","2,332","","","","2,737","","","","1,356","","","","1,040"],["Total Non-Performing Assets","","$","18,966","","","$","18,481","","","$","20,117","","","$","12,930","","","$","16,120"],["Accruing Loans and Leases Past Due 90 Days or More"],["Commercial"],["Commercial and Industrial","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","10","","","$","\u2014"],["Total Commercial","","","\u2014","","","","\u2014","","","","\u2014","","","","10","","","","\u2014"],["Consumer"],["Residential Mortgage","","","3,159","","","","5,274","","","","1,839","","","","2,446","","","","2,703"],["Home Equity","","","3,456","","","","3,187","","","","4,125","","","","2,684","","","","1,624"],["Automobile","","","729","","","","925","","","","949","","","","513","","","","886"],["Other 1","","","426","","","","1,160","","","","1,493","","","","914","","","","1,934"],["Total Consumer","","","7,770","","","","10,546","","","","8,406","","","","6,557","","","","7,147"],["Total Accruing Loans and Leases Past Due 90 Days or More","","$","7,770","","","$","10,546","","","$","8,406","","","$","6,567","","","$","7,147"],["Restructured Loans on Accrual Status and Not Past Due 90 Days or More","","$","60,519","","","$","68,065","","","$","63,103","","","$","48,731","","","$","55,672"],["Total Loans and Leases","","$","12,259,076","","","$","11,940,020","","","$","10,990,892","","","$","10,448,774","","","$","9,796,947"],["Ratio of Non-Accrual Loans and Leases to Total Loans and Leases","","","0.14","%","","","0.14","%","","","0.16","%","","","0.11","%","","","0.15","%"],["Ratio of Non-Performing Assets to Total Loans and Leases and Foreclosed Real Estate","","","0.15","%","","","0.15","%","","","0.18","%","","","0.12","%","","","0.16","%"],["Ratio of Commercial Non-Performing Assets to Total Commercial Loans and Leases and Commercial Foreclosed Real Estate","","","0.17","%","","","0.18","%","","","0.24","%","","","0.06","%","","","0.05","%"],["Ratio of Consumer Non-Performing Assets to Total Consumer Loans and Leases and Consumer Foreclosed Real Estate","","","0.14","%","","","0.14","%","","","0.15","%","","","0.16","%","","","0.24","%"],["Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More to Total Loans and Leases and Foreclosed Real Estate","","","0.22","%","","","0.24","%","","","0.26","%","","","0.19","%","","","0.24","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["1","Comprised of other revolving credit, installment, and lease financing."]]
[[/GREPCENT_TABLE]]

40

Table of Contents

Table 17 presents the activity in Non-Performing Assets (“NPAs”) for 2021:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","Table 17"],["Balance at Beginning of Year","","$","18,481"],["Additions","","","8,749"],["Reductions"],["Payments","","","(5,064",")"],["Return to Accrual Status","","","(3,074",")"],["Charge-offs/Write-downs","","","(126",")"],["Total Reductions","","","(8,264",")"],["Balance at End of Year","","$","18,966"]]
[[/GREPCENT_TABLE]]

NPAs consist of non-accrual loans and leases and foreclosed real estate.  Changes in the level of non-accrual loans and leases typically represent are caused by loans and leases that reach a specified past due status, offset by reductions for loans and leases that are charged-off, paid down, sold, transferred to foreclosed real estate, or are no longer classified as non-accrual because they have returned to accrual status.

Residential mortgage non-accrual loans increased by $0.1 million or 3% from December 31, 2020.  As of December 31, 2021, our residential mortgage non-accrual loans were comprised of eleven loans with a weighted average current LTV ratio of 58%.

Foreclosed real estate represents property acquired as the result of borrower defaults on loans.  Foreclosed real estate is recorded at fair value, less estimated selling costs, at the time of foreclosure.  On an ongoing basis, properties are appraised as required by market conditions and applicable regulations.  Foreclosed real estate as of December 31, 2021 was unchanged from December 31, 2020.

If interest due on the balances of all non-accrual loans as of December 31, 2021, had been accrued under the original terms, approximately $0.8 million in total interest income would have been recorded in 2021.

Loans and Leases Past Due 90 Days or More and Still Accruing Interest

Loans and leases in this category are 90 days or more past due, as to principal or interest, and are still accruing interest because they are well-secured and in the process of collection.  Loans and leases past due 90 days or more and still accruing interest were $7.8 million as of December 31, 2021, a $2.8 million or 26% decrease from December 31, 2020.  This decrease was primarily in our residential mortgage portfolio.

Loans Modified in a Troubled Debt Restructuring

Table 18 presents information on loans whose terms have been modified in a TDR:

[[GREPCENT_TABLE]]
[["Loans Modified in a Troubled Debt Restructuring","","","","","","Table 18"],["","","December 31,"],["(dollars in thousands)","","2021","","","2020"],["Commercial"],["Commercial and Industrial","","$","18,722","","","$","20,337"],["Commercial Mortgage","","","11,777","","","","7,605"],["Total Commercial","","","30,499","","","","27,942"],["Consumer"],["Residential Mortgage","","","16,102","","","","18,503"],["Home Equity","","","4,877","","","","4,070"],["Automobile","","","16,148","","","","19,155"],["Other 1","","","2,331","","","","2,809"],["Total Consumer","","","39,458","","","","44,537"],["Total","","$","69,957","","","$","72,479"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["1","Comprised of other revolving credit and installment financing."]]
[[/GREPCENT_TABLE]]

41

Table of Contents

The Company initially offered loan and lease modifications to assist borrowers during the COVID-19 national emergency. These modifications generally involve principal and/or interest payment deferrals for up to six months.  Similar to the initial modifications granted, the additional round of loan modifications generally involve principal and/or interest payment deferrals for up to an additional six months for commercial and consumer loans, and principal-only deferrals for up to an additional 12 months for selected commercial loans.  The Company generally continues to accrue and recognize interest income during the deferral period.  The Company offers several repayment options such as immediate repayment, repayment over a designated time period or as a balloon payment at maturity, or by extending the loan term.  These modifications generally do not involve forgiveness or interest rate reductions.  In accordance with Section 4013 of the CARES Act and the joint agency statement issued by banking agencies, these initial COVID-19 related loan and lease modifications are not accounted for as TDRs.  As of December 31, 2021, these COVID-19 related loan and lease modifications totaled $40.5 million (8 loans and leases) for the commercial segment, in which interest payments continued to be received for all loans, and $3.1 million (11 loans and leases) for the consumer segment.  See Note 4 to the Consolidated Financial Statements for more information.  Loans in a deferral program will continue to accrue interest during the deferral period unless otherwise classified as nonperforming.  The provisions of the CARES Act and the interagency guidance issued by Federal banking regulators provided clarification related to modifications and deferral programs to assist borrowers who are negatively impacted by the COVID-19 pandemic.  The guidance and clarifications detail certain provisions whereby banks are permitted to make deferrals and modifications to the terms of a loan which would not require the loans be reported as TDRs.  In accordance with the CARES Act and the interagency guidance, we elected to not report qualified loan modifications as TDRs.  The relief related to TDRs under the CARES Act was extended by the Consolidated Appropriations Act, 2021.  Under the Consolidated Appropriations Act, relief under the CARES Act will continue until the earlier of (i) 60 days after the date the COVID-19 national emergency comes to an end or (ii) January 1, 2022.  We do not know if the date will be extended beyond January 1, 2022 and it is possible that a failure to extend the date will result in an increase in the volume of loans considered TDRs.  It is also unknown whether customers currently on a deferral period will be able to perform under the original terms of the loan once the deferral period ends.  Any such inability to perform may result in increases in past due and nonperforming loans.

42

Table of Contents

Reserve for Credit Losses

The reserve for credit losses consists of the Allowance and the Unfunded Reserve.  The reserve for credit losses also included a reserve for accrued interest receivable related to loans in which interest payment forbearances were granted to borrowers impacted by the COVID-19 pandemic.  Table 19 presents the activity in the Company’s reserve for credit losses for the years ended December 31:

[[GREPCENT_TABLE]]
[["Reserve for Credit Losses","","","","","","","","","","","","","","","","","","Table 19"],["(dollars in thousands)","","2021","","","2020","","","2019","","","2018","","","2017"],["Balance at Beginning of Period","","$","221,303","","","$","116,849","","","$","113,515","","","$","114,168","","","$","110,845"],["CECL Adoption (Day 1) Impact","","","\u2014","","","","(5,072",")","","","\u2014","","","","\u2014","","","","\u2014"],["Loans and Leases Charged-Off"],["Commercial"],["Commercial and Industrial","","","(1,117",")","","","(1,697",")","","","(1,122",")","","","(1,505",")","","","(1,408",")"],["Commercial Mortgage","","","\u2014","","","","\u2014","","","","(1,616",")","","","\u2014","","","","\u2014"],["Consumer"],["Residential Mortgage","","","(316",")","","","(204",")","","","(112",")","","","(101",")","","","(729",")"],["Home Equity","","","(417",")","","","(397",")","","","(900",")","","","(665",")","","","(995",")"],["Automobile","","","(4,939",")","","","(6,496",")","","","(7,130",")","","","(8,218",")","","","(7,737",")"],["Other 1","","","(10,530",")","","","(12,244",")","","","(13,075",")","","","(14,075",")","","","(12,386",")"],["Total Loans and Leases Charged-Off","","","(17,319",")","","","(21,038",")","","","(23,955",")","","","(24,564",")","","","(23,255",")"],["Recoveries on Loans and Leases Previously Charged-Off"],["Commercial"],["Commercial and Industrial","","","506","","","","2,288","","","","1,513","","","","2,039","","","","1,482"],["Commercial Mortgage","","","\u2014","","","","40","","","","\u2014","","","","\u2014","","","","\u2014"],["Lease Financing","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","3"],["Consumer"],["Residential Mortgage","","","2,467","","","","1,292","","","","1,927","","","","807","","","","639"],["Home Equity","","","1,666","","","","2,892","","","","2,339","","","","2,001","","","","2,681"],["Automobile","","","3,510","","","","3,775","","","","2,961","","","","2,902","","","","2,495"],["Other 1","","","3,205","","","","3,613","","","","2,549","","","","2,737","","","","2,128"],["Total Recoveries on Loans and Leases Previously Charged-Off","","","11,354","","","","13,900","","","","11,289","","","","10,486","","","","9,428"],["Net Charged-Off - Loans and Leases","","","(5,965",")","","","(7,138",")","","","(12,666",")","","","(14,078",")","","","(13,827",")"],["Net Charged-Off - Accrued Interest Receivable","","","(541",")","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Provision for Credit Losses 2"],["Loans and Leases","","","(52,466",")","","","115,100","","","","16,000","","","","13,425","","","","16,900"],["Accrued Interest Receivable 3","","","(1,745",")","","","2,700","","","","\u2014","","","","\u2014","","","","\u2014"],["Unfunded Commitments 4","","","3,711","","","","(1,136",")","","","\u2014","","","","\u2014","","","","250"],["Total Provision for Credit Losses","","","(50,500",")","","","116,664","","","","16,000","","","","13,425","","","","17,150"],["Balance at End of Period","","$","164,297","","","$","221,303","","","$","116,849","","","$","113,515","","","$","114,168"],["Components"],["Allowance for Credit Losses - Loans and Leases","","$","157,821","","","$","216,252","","","$","110,027","","","$","106,693","","","$","107,346"],["Allowance for Credit Losses - Accrued Interest Receivable 3","","","414","","","","2,700","","","","\u2014","","","","\u2014","","","","\u2014"],["Reserve for Unfunded Commitments 4","","","6,062","","","","2,351","","","","6,822","","","","6,822","","","","6,822"],["Total Reserve for Credit Losses","","$","164,297","","","$","221,303","","","$","116,849","","","$","113,515","","","$","114,168"],["Average Loans and Leases Outstanding","","$","12,023,669","","","$","11,592,093","","","$","10,688,424","","","$","10,043,661","","","$","9,346,828"],["Ratio of Net Loans and Leases Charged-Off to Average Loans and Leases Outstanding","","","0.05","%","","","0.06","%","","","0.12","%","","","0.14","%","","","0.15","%"],["Ratio of Allowance for Credit Losses to Loans and Leases Outstanding","","","1.29","%","","","1.81","%","","","1.00","%","","","1.02","%","","","1.10","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["1","Comprised of other revolving credit, installment, and lease financing."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["2","Certain prior period information has been reclassified to conform to current presentations."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["3","Beginning December 31, 2020, the Company established a reserve on accrued interest receivable related to loans in which interest payment forbearances were granted to borrowers impacted by the COVID-19 pandemic. The reserve was recorded as a contra-asset against accrued interest receivable with the offset to provision for credit losses."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["4","The reserve for unfunded commitments is separately recorded in other liabilities in the consolidated statements of condition. For the year ended December 31, 2021, the offsetting provision was recorded in provision for credit losses in the consolidated statements of income. In previous reporting periods, the offsetting provision was recorded in other noninterest expense."]]
[[/GREPCENT_TABLE]]

43

Table of Contents

Allowance for Credit Losses

Table 20 presents the allocation of the Allowance by loan and lease category.

[[GREPCENT_TABLE]]
[["Allocation of Allowance for Credit Losses","","","","","","","","","","","","","","","","","","Table 20"],["","","December 31,"],["(dollars in thousands)","","2021","","","2020","","","2019","","","2018","","","2017"],["Commercial"],["Commercial and Industrial","","$","27,650","","","$","43,092","","","$","29,281","","","$","26,408","","","$","24,750"],["Commercial Mortgage","","","29,997","","","","31,723","","","","38,335","","","","34,869","","","","34,890"],["Construction","","","4,311","","","","5,417","","","","4,840","","","","4,398","","","","5,109"],["Lease Financing","","","2,992","","","","4,615","","","","1,345","","","","1,199","","","","1,073"],["Total Commercial","","","64,950","","","","84,847","","","","73,801","","","","66,874","","","","65,822"],["Consumer"],["Residential Mortgage","","","20,721","","","","32,643","","","","6,366","","","","6,870","","","","6,515"],["Home Equity","","","18,924","","","","37,987","","","","9,777","","","","11,240","","","","12,520"],["Automobile","","","25,018","","","","28,822","","","","9,269","","","","11,576","","","","10,940"],["Other 1","","","28,208","","","","31,953","","","","10,814","","","","10,133","","","","11,549"],["Total Consumer","","","92,871","","","","131,405","","","","36,226","","","","39,819","","","","41,524"],["Total Allocation of Allowance for Credit Losses","","$","157,821","","","$","216,252","","","$","110,027","","","$","106,693","","","$","107,346"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2021","","2020","","2019","","2018","","2017"],["","","Alloc. Allow. as % of loan or lease category","","","Loan category as % of total loans and leases","","","","Alloc. Allow. as % of loan or lease category","","","Loan category as % of total loans and leases","","","","Alloc. Allow. as % of loan or lease category","","","Loan category as % of total loans and leases","","","","Alloc. Allow. as % of loan or lease category","","","Loan category as % of total loans and leases","","","","Alloc. Allow. as % of loan or lease category","","","Loan category as % of total loans and leases"],["Commercial"],["Commercial and Industrial","","","1.86","","%","","12.14","","%","","","2.30","","%","","15.70","","%","","","2.12","","%","","12.55","","%","","","1.98","","%","","12.74","","%","","","1.93","","%","","13.06","","%"],["Commercial Mortgage","","","0.95","","","","25.71","","","","","1.11","","","","23.91","","","","","1.52","","","","22.91","","","","","1.51","","","","22.03","","","","","1.66","","","","21.48"],["Construction","","","1.96","","","","1.80","","","","","2.09","","","","2.18","","","","","2.49","","","","1.77","","","","","2.59","","","","1.63","","","","","2.53","","","","2.06"],["Lease Financing","","","2.85","","","","0.86","","","","","4.17","","","","0.93","","","","","1.10","","","","1.11","","","","","0.68","","","","1.69","","","","","0.59","","","","1.85"],["Total Commercial","","","1.31","","","","40.51","","","","","1.66","","","","42.72","","","","","1.75","","","","38.34","","","","","1.68","","","","38.09","","","","","1.75","","","","38.45"],["Consumer"],["Residential Mortgage","","","0.48","","","","35.15","","","","","0.79","","","","34.59","","","","","0.16","","","","35.40","","","","","0.19","","","","35.16","","","","","0.19","","","","35.39"],["Home Equity","","","1.03","","","","14.98","","","","","2.37","","","","13.44","","","","","0.58","","","","15.25","","","","","0.67","","","","16.09","","","","","0.79","","","","16.18"],["Automobile","","","3.40","","","","6.01","","","","","4.07","","","","5.94","","","","","1.29","","","","6.55","","","","","1.76","","","","6.30","","","","","2.07","","","","5.39"],["Other 1","","","6.88","","","","3.35","","","","","8.08","","","","3.31","","","","","2.21","","","","4.46","","","","","2.22","","","","4.36","","","","","2.57","","","","4.59"],["Total Consumer","","","1.27","","","","59.49","","","","","1.92","","","","57.28","","","","","0.53","","","","61.66","","","","","0.62","","","","61.91","","","","","0.69","","","","61.55"],["Total","","","1.29","","%","","100.00","","%","","","1.81","","%","","100.00","","%","","","1.00","","%","","100.00","","%","","","1.02","","%","","100.00","","%","","","1.10","","%","","100.00","","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["1","Comprised of other revolving credit, installment, and lease financing."]]
[[/GREPCENT_TABLE]]

Allowance for Credit Losses – Loans and Leases

As of December 31, 2021, the Allowance was $157.8 million or 1.29% of total loans and leases outstanding (1.32% excluding PPP loans), compared with an Allowance of $216.3 million or 1.81% of total loans and leases outstanding (1.89% excluding PPP loans) as of December 31, 2020.  The decrease in the Allowance and the ratio of Allowance to loans and leases outstanding was primarily due to management’s best estimate of losses over the life of loans and leases in our portfolio in accordance with the CECL approach, given the economic outlook, consumer delinquency rates, post deferral consumer payment trends, low commercial delinquency rates post-deferral, strong commercial performance and liquidity levels, and forecasts for COVID-19 pandemic driven market changes, as well as the cumulative impact of the intervention of fiscal, monetary and regulatory programs. The CECL approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). It removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was probable a loss event was incurred.

44

Table of Contents

Net charge-offs of loans and leases were $6.0 million or 0.05% of total average loans and leases in 2021 compared to $7.1 million or 0.06% of total average loans and leases in 2020.  Net charge-offs in our consumer portfolios were $5.4 million in 2021 compared to $7.8 million in 2020.  This decrease was primarily reflected in our other and automobile portfolio.  Net charge-offs in our commercial portfolios were $0.6 million in 2021 compared to net recoveries of $0.6 million in 2020.  This increase in charge-offs was primarily reflected in our commercial and industrial portfolio.

Although we determine the amount of each component of the Allowance separately, the Allowance as a whole was considered appropriate by management as of December 31, 2021, based on our ongoing analysis of estimated probable credit losses, credit risk profiles, economic conditions, coverage ratios, and other relevant factors.

The allocation of the Allowance to our commercial portfolio segment decreased by $19.9 million or 23% from December 31, 2020.  This reduction was primarily due to a $15.4 million decrease in the Allowance allocated to the commercial and industrial portfolio, a $1.7 million decrease in the Allowance allocated to the commercial mortgage portfolio, and a $1.6 million decrease in the Allowance allocated to the lease financing portfolio. The reductions were primarily due to improving economic conditions and lower risk rating migration expectations.

The allocation of the Allowance to our consumer portfolio segment decreased by $38.5 million or 29% from December 31, 2020.  This reduction was due to a $19.1 million decrease in the Allowance allocated to the home equity portfolio, an $11.9 million decrease in the Allowance allocated to the residential mortgage portfolio, and reductions in the Allowance allocated to the automobile and other portfolios, each totaling $3.8 million.  The reductions were primarily due to improving economic conditions and lower loss forecasts.

See Note 4 to the Consolidated Financial Statements for more information on the Allowance and credit quality indicators.

Reserve for Unfunded Commitments

The Unfunded Reserve was $6.1 million as of December 31, 2021, and $2.4 million as of December 31, 2020, an increase of $3.7 million, which was primarily due to the impact of risk rating migrations for certain commitments that were largely unfunded.

Provision for Credit Losses

The provision for credit losses was a net benefit of $50.5 million in 2021 and a net expense of $117.8 million in 2020.  This decrease was primarily due to management’s best estimate of losses over the life of loans and leases in our portfolio in accordance with the CECL approach, given the economic outlook, consumer delinquency rates, post deferral consumer payment trends, low commercial delinquency rates post-deferral, strong commercial performance and liquidity levels, and forecasts for COVID-19 pandemic driven market changes, as well as the cumulative impact of the intervention of fiscal, monetary and regulatory programs.

Other Credit Risks

In the normal course of business, we serve the needs of state and political subdivisions in multiple capacities, including traditional banking products such as deposit services, and by investing in municipal debt securities.  The carrying value of our municipal debt securities was $75.8 million as of December 31, 2021, and $58.6 million as of December 31, 2020.  We also maintained investments in corporate bonds with a carrying value of $403.4 million as of December 31, 2021, and $236.6 million as of December 31, 2020.  We are exposed to credit risk in these investments should the issuer of a security be unable to meet its financial obligations.  This may result in the issuer failing to make scheduled interest payments and/or being unable to repay the principal upon maturity.

Our use of derivative financial instruments exposes the Company to counterparty credit risk.  See Note 17 to the Consolidated Financial Statements for more information.

Market Risk

Market risk is the potential of loss arising from adverse changes in interest rates and prices.  We are exposed to market risk as a consequence of the normal course of conducting our business activities.  Our market risk management process involves measuring, monitoring, and mitigating risks that can significantly impact our statements of income and condition.  In this management process, market risks are balanced with expected returns in an effort to enhance earnings performance while limiting volatility.

Our primary market risk exposure is interest rate risk.

45

Table of Contents

Interest Rate Risk

The objective of our interest rate risk management process is to optimize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.  The potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates.  This interest rate risk arises primarily from our core business activities of extending loans and accepting deposits.  Our investment securities portfolio is also subject to significant interest rate risk.

Many factors affect our exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and repricing characteristics of financial instruments.  Our earnings are affected not only by general economic conditions but also by the monetary and fiscal policies of the U.S. and its agencies, particularly the Federal Reserve Bank (the “FRB”).  The monetary policies of the FRB can influence the overall growth of loans, investment securities, and deposits and the level of interest rates earned on assets and paid for liabilities.

In managing interest rate risk, we, through the Asset/Liability Management Committee (“ALCO”), measure short and long-term sensitivities to changes in interest rates.  The ALCO, which is comprised of members of executive management, utilizes several techniques to manage interest rate risk, which include:

[[GREPCENT_TABLE]]
[["\u2022","adjusting the statement of condition mix or altering the interest rate characteristics of assets and liabilities;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","changing product pricing strategies;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","modifying characteristics of the investment securities portfolio; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","using derivative financial instruments."]]
[[/GREPCENT_TABLE]]

Our use of derivative financial instruments, as detailed in Note 17 to the Consolidated Financial Statements, has generally been limited.  This is due to natural on-balance sheet hedges arising out of offsetting interest rate exposures from loans and investment securities with deposits and other interest-bearing liabilities.  In particular, the investment securities portfolio is utilized to manage the interest rate exposure and sensitivity to within the guidelines established by the ALCO.  We utilize natural and offsetting economic hedges in an effort to reduce the need to employ off-balance sheet derivative financial instruments to hedge interest rate risk exposures.  Expected movements in interest rates are also considered in managing interest rate risk.  Thus, as interest rates change, we may use different techniques to manage interest rate risk.

A key element in our ongoing process to measure and monitor interest rate risk is the utilization of an asset/liability simulation model that attempts to capture the dynamic nature of the statement of condition.  The model is used to estimate and measure the statement of condition sensitivity to changes in interest rates.  These estimates are based on assumptions about the behavior of loan and deposit pricing, repayment rates on mortgage-based assets, and principal amortization and maturities on other financial instruments.  The model’s analytics include the effects of standard prepayment options on mortgages and customer withdrawal options for deposits.  While such assumptions are inherently uncertain, we believe that our assumptions are reasonable.

We utilize net interest income simulations to analyze short-term income sensitivities to changes in interest rates.  Table 21 presents, for the twelve months subsequent to December 31, 2021, and December 31, 2020, an estimate of the change in net interest income that would result from a gradual and immediate change in interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario.  The base case scenario assumes the statement of condition and interest rates are generally unchanged.  Based on our net interest income simulation as of December 31, 2021, net interest income is expected to increase as interest rates rise.  This is due in part to our strategy to maintain a relatively short investment portfolio duration.  In addition, rising interest rates would drive higher rates on loans and investment securities, as well as induce a slower pace of premium amortization on certain securities within our investment portfolio.  However, lower interest rates would likely cause a decline in net interest income as lower rates would lead to lower yields on loans and investment securities, as well as drive higher premium amortization on existing investment securities.  Based on our net interest income simulation as of December 31, 2021, net interest income sensitivity to changes in interest rates for the twelve months subsequent to December 31, 2021, was more sensitive in comparison to the sensitivity profile for the twelve months subsequent to December 31, 2020.  Year-over-year asset sensitivity increased due to faster forecasted prepayments for mortgage-related assets due to the lower rate environment, higher liquidity, as well as higher balances in mortgage-backed securities and in floating rate commercial mortgage loans.

46

Table of Contents

[[GREPCENT_TABLE]]
[["Net Interest Income Sensitivity Profile","","","","","","","","","","Table 21"],["","","Impact on Future Annual Net Interest Income"],["(dollars in thousands)","","December 31, 2021","","","December 31, 2020"],["Gradual Change in Interest Rates (basis points)"],["+200","","$","29,697","","","","6.1","%","","$","21,584","","","","4.6","%"],["+100","","","15,306","","","","3.1","","","","10,776","","","","2.3"],["-100","","","(8,922",")","","","(1.8",")","","","(3,547",")","","","(0.8",")"],["Immediate Change in Interest Rates (basis points)"],["+200","","$","68,037","","","","14.0","%","","$","56,113","","","","11.9","%"],["+100","","","38,361","","","","7.9","","","","30,439","","","","6.5"],["-100","","","(30,511",")","","","(6.3",")","","","(13,517",")","","","(2.9",")"]]
[[/GREPCENT_TABLE]]

To analyze the impact of changes in interest rates in a more realistic manner, non-parallel interest rate scenarios are also simulated.  These non-parallel interest rate scenarios indicate that net interest income may decrease from the base case scenario should the yield curve flatten or become inverted for a period of time.  Conversely, if the yield curve were to steepen, net interest income may increase.

Other Market Risks

In addition to interest rate risk, we are exposed to other forms of market risk in our normal business transactions.  Foreign currency and foreign exchange contracts expose us to a small degree of foreign currency risk.  These transactions are primarily executed on behalf of customers.  Our trust and asset management income is at risk to fluctuations in the market values of underlying assets, particularly debt and equity securities.  Also, our share-based compensation expense is dependent on the fair value of our stock options, restricted stock units, and restricted stock at the date of grant.  The fair value of stock options, restricted stock units, and restricted stock is impacted by the market price of the Parent’s common stock on the date of grant and is at risk to changes in equity markets, general economic conditions, and other factors.

Liquidity Risk Management

The objective of our liquidity risk management process is to manage cash flow and liquidity in an effort to provide continuous access to sufficient, reasonably priced funds.  Funding requirements are impacted by loan originations and refinancings, deposit balance changes, liability issuances and settlements, and off-balance sheet funding commitments.  We consider and comply with various regulatory guidelines regarding required liquidity levels and regularly monitor our liquidity position in light of the changing economic environment and customer activity.  Based on ongoing liquidity assessments, we may alter our asset, liability, and off-balance sheet positions.  The ALCO monitors sources and uses of funds and modifies asset and liability positions as liquidity requirements change.  This process, combined with our ability to raise funds in money and capital markets and through private placements, provides flexibility in managing the exposure to liquidity risk.

In an effort to satisfy our liquidity needs, we actively manage our assets and liabilities.  We have access to immediate liquid resources in the form of cash which is primarily on deposit with the FRB.  Potential sources of liquidity also include investment securities in our available-for-sale securities portfolio, our ability to sell loans in the secondary market, and to secure borrowings from the FRB and FHLB.  Our held-to-maturity securities, while not intended for sale, may also be utilized in repurchase agreements to obtain funding.  Our core deposits have historically provided us with a long-term source of stable and relatively low cost source of funding.  Additional funding is available through the issuance of long-term debt or equity.

Maturities and payments on outstanding loans and investment securities also provide a steady flow of funds.  Liquidity is further enhanced by our ability to access secured borrowings from the FHLB and FRB.  As of December 31, 2021, we could have borrowed an additional $3.0 billion from the FHLB and an additional $713.3 million from the FRB based on the amount of pledged loans and investment securities.

We continued our focus on maintaining a strong liquidity position throughout 2021.  As of December 31, 2021, cash and cash equivalents were $560.4 million, the carrying value of our available-for-sale investment securities was $4.3 billion, and total deposits were $20.4 billion.  As of December 31, 2021, our available-for-sale investment securities portfolio was comprised of securities with an average base duration of approximately 4.15 years.

47

Table of Contents

Capital Management

We actively manage capital, commensurate with our risk profile, in our efforts to enhance shareholder value.  We also seek to maintain capital levels for the Company and the Bank at amounts in excess of the regulatory “well-capitalized” thresholds.  Periodically, we may respond to market conditions by implementing changes to our overall balance sheet positioning to manage our capital position.

The Company and the Bank are each subject to regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements could cause certain mandatory and discretionary actions by regulators that, if undertaken, would likely have a material effect on our financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures.  These measures were established by regulation intended to ensure capital adequacy.  As of December 31, 2021, the Company’s capital levels remained characterized as “well-capitalized.”  The Company’s regulatory capital ratios are presented in Table 22 below.  Capital ratios are calculated using the regulatory capital rule that allows a five-year transition period related to the adoption of CECL.  There have been no conditions or events since December 31, 2021, that management believes have changed either the Company’s or the Bank’s capital classifications.

As of December 31, 2021, shareholders’ equity was $1.6 billion, an increase of $237.1 million or 17% from December 31, 2020.  For 2021 net income of $253.4 million, net preferred stock issuance of $175.5 million, common stock issuances of $14.0 million, and share-based compensation of $13.3 million were offset by other comprehensive loss of $74.2 million, cash dividends of $110.6 million paid on common stock shares, cash dividends of $3.0 million paid on preferred stock shares, and common stock repurchases of $31.3 million.  In 2021, included in the amount of common stock repurchased were 328,832 shares repurchased under our share repurchase program.  These shares were repurchased at an average cost per share of $83.14 and a total cost of $27.3 million.  From the beginning of our share repurchase program in July 2001 through December 31, 2021, we repurchased a total of 57.4 million shares of common stock and returned a total of nearly $2.3 billion to our common shareholders at an average cost of $40.76 per share.

Remaining buyback authority was $85.7 million as of December 31, 2021.  We suspended share repurchases from March 2020 to July 2021 in light of the COVID-19 pandemic. The actual amount and timing of future share repurchases, if any, will depend on market and economic conditions, regulatory rules, applicable SEC rules, and various other factors.

On June 15, 2021, the Company issued and sold 7,200,000 depositary shares (the “depositary shares”), each representing a 1/40th ownership interest in a share of 4.375% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share (the “Series A Preferred Stock”).  The Series A Preferred Stock has a liquidation preference of $1,000 per share.  Net proceeds, after underwriting discounts and expenses, totaled $175.5 million.  Dividends on the Series A Preferred Stock are not cumulative and will be paid when declared by the Parent’s Board of Directors to the extent that we have legally available funds to pay dividends.  If declared, dividends will accrue and be payable quarterly, in arrears, on the liquidation preference amount, on a non-cumulative basis, at a rate of 4.375% per annum.  Holders of the Series A Preferred Stock will not have voting rights, except with respect to certain changes in the terms of the preferred stock, certain dividend non-payments and as otherwise required by applicable law.  The Company may redeem the Series A Preferred Stock at its option, (i) in whole or in part, from time to time, on any dividend payment date on or after August 1, 2026 or (ii) in whole but not in part, at any time within 90 days following a regulatory capital treatment event, in either case at a redemption price equal to $1,000 per share (equivalent to $25 per depositary share), plus any declared and unpaid dividends.

In January 2022, the Parent’s Board of Directors declared the quarterly dividend of its Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, of $10.94 per share, equivalent to $0.2735 per depositary share. The dividend was paid on February 1, 2022, to shareholders of record of the preferred stock at the close of business on January 18, 2022.

In January 2022, the Parent’s Board of Directors declared the quarterly cash dividend of $0.70 per share on the Parent’s outstanding common shares.  The dividend will be payable on March 14, 2022, to shareholders of record at the close of business on February 28, 2022.

48

Table of Contents

Table 22 presents a five-year history of activities and balances in our capital accounts, along with key capital ratios.

[[GREPCENT_TABLE]]
[["Shareholders\u2019 Equity and Regulatory Capital","","","","","","","","","","","","","","Table 22"],["","","December 31,"],["(dollars in thousands)","","2021","","","2020","","","2019","","","2018","","","2017"],["Change in Shareholders' Equity"],["Net Income","","$","253,372","","","$","153,804","","","$","225,913","","","$","219,602","","","$","184,672"],["Cash Dividends Paid on Common Shares","","","(110,633",")","","","(107,434",")","","","(105,478",")","","","(98,496",")","","","(87,066",")"],["Cash Dividends Paid on Preferred Shares","","","(2,975",")","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Dividend Reinvestment Program","","","4,835","","","","5,012","","","","5,039","","","","4,689","","","","4,360"],["Preferred Stock Issued, Net","","","175,487","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Common Stock Repurchased","","","(31,258",")","","","(18,006",")","","","(137,649",")","","","(91,988",")","","","(47,076",")"],["Other1","","","(51,724",")","","","54,299","","","","30,807","","","","2,525","","","","15,441"],["Increase in Shareholders' Equity","","$","237,104","","","$","87,675","","","$","18,632","","","$","36,332","","","$","70,331"],["Regulatory Capital"],["Total Common Shareholders' Equity","","$","1,436,124","","","$","1,374,507","","","$","1,286,832","","","$","1,268,200","","","$","1,231,868"],["Add: CECL Transitional Amount","","","9,498","","","","23,750","","","","\u2014","","","","\u2014","","","","\u2014"],["Less: Goodwill, Net of Deferred Tax Liabilities","","","28,747","","","","28,718","","","","28,718","","","","28,718","","","","28,718"],["Postretirement Benefit Liability Adjustments","","","(33,496",")","","","(43,250",")","","","(38,757",")","","","(36,010",")","","","(27,715",")"],["Net Unrealized Gains (Losses) on Investment Securities","","","(32,886",")","","","51,072","","","","7,645","","","","(15,033",")","","","(7,000",")"],["Other","","","(198",")","","","(198",")","","","(198",")","","","(198",")","","","(198",")"],["Common Equity Tier 1 Capital","","","1,483,455","","","","1,361,915","","","","1,289,424","","","","1,290,723","","","","1,238,063"],["Preferred Stock, Net of Issuance Cost","","","175,487","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Tier 1 Capital","","","1,658,942","","","","1,361,915","","","","1,289,424","","","","1,290,723","","","","1,238,063"],["Allowable Reserve for Credit Losses","","","153,001","","","","141,869","","","","116,849","","","","113,515","","","","114,168"],["Total Regulatory Capital","","$","1,811,943","","","$","1,503,784","","","$","1,406,273","","","$","1,404,238","","","$","1,352,231"],["Risk-Weighted Assets","","$","12,236,805","","","$","11,295,077","","","$","10,589,061","","","$","9,878,904","","","$","9,348,296"],["Key Regulatory Capital Ratios"],["Common Equity Tier 1 Capital Ratio","","","12.12","%","","","12.06","%","","","12.18","%","","","13.07","%","","","13.24","%"],["Tier 1 Capital Ratio","","","13.56","","","","12.06","","","","12.18","","","","13.07","","","","13.24"],["Total Capital Ratio","","","14.81","","","","13.31","","","","13.28","","","","14.21","","","","14.46"],["Tier 1 Leverage Ratio","","","7.32","","","","6.71","","","","7.25","","","","7.60","","","","7.26"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["1","Includes unrealized gains and losses on available-for-sale investment securities, minimum pension liability adjustments, common stock issuances under share-based compensation, and preferred stock issuance, net."]]
[[/GREPCENT_TABLE]]

Regulatory Initiatives Affecting the Banking Industry

Basel III

Under final FRB and FDIC approved rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks minimum requirements increased for both the quantity and quality of capital held by the Company.  The Basel III capital standards substantially revised the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including the definitions and the components of Tier 1 capital and Total Capital, the method of evaluating risk-weighted assets, institution of a capital conservation buffer, and other matters affecting regulatory capital ratios.  Strict eligibility criteria for regulatory capital instruments were also implemented under the rules.

The phase-in period for the final rules became effective for the Company on January 1, 2015, with full compliance with all of the final rules’ requirements phased in over a multi-year schedule, which were fully implemented on January 1, 2019.  As of December 31, 2021, the Company’s capital levels remained characterized as “well-capitalized” under the new rules.

Management continues to monitor regulatory developments and their potential impact to the Company’s liquidity requirements.

Stress Testing

Enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act in May 2018 significantly altered several provisions of the Dodd-Frank Act, including how stress tests are run.  Bank holding companies with total assets of less than $100 billion, such as the Company, are no longer subject to company-run stress testing requirements in section 165(i)(2) of the Dodd-Frank Act, including publishing a summary of results.  At this time, the Company continues to run internal stress tests as a component of our comprehensive risk management and capital planning process.

49

Table of Contents

CARES Act

On March 27, 2020, President Trump signed the CARES Act into law.  Many of the provisions of the CARES Act were renewed or extended by the Coronavirus Response and Relief Supplemental Appropriations Act on December 21, 2020.

The CARES Act established the Paycheck Protection Program, an expansion of the SBA’s 7(a) loan program.  The PPP provided loans to small businesses who were affected by economic conditions as a result of the COVID-19 pandemic to provide cash flow assistance to employers who maintained their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during this emergency.  The funding period of the PPP has ended on May 31, 2021.  Pursuant to the provisions of Section 1106 of the CARES Act, borrowers may apply to the Bank for loan forgiveness of all or a portion of the loan, subject to certain eligibility requirements and conditions.

In 2021, the Bank participated in the second round of the PPP.  The expertise and diligence of our PPP team enabled us to process more than 3,400 PPP loans totaling over $287 million in 2021.  The combined Bank of Hawaii PPP loans processed in 2020 and 2021 were almost 8,000 loans totaling over $830 million.  In addition, to assist Hawaii business, the Bank processed more than 7,500 PPP loan forgiveness applications totaling more than $700 million in federal funding.

Operational Risk

Operational risk represents the risk of loss resulting from our operations, including, but not limited to, the risk of fraud by employees or persons outside the Company, errors relating to transaction processing and technology, failure to adhere to compliance requirements, and the risk of cyber attacks.  We are also exposed to operational risk through our outsourcing arrangements, and the effect that changes in circumstances or capabilities of our outsourcing vendors can have on our ability to continue to perform operational functions necessary to our business.  The risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity.  Operational risk is inherent in all business activities, and management of this risk is important to the achievement of Company goals and objectives.

Our Operational Risk Committee (the “ORC”) provides oversight and assesses the most significant operational risks facing the Company.  We have developed a framework that provides for a centralized operating risk management function through the ORC, supplemented by business unit responsibility for managing operational risks specific to their business units.  Our internal audit department also validates the system of internal controls through ongoing risk-based audit procedures and reports on the effectiveness of internal controls to executive management and the Audit and Risk Committee of the Board of Directors.

We continuously strive to strengthen our system of internal controls to improve the oversight of operational risk.  While our internal controls have been designed to minimize operational risks, there is no assurance that business disruption or operational losses will not occur.  On an ongoing basis, management reassesses operational risks, implements appropriate process changes, and invests in enhancements to our systems of internal controls.

Guarantees

We pool Federal Housing Administration (“FHA”) insured and U.S. Department of Veterans Affairs (“VA”) guaranteed residential mortgage loans for sale to Ginnie Mae.  We also sell residential mortgage loans in the secondary market to Fannie Mae.  The agreements under which we sell residential mortgage loans to Ginnie Mae or Fannie Mae and the insurance or guaranty agreements with the FHA and VA contain provisions that include various representations and warranties regarding the origination and characteristics of the residential mortgage loans.  Although these loans are primarily sold on a non-recourse basis, we may be obligated to repurchase residential mortgage loans or reimburse the respective investor if it is found that required documents were not delivered or were defective.

We also service substantially all of the loans we sell to investors in the secondary market.  Each agreement under which we act as servicer generally specifies a standard of responsibility for our actions and provides protection against expenses and liabilities incurred by us when acting in compliance with the respective servicing agreements.  However, if we commit a material breach of obligations as servicer, we may be subject to various penalties which may include the repurchase of an affected loan or a reimbursement to the respective investor.

See discussion of our risks related to representation and warranty provisions as well as our risks related to residential mortgage loan servicing activities in Note 20 to the Consolidated Financial Statements.  

50

Table of Contents

Selected Quarterly Consolidated Financial Data

Table 23 presents our selected quarterly financial data for 2021 and 2020.

[[GREPCENT_TABLE]]
[["Condensed Statements of Income","","","","","","","","","","","","","","","","","","","","","","","Table 23"],["","","Three Months Ended","","","Three Months Ended"],["","","2021","","","2020"],["(dollars in thousands, except per share amounts)","","Dec 31","","","Sep 30","","","Jun 30","","","Mar 31","","","Dec 31","","","Sep 30","","","Jun 30","","","Mar 31"],["Interest Income","","$","132,309","","","$","134,263","","","$","131,379","","","$","128,765","","","$","128,316","","","$","134,017","","","$","139,145","","","$","144,946"],["Interest Expense","","","5,921","","","","7,444","","","","7,865","","","","8,196","","","","8,817","","","","9,851","","","","12,454","","","","18,980"],["Net Interest Income","","","126,388","","","","126,819","","","","123,514","","","","120,569","","","","119,499","","","","124,166","","","","126,691","","","","125,966"],["Provision for Credit Losses 1","","","(9,700",")","","","(10,400",")","","","(16,100",")","","","(14,300",")","","","15,200","","","","28,600","","","","40,400","","","","33,600"],["Investment Securities Gains (Losses), Net","","","(1,258",")","","","(1,259",")","","","2,423","","","","(1,203",")","","","(1,193",")","","","(1,121",")","","","13,216","","","","(970",")"],["Noninterest Income","","","43,832","","","","42,637","","","","42,008","","","","44,173","","","","46,451","","","","42,855","","","","38,052","","","","47,119"],["Noninterest Expense","","","101,678","","","","96,519","","","","96,527","","","","98,865","","","","98,654","","","","89,949","","","","88,892","","","","96,312"],["Income Before Provision for Income Taxes","","","76,984","","","","82,078","","","","87,518","","","","78,974","","","","50,903","","","","47,351","","","","48,667","","","","42,203"],["Provision for Income Taxes","","","13,147","","","","20,025","","","","19,985","","","","19,025","","","","8,589","","","","9,511","","","","9,759","","","","7,461"],["Net Income","","$","63,837","","","$","62,053","","","$","67,533","","","$","59,949","","","$","42,314","","","$","37,840","","","$","38,908","","","$","34,742"],["Preferred Stock Dividends","","","1,969","","","","1,006","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Net Income Available to Common Shareholders","","$","61,868","","","$","61,047","","","$","67,533","","","$","59,949","","","$","42,314","","","$","37,840","","","$","38,908","","","$","34,742"],["Per Common Share"],["Basic Earnings Per Common Share","","$","1.56","","","$","1.53","","","$","1.69","","","$","1.51","","","$","1.06","","","$","0.95","","","$","0.98","","","$","0.88"],["Diluted Earnings Per Common Share","","$","1.55","","","$","1.52","","","$","1.68","","","$","1.50","","","$","1.06","","","$","0.95","","","$","0.98","","","$","0.87"],["Dividends Declared Per Common Share","","$","0.70","","","$","0.70","","","$","0.67","","","$","0.67","","","$","0.67","","","$","0.67","","","$","0.67","","","$","0.67"],["Performance Ratios"],["Net Income to Average Total Assets (ROA)","","","1.12","%","","","1.07","%","","","1.23","%","","","1.15","%","","","0.83","%","","","0.76","%","","","0.82","%","","","0.77","%"],["Net Income to Average Shareholders\u2019 Equity (ROE)","","","15.92","","","15.41","","","","19.17","","","","17.65","","","","12.26","","","11.01","","","","11.58","","","","10.64"],["Net Income to Average Common Equity (ROCE)","","","17.40","","","17.08","","","","19.61","","","","17.65","","","","12.26","","","11.01","","","","11.58","","","","10.64"],["Efficiency Ratio 2","","","60.18","","","57.38","","","","57.47","","","","60.45","","","","59.88","","","54.22","","","","49.95","","","","55.96"],["Net Interest Margin 3","","","2.34","","","","2.32","","","","2.37","","","","2.43","","","","2.48","","","","2.67","","","","2.83","","","","2.96"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["1","Provision for Credit Losses for 2021 includes Provision for Unfunded Commitments and Accrued Interest Receivable, 2020 represents only Provisions for Loans and Leases."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["2","The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income)."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["3","The net interest margin is defined as net interest income, on a taxable-equivalent basis, as a percentage of average earning assets."]]
[[/GREPCENT_TABLE]]

Fourth Quarter Results and Other Matters

Net Income Available for Common Shareholders

Net income available for common shareholders for the fourth quarter of 2021 was $61.9 million, an increase of $19.6 million or 46% compared to the fourth quarter of 2020.  Diluted earnings per common share were $1.55 for the fourth quarter of 2021, an increase of $0.49 or 46% compared to the fourth quarter of 2020.

Net Interest Income

Net interest income, on a taxable-equivalent basis, for the fourth quarter of 2021 was $126.7 million, an increase of $6.9 million or 6% compared to the fourth quarter of 2020.  This increase was primarily due to increase in investment securities portfolio, higher PPP income, and decrease in interest expense on time deposits.  Net interest margin was 2.34% for the fourth quarter of 2021, a decrease of 14 basis points compared to the fourth quarter of 2020, primarily due to lower yields in our investment securities and loans portfolio.

51

Table of Contents

Provision for Credit Losses

The provision for credit losses for the fourth quarter of 2021 was a net benefit of $9.7 million compared to a net expense of $15.2 million in the fourth quarter of 2020, while recording a net charge-off of loans and leases of $0.7 million in the fourth quarter of 2021 compared to a net recovery of $0.3 million in the fourth quarter of 2020.

Noninterest Income

Noninterest income, other than net gains on sales of investment securities, was $43.8 million in the fourth quarter of 2021, a decrease of $2.6 million or 6% compared to the fourth quarter of 2020.  This decrease was primarily due to a $3.9 million decrease in mortgage banking due to lower volume and customer derivatives. In addition, other income decreased by $1.7 million due to a decrease in fees related to our customer interest rate swap derivatives. These decreases were partially offset by a $2.3 million increase in fees, exchange, merchant income, and other service charges due to higher ATM, merchant services, and debit and credit card transaction volume.

Noninterest Expense

Noninterest expense was $101.7 million in the fourth quarter of 2021, an increase of $3.0 million or 3% compared to the fourth quarter of 2020.  This increase was primarily due to a $9.2 million increase in salaries and benefits due to increase in corporate incentive plans, medical, dental, and life insurance and share-based compensation of $3.6 million, $2.5 million and $1.4 million, respectively. These increases were offset by $5.5 million decrease in net occupancy expense primarily due to the closure of 12 branches in the fourth quarter of 2020 for a total exit cost of $5.6 million.

Provision for Income Taxes

The provision for income taxes was $13.1 million in the fourth quarter of 2021, an increase of $4.6 million or 53% compared to the fourth quarter of 2020.  The effective tax rate for the fourth quarter of 2021 was 17.08% compared with an effective tax rate of 16.87% for the fourth quarter of 2020.  The difference in the effective tax rate in the fourth quarter of 2021 compared to the same period of 2020 was primarily due to higher pretax income in 2021, partially offset by higher tax benefits in 2021.

Common Stock Repurchase Program

In the fourth quarter of 2021, we repurchased 87,500 shares of our common stock under our share repurchase program at an average cost per share of $83.83 and a total cost of $7.3 million. See Note 11 to the Consolidated Financial Statements for more information related to our common stock repurchase program.