CENTRAL PACIFIC FINANCIAL CORP (CPF) FY 2023 MD&A

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

Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements under "Part II, Item 8. Financial Statements and Supplementary Data."

Introduction

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

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

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

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

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

Executive Overview

The year 2023 proved to be a challenging operating environment with the failures of certain significant regional banks in the first half of 2023, stock market volatility caused by fears of a national economic recession, and a significant rise in market interest rates combined with an inverted yield curve. Additionally, the August 2023 wildfires in Maui have had a direct, significant impact on the State of Hawaii.

Despite these challenges, we believe we delivered solid financial performance while managing and mitigating risks that arose in 2023.

•We recorded net income of $58.7 million, or $2.17 per diluted common share in 2023, compared to $73.9 million, or $2.68 per diluted common share in 2022. Net income in 2023 included a provision for credit losses of $15.7 million, compared to a credit to the provision of $1.3 million in 2022.

•We recorded pre-provision net revenue ("PPNR") of $92.5 million, compared to $97.5 million in 2022. (See Table 3 - Pre-Provision Net Revenue for a reconciliation of this non-GAAP financial measure.)

•We recorded return on average assets ("ROA") and return on average shareholders' equity ("ROE") ratios of 0.78% and 12.38%, respectively, in 2023, compared to ROA and ROE ratios of 1.01% and 15.47%, respectively, in 2022.

•Asset quality remains strong as our nonperforming assets totaled $7.0 million, or 0.09% of total assets at December 31, 2023, compared to $5.3 million, or 0.07% of total assets at December 31, 2022.

•Our loan portfolio declined by $116.5 million, or 2.1% in 2023, primarily due to planned run-off of our U.S. Mainland purchased consumer portfolio, combined with lower origination activity primarily due to the significant rise in market interest rates which began in 2022. Our Hawaii loan portfolio grew by $42.4 million, or 0.9% in 2023.

•We realized deposit growth of $111.4 million, or 1.7% in 2023. Our core deposit portfolio declined by $89.0 million, or 1.5% primarily due to the continued migration from demand deposits to time deposits and off-balance sheet money market accounts.

•Our capital position and consistent profitability allowed us to pay cash dividends of $1.04 per share in 2023. In addition, in 2023 we repurchased an aggregate of 130,010 shares of common stock under our share repurchase program at an aggregate cost of $2.6 million, or an average of $20.24 per share.

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Business Environment

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

On August 8, 2023, a series of wildfires broke out on the Island of Maui, in Kula, Upcountry Maui, Kihei, and most devastatingly in the town of Lahaina. The wildfires took the lives of at least 100 people and destroyed over 2,200 structures, of which approximately 86% were residential homes. The disaster area had more than 800 business establishments with about 7,000 employees.

Visitors to Maui decreased by approximately 57% in September 2023 compared to September 2022 and has started to recover as West Maui officially reopened to visitors in early October 2023 and government officials are encouraging travelers to return to Maui, while avoiding the affected area, to support its economic recovery. In December 2023, visitors to Maui were down by approximately 25% compared to December 2022. The unemployment rate for the Island of Maui was 8.4% in September 2023 and has since improved to 5.5% in December 2023.

The Company did not sustain any damages to its facilities on Maui. As of December 31, 2023, the Company had approximately $103 million in loans to borrowers in Lahaina, Maui, of which the Company has estimated $90 million were not impacted by the Maui wildfires and $11 million sustained damage but was covered by insurance and/or land.

In response to the Maui wildfires, the Company provided three to six months interest and/or principal loan payment deferrals to customers who were directly impacted by the wildfires on a case-by-case basis. The Company granted 146 loan payment deferrals on loan balances totaling $31.6 million as of December 31, 2023.

While the Maui wildfires led to significant near term economic losses on the Island of Maui, there may be limited adverse effects on the broader Hawaii economy. Although Maui represents a significant share of Hawaii's tourism, and total visitors to Hawaii have fallen, some would-be visitors to Maui have shifted their travel to the other Hawaiian Islands, such as Oahu, Kauai or Hawaii Island.

Prior to the Maui wildfires, Hawaii’s economy continued its recovery from the COVID-19 pandemic. According to the latest available statistics from the Hawaii Tourism Authority ("HTA"), a total of 9.6 million visitors arrived to the Hawaiian Islands in the year ended December 31, 2023, mainly from the U.S. Mainland. This was a 4.4% increase from the 9.2 million visitors in 2022, and represents a recovery of approximately 93% from the 10.4 million visitors during the pre-pandemic and record year in 2019. Japanese visitor arrivals in the year ended December 31, 2023 continued to increase modestly; however, were only at around 36% of pre-pandemic 2019, or around 49% in the month of December 2023 compared to December 2019.

The HTA also reported that total spending by visitors was $20.78 billion in the year ended December 31, 2023, which increased by approximately 5.5% from the $19.70 billion in the year ended December 31, 2022, and increased by approximately 17.3% from $17.72 billion in pre-pandemic 2019. According to a recent report by the State of Hawaii's Department of Business, Economic Development and Tourism ("DBEDT"), total visitor arrivals are expected to increase to approximately 9.8 million in 2024 and visitor spending is expected to be approximately $21.63 billion in 2024.

The Department of Labor and Industrial Relations reported that Hawaii's seasonally adjusted annual unemployment rate was 2.9% in the month of December 2023. The unemployment rate of 2.9% in December 2023 fell below the national seasonally adjusted unemployment rate of 3.7%. DBEDT projects Hawaii's seasonally adjusted annual unemployment rate to be around 2.8% in 2024.

Hawaii's economy is measured by the growth of real personal income and real gross state product. DBEDT is expected to report real personal income declined by approximately 1.5% but real gross state product grew by approximately 1.9% for 2023. DBEDT projects real personal income to grow by 1.0% and real gross state product to grow by 1.3% for 2024.

Real estate lending is a primary focus for us, including residential mortgage and commercial mortgage loans. As a result, we are dependent on the strength of Hawaii's real estate market. According to the Honolulu Board of Realtors, the median resale price for a single-family home on Oahu fell just short of $1 million in December 2023. For the year ended December 31, 2023, the median price for a single-family home on Oahu was $1,050,000, representing a decrease of 5.0% from the median resale price of $1,105,000 for the year ended December 31, 2022. The median resale price for condominiums on Oahu was $508,500 for the

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year ended December 31, 2023, representing a decrease of 0.3% from the median resale price of $510,000 for the year ended December 31, 2022. Oahu unit sales volume decreased by 26.3% for single-family homes, and decreased by 28.0% for condominiums in 2023 from 2022 due to the significant rise in mortgage interest rates.

If the residential and commercial real estate markets we have exposure to deteriorate, our results of operations would be negatively impacted. See the "Overview of Results of Operations—Concentrations of Credit Risk" section for a further discussion on how a deteriorating real estate market, combined with the concentration risk within our portfolio, could have a significant negative impact on our asset quality and credit losses.

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

In an effort to rein in inflation, the FRB aggressively increased interest rates since the first quarter of 2022 when the Federal Funds Rate target was 0.00% to 0.25%. Since then, the FRB has raised the Federal Funds Rate by more than five percentage points, to the current 5.25% to 5.50%, a 22-year high. In January 2024, the FRB kept the Federal Funds Rate target steady for the fourth consecutive meeting and policymakers indicated that there may be three rate cuts of quarter percentage point increments in 2024, but it will not occur until they are confident that inflation is moving sustainably towards 2%.

In addition to the impacts from changes in monetary policy, other economic conditions may impact financial results in future periods. Loan demand, deposit growth, provision for credit losses, asset quality, noninterest income and noninterest expense are all affected by changes in economic conditions. Inflationary concerns, labor shortages, changes to the political and regulatory environment, including geopolitical conflicts, supply chain disruptions and the possibility of future bank failures, could adversely impact the economy, which could negatively impact our financial results as well as our customers’ creditworthiness. In light of these potential issues, we continue to monitor our liquidity. Refer to "Part II, Item 7 - Liquidity and Borrowing Arrangements" for discussion.

Recent Industry Developments

Beginning in March 2023, the banking industry experienced significant volatility as a result of high-profile regional bank failures, which resulted in industry-wide concerns related to liquidity, deposit outflows, unrealized or unrecognized losses on investment securities and impacting consumer confidence in the banking industry. As a result, the Company took a number of preemptive actions during the first half of 2023, which included pro-active outreach to clients and other liquidity contingency planning actions, such as maximizing funding sources and increased liquidity monitoring in response to these recent developments.

Despite industry and market volatility, we believe the Company’s balance sheet and liquidity position remained solid. The Company's total deposits of $6.85 billion increased by $111.4 million during the year ended December 31, 2023. The Company's deposit portfolio is diversified and long-tenured and approximately 65% of total deposits were FDIC-insured or collateralized as of December 31, 2023. The Company had $522.4 million in cash on its balance sheet and approximately $2.45 billion in total other liquidity sources, including available borrowing capacity and unpledged investment securities as of December 31, 2023. Total available sources of liquidity as a percentage of uninsured and uncollateralized deposits was approximately 125% as of December 31, 2023.

The Company’s capital remained strong with the leverage, tier 1 risk-based capital, total risk-based capital, and common equity tier 1 capital ratios of 8.8%, 12.4%, 14.6%, and 11.4%, respectively, as of December 31, 2023, all exceeding "well-capitalized" regulatory standards.

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

In January 2022, the Company announced the launch of a new BaaS initiative with the goal of expanding the Company both in and beyond Hawaii by investing in or collaborating with fintech companies. In the first quarter of 2022, the Company made a $2.0 million minority equity investment in Swell Financial, Inc. ("Swell"), a new fintech company. During the fourth quarter of 2022, Swell launched a consumer banking application that combined checking, credit and more into one integrated account, and the Bank served as the bank sponsor. As a result of a variety of adverse factors affecting Swell’s business and its strategy, the portfolio of Swell Cash and Credit accounts, which were immaterial, were closed in June 2023 and the Bank is no longer serving as the bank sponsor of Swell. As discussed in Note 6 - Investments in Unconsolidated Entities in the accompanying notes to the consolidated financial statements in this report, the Company entered into a transaction with Swell in the third quarter of 2023 whereby Swell repurchased the Company’s entire preferred and common stock equity investment in exchange

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for $0.5 million in cash, certain intellectual property rights and a platform usage fee agreement related to products that may be launched by Swell or its affiliates in the future (not to exceed $1.5 million in value). The Company cannot provide any assurance that the platform usage fees will be collected.

Due to the current operating environment, the BaaS initiative did not have a material impact on the Company's financial statements in 2023. The Company continues to evaluate potential future BaaS opportunities.

Critical Accounting Policies and Use of Estimates

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

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

On January 1, 2020, the Company adopted Accounting Standards Update ("ASU") 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which created material changes to the Company’s existing critical accounting policy that existed at December 31, 2019. Effective January 1, 2020 through December 31, 2023, the significant accounting policy which we believe to be the most critical in preparing our consolidated financial statements is the determination of the allowance for credit losses on loans.

Allowance for Credit Losses on Loans

Management considers the policies related to the allowance for credit losses ("ACL") on loans as the most critical to the financial statement presentation. The total ACL on loans includes activity related to allowances calculated in accordance with Accounting Standards Codification (“ASC”) 326, "Financial Instruments – Credit Losses". The ACL is established through provisioning of current expected credit losses as a charge to current earnings. Loan losses are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed while allowance is credited if subsequent recoveries are made. The amount maintained in the ACL reflects management’s continuing evaluation of the estimated credit losses expected to be recognized over the life of the loans in our loan portfolio at the balance sheet date. Allowance for credit losses is measured on a collective basis when similar risk characteristics exist. We stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and calculate the net amount expected to be collected over the life of the loans to estimate the expected credit losses in the loan portfolio. The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. Refer to Note 1 - Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements in this report for further discussion of the risk factors considered by management in establishing the ACL.

Overview of Results of Operations

2023 vs. 2022 Comparison

In 2023, we recognized net income of $58.7 million, or fully diluted earnings per share ("EPS") of $2.17, compared to net income of $73.9 million, or EPS of $2.68, in 2022. Our ROA and ROE for 2023 was 0.78% and 12.38%, respectively, compared to 1.01% and 15.47%, respectively, in 2022.

We recorded a provision for credit losses of $15.7 million in 2023, compared to a credit to the provision of $1.3 million in 2022. The increase in the provision for credit losses reflects higher charge-offs of our U.S. Mainland unsecured consumer loan portfolio, and the outlook for continued pressure on the national consumer segment.

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Net interest income decreased by $5.6 million from 2022 to 2023, primarily driven by higher average balances and average rates paid on interest-bearing deposits and long-term debt, partially offset by higher average balances and average yields earned on loans and interest-bearing deposits in other financial institutions.

Other operating income decreased by $1.3 million from 2022 to 2023. The decrease in other operating income was primarily due to the gain on sale of Visa Class B common stock of $8.5 million recorded in 2022, combined with a loss on sale of investment securities of $2.1 million recorded in 2023 primarily due to an investment securities portfolio repositioning completed in the fourth quarter of 2023, and lower mortgage banking income primarily attributable to lower origination activity due to the significant rise in market interest rates which began in 2022. These negative variances were partially offset by a gain on sale of a real estate office property of $5.1 million completed in the fourth quarter of 2023, higher income from bank-owned life insurance and higher other service charges and fees. The higher income from bank-owned life insurance was primarily attributable to stock market volatility and was partially offset by higher deferred compensation expense included in salaries and employee benefits and other expenses in other operating expense. See Table 6 - Components of Other Operating Income for more information.

Other operating expense decreased by $1.8 million from 2022 to 2023. The decrease was primarily due to lower salaries and employee benefits expense and lower pension plan and Supplemental Executive Retirement Plans ("SERP") expense (included in other) attributable to a non-recurring non-cash charge of $4.9 million related to the termination and settlement of the Company's defined benefit retirement plan during the second quarter of 2022, partially offset by higher computer software expense, a non-recurring charge of $2.3 million related to the early termination of a lease (included in other), higher FDIC insurance assessment (included in other), higher directors' deferred compensation plan expense (included in other) and higher net occupancy expense. See Table 7 - Components of Other Operating Expense for more information.

2022 vs. 2021 Comparison

In 2022, we recognized net income of $73.9 million, or EPS of $2.68, compared to net income of $79.9 million, or EPS of $2.83, in 2021. Our ROA and ROE for 2022 was 1.01% and 15.47%, respectively, compared to 1.13% and 14.38%, respectively, in 2021.

We recorded a credit to the provision for credit losses of $1.3 million in 2022, compared to a credit of $14.6 million in 2021.

Net interest income increased by $4.5 million from 2021 to 2022, primarily driven by higher average loans and investment securities balances and higher average yields earned on interest-earning assets, partially offset by lower net interest income and fees on the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") loans, combined with higher average interest-bearing deposit and borrowing costs due to the increase in market interest rates which began in 2022.

Other operating income increased by $4.9 million from 2021 to 2022. The increase in other operating income was primarily due to due to the gain on sale of Visa Class B common stock and higher service charges on deposit accounts, partially offset by lower mortgage banking income and lower income from bank-owned life insurance. See Table 6 - Components of Other Operating Income for more information.

Other operating expense increased by $2.9 million from 2021 to 2022. The increase in other operating expense was primarily due to higher pension plan expense (included in other) and higher computer software expense, partially offset by lower directors' deferred compensation plan expense (included in other), lower salaries and employee benefits expense, and lower advertising expense. The higher pension plan expense is primarily attributable to the termination and settlement of the Company's defined benefit retirement plan resulting in a one-time noncash settlement charge of $4.9 million. See Table 7 - Components of Other Operating Expense for more information.

Net Interest Income

The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the yields and rates thereon. Net interest income, when expressed as a percentage of average interest-earning assets, is referred to as "net interest margin." Interest income, which includes loan fees and resultant yield information, is expressed on a taxable-equivalent basis using a federal statutory tax rate of 21%. Table 2 - Analysis of Changes in Net Interest Income (Taxable-Equivalent) presents an analysis of changes in components of net interest income between years. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in volume and (ii) changes in rates. The change in volume is calculated as change in average balance, multiplied by prior period average yield/rate. The change in rate is calculated as change in average yield/rate, multiplied by current period volume. The change in

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interest income not solely due to change in volume or change in rate has been allocated proportionately to change in volume and change in average rate.

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

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

The banking and financial services industry in the State of Hawaii is highly competitive. Net interest income is our primary source of earnings and is derived primarily from the difference between the interest income we earn on loans and investment securities, and the interest expense we pay on deposits and borrowings.

Net interest income (expressed on a taxable-equivalent basis) totaled $210.8 million in 2023, which decreased by $5.6 million, or 2.6%, from $216.4 million in 2022, which increased by $4.8 million, or 2.3%, from net interest income of $211.6 million recognized in 2021. The decrease in net interest income for 2023 was primarily due to increases in average balances and average rates paid on interest-bearing deposits and long-term debt, partially offset by increases in average balances and average yields earned on loans and interest-bearing deposits in other financial institutions.

Average yields earned on our interest-earning assets increased by 62 basis points ("bps") in the year ended December 31, 2023, from the year ended December 31, 2022. The increase in average yields earned on interest-earning assets in 2023 was primarily attributable to the 64 bps increase in average yields earned on loans, the 442 bps increase in average yields earned on interest-bearing deposits in other financial institutions, and the 15 bps increase in average yields earned on investment securities.

Average rates paid on our interest-bearing liabilities in the year ended December 31, 2023 increased by 109 bps from the year ended December 31, 2022. The increase in average rates paid on our interest-bearing liabilities in 2023 was primarily due to increases in average rates paid on interest-bearing deposits and long-term debt of 107 bps and 114 bps, respectively, attributable to the significant increase in market interest rates which began in 2022.

In the fourth quarter of 2023, the Company sold $30.0 million in available-for-sale investment securities as part of an investment portfolio restructuring strategy. The Company received $28.1 million in gross proceeds and reinvested the proceeds in $28.3 million in higher yield investment securities with an average yield of 5.68% and a weighted average duration of 2.5 years. The investment securities sold had an average yield of 3.25% and a weighted average duration of 3.4 years. There were

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no gross realized gains on the sales of the investment securities. Gross realized losses on the sales of the investment securities were $1.9 million. The specific identification method was used as the basis for determining the cost of all securities sold.

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

In 2021, the Company sold $279.4 million in available-for-sale investment securities as part of an investment portfolio rebalancing strategy. The Company received $279.5 million in gross proceeds and reinvested the proceeds in $284.9 million in higher yield investment securities with an average yield of 1.64% and a weighted average life of 6.6 years. The investment securities sold had an average yield of 0.35% and a weighted average life of 2.0 years. Gross realized gains and losses on the sales of the investment securities were $3.4 million and $3.2 million, respectively. The specific identification method was used as the basis for determining the cost of all securities sold.

Interest Income

Our primary sources of interest income include interest on loans, which represented 85.8%, 85.8%, and 88.4% of taxable-equivalent interest income in 2023, 2022 and 2021, respectively, as well as interest earned on investment securities, which represented 11.5%, 13.8% and 11.4% of taxable-equivalent interest income, respectively. Interest income expressed on a taxable-equivalent basis of $283.4 million in 2023 increased by $49.9 million, or 21.4%, from the $233.5 million earned in 2022, which increased by $14.2 million, or 6.5%, from the $219.3 million earned in 2021.

The increase in taxable-equivalent interest income in 2023 from 2022 was primarily due to increases in average yields earned on loans of 64 bps and average loan balances of $210.0 million, resulting in higher interest income of approximately $35.1 million and $7.9 million, respectively. In addition, the average yields earned on interest-bearing deposits in other financial institutions and investment securities increased by 442 bps and 15 bps, respectively, resulting in higher interest income of approximately $5.9 million and $2.3 million, respectively. These increases were partially offset by a decrease in average investment securities balances of $98.9 million, resulting in lower interest income of approximately $2.0 million.

The increase in taxable-equivalent interest income in 2022 from 2021 was primarily due to higher average investment securities balances of $242.6 million, which contributed to an increase in interest income of $4.7 million in 2022, and higher average core loan (or total loans excluding PPP loans) balances of $587.7 million, which contributed to an increase in interest income of $21.2 million. In addition, the average yield earned on investment securities and the average normalized yield on core loans (or total loans excluding PPP) increased by 17 bps and 15 bps, respectively, which increased interest income by approximately $2.5 million and $8.0 million, respectively. These increases were partially offset by the decline in PPP net interest income and loan fees from $26.4 million in 2021 to $3.6 million in 2022.

Interest Expense

In 2023, interest expense was $72.7 million which represented an increase of $55.6 million, or 325.1%, compared to interest expense of $17.1 million in 2022, which was an increase of $9.4 million, or 121.6%, compared to $7.7 million in 2021.

Due to the rising interest rate environment, the average rates paid on interest-bearing deposits of 1.32% in 2023 increased by 107 bps from 2022, resulting in an increase in interest expense of approximately $48.0 million. Average interest-bearing deposit balances increased by $379.1 million, resulting in an increase in interest expense of approximately $3.8 million. Increases in average balances and average rates paid on long-term debt of $43.2 million and 114 bps, respectively, resulted in an total increase in interest expense of approximately $3.7 million.

Average rates paid on interest-bearing deposits, FHLB advances and other short-term borrowings and long-term debt in 2022 increased by 16 bps, 254 bps and 78 bps, respectively, from 2021, which contributed to increases in interest expense of $7.5 million, $0.9 million, and $0.8 million, respectively.

Net Interest Margin

Our net interest margin was 2.94%, 3.09% and 3.18% in 2023, 2022 and 2021, respectively. The decrease in our net interest margin in 2023 from 2022 was primarily due to the increases in average rates paid on interest-bearing deposits and long-term

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debt, which outpaced the increases in average yields earned on loans, interest-bearing deposits in other financial institutions and investment securities.

The decrease in our net interest margin in 2022 from 2021 was primarily due to the lower recognition of net loan fees related to loans originated and forgiven under the PPP, combined with higher rates paid on interest-bearing deposits and borrowings.

Excluding the PPP net interest income and net loan fees of $0.1 million, $3.6 million, and $26.4 million in the years ended December 31, 2023, 2022 and 2021, respectively, our net interest margin was 2.94%, 3.05%, and 2.96% in the years ended December 31, 2023, 2022 and 2021, respectively.

Non-GAAP Financial Measures

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

The Company believes that Pre-Provision Net Revenue ("PPNR"), a non-GAAP financial measure, is useful as a tool to help evaluate the ability to provide for credit costs through operations. The following table sets forth a reconciliation of the Company's PPNR for each of the periods presented:

Table 3. Pre-Provision Net Revenue

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

Table 4. Reconciliation of Efficiency Ratio

Our efficiency ratio increased to 63.95% in 2023, compared to 63.00% in 2022 and 64.16% in 2021. The increase in our efficiency ratio in 2023 compared to 2022, was primarily driven by the aforementioned decreases in net interest income and other operating income, offset by the decrease in other operating expense.

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Table 5. Other Non-GAAP Financial Measures

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Other Operating Income

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

Table 6. Components of Other Operating Income

Total other operating income of $46.7 million in 2023 decreased by $1.3 million, or 2.6%, from the $47.9 million earned in 2022, which increased by $4.9 million, or 11.3%, from the $43.1 million earned in 2021.

The decrease in other operating income in 2023 from 2022 was primarily due to a non-recurring $8.5 million gain on sale of Class B common stock of Visa, Inc. ("Visa") recorded in the second quarter of 2022. Due to transfer restrictions on the Visa Class B common stock and the lack of a readily determinable fair value, the investment was carried at the Company's zero cost basis, therefore the entire net proceeds from the sale of $8.5 million were recorded as a gain on sale of investment securities. In the fourth quarter of 2023, the Company completed an investment portfolio repositioning resulting in a $1.9 million loss on the sales of investment securities. In addition, the Company recorded lower mortgage banking income of $1.2 million. The lower mortgage banking income was primarily attributable to lower originations and fewer loans sold as a result of the significant increases in market interest rates which began in 2022. The Company's Home Loans Division recorded $266.6 million in loan originations in 2023, down from $568.2 million in loan originations in 2022 and $1.18 billion in loan originations in 2021. The lower amortization of mortgage servicing rights (included in mortgage banking income) was primarily attributable to the continued increases in market interest rates. These decreases were partially offset by a $5.1 million gain on sale of real estate office property, higher income from bank-owned life insurance ("BOLI") of $3.0 million and higher other service charges and fees. Significant variances in income from BOLI are primarily attributable to volatility in the equity markets. The Company has certain company-owned life insurance policies used to hedge its deferred compensation plans, which are tied to the equity markets and had gains in 2023 and losses in 2022, therefore, the Company has also recognized offsetting positive and negative deferred compensation expense in other operating expenses in 2023 and 2022, respectively.

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The increase in other operating income in 2022 from 2021 was primarily due to the aforementioned $8.5 million gain on sale of Class B common stock of Visa and higher service charges on deposit accounts of $1.8 million. These increases were partially offset by lower mortgage banking income of $3.9 million and lower income from BOLI of $1.6 million. The lower mortgage banking income was primarily attributable to fewer loans sold as a result of the increase in interest rates. The lower amortization of mortgage servicing rights (included in mortgage banking income) was primarily attributable to the increase in market interest rates.

Other Operating Expense

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

Table 7. Components of Other Operating Expense

Total other operating expense of $164.1 million in 2023 decreased by $1.8 million, or 1.1%, from total operating expense of $166.0 million in 2022, which increased by $2.9 million, or 1.8%, compared to 2021.

The decrease in total other operating expense in 2023, compared to 2022, was primarily due to lower salaries and employee benefits of $6.7 million and a non-recurring non-cash charge of $4.9 million related to the termination and settlement of the Company's defined benefit retirement plan during the second quarter of 2022. These decreases were partially offset by a non-

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recurring charge of $2.3 million related to the early termination of a branch lease, higher computer software expense of $2.9 million, FDIC insurance assessment of $1.8 million, directors' deferred compensation plan expenses of $1.4 million and net occupancy expense of $1.2 million. Significant fluctuations in directors' deferred compensation plan expenses are primarily due to volatility in the equity markets.

The increase in total other operating expense in 2022, compared to 2021, was primarily due to a higher pension plan and SERP expenses of $4.1 million, higher computer software expense of $1.5 million, and higher net occupancy expense of $0.8 million, partially offset by lower directors' deferred compensation plan expenses of $2.3 million, lower salaries and employee benefits of $1.4 million, and lower advertising expense of $1.3 million. The increase in pension plan and SERP expense was primarily attributable to the aforementioned non-recurring non-cash charge of $4.9 million related to the termination and settlement of the Company's defined benefit retirement plan.

Income Taxes

In 2023, the Company recorded income tax expense of $18.2 million, compared to $24.8 million in 2022, and $25.8 million in 2021. Our effective tax rate was 23.6% in 2023 compared to 25.2% in 2022 and 24.4% in 2021.

The decrease in income tax expense in 2023 from 2022 was primarily due to lower pre-tax income. The decrease in the effective tax rate in 2023 from 2022 was primarily attributable to higher tax-exempt income from BOLI as a percentage of pre-tax income.

The decrease in income tax expense in 2022 from 2021 was primarily due to lower pre-tax income. The increase in the effective tax rate in 2022 from 2021 was primarily attributable to lower tax-exempt income from BOLI.

As of December 31, 2023, the valuation allowance on our net deferred tax assets ("DTA") totaled $4.4 million, which related to our DTA from net apportioned net operating loss ("NOL") carryforwards for California state income tax purposes as we do not expect to generate sufficient income in California to utilize the DTA. Net of this valuation allowance, the Company's net DTA totaled $29.5 million as of December 31, 2023, compared to a net DTA of $48.5 million as of December 31, 2022, and is included in other assets in the Company's consolidated balance sheets.

On August 16, 2022, the Inflation Reduction Act ("IRA") of 2022 was signed into law to implement new tax provisions and provide various incentives and tax credits. The IRA created a 15% corporate alternative minimum tax and an excise tax of 1% on stock repurchases from publicly traded U.S. corporations, among other changes. As of December 31, 2023, the Company determined that neither this Act nor changes to income tax laws or regulations in other jurisdictions had a significant impact on income tax expense. As of December 31, 2023, the Company accrued $26 thousand in excise tax on the Company's stock repurchases.

Financial Condition

Total assets of $7.64 billion at December 31, 2023 increased by $210.0 million, or 2.8%, from the $7.43 billion at December 31, 2022, and total liabilities of $7.14 billion at December 31, 2023 increased by $159.1 million, or 2.3%, from the $6.98 billion at December 31, 2022. The increase in total assets and total liabilities in 2023 was primarily due to deposit growth, an increase in long-term debt and lower share repurchases to preserve capital.

Loan Portfolio

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

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

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supported by appropriate documentation including, current financial statements, credit reports, collateral information, asset verification, tax returns, title reports, and appraisals (where appropriate).

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

Loans totaled $5.44 billion at December 31, 2023, which decreased by $116.5 million, or 2.1%, from the $5.56 billion at December 31, 2022, which increased by $453.8 million, or 8.9%, from the $5.10 billion held at December 31, 2021. The decrease in our loan portfolio in 2023 was largely due to run-off in our U.S. mainland purchased consumer loans. The decrease in total loans included net decreases in the following loan portfolios: consumer of $168.2 million, or 21.1%, residential mortgage of $13.2 million, or 0.7%, home equity of $2.9 million, or 0.4% and PPP loan portfolio of $1.3 million, or 49.7%. These decreases were offset by net increases in the other commercial, financial, and agricultural of $30.5 million, or 5.6%, commercial mortgage of $19.8 million, or 1.5% and construction of $18.8 million, or 11.3%. In 2023, we did not foreclose on any loans. In addition, we recorded loan charge-offs of $19.2 million.

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

Table 8. Loans by Categories

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

Table 9. Loans by Geographic Distribution

Commercial and Industrial - Small Business Administration Payroll Protection Program

Paycheck Protection Program ("PPP") loans, which were originated in 2020 and early 2021, are loans to qualified small businesses under the PPP administered by the Small Business Administration ("SBA") under the provisions of the Coronavirus Aid, Relief, and Economic Security Act ("the CARES Act"). Loans covered by the PPP were eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The PPP loans, regardless of any forgiven amount, is guaranteed by the SBA.

Commercial and Industrial - Other

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

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

In 2023, our commercial and industrial loan portfolio, excluding PPP loans, increased by $30.5 million, which was attributable to a increase in the Hawaii portfolio of $36.8 million, offset by a decline in the U.S. Mainland portfolio of $6.3 million. Our commercial, financial, and agricultural loan portfolio, excluding PPP loans, increased by $13.8 million in 2022.

Real Estate—Construction

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

In 2023, our construction loan portfolio increased by $18.8 million. Our construction loan portfolio increased by $43.9 million in 2022. These fluctuations are driven by the start and completion of construction projects and are consistent with a normal construction cycle.

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Interest Reserves

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

The outstanding principal balance of loans with interest reserves was $100.9 million at December 31, 2023, compared to $68.6 million in the prior year, while remaining interest reserves was $10.2 million, or 10.1% of the outstanding principal balance of loans with interest reserves at December 31, 2023, compared to $10.5 million, or 15.3% of the outstanding principal balance of loans with interest reserves at December 31, 2022.

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

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

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

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

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

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

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

•Determination that there continues to be satisfactory project progress.

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

Real Estate—Mortgage

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

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Table 10. Mortgage Loan Portfolio Composition

Residential

Residential mortgage loans include fixed-rate and adjustable-rate loans primarily secured by single-family owner-occupied primary residences in Hawaii. Maximum loan-to-value ratios of 80% are typically required for fixed-rate and adjustable-rate loans secured by single-family owner-occupied residences, although higher levels are permitted with accompanying mortgage insurance. First mortgage loans secured by residential properties generally carry a moderate level of credit risk. With an average loan origination size of approximately $0.6 million, marketable collateral and a stable Hawaii residential real estate market, credit losses on residential mortgage loans have historically been minimal. However, economic conditions including unemployment levels, future changes in interest rates and other market factors can impact the marketability and value of collateral and thus the level of credit risk inherent in the portfolio.

Closed-end residential mortgage loan balances as of December 31, 2023 totaled $1.93 billion, decreasing by $13.2 million, or 0.7%, from the $1.94 billion held at year-end 2022, which increased by $65.0 million, or 3.5%, from the $1.88 billion held at year-end 2021. The decrease in closed-end residential mortgage loan balances in 2023 was primarily due to lower origination activity primarily attributable to the significant increase in market interest rates which began in 2022.

Residential mortgage loans held for sale at December 31, 2023 totaled $1.8 million, an increase of $0.7 million, or 60.9%, from the December 31, 2022 balance of $1.1 million, which decreased by $2.4 million, or 68.7%, from the December 31, 2021 balance of $3.5 million. We did not securitize any residential mortgage loans in 2023, 2022 and 2021.

Home Equity

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

HELOC balances as of December 31, 2023 totaled $736.5 million, decreasing by $2.9 million, or 0.4%, from the $739.4 million held at December 31, 2022, which increased by $102.1 million, or 16.0%, from the $637.2 million held at December 31, 2021.

Commercial Mortgage

Real estate mortgage loans secured by commercial properties represent a sizable portion of our loan portfolio. Our policy with respect to commercial mortgages is that loans be made for sound purposes, have a definite source and/or plan of repayment established at inception, and be backed up by reliable secondary sources of repayment and satisfactory collateral with good marketability. Loans secured by commercial property carry a greater risk than loans secured by residential property due to

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operating income risk. Operating income risk is the risk that the borrower will be unable to generate sufficient cash flow from the operation of the property. The commercial real estate market and interest rate conditions through economic cycles will impact risk levels.

Commercial mortgage balances as of December 31, 2023 totaled $1.38 billion, increasing by $19.8 million, or 1.5%, from the $1.36 billion held at December 31, 2022, which increased by $142.9 million, or 11.7%, from the $1.22 billion held at December 31, 2021. The increase in commercial mortgage balances in 2023 was primarily due to increased demand from both new and existing customers.

Consumer Loans

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

Table 11. Consumer Loan Portfolio Composition

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

Consumer loans totaled $630.5 million at December 31, 2023, decreasing by $168.2 million, or 21.1%, from December 31, 2022 of $798.8 million, which increased by $174.9 million, or 28.0%, compared to the $623.9 million held at December 31, 2021.

At December 31, 2023, automobile loans, primarily indirect dealer loans and loans purchased from third-party originators, comprised 44.9% of consumer loans outstanding. Total automobile loans of $283.0 million at December 31, 2023 decreased by $85.3 million, or 23.2%, from December 31, 2022 of $368.3 million, which increased by $69.9 million, or 23.4%, from $298.4 million at December 31, 2021.

In 2023, we purchased $15.7 million in U.S. Mainland automobile loans, which included a $0.6 million premium over the $15.2 million outstanding balance. In 2022, we purchased U.S. Mainland automobile loans totaling $106.2 million, which included a $4.7 million premium over the $101.5 million outstanding balance. In 2021, we purchased U.S. Mainland automobile loans totaling $76.5 million, which included a $5.1 million premium over the $71.4 million outstanding balance.

Purchased unsecured consumer and home improvement loans of $213.4 million at December 31, 2023 decreased by $101.5 million, or 32.2%, from December 31, 2022 of $314.9 million, which increased by $109.3 million, or 53.2%, from $205.6 million at December 31, 2021.

In 2023, we purchased $3.9 million in U.S. Mainland unsecured consumer loans under forward flow purchase agreements at par, with outstanding balances totaling $3.9 million. In 2022, we purchased U.S. Mainland unsecured consumer loans under forward flow purchase agreements with outstanding balances totaling $229.3 million for $217.2 million, reflecting a net discount of $12.1 million. In 2021, we purchased U.S. Mainland unsecured consumer loans under forward flow purchase agreements with outstanding balances totaling $199.8 million for $190.2 million, reflecting a net discount of $9.6 million.

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Other revolving credit plans loans include extensions of credit to individuals and totaled $100.3 million at December 31, 2023, which increased by $19.9 million, or 24.8%, from December 31, 2022 of $80.4 million, which increased by $1.7 million, or 2.1%, from $78.7 million at December 31, 2021.

Total student loans of $0.5 million at December 31, 2023 decreased by $0.5 million, or 48.9%, from December 31, 2022 of $1.1 million, which decreased by $0.8 million, or 42.9%, from $1.9 million at December 31, 2021.

Other consumer loans of $33.4 million at December 31, 2023 decreased by $0.8 million, or 2.4%, from December 31, 2022 of $34.2 million, which decreased by $5.2 million, or 13.1%, from $39.4 million at December 31, 2021.

Concentrations of Credit Risk

As of December 31, 2023, approximately $4.23 billion, or 77.8% of loans outstanding were secured by real estate, including construction loans, residential mortgage loans, home equity loans, and commercial mortgage loans. As of December 31, 2022, approximately $4.21 billion, or 75.8% of loans outstanding were secured by real estate, including construction loans, residential mortgage loans, home equity loans, and commercial mortgage loans.

The majority of our loans are made to companies and individuals with headquarters in, or residing in, the State of Hawaii. Consistent with our focus of being a Hawaii-based bank, 85.2% of our loan portfolio was concentrated in the Hawaii market while 14.8% was concentrated in the U.S. Mainland as of December 31, 2023. As of December 31, 2022, 82.7% and 17.3% of our loan portfolio was concentrated in the Hawaii market and U.S. Mainland, respectively.

Our foreign credit exposure as of December 31, 2023 and December 31, 2022 was minimal and did not exceed 1% of total assets.

Maturities and Sensitivities of Loans to Changes in Interest Rates

At December 31, 2023, all PPP loans were fixed-rate. Commercial and industrial loans, excluding PPP loans, were 52.0% fixed-rate and 48.0% variable-rate. Real estate construction loans were 44.2% fixed-rate and 55.8% variable-rate. Residential mortgage loans were 84.1% fixed-rate and 15.9% variable-rate. Home equity lines and loans were 13.5% fixed-rate and 86.5% variable-rate. Commercial mortgage loans were 55.9% fixed-rate and 44.1% variable-rate. Consumer loans were 86.2% fixed-rate and 13.8% variable-rate.

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

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

The following table sets forth the maturity distribution and sensitivities of the loan portfolio to changes in interest rates at December 31, 2023. Maturities are based on contractual maturity dates and do not factor in principal amortization. This differs from the assumptions used in the net interest income sensitivity analysis included in Table 22 - Net Interest Income Sensitivity.

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Table 12. Maturity Distribution and Sensitivities of Loans to Changes in Interest Rates

Provision and Allowance for Credit Losses for Loans

As described above under the "Critical Accounting Policies and Use of Estimates" section, the provision for credit losses ("Provision") for loans is determined by management's ongoing evaluation of the loan portfolio and our assessment of the ability of the ACL for loans to cover expected credit losses for loans. Our methodology for determining the adequacy of the ACL and Provision for loans takes into account many factors, including the level and trend of nonperforming and potential problem loans, net charge-off experience, current repayment by borrowers, prepayment assumptions, fair value of collateral

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securing specific loans, changes in lending and underwriting standards and general economic factors, nationally and in the markets we serve.

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

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

Table 13. Allowance for Credit Losses for Loans

Our ACL for loans at December 31, 2023 totaled $63.9 million, which increased by $0.2 million, or 0.3%, from $63.7 million at December 31, 2022, which decreased by $4.4 million, or 6.4%, from $68.1 million at December 31, 2021. When expressed as a percentage of total loans, our ACL for loans was 1.18%, 1.15%, and 1.33% as of December 31, 2023, 2022 and 2021, respectively.

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During 2023, we recognized a Provision of $15.7 million, which included a Provision for off-balance sheet credit exposures of $0.5 million and a Provision for loans of $15.2 million. During 2022, we recognized a credit to the Provision of $1.3 million, which included a credit to the Provision for off-balance sheet credit exposures of $1.6 million, offset by a debit to the Provision for loans of $0.3 million. During 2021, we recognized a credit to the Provision of $14.6 million, which included a credit to the Provision for loans of $14.3 million, a credit to the Provision for off-balance sheet credit exposures of $0.1 million and a credit to the Provision for accrued interest receivable of $0.2 million.

The increase in our ACL for loans as a percentage of total loans from December 31, 2022 to December 31, 2023 and the increase in the Provision in 2023 reflects higher charge-offs of our U.S. Mainland unsecured consumer loan portfolio, and the outlook for continued pressure on the national consumer segment.

Our ACL for loans as a percentage of our nonaccrual loans decreased to 912% at December 31, 2023 from 1,214% at December 31, 2022, which increased from 1,158% at December 31, 2021.

Overall, the Company maintained strong credit quality as represented by nonperforming assets of $7.0 million, $5.3 million, and $5.9 million at December 31, 2023, 2022 and 2021, respectively. Net charge-offs were $15.0 million, $4.6 million, and $0.8 million, respectively, for the years ended December 31, 2023, 2022 and 2021.

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

Table 14. Allocation of Allowance for Credit Losses for Loans

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

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

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

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Table 15. Nonperforming Assets, Past Due and Restructured Loans

Nonperforming assets, which includes nonaccrual loans, nonperforming loans classified as held for sale, if any, and other real estate owned, totaled $7.0 million, or 0.09% of total assets at December 31, 2023, compared to $5.3 million, or 0.07% of total assets at December 31, 2022. Nonperforming assets at December 31, 2023 were comprised entirely of nonaccrual loans totaling $7.0 million, none of which were loans classified as held for sale.

The increase in nonperforming assets in 2023 was attributable to $12.9 million in gross additions, offset by $6.8 million in repayments, $0.6 million in loans returned to accrual status and $3.8 million in charge-offs, valuation and other adjustments.

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Net changes to nonperforming assets by category during 2023 included net increases in residential mortgage loans of $1.2 million, home equity loans of $0.3 million and commercial and industrial, consumer and commercial mortgage loans of $0.1 million each.

Loans delinquent for 90 days or more still accruing interest totaled $1.3 million at December 31, 2023, compared to $1.8 million at December 31, 2022.

Since the adoption of ASU 2022-02 on January 1, 2023 and during the year ended December 31, 2023, the Company has not modified any loans for borrowers experiencing financial difficulty that were determined to be material under management's judgement for further disclosure. In response to the Maui wildfires, the Company provided three to six months interest and/or principal loan payment deferrals to customers who were directly impacted by the wildfires on a case-by-case basis. The Company granted 146 loan payment deferrals on loan balances totaling $31.6 million as of December 31, 2023. The loan payment deferrals were not considered more than minor and thus are not reportable as loan modifications to borrowers facing financial difficulty.

Prior to our adoption of ASU 2022-02, we accounted for a modification to the contractual terms of a loan that resulted in granting a concession to a borrower experiencing financial difficulties as a troubled debt restructuring ("TDR").

Loans identified as TDRs prior to our adoption of ASU 2022-02 included in nonperforming assets at December 31, 2023 consisted of five Hawaii residential mortgage loans with a combined principal balance of $0.9 million and a Hawaii consumer loan of $15 thousand. At December 31, 2022, loans identified as TDRs prior to our adoption of ASU 2022-02 included in nonperforming assets consisted of four loans with a principal balance of $1.1 million. There were $2.1 million of loans identified as TDRs prior to our adoption of ASU 2022-02 still accruing interest at December 31, 2023, none of which were more than 90 days delinquent. At December 31, 2022, there were $2.8 million of loans identified as TDRs prior to our adoption of ASU 2022-02 still accruing interest, none of which were more than 90 days delinquent.

Criticized loans at December 31, 2023 declined by $27.1 million from December 31, 2022 to $50.0 million, or 0.9% of the total loan portfolio. Special mention loans declined by $8.2 million to $24.8 million, or 0.5% of the total loan portfolio. Classified loans declined by $18.9 million to $25.3 million, or 0.5% of the total loan portfolio.

The Company's ratio of classified assets and other real estate owned to tier 1 capital and the ACL decreased from 6.25% at December 31, 2022 to 3.41% at December 31, 2023.

Investment Portfolio

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

Table 16. Distribution of Investment Securities

Investment securities totaled $1.28 billion at December 31, 2023, which decreased by $57.1 million, or 4.3%, from the $1.34 billion held at December 31, 2022, which decreased by $295.0 million, or 18.1%, from the $1.63 billion at year-end 2021.

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The decrease in the investment securities portfolio reflects principal runoff of $99.2 million and the sale of investment securities with a book value of $30.0 million, partially offset by purchases of investment securities of $47.4 million and a market valuation increase on the AFS portfolio of $29.3 million.

In December 2023, the Company executed an investment portfolio restructuring of its AFS investment securities portfolio. The Company sold 17 AFS investment securities with a book value of $30.0 million, weighted average yield of 3.25%, weighted average duration of 3.4 years, and received proceeds of $28.1 million, which resulted in gross realized losses of $1.9 million. No gross gains were realized on the sale. With the proceeds, the Company purchased higher yielding AFS investment securities totaling $28.3 million with a weighted average yield of 5.68% and a weighted average duration of 2.5 years.

The fluctuations in market valuation on the AFS portfolio continues to be driven by changes in market interest rates. To mitigate the potential future impact to capital through AOCI, in 2022, the Company transferred 81 investment securities that were classified as AFS to HTM. The investment securities had an amortized cost basis of $762.7 million and a fair market value of $673.2 million. On the dates of transfer, these securities had total net unrealized losses of $89.5 million. There was no impact to net income as a result of the reclassifications.

Maturity Distribution of Investment Portfolio

The following table sets forth the maturity distribution of the investment portfolio and weighted-average yields by investment type and maturity grouping at December 31, 2023.

Table 17. Maturity Distribution of Investment Portfolio

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

The weighted-average yield of the investment portfolio was 2.22% as of December 31, 2023, which increased by 12 bps from 2.10% as of December 31, 2022.

Deposits

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

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

Table 18. Deposits by Categories

Total deposits of $6.85 billion at December 31, 2023 increased by $111.4 million, or 1.7%, from total deposits of $6.74 billion at December 31, 2022. Total deposits at December 31, 2022 increased by $97.1 million, or 1.5%, over the year-end 2021 balance of $6.64 billion. The increase in deposits in 2023 reflects net increases in savings and money market deposits of $10.7 million, other time deposits up to $250,000 totaling $203.8 million, government time deposits of $84.5 million, and other time deposits greater than $250,000 (excluding government time deposits) of $115.8 million. The net increases were partially offset by decreases in noninterest-bearing demand deposits of $179.4 million and interest-bearing demand deposits of $124.0 million. The Company did not have any wholesale, brokered or listing service deposits.

Core deposits totaled $5.99 billion at December 31, 2023 and decreased by $88.97 million, or 1.5%, from December 31, 2022, which decreased by $0.08 billion or 1.3% from December 31, 2021. Core deposits as a percentage of total deposits was 87.4% at December 31, 2023, compared to 90.2% at December 31, 2022 and 92.8% at December 31, 2021.

After experiencing large increases in core deposits in 2020 and 2021 primarily due to the deposit of PPP funds and other government stimulus into both new and existing deposit accounts, during 2022 and 2023, the Company experienced moderation of core deposit balances and continues to experience migration from lower cost demand deposits to higher cost time deposits attributable to the rising interest rate environment. Going forward, the Company is focused on expanding deposit relationships with both commercial and retail customers in the State of Hawaii.

As an FDIC-insured institution, our deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The Company reported uninsured deposits of $2.91 billion, or approximately 42% of total deposits in its FDIC Call Report as of December 31, 2023, compared to the reported $2.78 billion, or approximately 41% of total deposits as of December 31, 2022. The Company had fully collateralized deposits of approximately $536.3 million and $426.2 million as of December 31, 2023 and December 31, 2022, respectively. The Company's uninsured deposits, excluding fully collateralized deposits, were approximately $2.37 billion, or approximately 35% of total deposits, and $2.35 billion, or approximately 35% of total deposits, as of December 31, 2023 and December 31, 2022, respectively.

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The table below sets forth the contractual maturities of our time deposits greater than the FDIC insurance limit of $250,000 as of December 31, 2023.

Table 19. Contractual Maturities of Time Deposits Greater Than $250,000

For additional information regarding the contractual maturities of our time deposits, See Note 9 - Deposits to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data."

The table below sets forth information regarding the average balances and average rates paid for certain deposit categories for each of the periods presented.

Table 20. Average Balances and Average Rates Paid on Deposits

Average balances are computed using daily average balances. The average rate on time deposits, which are most sensitive to changes in market rates, increased by 241 bps in 2023, while savings and money market deposit rates increased by 81 bps. The average rate paid on interest-bearing deposits increased 107 bps to 1.32% in 2023 from 0.25% in 2022, which increased from 0.09% in 2021. The average rate paid on all deposits increased 77 bps to 0.94% in 2023 from 0.17% in 2022, which increased from 0.06% in 2021.

Based on the Federal Open Market Committee's recent statements, the Company anticipates interest rates will begin to decline in 2024. However, the Company expects overall deposit rates to continue to increase slightly in 2024 as time deposits continue to mature and reprice. In addition to the external interest rate environment, the overall direction and magnitude of rate movements in our deposit base will largely depend on the level of deposit growth we need to maintain adequate liquidity and competitive pricing considerations.

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Contractual Obligations

The following table sets forth our material contractual obligations (excluding deposit liabilities) as of December 31, 2023.

Table 21. Contractual Obligations

Components of short-term borrowings and long-term debt are discussed in Note 10 - Short-Term Borrowings and Long-Term Debt to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data." SERP obligations include obligations under our Supplemental Executive Retirement Plans, which are discussed in Note 14 - Retirement Benefits to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data." Operating leases represent leases on bank premises as discussed in Note 15 - Operating Leases to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data." Purchase obligations represent other contractual obligations to purchase goods or services at specified terms including, but not limited to, software licensing agreements, equipment maintenance contracts and professional service contracts. Other long-term liabilities represent expected payments for unfunded commitments related to our investments in LIHTC partnerships and other unconsolidated entities.

In January 2021, the Board of Directors approved termination of, and authorized Company management to commence taking actions to terminate, the Company's defined benefit retirement plan. Final settlement occurred during the second quarter of 2022. The Company has no further defined benefit retirement plan liability or ongoing pension expense recognition as of December 31, 2023.

Contractual obligations in Table 21 - Contractual Obligations do not include off-balance sheet arrangements. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees written, forward foreign exchange contracts, forward interest rate contracts and interest rate swaps and options. These instruments and the related off-balance sheet exposures are discussed in detail in Note 20 - Financial Instruments With Off-Balance Sheet Risk to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data."

Capital Resources

In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources and uses of capital in conjunction with an analysis of the size and quality of our assets, the anticipated performance of our business, and the level of risk and regulatory capital requirements. As part of this ongoing assessment, the Board of Directors reviews our capital position on an ongoing basis to ensure it is adequate, including, but not limited to, the need for raising additional capital (whether debt and/or equity) or returning capital to our shareholders, including the ability to declare cash dividends or repurchase our securities.

Common and Preferred Equity

Shareholders' equity totaled $503.8 million at December 31, 2023, an increase of $50.9 million, or 11.2%, from the $452.9 million at December 31, 2022, which decreased by $105.3 million, or 18.9%, from December 31, 2021. The increase in shareholders' equity from December 31, 2022 to December 31, 2023 was primarily attributable to net income of $58.7 million and other comprehensive income of $21.4 million, partially offset by cash dividends paid of $28.1 million and the repurchase of 130,010 shares of common stock for a total cost of $2.6 million. During 2023, the Company repurchased approximately 0.5% of its common stock outstanding at December 31, 2022.

The decrease in shareholders' equity from December 31, 2021 to December 31, 2022 was primarily attributable to other comprehensive loss of $136.0 million, cash dividends paid of $28.5 million, and the repurchase of 868,613 shares of our

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common stock for a total cost of $20.7 million, under our stock repurchase program, partially offset by net income of $73.9 million. During 2022, the Company repurchased approximately 3.1% of its common stock outstanding at December 31, 2021.

When expressed as a percentage of total assets, shareholders' equity was 6.6% at December 31, 2023, compared to 6.1% at December 31, 2022 and 7.5% at December 31, 2021. The increase in the ratio of shareholders' equity to total assets from 2022 to 2023 was primarily attributable to lower unrealized losses on available-for-sale investment securities recorded in accumulated other comprehensive income as of December 31, 2023 compared to December 31, 2022, and lower repurchases of common stock under the stock repurchase program during the year ended December 31, 2023. The decline in our ratio of shareholders' equity to total assets from 2021 to 2022 was primarily attributable to unrealized losses on available-for-sale investment securities recorded in accumulated other comprehensive loss during the year ended December 31, 2022 due to market volatility and the rising interest rate environment.

Book value per share was $18.63, $16.76, and $20.14 at year-end 2023, 2022 and 2021, respectively. The increase in book value per share from 2022 was primarily attributable to the increase in shareholders' equity from December 31, 2022 to December 31, 2023, as described above.

Trust Preferred Securities

As of December 31, 2023, we have two remaining statutory trusts, CPB Capital Trust IV ("Trust IV") and CPB Statutory Trust V ("Trust V"), which issued a total of $50.0 million in floating rate trust preferred securities.

On July 3, 2023, after the cessation of the LIBOR benchmark rate on June 30, 2023, the Company amended its Trust IV and Trust V debt agreements to replace the LIBOR-based reference rate with an adjusted CME Term Secured Overnight Financing Rate ("SOFR") plus a tenor spread adjustment. Accounting Standards Codification ("ASC") 848 allows us to account for the modification as a continuation of the existing contract without additional analysis. The $30.0 million in floating rate trust preferred securities of Trust IV bear an interest rate of three-month CME Term SOFR plus a tenor spread adjustment of 0.26% plus 2.45% and the $20.0 million in floating rate trust preferred securities of Trust V bear an interest rate of three-month CME Term SOFR plus a tenor spread adjustment of 0.26% plus 1.87%.

Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of the trusts' obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from time to time to defer subordinated debenture interest payments, which would result in a deferral of dividend payments on the related trust preferred securities, for up to 20 consecutive quarterly periods without default or penalty.

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

Subordinated Notes

On October 20, 2020, the Company completed a $55.0 million private placement of ten-year fixed-to-floating rate subordinated notes, which will be used to support regulatory capital ratios and for general corporate purposes. The Company exchanged the privately placed notes for registered notes with the same terms and in the same aggregate principal amount at the end of the fourth quarter of 2020. The notes bear a fixed interest rate of 4.75% for the first five years through November 1, 2025 and will reset quarterly thereafter for the remaining five years to the then current three-month Secured Overnight Financing Rate, as published by the Federal Reserve Bank of New York, plus 456 basis points. The notes are redeemable at our option on any interest payment date on or after November 1, 2025. The subordinated notes totaled $54.6 million as of December 31, 2023, and includes $0.4 million in debt issuance costs, which are being amortized over the expected life.

Holding Company Capital Resources

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

CPF relies on the Bank to pay dividends to it to fund its obligations. In order to meet its ongoing obligations, on a stand-alone basis, CPF had an available cash balance of approximately $22.1 million as of December 31, 2023.

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As a Hawaii state-chartered bank, the Bank may only pay dividends to the extent it has retained earnings as defined under Hawaii banking law ("Statutory Retained Earnings"), which differs from GAAP retained earnings. The Bank had Statutory Retained Earnings of $169.1 million and $145.7 million, as of December 31, 2023 and 2022, respectively.

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

Share Repurchases

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

In January 2022, the Company’s Board of Directors approved an authorization to repurchase up to $30 million of its common stock from time to time in the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase program (the "2022 Repurchase Plan").

In 2022, 868,613 shares of common stock, at a cost of $20.7 million, were repurchased under the Company's share repurchase programs. A total of $10.3 million remained available for repurchase under the 2022 Repurchase Plan at December 31, 2022.

In January 2023, the Company’s Board of Directors approved a new authorization to repurchase of up to $25 million of its common stock from time to time in the open market or in privately negotiated transactions (the "2023 Repurchase Plan"), pursuant to a newly authorized share repurchase program. The 2023 Repurchase Plan replaced and superseded in its entirety the 2022 Repurchase Plan.

Following the regional bank failures occurring in March 2023, the Company has significantly reduced its volume of share repurchases to strengthen capital and liquidity considering the elevated market risks. In 2023, 130,010 shares of common stock, at a cost of $2.6 million, were repurchased under the Company's 2022 and 2023 Repurchase Plans. A total of $23.4 million remained available for repurchase under the 2023 Repurchase Plan at December 31, 2023. The Company will continue to monitor the environment and assess risk and return as part of its ongoing capital management decisions on future share repurchases.

In January 2024, the Company’s Board of Directors approved a new authorization to repurchase of up to $20 million of its common stock from time to time in the open market or in privately negotiated transactions (the "2024 Repurchase Plan"), pursuant to a newly authorized share repurchase program. The 2024 Repurchase Plan replaces and supersedes in its entirety the 2023 Repurchase Plan. Our ability to repurchase shares is subject to the capital needs of the Company, and there can be no assurance that the Board of Directors will approve the repurchase of shares of our common stock in the future.

Transaction Risk

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

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

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

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Compliance Risk

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

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

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

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

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

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

Strategic Risk

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

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

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

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

Asset/Liability Management and Interest Rate Risk

Our earnings and capital are sensitive to risk of interest rate fluctuations. Interest rate risk arises when rate-sensitive assets and rate-sensitive liabilities mature or reprice during different periods or in differing amounts. In the normal course of business, we are subjected to interest rate risk through the activities of making loans and taking deposits, as well as from our investment

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securities portfolio and other interest-bearing funding sources. Asset/liability management attempts to coordinate our rate-sensitive assets and rate-sensitive liabilities to meet our financial objectives.

Our Asset/Liability Management Policy seeks to maximize the risk-adjusted return to shareholders while maintaining consistently acceptable levels of liquidity, interest rate risk and capitalization. Our Asset/Liability Management Committee ("ALCO") utilizes detailed and dynamic earnings and capital simulations that analyzes various interest rate scenarios and balance sheet forecasts. Earnings are typically measured by estimated changes in net interest income under different rate scenarios. Capital impact is measured through an Economic Value of Equity ("EVE") analysis which monitors the impact of the durations of rate sensitive assets and liabilities. The EVE analysis simulates the cash flows for all on- and off- balance sheet instruments under different rate scenarios which are then discounted to determine a present value for each scenario. The net present value of our assets and liabilities represent the EVE for each scenario. The EVE results for each scenario are then compared to the base scenario to determine the Company’s sensitivities to longer term rate exposures. The results of the analyses are shared with the Board of Directors and informs strategic actions to mitigate and optimize our risk position and profitability. Adverse interest rate risk exposures are managed through the shortening or lengthening of the duration of assets and liabilities.

The ALCO simulation model used to measure and manage interest rate risk exposures includes both dynamic and static balance sheet and rate scenarios. The dynamic model scenarios provide an enhanced view that enables management and the Board of Directors to have a realistic view of the expected impact to earnings and capital from forecasted non-parallel movements in interest rates as well as balance sheet changes. On the other hand, static rate scenarios are a measurement of embedded interest rate risk in the balance sheet as of a point in time and incorporate various hypothetical interest rate scenarios that may include gradual or immediate parallel rate changes. The static scenarios have the benefit of comparability against other financial institutions but are not intended to represent management’s forecast. Both dynamic and static model simulations include the use of a number of key modeling assumptions including prepayment speeds, pricing spreads of assets and liabilities, deposit decay rates and the timing and magnitude of deposit rate changes in relation to changes in the overall level of interest rates. The assumptions are typically based on analyses of institution specific actual historical data and trends. Market information is also incorporated where relevant and appropriate. Assumptions are periodically reviewed and updated by ALCO. During periods of increased market volatility, assumptions will be reviewed more frequently. While management believes the assumptions are reasonable, actual behaviors and results may likely differ.

The following table reflects our static net interest income sensitivity analysis as of December 31, 2023. The simulations estimate net interest income assuming no balance sheet growth under a flat interest rate scenario. The net interest income sensitivity is measured as the change in net interest income in alternate interest rate scenarios as a percentage of the flat rate scenario. The alternate rate scenarios assume rates move up or down 100 and 200 bps in either a gradual (defined as the stated change over a 12-month period in equal increments) or an instantaneous, parallel fashion. The net interest income sensitivity table shows that the Company’s balance sheet is relatively well-matched against movements in interest rates and within our ALCO Policy risk limits that have been approved by the Board of Directors.

Table 22. Net Interest Income Sensitivity

Liquidity Risk and Borrowing Arrangements

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

The high profile regional bank failures in the first half of 2023 drove several precautionary actions to ensure adequate liquidity including carrying higher levels of on-balance sheet liquidity, limited portfolio reinvestments, and efficient allocation of collateral to maximize funding sources. The higher level of on balance sheet liquidity was carried through the remainder of

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2023 and is seen in the financial results. Additionally, the Company performs regular liquidity stress testing under a variety of scenarios to ensure that liquidity is adequate under certain potential liquidity stress events. Further, forecasts of Company cashflows are updated and analyzed periodically and more frequently during periods of elevated liquidity risk.

Core deposits have historically provided us with a sizable source of relatively stable and low cost funds, but are subject to competitive pressure in our market. A significant portion of our deposits are granular, long-tenured, and relationship-based. In addition to core deposit funding, we also have access to a variety of other short-term and long-term funding sources, which include proceeds from maturities of our loans and investment securities, as well as secondary funding sources available to meet our liquidity needs such as the FHLB, secured repurchase agreements and the Federal Reserve discount window, and the Bank Term Funding Program ("BTFP") which is scheduled to cease making new loans on March 11, 2024.

Our loan-to-deposit ratio at December 31, 2023 was 79.4% compared to 82.5% at December 31, 2022. The Company had cash on its balance sheet of $522.4 million and total other liquidity sources, including available borrowing capacity and unpledged investment securities of approximately $2.45 billion as of December 31, 2023. Total available sources of liquidity as a percentage of uninsured and uncollateralized deposits was approximately 125%. Refer to Note 10 - Short-Term Borrowings and Long-Term Debt in the accompanying notes to the consolidated financial statements in this report for information on the Company's borrowing arrangements.

Off-Balance Sheet Arrangements

In the normal course of business, we enter into off-balance sheet arrangements to meet the financing needs of our banking customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees written, forward foreign exchange contracts, forward interest rate contracts, interest rate swaps and options, and risk participation agreements. These instruments and the related off-balance sheet exposures are discussed in detail in Note 20 - Financial Instruments With Off-Balance Sheet Risk to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data." In the unlikely event that we must satisfy a significant amount of outstanding commitments to extend credit, liquidity may be adversely impacted, as may credit risk. The remaining components of off-balance sheet arrangements, primarily interest rate options and forward interest rate contracts related to our mortgage banking activities, are not expected to have a material impact on our consolidated financial position or results of operations.

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