CENTRAL PACIFIC FINANCIAL CORP [CPF] Filings

10-Q 1 cpf-20240630.htm 10-Q cpf-20240630

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2024

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

For the transition period from to

Commission File Number: 001-31567

CENTRAL PACIFIC FINANCIAL CORP.

(Exact name of registrant as specified in its charter)


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

220 South King Street, Honolulu, Hawaii 96813

(Address of principal executive offices) (Zip code)

(808) 544-0500

(Registrant's telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, No Par Value

CPF

New York Stock Exchange

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

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

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


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

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

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

The number of shares outstanding of registrant's common stock, no par value, on July 22, 2024 was 27,063,644 shares.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

Form 10-Q

Table of Contents


		Page

Part I.	Financial Information	3

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets - June 30, 2024 and December 31, 2023	3

	Consolidated Statements of Income - Three and six months ended June 30, 2024 and 2023	4

	Consolidated Statements of Comprehensive Income - Three and six months ended June 30, 2024 and 2023	5

	Consolidated Statements of Changes in Equity - Three and six months ended June 30, 2024 and 2023	6

	Consolidated Statements of Cash Flows - Six months ended June 30, 2024 and 2023	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	45

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	67

Item 4.	Controls and Procedures	67

Part II.	Other Information	68

Item 1.	Legal Proceedings	68

Item 1A.	Risk Factors	68

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68

Item 5.	Other Information	68

Item 6.	Exhibits	69

Signatures		70

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	As of
(dollars in thousands)	June 30, 2024		December 31, 2023
Assets
Cash and due from financial institutions	$	103,829	$	116,181
Interest-bearing deposits in other financial institutions	195,062		406,256
Investment securities:
Available-for-sale debt securities, at fair value	676,719		647,210
Held-to-maturity debt securities, at amortized cost; fair value of: $528,088 at June 30, 2024 and $565,178 at December 31, 2023	615,867		632,338

Total investment securities	1,292,586		1,279,548
Loans held for sale	3,950		1,778
Loans	5,383,644		5,438,982
Less: allowance for credit losses	(62,225)		(63,934)
Loans, net of allowance for credit losses	5,321,419		5,375,048
Premises and equipment, net	100,646		96,184
Accrued interest receivable	23,184		21,511
Investment in unconsolidated entities	40,155		41,546

Mortgage servicing rights, net	8,636		8,696

Bank-owned life insurance	173,716		170,706
Federal Home Loan Bank of Des Moines ("FHLB") stock	6,925		6,793
Right-of-use lease assets	32,081		29,720
Other assets	84,763		88,829
Total assets	$	7,386,952	$	7,642,796
Liabilities
Deposits:
Noninterest-bearing demand	$	1,847,173	$	1,913,379
Interest-bearing demand	1,283,669		1,329,189
Savings and money market	2,234,111		2,209,733
Time	1,217,502		1,395,291
Total deposits	6,582,455		6,847,592

Long-term debt, net of unamortized debt issuance costs of $324 at June 30, 2024 and $445 at December 31, 2023	156,223		156,102
Lease liabilities	33,422		30,634

Accrued interest payable	14,998		18,948
Other liabilities	81,207		85,705
Total liabilities	6,868,305		7,138,981
Contingent liabilities and other commitments (see Note 16)
Equity

Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding: none at June 30, 2024 and December 31, 2023	—		—
Common stock, no par value, authorized 185,000,000 shares; issued and outstanding: 27,063,644 at June 30, 2024 and 27,045,033 at December 31, 2023	404,494		405,439
Additional paid-in capital	104,161		102,982
Retained earnings	132,683		117,990
Accumulated other comprehensive loss	(122,691)		(122,596)


Total equity	518,647		503,815
Total liabilities and equity	$	7,386,952	$	7,642,796

See accompanying notes to consolidated financial statements.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands, except per share data)	2024		2023		2024		2023
Interest income:
Interest and fees on loans	$	64,422	$	60,455	$	127,241	$	118,724
Interest and dividends on investment securities:
Taxable investment securities	8,466		7,145		15,677		14,481
Tax-exempt investment securities	598		727		1,253		1,517

Interest on deposits in other financial institutions	2,203		877		5,814		1,154
Dividend income on FHLB stock	151		120		257		256
Total interest income	75,840		69,324		150,242		136,132
Interest expense:
Interest on deposits:
Demand	490		411		989		774
Savings and money market	8,977		4,670		17,420		8,056
Time	12,173		8,932		25,163		15,196
Interest on short-term borrowings	1		378		1		1,139
Interest on long-term debt	2,278		2,199		4,561		4,037
Total interest expense	23,919		16,590		48,134		29,202
Net interest income	51,921		52,734		102,108		106,930
Provision for credit losses	2,239		4,319		6,175		6,171
Net interest income after provision for credit losses	49,682		48,415		95,933		100,759
Other operating income:
Mortgage banking income	1,040		690		1,653		1,216
Service charges on deposit accounts	2,135		2,137		4,238		4,248
Other service charges and fees	5,869		4,994		11,130		9,979
Income from fiduciary activities	1,449		1,068		2,884		2,389
Income from bank-owned life insurance	1,234		1,185		2,756		2,476




Other	394		361		704		1,136
Total other operating income	12,121		10,435		23,365		21,444
Other operating expense:
Salaries and employee benefits	21,246		20,848		41,981		42,871
Net occupancy	4,597		4,310		9,197		8,784
Computer software	4,381		4,621		8,668		9,227
Legal and professional services	2,506		2,469		4,826		5,355
Equipment	995		932		2,005		1,878
Advertising	901		942		1,815		1,875
Communication	657		791		1,494		1,569



Other	5,868		4,990		11,741		10,451
Total other operating expense	41,151		39,903		81,727		82,010
Income before income taxes	20,652		18,947		37,571		40,193
Income tax expense	4,835		4,472		8,809		9,531
Net income	$	15,817	$	14,475	$	28,762	$	30,662
Per common share data:
Basic earnings per share	$	0.58	$	0.54	$	1.06	$	1.14
Diluted earnings per share	$	0.58	$	0.53	$	1.06	$	1.13

Basic weighted average shares outstanding	27,053,549		27,024,043		27,050,037		27,011,659
Diluted weighted average shares outstanding	27,116,349		27,071,478		27,106,267		27,090,258

See accompanying notes to consolidated financial statements.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2024		2023		2024		2023
Net income	$	15,817	$	14,475	$	28,762	$	30,662
Other comprehensive income (loss), net of tax:
Net change in fair value of available-for-sale investment securities	274		(6,025)		(4,906)		5,181
Amortization of unrealized losses on investment securities transferred to held-to-maturity	1,374		1,451		2,580		2,676
Net change in fair value of derivatives	(16)		2,040		2,231		877
Supplemental Executive Retirement Plans	—		(13)		—		(25)
Total other comprehensive income (loss), net of tax	1,632		(2,547)		(95)		8,709
Comprehensive income	$	17,449	$	11,928	$	28,667	$	39,371

See accompanying notes to consolidated financial statements.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)


	Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings		Accum. Other Comp. Loss		Total
	(dollars in thousands, except per share data)
Balance at December 31, 2023	27,045,033	$	—	$	405,439	$	102,982	$	117,990	$	(122,596)	$	503,815


Net income	—	—		—		—		12,945		—		12,945
Other comprehensive loss	—	—		—		—		—		(1,727)		(1,727)
Cash dividends declared ($0.26 per share)	—	—		—		—		(7,033)		—		(7,033)

Common stock repurchased and retired and other related costs	(49,960)	—		(945)		—		—		—		(945)
Share-based compensation	47,253	—		—		148		—		—		148

Balance at March 31, 2024	27,042,326	—		404,494		103,130		123,902		(124,323)		507,203
Net income	—	—		—		—		15,817		—		15,817
Other comprehensive income	—	—		—		—		—		1,632		1,632
Cash dividends declared ($0.26 per share)	—	—		—		—		(7,036)		—		(7,036)


Share-based compensation	21,318	—		—		1,031		—		—		1,031

Balance at June 30, 2024	27,063,644	$	—	$	404,494	$	104,161	$	132,683	$	(122,691)	$	518,647


	Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings		Accum. Other Comp. Loss		Total
	(dollars in thousands, except per share data)
Balance at December 31, 2022	27,025,070	$	—	$	408,071	$	101,346	$	87,438	$	(143,984)	$	452,871



Net income	—	—		—		—		16,187		—		16,187
Other comprehensive income	—	—		—		—		—		11,256		11,256
Cash dividends declared ($0.26 per share)	—	—		—		—		(7,025)		—		(7,025)

Common stock repurchased and retired and other related costs	(101,760)	—		(2,205)		—		—		—		(2,205)
Share-based compensation	82,235	—		—		(158)		—		—		(158)

Balance at March 31, 2023	27,005,545	—		405,866		101,188		96,600		(132,728)		470,926
Net income	—	—		—		—		14,475		—		14,475
Other comprehensive loss	—	—		—		—		—		(2,547)		(2,547)
Cash dividends declared ($0.26 per share)	—	—		—		—		(7,029)		—		(7,029)

Common stock repurchased and retired and other related costs	(23,750)	—		(355)		—		—		—		(355)
Share-based compensation	63,997	—		—		809		—		—		809

Balance at June 30, 2023	27,045,792	$	—	$	405,511	$	101,997	$	104,046	$	(135,275)	$	476,279

See accompanying notes to consolidated financial statements.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended June 30,
(dollars in thousands)	2024		2023
Cash flows from operating activities:
Net income	$	28,762	$	30,662
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	6,175		6,171
Depreciation and amortization of premises and equipment	3,454		3,376
Loss on disposal of premises and equipment	16		9

Cash flows from operating leases	(2,682)		(2,692)

Amortization of mortgage servicing rights	370		356
Net amortization and accretion of premium/discounts on investment securities	1,099		1,602
Share-based compensation	1,179		651

Net gain on sales of residential mortgage loans	(748)		(296)
Proceeds from sales of loans held for sale	36,620		14,486
Originations of loans held for sale	(38,044)		(15,678)
Equity in losses of unconsolidated entities	31		25
Distributions from unconsolidated entities	—		44
Net increase in cash surrender value of bank-owned life insurance	(2,756)		(2,622)
Deferred income tax expense	1,165		11,225
Net tax expense (benefit) from share-based compensation	128		(15)
Net change in other assets and liabilities	8,177		963
Net cash provided by operating activities	42,946		48,267
Cash flows from investing activities:
Proceeds from maturities of and calls on available-for-sale investment securities	25,495		28,515

Purchases of investment securities available-for-sale	(62,336)		(14,907)

Proceeds from maturities of and calls on held-to-maturity investment securities	19,545		18,148

Net repayments of loans	59,444		48,382
Purchases of loan portfolios	(12,384)		(19,659)


Purchases of bank-owned life insurance	(2,502)		—
Proceeds from bank-owned life insurance death benefits	2,248		2,453

Net purchases of premises, equipment and land	(7,932)		(8,270)

Contributions to unconsolidated entities	(7,787)		(75)
Net purchases of FHLB stock	(132)		(1,814)
Net cash provided by investing activities	13,659		52,773
Cash flows from financing activities:
Net (decrease) increase in deposits	(265,137)		69,514
Net decrease in FHLB advances and other short-term borrowings	—		(5,000)
Proceeds from long-term debt	—		50,000

Cash dividends paid on common stock	(14,069)		(14,054)
Repurchases of common stock and other related costs	(945)		(2,560)

Net cash (used in) provided by financing activities	(280,151)		97,900
Net (decrease) increase in cash and cash equivalents	(223,546)		198,940
Cash and cash equivalents at beginning of period	522,437		112,044
Cash and cash equivalents at end of period	$	298,891	$	310,984

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)


	Six Months Ended June 30,
(dollars in thousands)	2024		2023
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	52,084	$	22,540
Income taxes	—		3,806


Supplemental disclosure of non-cash information:





Lease liabilities arising from obtaining right-of-use lease assets	5,029		—
Amortization of unrealized losses on investment securities transferred to held-to-maturity at fair value	3,505		3,644

See accompanying notes to consolidated financial statements.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

These interim condensed consolidated financial statements and notes should be read in conjunction with the Company's consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended December 31, 2023. In the opinion of management, all adjustments necessary for a fair presentation have been made and include all normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.

Allowance for Credit Losses for Loans

The allowance for credit losses ("ACL") for loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on loans. The Company’s policy is to charge off a loan against the ACL during the period in which the loan is deemed to be uncollectible and all interest previously accrued but uncollected, is reversed against current period interest income. Subsequent receipts, if any, are credited first to the remaining principal, then to the ACL for loans as recoveries, and finally to interest income.

The ACL for loans represents management's estimate of all expected credit losses over the expected life of the Company’s loan portfolio as of a given balance sheet date. Management estimates the ACL balance using relevant information available from both internal and external sources, regarding the collectability of cash flows impacted by past events, current conditions, and reasonable and supportable forecasts of future economic conditions. When the Company is unable to forecast future economic events, management may revert to historical information.

The Company's ACL model incorporates a reasonable and supportable forecast period of one year and reverts to historical loss information on a straight-line basis over one year when its forecast is no longer deemed reasonable and supportable. Historical loss experience provides the basis for the Company’s expected credit loss estimate. Adjustments to historical loss information may be made for differences in current loan-specific risk characteristics, such as differences in underwriting standards, portfolio mix, or when historical asset terms do not reflect the contractual terms of the financial assets being evaluated.

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

The Company uses Moody’s Analytics ("Moody's"), a firm widely recognized and used for its research, analysis, and economic forecasts, for its economic forecast assumptions. The Company generally uses Moody’s most recent Baseline forecast, which is updated at least monthly with a variety of upside and downside economic scenarios and includes both national and Hawaii-specific economic indicators. In addition, the Company uses a qualitative factor for forecast imprecision to account for economic and market volatility or instability.

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The ACL for loans is measured on a collective or pool basis when similar risk characteristics exist. The following is a description and the risk characteristics of each segment:

Commercial and industrial loans - SBA Paycheck Protection Program loans

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

Commercial and industrial loans - Others

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

Construction loans

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

Commercial real estate loans - Multi-family

Multi-family mortgage loans can comprise multi-building properties with extensive amenities or a single building with no amenities. The predominant risk characteristic of this segment is operating risk or the ability to generate sufficient rental income from the operation of the property.

Commercial real estate loans - Others

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

Residential mortgage loans

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

Home equity lines of credit

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

Consumer loans - Other revolving

Other revolving consumer loans consist of unsecured consumer lines of credit. The predominant risk characteristics of this segment relate to current and projected economic conditions, as well as employment and income levels attributed to the borrower.

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Consumer loans - Non-revolving

Non-revolving consumer loans consist of non-revolving (term) consumer loans, including automobile dealer loans. The predominant risk characteristics of this segment relate to current and projected economic conditions, as well as employment and income levels attributed to the borrower.

Purchased consumer loans

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

The following table presents the Company's loan portfolio segments and the methodology used to measure expected credit losses. The historical look-back period is 2008 to present, economic forecast length is one year and the reversion method is one year (on a straight-line basis) for all segments.

Expected Credit Loss Methodology

Historical Look-Back Period

Economic Forecast Length

Reversion Method

Loan Segment

After

June 30, 2023

June 30, 2023
and Prior

Commercial and industrial - SBA PPP

Zero Loss

2008 to present

One year

One year
(straight-line
basis)

Commercial and industrial - All others

DCF

PD/LGD

Construction

DCF

PD/LGD

Commercial real estate - Multi-family

DCF

PD/LGD

Commercial real estate - All others

DCF

PD/LGD

Residential mortgage

DCF

Loss-Rate Migration

Home equity

DCF

Loss-Rate Migration

Consumer - Other revolving

DCF

Loss-Rate Migration

Consumer - Non-revolving

DCF

Loss-Rate Migration

Consumer - Purchased portfolios

WARM

During the third quarter of 2023, the Company updated its methodology to measure expected credit losses from the Probability of Default/Loss Given Default ("PD/LGD") or Loss-Rate Migration methods to the Discounted Cash Flow ("DCF") method for all segments except the SBA PPP and purchased consumer loan segments. The Company believes that the DCF methodology has better alignment with the Current Expected Credit Losses ("CECL") standard for forward looking forecasting, while also factoring in more detailed assumptions. At the time of the methodology update, the Company ran the ACL model under both the current and previous methodologies and noted that the changes to the ACL model and the differences in methodologies did not result in a material impact to the Company's financial statements and as a percentage of the ACL. The Company is utilizing an industry leading software platform to perform the DCF analysis using a historical look back period of 2008 to present.

The Company continues to use the Moody's baseline forecast with an economic forecast length of one year and a one-year, straight-line reversion method. We revert to the historical average of the macroeconomic variables being used. Forecast models exclude the post-2019 COVID-19 pandemic period due to abnormal and volatile behavior.

The ACL on the purchased consumer loan portfolios continues to be calculated using the Remaining Life methodology (also known as the Weighted Average Remaining Maturity or "WARM" methodology) as this portfolio is evaluated on a pooled basis. Because SBA PPP loans are guaranteed by the SBA and may be forgivable in whole or in part in accordance with the requirements of the PPP we anticipate zero losses on these loans and accordingly apply a Zero Loss methodology.

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The following is a description of the methodologies utilized to measure expected credit losses from the third quarter of 2023 to present:

Discounted Cash Flow

The DCF methodology calculates CECL reserves as the difference between the amortized cost of a loan and the discounted expected value of future cash flows. Expected future cash flows are calculated based on assumptions of PD/LGD, prepayments and recovery rates, and are discounted using the loan’s effective interest rate.

Remaining Life or Weighted Average Remaining Maturity

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

The following is a description of the methodologies utilized to measure expected credit losses as of June 30, 2023 and prior:

Probability of Default/Loss Given Default

The PD/LGD calculation is based on a cohort methodology whereby loans in the same cohort are tracked over time to identify defaults and corresponding losses. PD/LGD analysis requires a portfolio segmented into pools, and we elected to then further sub-segment by risk characteristics such as Risk Rating, loans modified for borrowers experiencing financial difficulty, TDRs prior to the adoption of ASU 2022-02 and nonaccrual status to measure losses accurately. PD measures the count or dollar amount of loans that defaulted in a given cohort. LGD measures the losses related to the loans that defaulted. Total loss rate is calculated using the formula 'PD times LGD'.

Loss-Rate Migration

Loss-rate migration analysis is a cohort-based approach that measures cumulative net charge-offs over a defined time-horizon to calculate a loss rate that will be applied to the loan pool. Loss-rate migration analysis requires the portfolio to be segmented into pools then further sub-segmented by risk characteristics such as days past due, delinquency counters, loans modified for borrowers experiencing financial difficulty, TDRs prior to the adoption of ASU 2022-02 and nonaccrual status to measure loss rates accurately. The key inputs to run a loss-rate migration analysis are the length and frequency of the migration period, the dates for the migration periods to start and the number of migration periods used for the analysis. For each migration period, the analysis will determine the outstanding balance in each segment and/or sub-segment at the start of each period. These loans will then be followed for the length of the migration period to identify the amount of associated charge-offs and recoveries. A loss rate for each migration period is calculated using the formula: net charge-offs over the period divided by beginning loan balance.

Other

Under both the previous and current methodologies utilized to measure expected credit losses, if a loan ceases to share similar risk characteristics with other loans in its segment, it will be moved to a different pool sharing similar risk characteristics. Loans that do not share risk characteristics are evaluated on an individual basis based on the fair value of the collateral or other approaches such as the discounted cash flows methodology. Individually evaluated loans are not included in the collective evaluation.

Impact of Other Recently Issued Accounting Pronouncements on Future Filings

In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures". ASU 2023-09 expands existing income tax disclosures for rate reconciliations by requiring disclosure of certain specific categories in the rate reconciliation, as well as additional qualitative information about the reconciliation, and additional disaggregated information about income taxes paid. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted, and is to be applied on a prospective basis. The Company does not expect ASU 2023-09 to have a material impact on its consolidated financial statements.

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2. INVESTMENT SECURITIES

The amortized cost, gross unrecognized/unrealized gains and losses, fair value and related ACL on available-for-sale ("AFS") and held-to-maturity ("HTM") debt securities at June 30, 2024 and December 31, 2023 are as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		ACL
(dollars in thousands)
June 30, 2024
Available-for-sale:
Debt securities:
States and political subdivisions	$	151,771	$	3	$	(30,299)	$	121,475	$	—
Corporate securities	35,492		—		(4,029)		31,463		—
U.S. Treasury and other government-sponsored entities and agencies	55,662		147		(2,078)		53,731		—

Mortgage-backed securities:
Residential - U.S. government-sponsored entities and agencies	416,128		50		(62,224)		353,954		—
Residential - Non-government agencies	18,454		135		(1,141)		17,448		—
Commercial - U.S. government-sponsored entities and agencies	98,346		—		(14,834)		83,512		—
Commercial - Non-government agencies	15,269		—		(133)		15,136		—
Total available-for-sale investment securities	$	791,122	$	335	$	(114,738)	$	676,719	$	—


	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value		ACL
(dollars in thousands)
June 30, 2024
Held-to-maturity:
Debt securities:
States and political subdivisions	$	42,002	$	—	$	(8,138)	$	33,864	$	—



Mortgage-backed securities:
Residential - U.S. government-sponsored entities and agencies	573,865		—		(79,641)		494,224		—



Total held-to-maturity investment securities	$	615,867	$	—	$	(87,779)	$	528,088	$	—


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		ACL
(dollars in thousands)
December 31, 2023
Available-for-sale:
Debt securities:
States and political subdivisions	$	156,432	$	13	$	(29,810)	$	126,635	$	—
Corporate securities	35,731		—		(4,317)		31,414		—
U.S. Treasury and other government-sponsored entities and agencies	28,105		33		(1,941)		26,197		—

Mortgage-backed securities:
Residential - U.S. government-sponsored entities and agencies	441,898		95		(63,607)		378,386		—
Residential - Non-government agencies	19,322		366		(980)		18,708		—
Commercial - U.S. government-sponsored entities and agencies	58,318		—		(7,404)		50,914		—
Commercial - Non-government agencies	15,144		—		(188)		14,956		—
Total available-for-sale investment securities	$	754,950	$	507	$	(108,247)	$	647,210	$	—

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	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value		ACL
(dollars in thousands)
December 31, 2023
Held-to-maturity:
Debt securities:
States and political subdivisions	$	41,959	$	—	$	(6,706)	$	35,253	$	—



Mortgage-backed securities:
Residential - U.S. government-sponsored entities and agencies	590,379		61		(60,515)		529,925		—



Total held-to-maturity investment securities	$	632,338	$	61	$	(67,221)	$	565,178	$	—

During the first quarter of 2022, the Company entered into a forward starting interest rate swap, with a notional amount of $115.5 million, that was designated as a fair value hedge of certain municipal debt securities. The Company pays the counterparty a fixed rate of 2.095% and receives a floating rate based on the Federal Funds effective rate. The fair value hedge became effective on March 31, 2024 and has a maturity date of March 31, 2029.

During the three and six months ended June 30, 2024, the Company recorded income from the interest rate swap of $0.9 million and $0.8 million, respectively, in interest income on taxable investment securities on the Company's consolidated statements of income.

During the three and six months ended June 30, 2024, the Company recorded a total of $1.9 million and $3.5 million, respectively, in amortization of unrecognized losses on the aforementioned investment securities transferred from AFS to HTM. During the three and six months ended June 30, 2023, the Company recorded a total of $2.0 million and $3.6 million, respectively, in amortization of unrecognized losses on the aforementioned investment securities transferred from AFS to HTM.

The Company elected to not measure an estimate of credit losses on accrued interest receivable as the Company writes off any uncollectible accrued interest receivable in a timely manner. Accrued interest receivable on investment securities is reported together with accrued interest receivable on loans and other assets in the consolidated balance sheets.

Accrued interest receivable on investment securities totaled $4.3 million and $4.0 million as of June 30, 2024 and December 31, 2023, respectively.

The amortized cost, estimated fair value and weighted average yield of our AFS and HTM debt securities at June 30, 2024, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.


(dollars in thousands)	Amortized Cost		Fair Value		Weighted Average Yield (1)
Available-for-sale:
Debt securities:
Due in one year or less	$	1,361	$	1,357	2.67	%
Due after one year through five years	53,764		49,405		2.74
Due after five years through ten years	63,131		60,566		4.00
Due after ten years	124,669		95,341		2.44
Mortgage-backed securities:
Residential - U.S. government-sponsored entities and agencies	416,128		353,954		2.21
Residential - Non-government agencies	18,454		17,448		4.56
Commercial - U.S. government-sponsored entities and agencies	98,346		83,512		2.75