UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2023

or

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

For the transition period from               to              

Commission File Number: 001-31567

CENTRAL PACIFIC FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

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

220 South King Street, Honolulu, Hawaii 96813

(Address of principal executive offices) (Zip code)

(808) 544-0500

(Registrant's telephone number, including area code)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, No Par Value	CPF	New York Stock Exchange

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

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

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

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

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

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

The number of shares outstanding of registrant's common stock, no par value, on October 13, 2023 was 27,043,169 shares.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

Form 10-Q

Table of Contents

		Page
Part I.	Financial Information	3
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets - September 30, 2023 and December 31, 2022	3
	Consolidated Statements of Income - Three and nine months ended September 30, 2023 and 2022	4
	Consolidated Statements of Comprehensive Income (Loss) - Three and nine months ended September 30, 2023 and 2022	5
	Consolidated Statements of Changes in Equity - Three and nine months ended September 30, 2023 and 2022	6
	Consolidated Statements of Cash Flows - Nine months ended September 30, 2023 and 2022	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	48
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	72
Item 4.	Controls and Procedures	72
Part II.	Other Information	73
Item 1.	Legal Proceedings	73
Item 1A.	Risk Factors	73
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	73
Item 5.	Other Information	74
Item 6.	Exhibits	75
Signatures		76

2

PART I.   FINANCIAL INFORMATION

Item 1. Financial Statements

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(dollars in thousands)	September 30, 2023		December 31, 2022
Assets
Cash and due from financial institutions	$	108,818	$	97,150
Interest-bearing deposits in other financial institutions	329,913		14,894
Investment securities:
Available-for-sale debt securities, at fair value	625,253		671,794
Held-to-maturity debt securities, at amortized cost; fair value of: $531,887 at September 30, 2023 and $596,780 at December 31, 2022	640,053		664,883
Total investment securities	1,265,306		1,336,677
Loans held for sale, at fair value	—		1,105
Loans	5,508,710		5,555,466
Less: allowance for credit losses	64,517		63,738
Loans, net of allowance for credit losses	5,444,193		5,491,728
Premises and equipment, net	97,378		91,634
Accrued interest receivable	21,529		20,345
Investment in unconsolidated entities	42,523		46,641
Mortgage servicing rights	8,797		9,074
Bank-owned life insurance	168,543		167,967
Federal Home Loan Bank of Des Moines ("FHLB") stock	10,995		9,146
Right-of-use lease assets	32,294		34,985
Other assets	107,635		111,417
Total assets	$	7,637,924	$	7,432,763
Liabilities
Deposits:
Noninterest-bearing demand	$	1,969,523	$	2,092,823
Interest-bearing demand	1,345,843		1,453,167
Savings and money market	2,209,550		2,199,028
Time	1,349,829		991,205
Total deposits	6,874,745		6,736,223
FHLB advances and other short-term borrowings	—		5,000
Long-term debt (net of debt issuance costs of $506 at September 30, 2023 and $688 at December 31, 2022)	156,041		105,859
Lease liabilities	33,186		35,889
Other liabilities	105,354		96,921
Total liabilities	7,169,326		6,979,892
Contingent liabilities and other commitments (see Notes 7, 15 and 16)
Equity
Shareholders' equity:
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding: none at September 30, 2023 and December 31, 2022	—		—
Common stock, no par value, authorized 185,000,000 shares; issued and outstanding: 27,043,169 at September 30, 2023 and 27,025,070 at December 31, 2022	405,439		408,071
Additional paid-in capital	102,550		101,346
Retained earnings	110,156		87,438
Accumulated other comprehensive loss	(149,547)		(143,984)
Total shareholders' equity	468,598		452,871
Total liabilities and equity	$	7,637,924	$	7,432,763

See accompanying notes to consolidated financial statements.

3

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands, except per share data)	2023		2022		2023		2022
Interest income:
Interest and fees on loans	$	62,162	$	51,686	$	180,886	$	143,598
Interest and dividends on investment securities:
Taxable investment securities	7,016		6,933		21,497		20,937
Tax-exempt investment securities	709		805		2,226		2,428
Dividends	—		—		—		21
Interest on deposits in other financial institutions	2,412		107		3,566		370
Dividend income on FHLB stock	113		138		369		265
Total interest income	72,412		59,669		208,544		167,619
Interest expense:
Interest on deposits:
Demand	460		217		1,234		473
Savings and money market	6,464		1,054		14,520		1,700
Time	11,268		1,092		26,464		2,051
Interest on short-term borrowings	—		660		1,139		662
Interest on long-term debt	2,292		1,281		6,329		3,455
Total interest expense	20,484		4,304		49,686		8,341
Net interest income	51,928		55,365		158,858		159,278
Provision (credit) for credit losses	4,874		362		11,045		(1,844)
Net interest income after provision (credit) for credit losses	47,054		55,003		147,813		161,122
Other operating income:
Mortgage banking income	765		831		1,981		3,143
Service charges on deposit accounts	2,193		2,138		6,441		6,025
Other service charges and fees	5,203		4,955		15,182		14,053
Income from fiduciary activities	1,234		1,165		3,623		3,507
Net (losses) gains on sales of investment securities	(135)		—		(135)		8,506
Income from bank-owned life insurance	379		167		2,855		(322)
Other	408		373		1,544		1,406
Total other operating income	10,047		9,629		31,491		36,318
Other operating expense:
Salaries and employee benefits	19,015		22,778		61,886		66,089
Net occupancy	4,725		4,743		13,509		12,965
Equipment	1,112		1,085		2,990		3,242
Communication	809		712		2,378		2,262
Legal and professional services	2,359		2,573		7,714		8,115
Computer software	4,473		4,138		13,700		10,844
Advertising	968		1,150		2,843		3,450
Other	6,150		4,819		16,601		18,585
Total other operating expense	39,611		41,998		121,621		125,552
Income before income taxes	17,490		22,634		57,683		71,888
Income tax expense	4,349		5,919		13,880		18,141
Net income	$	13,141	$	16,715	$	43,803	$	53,747
Per common share data:
Basic earnings per share	$	0.49	$	0.61	$	1.62	$	1.96
Diluted earnings per share	$	0.49	$	0.61	$	1.62	$	1.94
Basic weighted average shares outstanding	27,042,762		27,356,614		27,022,141		27,487,237
Diluted weighted average shares outstanding	27,079,484		27,501,212		27,081,541		27,666,197

See accompanying notes to consolidated financial statements.

4

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2023		2022		2023		2022
Net income	$	13,141	$	16,715	$	43,803	$	53,747
Other comprehensive income (loss), net of tax:
Net change in fair value of available-for-sale investment securities	(18,061)		(27,732)		(12,880)		(152,332)
Amortization of unrealized losses on investment securities transferred to held-to-maturity	1,488		1,699		4,164		3,147
Net change in fair value of derivatives	2,313		3,194		3,190		5,304
Defined benefit retirement plan and SERPs	(12)		18		(37)		2,588
Total other comprehensive income (loss), net of tax	(14,272)		(22,821)		(5,563)		(141,293)
Comprehensive income (loss)	$	(1,131)	$	(6,106)	$	38,240	$	(87,546)

See accompanying notes to consolidated financial statements.

5

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. Gain (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
Net income	—	—		—		—		13,141		—		13,141
Other comprehensive loss	—	—		—		—		—		(14,272)		(14,272)
Cash dividends declared ($0.26 per share)	—	—		—		—		(7,031)		—		(7,031)
Common stock repurchased and retired and other related costs	(4,500)	—		(72)		—		—		—		(72)
Share-based compensation	1,877	—		—		553		—		—		553
Balance at September 30, 2023	27,043,169	$	—	$	405,439	$	102,550	$	110,156	$	(149,547)	$	468,598

6

	Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings		Accum. Other Comp. Loss		Non- Controlling Interest		Total
	(dollars in thousands, except per share data)
Balance at December 31, 2021	27,714,071	$	—	$	426,091	$	98,073	$	42,015	$	(7,960)	$	48	$	558,267
Net income	—	—		—		—		19,438		—		—		19,438
Other comprehensive loss	—	—		—		—		—		(79,387)		—		(79,387)
Cash dividends declared ($0.26 per share)	—	—		—		—		(7,201)		—		—		(7,201)
Common stock sold by directors' deferred compensation plan (40,670 shares, net)	—	—		1,114		—		—		—		—		1,114
Common stock repurchased and retired and other related costs	(234,981)	—		(6,731)		—		—		—		—		(6,731)
Share-based compensation	105,839	—		679		197		—		—		—		876
Non-controlling interest	—	—		—		—		—		—		2		2
Balance at March 31, 2022	27,584,929	—		421,153		98,270		54,252		(87,347)		50		486,378
Net income	—	—		—		—		17,594		—		—		17,594
Other comprehensive loss	—	—		—		—		—		(39,085)		—		(39,085)
Cash dividends declared ($0.26 per share)	—	—		—		—		(7,153)		—		—		(7,153)
Common stock purchased by directors' deferred compensation plan ((38,000) shares, net)	—	—		927		—		—		—		—		927
Common stock repurchased and retired and other related costs	(174,429)	—		(4,218)		—		—		—		—		(4,218)
Share-based compensation	53,062	—		—		707		—		—		—		707
Non-controlling interest	—	—		—		—		—		—		(50)		(50)
Balance at June 30, 2022	27,463,562	—		417,862		98,977		64,693		(126,432)		—		455,100
Net income	—	—		—		—		16,715		—		—		16,715
Other comprehensive loss	—	—		—		—		—		(22,821)		—		(22,821)
Cash dividends declared ($0.26 per share)	—	—		—		—		(7,107)		—		—		(7,107)
Common stock repurchased and retired and other related costs	(218,000)	—		(4,868)		—		—		—		—		(4,868)
Share-based compensation	17,317	—		—		1,449		—		—		—		1,449
Balance at September 30, 2022	27,262,879	$	—	$	412,994	$	100,426	$	74,301	$	(149,253)	$	—	$	438,468

See accompanying notes to consolidated financial statements.

7

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
(dollars in thousands)	2023		2022
Cash flows from operating activities:
Net income	$	43,803	$	53,747
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for credit losses	11,045		(1,844)
Depreciation and amortization of premises and equipment	5,204		4,876
Loss on disposal of premises and equipment	9		139
Cash flows from operating leases	(3,950)		(4,485)
Amortization of mortgage servicing rights	538		1,115
Net amortization and accretion of premium/discounts on investment securities	2,385		3,522
Share-based compensation	1,204		2,353
Net loss (gain) on sales of investment securities	135		(8,506)
Net gain on sales of residential mortgage loans	(565)		(1,626)
Proceeds from sales of loans held for sale	30,143		73,763
Originations of loans held for sale	(28,473)		(70,307)
Equity in losses (earnings) of unconsolidated entities	12		(171)
Distributions from unconsolidated entities	44		180
Net (increase) decrease in cash surrender value of bank-owned life insurance	(3,203)		823
Deferred income tax benefit (expense)	8,955		(36,447)
Net tax (benefit) expense from share-based compensation	(20)		196
Net change in other assets and liabilities	16,234		64,673
Net cash provided by operating activities	83,500		82,001
Cash flows from investing activities:
Proceeds from maturities of and calls on available-for-sale investment securities	44,812		150,319
Purchases of investment securities available-for-sale	(19,057)		(89,063)
Proceeds from sale of investment securities	1,405		8,506
Proceeds from maturities of and calls on held-to-maturity investment securities	29,823		23,712
Purchases of held-to-maturity investment securities	—		(9,934)
Loan repayments (originations), net	46,520		(70,246)
Purchases of loan portfolios	(19,659)		(252,188)
Proceeds from sales of loans originated for investment	9,629		—
Purchases of bank-owned life insurance	—		(1,300)
Proceeds from bank-owned life insurance death benefits	2,627		1,864
Net purchases of premises, equipment and land	(10,969)		(14,981)
Net return of capital from unconsolidated entities	495		—
Investments in unconsolidated entities	(395)		(8,995)
Net purchases of FHLB stock	(1,849)		(5,582)
Net cash provided by (used in) investing activities	83,382		(267,888)
Cash flows from financing activities:
Net increase (decrease) in deposits	138,522		(82,724)
Net (decrease) increase in FHLB advances and other short-term borrowings	(5,000)		115,000
Proceeds from long-term debt	50,000		—
Cash dividends paid on common stock	(21,085)		(21,461)
Repurchases of common stock and other related costs	(2,632)		(15,817)
Net proceeds from issuance of common stock and stock option exercises	—		679
Net cash provided by (used in) financing activities	159,805		(4,323)
Net increase (decrease) in cash and cash equivalents	326,687		(190,210)
Cash and cash equivalents at beginning of period	112,044		328,907
Cash and cash equivalents at end of period	$	438,731	$	138,697

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

	Nine Months Ended September 30,
(dollars in thousands)	2023		2022
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	37,673	$	7,185
Income taxes	7,316		5,576
Supplemental disclosure of non-cash information:
Net change in common stock held by directors’ deferred compensation plan	—		(2,041)
Net transfer of investment securities from available-for-sale to held-to-maturity at fair value	—		673,254
Amortization of unrealized losses on investment securities transferred to held-to-maturity at fair value	3,644		4,295
Other intangible assets and services provided in exchange for Swell common stock	—		1,500
Other intangible assets received in exchange for Swell common stock	1,500		—

See accompanying notes to consolidated financial statements.

8

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 the 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, 2022. 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. A loan is deemed to be uncollectible when it is probable that a loss will be incurred and when it is possible to determine a reasonable estimate of the loss. 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. During times of economic and market volatility or instability, the Company may include a qualitative factor for forecast imprecision that accounts for other potential economic scenarios available.

9

The ACL for loans is measured on a collective or pool basis when similar risk characteristics exist. The Company segments its portfolio generally by the loan categories in the Federal Financial Institutions Examination Council ("FFIEC") Call Report. 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 primarily includes 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 relates 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 auto dealer loans. The predominant risk characteristics of this segment also relates 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.

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. 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 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 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.

The following is a description of the methodologies utilized to measure expected credit losses:

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 Life

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.

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

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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 monitored 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

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.

The following table presents the Company's loan portfolio segments and the methodology used to measure expected credit losses. As of September 30, 2023, 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	September 30, 2023	June 30, 2023 and Prior
Commercial and industrial - SBA PPP	Zero Loss	PD/LGD	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
Purchased consumer portfolios	WARM	WARM

Accounting Standards Adopted in 2023

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)." This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. Entities can (1) elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can also (2) elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. Finally, entities can (3) make a one-time election to sell and/or reclassify held-to-maturity (“HTM”) debt securities that reference an interest rate affected by reference rate reform. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848)," which clarifies that all derivative instruments affected by the changes to interest rates used for discounting, margining or contract price alignment, regardless of whether they reference LIBOR or another rate expected to be discontinued as a result of reference rate reform, an entity may apply certain practical expedients in Topic 848. ASU 2020-04 and 2021-01 are elective and can be adopted between March 12, 2020 and December 31, 2022. In December 2022, the FASB issued ASU 2022-06, "Deferral of the Sunset Date of Topic 848", which extends the temporary relief provision period and allows companies to defer the adoption to December 31, 2024. The Company adopted ASU 2020-04 and elected optional expedients above for applicable contract modifications. We currently do not have any hedge accounting for hedging relationships that meet the stated criteria. The adoption did not have an impact on the consolidated financial statements.

In March 2022, the FASB issued ASU 2022-01, "Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method", which clarifies the guidance on fair value hedge accounting of interest rate risk portfolios of financial assets. ASU 2022-01 updates guidance in Topic 815, to expand the scope of the current last-of-layer method to allow multiple hedged layers

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to be designated for a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments on a prospective basis. Additionally, ASU 2022-01 clarifies that basis adjustments related to existing portfolio layer hedge relationships should not be considered when measuring credit losses on the financial assets included in the closed portfolio. Further, ASU 2022-01 clarifies that any reversal of fair value hedge basis adjustments associated with an actual breach should be recognized in interest income immediately. ASU 2022-01 was effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company adopted ASU 2022-01 effective January 1, 2023 and it did not have an impact on our consolidated financial statements as we currently do not use the last-of-layer hedge accounting method.

In March 2022, the FASB issued ASU 2022-02, "Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures". ASU 2022-02 updates guidance in Topic 326 to eliminate the TDR accounting guidance by creditors in Subtopic 310-40, "Receivables—Troubled Debt Restructurings by Creditors", while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. Instead of applying the recognition and measurement guidance for TDRs, an entity would apply the loan refinancing and restructuring guidance to determine whether a modification or other form of restructuring results in a new loan or a continuation of an existing loan. Additionally, the amendments in ASU 2022-02 require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases in the existing vintage disclosures within the scope of Subtopic 326-20, "Financial Instruments—Credit Losses—Measured at Amortized Cost". ASU 2022-02 was effective for fiscal years beginning after December 15, 2022, with early adoption permitted. ASU 2022-02 requires prospective transition for disclosures related to loan restructurings for borrowers experiencing financial difficulty and the presentation of current-period gross write-offs by year of origination while removing the presentation of current-period recoveries and net write-off from the vintage disclosure for charge-offs. The guidance related to the recognition and measurement of existing TDRs and new loan modifications or restructurings may be adopted on a prospective or modified retrospective transition method. The Company adopted ASU 2022-02 effective January 1, 2023 using the prospective transition method.

Effective our adoption date, loan modifications or restructurings for borrowers experiencing financial difficulty were and continue to be evaluated to determine whether they result in a new loan or a continuation of an existing loan. Loan restructurings for borrowers experiencing financial difficulty are generally accounted for as a continuation of the existing loan as the terms of the restructured loans are typically not at market rates. At adoption of this guidance on January 1, 2023, there was no material impact on our financial statements.

When a loan is restructured under ASU 2022-02, we continue to measure impairment on the loan using the discounted cash flow method that utilizes a prepayment-adjusted discount rate based on the loan’s restructured terms. Under the TDR accounting model, we used the discount rate that was in effect prior to the restructuring to measure impairment. Using the interest rate that was in effect prior to the restructuring resulted in the recognition, in the allowance for credit losses, of the economic concession that we granted to borrowers as part of the loan restructuring. Using a post-restructuring interest rate does not result in the recognition of an economic concession in the allowance for credit losses.

As we have elected a prospective transition, the economic concession on a loan that was previously restructured and accounted for as a TDR will continue to be measured in our allowance for credit losses using the discount rate that was in effect prior to the restructuring and the economic concession may increase or decrease as we update our cash flow assumptions related to the expected life of the loan. Further, the component of the allowance for credit losses representing economic concessions will decrease as the borrower makes payments in accordance with the restructured terms of the mortgage loan and as the loan is sold, liquidated, or subsequently restructured.

Impact of Other Recently Issued Accounting Pronouncements on Future Filings

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

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2. INVESTMENT SECURITIES

The amortized cost, fair value and related ACL, and corresponding gross unrecognized gains and losses on held-to-maturity ("HTM") debt securities at September 30, 2023 and December 31, 2022 are as follows:

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value		ACL
(dollars in thousands)
September 30, 2023
Held-to-maturity:
Debt securities:
States and political subdivisions	$	41,930	$	—	$	(9,892)	$	32,038	$	—
Mortgage-backed securities:
Residential - U.S. Government-sponsored enterprises	598,123		—		(98,274)		499,849		—
Total held-to-maturity securities	$	640,053	$	—	$