Central Pacific Financial Corporation

04/24/2024 | Press release | Distributed by Public on 04/24/2024 13:22

Quarterly Report for Quarter Ending March 31, 2024 (Form 10-Q)

cpf-20240331
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 March 31, 2024

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, Hawaii96813
(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 April 12, 2024 was 27,042,326 shares.

Table of Contents
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 - March 31, 2024 and December 31, 2023
3
Consolidated Statements of Income - Three months ended March 31, 2024 and 2023
4
Consolidated Statements of Comprehensive Income - Three months ended March 31, 2024 and 2023
5
Consolidated Statements of Changes in Equity - Three months ended March 31, 2024 and 2023
6
Consolidated Statements of Cash Flows - Three months ended March 31, 2024 and 2023
7
Notes to Consolidated Financial Statements
8
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
40
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
60
Item 4.
Controls and Procedures
60
Part II.
Other Information
61
Item 1.
Legal Proceedings
61
Item 1A.
Risk Factors
61
Item 2.
Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
61
Item 5.
Other Information
61
Item 6.
Exhibits
62
Signatures
63

2
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) March 31,
2024 		December 31,
2023
Assets
Cash and due from financial institutions $ 98,410 $ 116,181
Interest-bearing deposits in other financial institutions 214,472 406,256
Investment securities:
Available-for-sale debt securities, at fair value 660,833 647,210
Held-to-maturity debt securities, at amortized cost; fair value of: $541,685 at March 31, 2024 and $565,178 at December 31, 2023
624,948 632,338
Total investment securities 1,285,781 1,279,548
Loans held for sale 755 1,778
Loans 5,401,417 5,438,982
Less: allowance for credit losses (63,532) (63,934)
Loans, net of allowance for credit losses 5,337,885 5,375,048
Premises and equipment, net 97,688 96,184
Accrued interest receivable 21,957 21,511
Investment in unconsolidated entities 40,780 41,546
Mortgage servicing rights, net 8,599 8,696
Bank-owned life insurance 172,228 170,706
Federal Home Loan Bank of Des Moines ("FHLB") stock 6,921 6,793
Right-of-use lease assets 32,079 29,720
Other assets 92,444 88,829
Total assets $ 7,409,999 $ 7,642,796
Liabilities
Deposits:
Noninterest-bearing demand $ 1,848,554 $ 1,913,379
Interest-bearing demand 1,290,321 1,329,189
Savings and money market 2,211,966 2,209,733
Time 1,268,013 1,395,291
Total deposits 6,618,854 6,847,592
Long-term debt, net of unamortized debt issuance costs of $384 at March 31, 2024 and $445 at December 31, 2023
156,163 156,102
Lease liabilities 33,169 30,634
Accrued interest payable 16,654 18,948
Other liabilities 77,956 85,705
Total liabilities 6,902,796 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 March 31, 2024 and December 31, 2023
- -
Common stock, no par value, authorized 185,000,000 shares;
issued and outstanding: 27,042,326 at March 31, 2024 and 27,045,033 at December 31, 2023
404,494 405,439
Additional paid-in capital 103,130 102,982
Retained earnings 123,902 117,990
Accumulated other comprehensive loss (124,323) (122,596)
Total equity 507,203 503,815
Total liabilities and equity $ 7,409,999 $ 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 March 31,
(dollars in thousands, except per share data) 2024 2023
Interest income:
Interest and fees on loans $ 62,819 $ 58,269
Interest and dividends on investment securities:
Taxable investment securities 7,211 7,336
Tax-exempt investment securities 655 790
Interest on deposits in other financial institutions 3,611 277
Dividend income on FHLB stock 106 136
Total interest income 74,402 66,808
Interest expense:
Interest on deposits:
Demand 499 363
Savings and money market 8,443 3,386
Time 12,990 6,264
Interest on short-term borrowings - 761
Interest on long-term debt 2,283 1,838
Total interest expense 24,215 12,612
Net interest income 50,187 54,196
Provision for credit losses 3,936 1,852
Net interest income after provision for credit losses 46,251 52,344
Other operating income:
Mortgage banking income 613 526
Service charges on deposit accounts 2,103 2,111
Other service charges and fees 5,261 4,985
Income from fiduciary activities 1,435 1,321
Income from bank-owned life insurance 1,522 1,291
Other 310 775
Total other operating income 11,244 11,009
Other operating expense:
Salaries and employee benefits 20,735 22,023
Net occupancy 4,600 4,474
Computer software 4,287 4,606
Legal and professional services 2,320 2,886
Equipment 1,010 946
Advertising 914 933
Communication 837 778
Other 5,873 5,461
Total other operating expense 40,576 42,107
Income before income taxes 16,919 21,246
Income tax expense 3,974 5,059
Net income $ 12,945 $ 16,187
Per common share data:
Basic earnings per share $ 0.48 $ 0.60
Diluted earnings per share $ 0.48 $ 0.60
Basic weighted average shares outstanding 27,046,525 26,999,138
Diluted weighted average shares outstanding 27,099,101 27,122,012

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 March 31,
(dollars in thousands) 2024 2023
Net income $ 12,945 $ 16,187
Other comprehensive income (loss), net of tax:
Net change in fair value of available-for-sale investment securities (5,180) 11,206
Amortization of unrealized losses on investment securities transferred to held-to-maturity 1,206 1,225
Net change in fair value of derivatives 2,247 (1,163)
Supplemental Executive Retirement Plans - (12)
Total other comprehensive income (loss), net of tax (1,727) 11,256
Comprehensive income $ 11,218 $ 27,443

See accompanying notes to consolidated financial statements.
5
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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

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

See accompanying notes to consolidated financial statements.
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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Three Months Ended March 31,
(dollars in thousands) 2024 2023
Cash flows from operating activities:
Net income $ 12,945 $ 16,187
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 3,936 1,852
Depreciation and amortization of premises and equipment 1,746 1,628
Loss on disposal of premises and equipment 3 2
Cash flows from operating leases (1,257) (1,390)
Amortization of mortgage servicing rights 178 189
Net amortization and accretion of premium/discounts on investment securities 561 803
Share-based compensation 148 (158)
Net gain on sales of residential mortgage loans (217) (128)
Proceeds from sales of loans held for sale 10,759 5,999
Originations of loans held for sale (9,736) (4,766)
Equity in losses (earnings) of unconsolidated entities 80 (28)
Distributions from unconsolidated entities - 31
Net increase in cash surrender value of bank-owned life insurance (1,522) (1,304)
Deferred income tax expense 2,652 8,388
Net tax expense (benefit) from share-based compensation 60 (7)
Net change in other assets and liabilities (3,340) (9,030)
Net cash provided by operating activities 16,996 18,268
Cash flows from investing activities:
Proceeds from maturities of and calls on available-for-sale investment securities 11,606 14,170
Purchases of investment securities available-for-sale (32,624) (14,913)
Proceeds from maturities of and calls on held-to-maturity investment securities 8,827 7,759
Net repayments of loans 33,444 15,085
Purchases of loan portfolios - (19,507)
Proceeds from bank-owned life insurance death benefits - 1,027
Net purchases of premises, equipment and land (3,253) (3,822)
Contributions to unconsolidated entities (7,707) (30)
Net purchases of FHLB stock (128) (2,814)
Net cash provided by (used in) investing activities 10,165 (3,045)
Cash flows from financing activities:
Net (decrease) increase in deposits (228,738) 10,745
Net increase in FHLB advances and other short-term borrowings - 20,000
Proceeds from long-term debt - 50,000
Cash dividends paid on common stock (7,033) (7,025)
Repurchases of common stock and other related costs (945) (2,205)
Net cash (used in) provided by financing activities (236,716) 71,515
Net (decrease) increase in cash and cash equivalents (209,555) 86,738
Cash and cash equivalents at beginning of period 522,437 112,044
Cash and cash equivalents at end of period $ 312,882 $ 198,782


CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)

Three Months Ended March 31,
(dollars in thousands) 2024 2023
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 26,509 $ 9,664
Supplemental disclosure of non-cash information:
Lease liabilities arising from obtaining right-of-use lease assets 3,333 -
Amortization of unrealized losses on investment securities transferred to held-to-maturity at fair value 1,638 1,668

See accompanying notes to consolidated financial statements.
7
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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. During times of economic and market volatility or instability, the Company may include a qualitative factor for forecast imprecision.

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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 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 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
Consumer - Purchased portfolios
WARM 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 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.

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 March 31, 2024 and December 31, 2023 are as follows:

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value ACL
(dollars in thousands)
March 31, 2024
Available-for-sale:
Debt securities:
States and political subdivisions $ 152,393 $ 8 $ (29,378) $ 123,023 $ -
Corporate securities 35,611 - (4,213) 31,398 -
U.S. Treasury and other government-sponsored entities and agencies 41,849 147 (2,090) 39,906 -
Mortgage-backed securities:
Residential - U.S. government-sponsored entities and agencies 412,443 7 (62,813) 349,637 -
Residential - Non-government agencies 18,893 129 (1,081) 17,941 -
Commercial - U.S. government-sponsored entities and agencies 99,213 - (15,334) 83,879 -
Commercial - Non-government agencies 15,206 - (157) 15,049 -
Total available-for-sale investment securities $ 775,608 $ 291 $ (115,066) $ 660,833 $ -

Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Fair Value ACL
(dollars in thousands)
March 31, 2024
Held-to-maturity:
Debt securities:
States and political subdivisions $ 41,984 $ - $ (7,324) $ 34,660 $ -
Mortgage-backed securities:
Residential - U.S. government-sponsored entities and agencies 582,964 - (75,939) 507,025 -
Total held-to-maturity investment securities $ 624,948 $ - $ (83,263) $ 541,685 $ -

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 $ -

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 date of transfers, these securities had a total net unrealized loss of $89.5 million. There was no impact to net income as a result of the reclassifications. The Company did not transfer any investment securities that were classified as AFS to HTM during 2023 and in the three months ended March 31, 2024.

During the three months ended March 31, 2024 and 2023, the Company recorded a total of $1.6 million and $1.7 million, respectively, in amortization of unrecognized losses on the aforementioned investment securities transferred from AFS to HTM.

Upon adoption of ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,"the Company elected to exclude accrued interest receivable from the amortized cost basis of debt securities and report accrued interest receivableon AFS debt securities together with accrued interest receivable on HTM securities and loans in the consolidated balance sheets. The Company also 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 AFS debt securities totaled $2.9 million and $3.2 million as of March 31, 2024 and December 31, 2023, respectively. Accrued interest receivable on HTM debt securities totaled $1.2 million and $1.2 million as of March 31, 2024 and December 31, 2023, respectively.

The amortized cost, estimated fair value and weighted average yield of our AFS and HTM debt securities at March 31, 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 $ 1,715 $ 1,707 2.86 %
Due after one year through five years 44,426 40,450 2.61
Due after five years through ten years 57,777 54,822 3.78
Due after ten years 125,935 97,348 2.49
Mortgage-backed securities:
Residential - U.S. government-sponsored entities and agencies 412,443 349,637 2.12
Residential - Non-government agencies 18,893 17,941 4.58
Commercial - U.S. government-sponsored entities and agencies 99,213 83,879 2.77
Commercial - Non-government agencies 15,206 15,049 4.98
Total available-for-sale securities $ 775,608 $ 660,833 2.56 %

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(dollars in thousands) Amortized Cost Fair Value
Weighted Average Yield (1)
Held-to-maturity:
Debt securities:
Due after ten years $ 41,984 $ 34,660 2.26 %
Mortgage-backed securities:
Residential - U.S. government-sponsored entities and agencies 582,964 507,025 1.92
Total held-to-maturity securities $ 624,948 $ 541,685 1.95 %

(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 Company did not sell any investment securities during the three months ended March 31, 2024 and 2023.

Investment securities with carrying values totaling $966.2 million and $990.4 million at March 31, 2024 and December 31, 2023, respectively, were pledged to secure public funds on deposit, Federal Reserve Bank borrowings and other financial transactions.

There were no holdings of investment securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders' equity at March 31, 2024 and December 31, 2023.

The following tables summarize AFS and HTM investment securities, which were in a loss position as of the dates presented, aggregated by major security type and length of time in a continuous loss position. There were a total of 220 and 208 AFS investment securities which were in an unrealized loss position, without an ACL, at March 31, 2024 and December 31, 2023, respectively. There were a total of 83 and 82HTM investment securities which were in an unrecognized loss position, without an ACL, at March 31, 2024 and December 31, 2023, respectively.

Less Than 12 Months 12 Months or Longer Total
(dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
March 31, 2024
Available-for-sale:
Debt securities:
States and political subdivisions $ 5,888 $ (46) $ 111,345 $ (29,332) $ 117,233 $ (29,378)
Corporate securities - - 31,398 (4,213) 31,398 (4,213)
U.S. Treasury and other government-sponsored entities and agencies 6,813 (57) 16,134 (2,033) 22,947 (2,090)
Mortgage-backed securities:
Residential - U.S. government-sponsored entities and agencies 9,802 (56) 334,758 (62,757) 344,560 (62,813)
Residential - Non-government agencies 5,709 (82) 8,020 (999) 13,729 (1,081)
Commercial - U.S. government-sponsored entities and agencies 20,122 (274) 63,757 (15,060) 83,879 (15,334)
Commercial - Non-government agencies - - 15,049 (157) 15,049 (157)
Total $ 48,334 $ (515) $ 580,461 $ (114,551) $ 628,795 $ (115,066)

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Less Than 12 Months 12 Months or Longer Total
(dollars in thousands) Fair Value Unrecognized Losses Fair Value Unrecognized Losses Fair Value Unrecognized Losses
March 31, 2024
Held-to-maturity:
Debt securities:
States and political subdivisions $ - $ - $ 34,660 $ (7,324) $ 34,660 $ (7,324)
Mortgage-backed securities:
Residential - U.S. government-sponsored entities and agencies 16,324 (112) 490,701 (75,827) 507,025 (75,939)
Total $ 16,324 $ (112) $ 525,361 $ (83,151) $ 541,685 $ (83,263)

Less Than 12 Months 12 Months or Longer Total
(dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
December 31, 2023
Available-for-sale:
Debt securities:
States and political subdivisions $ 534 $ (1) $ 114,601 $ (29,809) $ 115,135 $ (29,810)
Corporate securities - - 31,414 (4,317) 31,414 (4,317)
U.S. Treasury and other government-sponsored entities and agencies 2,893 (87) 16,286 (1,854) 19,179 (1,941)
Mortgage-backed securities:
Residential - U.S. government-sponsored entities and agencies - - 367,887 (63,607) 367,887 (63,607)
Residential - Non-government agencies - - 8,169 (980) 8,169 (980)
Commercial - U.S. government-sponsored entities and agencies 6,467 (1) 44,447 (7,403) 50,914 (7,404)
Commercial - Non-government agencies 9,663 (130) 5,293 (58) 14,956 (188)
Total $ 19,557 $ (219) $ 588,097 $ (108,028) $ 607,654 $ (108,247)

Less Than 12 Months 12 Months or Longer Total
(dollars in thousands) Fair Value Unrecognized Losses Fair Value Unrecognized Losses Fair Value Unrecognized Losses
December 31, 2023
Held-to-maturity:
Debt securities:
States and political subdivisions $ - $ - $ 35,253 $ (6,706) $ 35,253 $ (6,706)
Mortgage-backed securities:
Residential - U.S. government-sponsored entities and agencies 8,853 (33) 512,378 (60,482) 521,231 (60,515)
Total $ 8,853 $ (33) $ 547,631 $ (67,188) $ 556,484 $ (67,221)

Investment securities in an unrecognized or unrealized loss position are evaluated at least on a quarterly basis, and include evaluating the changes in the investment securities' ratings issued by rating agencies and changes in the financial condition of the issuer. For mortgage-related securities, delinquency and loss information with respect to the underlying collateral, changes in levels of subordination for the Company's particular position within the repayment structure, and remaining credit enhancement as compared to projected credit losses of the security are also evaluated.

The Company has evaluated its AFS and HTM investment securities that are in an unrecognized or unrealized loss position and has determined that the unrecognized or unrealized losses on the Company's investment securities are unrelated to credit quality and primarily attributable to changes in interest rates and volatility in the financial markets since purchase. All of the investment securities in an unrecognized or unrealized loss position continue to be rated investment grade by one or more major rating agencies. The Company does not intend to sell the AFS and HTM securities that were in an unrecognized or unrealized loss position as of March 31, 2024 and December 31, 2023,and it is unlikely that the Company will be required to sell these
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securities before recovery of its amortized cost basis that may be at maturity. Therefore, the Company has not recorded an ACL on these securities and the unrecognized or unrealized losses on these securities have not been recognized into income.

3. LOANS AND CREDIT QUALITY

The following table presents loans by class, excluding loans held for sale, net of deferred fees and costs as of the dates presented:

(dollars in thousands) March 31, 2024 December 31, 2023
Commercial and industrial $ 576,088 $ 576,038
Real estate:
Construction 168,989 185,994
Residential mortgage 1,924,403 1,927,206
Home equity 727,218 734,500
Commercial mortgage 1,424,305 1,384,579
Consumer 580,741 630,898
Gross loans 5,401,744 5,439,215
Net deferred fees and costs (327) (233)
Total loans, net of deferred fees and costs $ 5,401,417 $ 5,438,982

Interest income on loans is accrued at the contractual rate of interest on the unpaid principal balance. Accrued interest receivable on loans totaled $17.6 million and $17.1 million at March 31, 2024 and December 31, 2023, respectively, and was reported together with accrued interest receivable on HTM and AFS debt securitieson the consolidated balance sheets. Accrued interest receivable on loans is excluded from the estimate of credit losses.

The Company did not transfer any loans to the held for sale category during the three months ended March 31, 2024 and 2023 and did not sell any other loans originally held for investment during the three months ended March 31, 2024 and 2023.

There were no loans categorized as purchased credit deteriorated ("PCD") as of March 31, 2024 and December 31, 2023.

The following tables present loans purchased by class for the periods presented. No loan portfolios were purchased during the three months ended March 31, 2024.

Three Months Ended March 31, 2023
(dollars in thousands) U.S. Mainland Consumer - Unsecured U.S. Mainland Consumer - Automobile Total
Purchases:
Outstanding balance $ 3,780 $ 15,159 $ 18,939
Premium - 568 568
Purchase price $ 3,780 $ 15,727 $ 19,507

Foreclosure Proceedings

The Company did not own any foreclosed properties as of March 31, 2024 and December 31, 2023. The Company had $1.6 million and $2.3 million of residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure at March 31, 2024 and December 31, 2023, respectively. The Company had $0.1 million in commercial real estate loans in the process of foreclosure at March 31, 2024 and December 31, 2023.

The Company did not sell any foreclosed properties during the three months ended March 31, 2024 and 2023.

Nonaccrual and Past Due Loans

For all loan types, the Company determines delinquency status by considering the number of days full payments required by the contractual terms of the loan are past due. The following tables present by class, the aging of the recorded investment in past
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due loans as of the dates presented. The following tables also present the amortized cost of loans on nonaccrual status for which there was no related ACL as of the dates presented:

(dollars in thousands) Accruing
Loans
30 - 59 Days
Past Due 		Accruing
Loans
60 - 89 Days
Past Due 		Accruing
Loans
90+ Days
Past Due 		Nonaccrual
Loans 		Total
Past Due
and
Nonaccrual 		Loans Not
Past Due 		Total Loans Nonaccrual
Loans
With
No ACL
March 31, 2024
Commercial and industrial $ 1,368 $ 370 $ - $ 357 $ 2,095 $ 574,001 $ 576,096 $ -
Real estate:
Construction - - 588 - 588 167,981 168,569 -
Residential mortgage 2,775 1,274 386 7,979 12,414 1,912,475 1,924,889 6,948
Home equity 707 - 560 929 2,196 727,014 729,210 929
Commercial mortgage - - - 77 77 1,422,185 1,422,262 77
Consumer 4,241 1,691 924 790 7,646 572,745 580,391 -
Total $ 9,091 $ 3,335 $ 2,458 $ 10,132 $ 25,016 $ 5,376,401 $ 5,401,417 $ 7,954

(dollars in thousands) Accruing
Loans
30 - 59 Days
Past Due 		Accruing
Loans
60 - 89 Days
Past Due 		Accruing
Loans
90+ Days
Past Due 		Nonaccrual
Loans 		Total
Past Due
and
Nonaccrual 		Loans Not
Past Due 		Total Loans Nonaccrual
Loans
With
No ACL
December 31, 2023
Commercial and industrial $ 513 $ 169 $ - $ 432 $ 1,114 $ 574,593 $ 575,707 $ -
Real estate:
Construction - - - - - 185,519 185,519 -
Residential mortgage 3,082 2,140 - 4,962 10,184 1,917,605 1,927,789 4,855
Home equity 804 400 229 834 2,267 734,257 736,524 834
Commercial mortgage - - - 77 77 1,382,825 1,382,902 77
Consumer 5,677 2,329 1,083 703 9,792 620,749 630,541 -
Total $ 10,076 $ 5,038 $ 1,312 $ 7,008 $ 23,434 $ 5,415,548 $ 5,438,982 $ 5,766

Collateral-Dependent Loans

In accordance with ASC 326, a loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following tables present the amortized cost basis of collateral-dependent loans by class, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans as of the dates presented:

(dollars in thousands) Secured by
1-4 Family
Residential
Properties 		Secured by
Nonfarm
Nonresidential
Properties 		Total Allocated
ACL
March 31, 2024
Real estate:
Residential mortgage $ 9,438 $ - $ 9,438 $ 291
Home equity 929 - 929 -
Commercial mortgage - 77 77 -
Total $ 10,367 $ 77 $ 10,444 $ 291

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(dollars in thousands) Secured by
1-4 Family
Residential
Properties 		Secured by
Nonfarm
Nonresidential
Properties 		Total Allocated
ACL
December 31, 2023
Real estate:
Residential mortgage $ 6,450 $ - $ 6,450 $ 47
Home equity 834 - 834 -
Commercial mortgage - 77 77 -
Total $ 7,284 $ 77 $ 7,361 $ 47

Loan Modifications for Borrowers Experiencing Financial Difficulty

Since the adoption of ASU 2022-02 on January 1, 2023 and during the three months ended March 31, 2024, the Company has not had any material modifications to loans either individually or in the aggregate for borrowers experiencing financial difficulty.

Troubled Debt Restructurings Prior to the Adoption of ASU 2022-02

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").

There were $0.9 million of TDRs included in nonperforming assets at March 31, 2024, which remained unchanged from December 31, 2023. There were $2.1 million of TDRs that were still accruing interest at March 31, 2024, which remained unchanged from December 31, 2023. None of the TDRs still accruing interest at March 31, 2024 and December 31, 2023 were more than 90 days delinquent.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans by credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk rating of loans.

Pass.Loans classified as pass are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement.

Special Mention.Loans classified as special mention, while still adequately protected by the borrower's capital adequacy and payment capability, exhibit distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment. These exposures require management's close attention so as to avoid becoming undue or unwarranted credit exposures.

Substandard.Loans classified as substandard are inadequately protected by the borrower's current financial condition and payment capability or of the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful.Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimate loss is deferred until its more exact status may be determined.

Loss.Loans classified as loss are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor
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desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Losses are taken in the period in which they surface as uncollectible.

The following tables present the amortized cost basis, net of deferred (fees) costs, of the Company's loans by class, credit quality indicator and origination year as of the dates presented. Revolving loans converted to term as of and during the periods presented were not material to the total loan portfolio. In addition, the following tables present gross charge-offs of loans by origination year during the periods presented.

(dollars in thousands) Amortized Cost of Term Loans by Year of Origination Amortized Cost of Revolving Loans
March 31, 2024 2024 2023 2022 2021 2020 Prior Total
Commercial and industrial:
Risk Rating
Pass $ 37,614 $ 78,658 $ 83,837 $ 74,088 $ 30,721 $ 172,917 $ 91,170 $ 569,005
Special Mention - 222 - 2,723 - 806 - 3,751
Substandard - 70 1,058 688 604 920 - 3,340
Subtotal 37,614 78,950 84,895 77,499 31,325 174,643 91,170 576,096
Construction:
Risk Rating
Pass - 10,345 49,193 60,077 13,794 31,918 2,654 167,981
Substandard - - 588 - - - - 588
Subtotal - 10,345 49,781 60,077 13,794 31,918 2,654 168,569
Residential mortgage:
Risk Rating
Pass 7,707 100,136 267,558 610,289 410,346 519,315 - 1,915,351
Special Mention - - - - - 257 - 257
Substandard - - 1,773 658 1,881 4,969 - 9,281
Subtotal 7,707 100,136 269,331 610,947 412,227 524,541 - 1,924,889
Home equity:
Risk Rating
Pass 336 12,084 32,543 18,765 8,074 24,762 631,158 727,722
Substandard - - - - - 928 560 1,488
Subtotal 336 12,084 32,543 18,765 8,074 25,690 631,718 729,210
Commercial mortgage:
Risk Rating
Pass 47,725 96,160 258,505 201,934 113,839 687,403 6,661 1,412,227
Special Mention - 625 - - - 1,391 - 2,016
Substandard - - - 2,567 - 5,452 - 8,019
Subtotal 47,725 96,785 258,505 204,501 113,839 694,246 6,661 1,422,262
Consumer:
Risk Rating
Pass 6,987 84,938 235,559 129,145 32,035 31,016 58,997 578,677
Substandard - 38 301 237 37 1,070 5 1,688
Loss - - - - - 26 - 26
Subtotal 6,987 84,976 235,860 129,382 32,072 32,112 59,002 580,391
Total $ 100,369 $ 383,276 $ 930,915 $ 1,101,171 $ 611,331 $ 1,483,150 $ 791,205 $ 5,401,417

(dollars in thousands) Gross Charge-Offs by Year of Origination
Three Months Ended March 31, 2024 2024 2023 2022 2021 2020 Prior Total
Commercial and industrial $ - $ 9 $ 171 $ 78 $ 13 $ 411 $ 682
Consumer - 182 2,743 1,216 165 532 4,838
Gross charge-offs $ - $ 191 $ 2,914 $ 1,294 $ 178 $ 943 $ 5,520

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(dollars in thousands) Amortized Cost of Term Loans by Year of Origination Amortized Cost of Revolving Loans
December 31, 2023 2023 2022 2021 2020 2019 Prior Total
Commercial and industrial:
Risk Rating
Pass $ 83,333 $ 82,649 $ 77,551 $ 32,831 $ 42,162 $ 152,940 $ 90,177 $ 561,643
Special Mention - - 2,916 - - 944 93 3,953
Substandard 37 1,189 576 662 571 7,026 50 10,111
Subtotal 83,370 83,838 81,043 33,493 42,733 160,910 90,320 575,707
Construction:
Risk Rating
Pass 8,434 52,596 69,203 18,878 2,136 31,090 2,778 185,115
Special Mention - - 404 - - - - 404
Subtotal 8,434 52,596 69,607 18,878 2,136 31,090 2,778 185,519
Residential mortgage:
Risk Rating
Pass 101,473 266,314 609,648 414,430 144,312 385,452 - 1,921,629
Special Mention - - - - - 268 - 268
Substandard - 1,057 299 931 818 2,787 - 5,892
Subtotal 101,473 267,371 609,947 415,361 145,130 388,507 - 1,927,789
Home equity:
Risk Rating
Pass 12,229 32,208 19,589 8,766 6,372 17,379 638,917 735,460
Substandard - - - - 66 998 - 1,064
Subtotal 12,229 32,208 19,589 8,766 6,438 18,377 638,917 736,524
Commercial mortgage:
Risk Rating
Pass 96,479 256,660 202,933 115,055 112,578 566,325 6,311 1,356,341
Special Mention - - - - 10,513 9,638 - 20,151
Substandard - - 2,587 - 1,654 2,169 - 6,410
Subtotal 96,479 256,660 205,520 115,055 124,745 578,132 6,311 1,382,902
Consumer:
Risk Rating
Pass 88,593 261,752 144,341 36,431 27,970 10,538 59,130 628,755
Substandard 58 231 205 87 83 1,084 10 1,758
Loss - - - - - 28 - 28
Subtotal 88,651 261,983 144,546 36,518 28,053 11,650 59,140 630,541
Total $ 390,636 $ 954,656 $ 1,130,252 $ 628,071 $ 349,235 $ 1,188,666 $ 797,466 $ 5,438,982

(dollars in thousands) Gross Charge-Offs by Year of Origination
Three Months Ended March 31, 2023 2023 2022 2021 2020 2019 Prior Total
Commercial and industrial $ - $ 144 $ 32 $ - $ 191 $ 412 $ 779
Consumer - 904 1,186 200 180 216 2,686
Gross charge-offs $ - $ 1,048 $ 1,218 $ 200 $ 371 $ 628 $ 3,465

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4. ALLOWANCE FOR CREDIT LOSSES AND RESERVE FOR OFF-BALANCE SHEET CREDIT EXPOSURES

The following tables present by class, the activities in the ACL for loans during the periods presented:

(dollars in thousands) Real Estate
Three Months Ended March 31, 2024 Commercial and Industrial Construction Residential Mortgage Home Equity Commercial Mortgage Consumer Total
Beginning balance $ 7,181 $ 4,004 $ 14,626 $ 3,501 $ 17,543 $ 17,079 $ 63,934
Provision (credit) for credit losses on loans 419 (385) 1,392 226 (539) 3,008 4,121
Subtotal 7,600 3,619 16,018 3,727 17,004 20,087 68,055
Charge-offs (682) - - - - (4,838) (5,520)
Recoveries 90 - 8 6 - 893 997
Net (charge-offs) recoveries (592) - 8 6 - (3,945) (4,523)
Ending balance $ 7,008 $ 3,619 $ 16,026 $ 3,733 $ 17,004 $ 16,142 $ 63,532

(dollars in thousands) Real Estate
Three Months Ended March 31, 2023 Commercial and Industrial Construction Residential Mortgage Home Equity Commercial Mortgage Consumer Total
Beginning balance $ 6,824 $ 2,867 $ 11,804 $ 4,114 $ 17,902 $ 20,227 $ 63,738
Provision (credit) for credit losses on loans 836 220 (44) (77) (430) 1,110 1,615
Subtotal 7,660 3,087 11,760 4,037 17,472 21,337 65,353
Charge-offs (779) - - - - (2,686) (3,465)
Recoveries 250 - 53 - - 908 1,211
Net (charge-offs) recoveries (529) - 53 - - (1,778) (2,254)
Ending balance $ 7,131 $ 3,087 $ 11,813 $ 4,037 $ 17,472 $ 19,559 $ 63,099

In the three months ended March 31, 2024, we recorded a provision for credit losses of $3.9 million, which consisted of a provision for credit losses on loans of $4.1 million and a credit to the provision for credit losses on off-balance sheet credit exposures of $0.2 million.

In the three months ended March 31, 2023, we recorded a provision for credit losses of $1.9 million, which consisted of a provision for credit losses on loans of $1.6 million and a provision for credit losses on off-balance sheet credit exposures of $0.3 million.

The following table presents the activities in the reserve for off-balance sheet credit exposures, included in other liabilities, during the periods presented:

Three Months Ended March 31,
(dollars in thousands) 2024 2023
Beginning balance $ 3,706 $ 3,243
(Credit) provision for off-balance sheet credit exposures (185) 237
Ending balance $ 3,521 $ 3,480

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5. INVESTMENTS IN UNCONSOLIDATED ENTITIES

The following table presents the components of the Company's investments in unconsolidated entities as of the dates presented:

(dollars in thousands) March 31, 2024 December 31, 2023
Investments in low-income housing tax credit partnerships, net of amortization $ 37,151 $ 37,838
Investments in common securities of statutory trusts 1,547 1,547
Investments in affiliates 32 111
Other 2,050 2,050
Total $ 40,780 $ 41,546

The Company invests in low-income housing tax credit ("LIHTC") and other partnerships. The Company had commitments to fund LIHTC partnerships totaling $47.8 million as of March 31, 2024 and December 31, 2023. Unfunded commitments related to LIHTC partnerships totaled $14.3 millionand $22.0 million at March 31, 2024 and December 31, 2023, respectively, and are included in other liabilities in the Company's consolidated balance sheets. The investments are accounted for under the proportional amortization method and are included in investments in unconsolidated entities in the Company's consolidated balance sheets.

The following table presents the expected payments for the unfunded commitments of LIHTC and other partnerships as of March 31, 2024, for the remainder of fiscal year 2024, the next five succeeding fiscal years, and all years thereafter:

(dollars in thousands)
Year Ending December 31, LIHTC Other Total
2024 (remainder) $ 9,696 $ 903 $ 10,599
2025 4,248 - 4,248
2026 26 - 26
2027 26 - 26
2028 20 - 20
2029 27 - 27
Thereafter 286 - 286
Total unfunded commitments $ 14,329 $ 903 $ 15,232

The following table presents amortization and tax credits recognized associated with our investments in LIHTC partnerships for the periods presented:

Three Months Ended March 31,
(dollars in thousands) 2024 2023
Proportional amortization method:
Amortization expense recognized in income tax expense $ 686 $ 714
Tax credits recognized in income tax expense 800 892

In 2021, the Company committed $2.0 million to the JAM FINTOP Banktech Fund, L.P. The Company does not have the ability to exercise significant influence over the JAM FINTOP Banktech Fund, L.P. and the investment does not have a readily determinable fair value. As a result, the Company determined that the cost method of accounting for the investment was
appropriate. The Company had $0.9 million and $1.0 million in unfunded commitments related to the investment as of March 31, 2024 and December 31, 2023, respectively, which was recorded in other liabilities.

During the first quarter of 2022, the Company invested $2.0 million in Swell Financial, Inc. ("Swell"). The Company did not have the ability to exercise significant influence over Swell and the investment did not have a readily determinable fair value. As a result, the Company determined that the cost method of accounting for the investment was appropriate.

During the third quarter of 2023, the Company entered into a transaction with Swell whereby Swell repurchased the Company's entire preferred and common stock equity investment in exchange for $0.5 million in cash and certain intellectual property
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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).

Due to the aforementioned events, the Company performed an impairment analysis and concluded the intellectual property rights and the platform usage fee agreement received in exchange for the Company's investment in Swell were not impaired as of March 31, 2024 and December 31, 2023. The intangible assets, net of accumulated amortization, totaling $1.4 million and $1.5 million are included in other assets on the Company's consolidated balance sheet as of March 31, 2024 and December 31, 2023, respectively.

6. MORTGAGE SERVICING RIGHTS

The following table presents changes in mortgage servicing rights ("MSR") for the periods presented:

(dollars in thousands)
Balance at December 31, 2023 $ 8,696
Additions 81
Amortization (178)
Balance at March 31, 2024 $ 8,599
Balance at December 31, 2022 $ 9,074
Additions 58
Amortization (189)
Balance at March 31, 2023 $ 8,943

Income generated as the result of new MSR is reported as gains on sales of loans and totaled $0.1 million for the three months ended March 31, 2024 and March 31, 2023.

Amortization of MSR totaled $0.2 million for the three months ended March 31, 2024 and March 31, 2023.

The following table presents the fair market value and key assumptions used in determining the fair market value of MSR as of the dates presented:

(dollars in thousands) March 31, 2024 December 31, 2023
Fair market value, beginning of year $ 12,185 $ 12,061
Fair market value, end of period 12,134 12,185
Weighted average discount rate 9.5 % 9.5 %
Weighted average prepayment speed assumption 11.3 11.2
The following table presents carrying values and accumulated amortization related to MSR as of the dates presented:

March 31, 2024 December 31, 2023
(dollars in thousands) Gross
Carrying
Value 		Accumulated
Amortization 		Net
Carrying
Value 		Gross
Carrying
Value 		Accumulated
Amortization 		Net
Carrying
Value
Mortgage servicing rights $ 69,821 $ (61,222) $ 8,599 $ 69,740 $ (61,044) $ 8,696

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The following table presents the estimated amortization expense for the remainder of fiscal year 2024, the next five succeeding fiscal years, and all years thereafter, based on MSRheld as of March 31, 2024:

(dollars in thousands)
Year Ending December 31,
2024 (remainder) $ 617
2025 829
2026 748
2027 674
2028 603
2029 531
Thereafter 4,597
Total $ 8,599

The Company performs an impairment assessment of its MSR whenever events or changes in circumstance indicate that the carrying value of the MSR may not be recoverable.

7. DERIVATIVES

The Company utilizes various designated and undesignated derivative financial instruments to reduce its exposure to movements in interest rates. The Company measures all derivatives at fair value on its consolidated balance sheet. In each reporting period, the Company records the derivative instruments in other assets or other liabilities depending on whether the derivatives are in an asset or liability position. For derivative instruments that are designated as cash flow hedging instruments, the Company records the effective portion of the changes in the fair value of the derivative in accumulated other comprehensive income (loss) ("AOCI"), net of tax, until earnings are affected by the variability of cash flows of the hedged transaction. The Company immediately recognizes the portion of the gain or loss in the fair value of the derivative that represents hedge ineffectiveness in current period earnings. For derivative instruments that are not designated as hedging instruments, changes in the fair value of the derivative are included in current period earnings.

Derivative financial instruments are subject to credit and counterparty risk, which is defined as the risk of financial loss if a borrower or counterparty is either unable or unwilling to repay borrowings or settle transactions in accordance with the underlying contractual terms. Credit and counterparty risks associated with derivative financial instruments are similar to those relating to traditional financial instruments. The Company manages derivative credit and counterparty risk by evaluating the creditworthiness of each borrower or counterparty and requiring collateral where appropriate.

Interest Rate Lock and Forward Sale Commitments

The Company enters into interest rate lock commitments on certain mortgage loans that are intended to be sold. To manage interest rate risk on interest rate lock commitments, the Company also enters into forward loan sale commitments on the loans that are intended to be sold. The interest rate lock and forward loan sale commitments are accounted for as undesignated derivatives and are recorded at their respective fair values in other assets and other liabilities, with changes in fair value recorded in current period earnings. These instruments serve to reduce the Company's exposure to movements in interest rates.

The Company was party to interest rate lock commitments on $0.8 million and $1.8 million of mortgage loans at March 31, 2024 and December 31, 2023, respectively. The Company was not a party to any forward sale commitments on mortgage loans at March 31, 2024 and December 31, 2023.

Risk Participation Agreements

The Company enters into credit risk participation agreements ("RPA") with financial institution counterparties for interest rate swaps related to loans in which it participates. The RPAs entered into by us and a participant bank provide credit protection to the financial institution counterparties should the borrowers fail to perform on their interest rate derivative contracts with the financial institutions. The RPAs are accounted for as undesignated derivatives and are recorded at fair value, with changes in fair value recorded in current period earnings.

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The Company was party to RPAs with total notional amounts of $35.8 million and $36.0 million at March 31, 2024 and December 31, 2023, respectively. The fair value of the RPAs was insignificant to the consolidated financial statements at March 31, 2024 and December 31, 2023.

Back-to-Back Swap Agreements

The Company established a program whereby it originates a variable rate loan and enters into a variable-to-fixed interest rate swap with the customer. The Company also enters into an equal and offsetting swap with a highly rated third-party financial institution. These "back-to-back swap agreements" are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. These back-to-back swap agreements are free-standing derivatives and recorded at fair value on our consolidated balance sheet in other assets or other liabilities.

The Company was party to swap agreements with its borrowers with total notional amounts of $50.9 million and $51.1 million at March 31, 2024 and December 31, 2023, respectively, offset by swap agreements with third party financial institutions with the same total notional amounts. The Company received $13.8 millionand $9.6 million in counter-party cash collateral related to the back-to-back swap agreements at March 31, 2024 and December 31, 2023, respectively.

Interest Rate Swaps

During the first quarter of 2022, the Company entered into a forward starting interest rate swap, with an effective date of March 31, 2024. This transaction had a notional amount of $115.5 million and 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 has a maturity date of March 31, 2029.

The interest rate swap is carried on the Company's consolidated balance sheet at its fair value in other assets (when the fair value is positive) or in other liabilities (when the fair value is negative). The changes in the fair value of the interest rate swap are recorded in interest income. The unrealized gains or losses due to changes in fair value of the hedged debt securities due to changes in benchmark interest rates are recorded as an adjustment to the hedged debt securities and offset in the same interest income line item.

The following tables present the location of all assets and liabilities associated with our derivative instruments within the consolidated balance sheets as of the dates presented:

Derivative Financial Instruments Not Designated as Hedging Instruments Asset Derivatives Liability Derivatives
Fair Value at Fair Value at
(dollars in thousands) Balance Sheet Location March 31,
2024 		December 31,
2023 		March 31,
2024 		December 31,
2023
Interest rate lock and forward sale commitments Other assets / other liabilities $ 3 $ - $ 2 $ 34
Back-to-back swap agreements Other assets / other liabilities 4,220 3,547 4,220 3,547
Derivative Financial Instruments Designated as Hedging Instruments Asset Derivatives Liability Derivatives
Fair Value at Fair Value at
(dollars in thousands) Balance Sheet Location March 31,
2024 		December 31,
2023 		March 31,
2024 		December 31,
2023
Interest rate swap Other assets / other liabilities $ 9,375 $ 6,440 $ - $ -

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

Derivative Financial Instruments
Not Designated as Hedging Instruments 		Location of Gain (Loss)
Recognized in
Earnings on Derivatives 		Amount of Gain (Loss)
Recognized in
Earnings on Derivatives
(dollars in thousands)
Three Months Ended March 31, 2024
Interest rate lock and forward sale commitments Mortgage banking income $ 35
Back-to-back swap agreements Other service charges and fees 80
Three Months Ended March 31, 2023
Interest rate lock and forward sale commitments Mortgage banking income (8)
Loans held for sale Other income 3
Derivative Financial Instruments
Designated as Hedging Instruments 		Location of Gain (Loss)
Recognized in
Earnings on Derivatives 		Amount of Gain (Loss)
Recognized in
Earnings on Derivatives
(dollars in thousands)
Three Months Ended March 31, 2024
Interest rate swap Interest income $ (108)
Three Months Ended March 31, 2023
Interest rate swap Interest income 57

The following table presents the amounts recorded on the consolidated balance sheets related to cumulative basis adjustments for fair value hedges as of the periods presented:

Line Item in the Consolidated Balance Sheets
Carrying Amount of the Hedged Assets
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
(dollars in thousands)
March 31, 2024
March 31, 2024
Investment securities, available-for-sale
$ 90,419 $ (485)

8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Federal Home Loan Bank Advances and Other Borrowings

The Bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB") and maintained a $1.93 billion line of credit as of March 31, 2024, which remained unchanged from December 31, 2023. At March 31, 2024, $1.80 billion was undrawn under this arrangement, compared to $1.81 billion at December 31, 2023. There were no short-term borrowings under this arrangement at March 31, 2024 and December 31, 2023. There were $50.0 million in long-term advances under the FHLB arrangement bearing interest rates between 4.02% and 4.62% at March 31, 2024 and December 31, 2023.

The FHLB provides standby letters of credit on behalf of the Bank to secure certain public deposits. If the FHLB is required to make a payment on a standby letter of credit, the payment amount is converted to an advance at the FHLB. Standby letters of credit under this arrangement that are used to collateralize certain government deposits totaled $75.0 million as of March 31, 2024, compared to $72.0 million as of December 31, 2023.

In accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB, the FHLB advances and standby letters of credit available at March 31, 2024 and December 31, 2023 were secured by certain real estate loans with a carrying value of approximately $3.16 billion.

The Bank had additional unused borrowings available at the Federal Reserve Discount Window of $241.0 million and $285.8 million at March 31, 2024 and December 31, 2023, respectively. Certain commercial and commercial real estate loans with a
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par value totaling $133.4 million and $135.1 million at March 31, 2024 and December 31, 2023, respectively, were pledged as collateral on our line of credit with the Federal Reserve. In addition, investment securities with a par value of $194.0 million and $196.7 million as of March 31, 2024 and December 31, 2023, respectively, were pledged to the Federal Reserve in support of the line of credit. The Federal Reserve does not have the right to sell or repledge these loans and investment securities.

The Bank had an unused and unsecured credit line available at Pacific Coast Bankers' Bank ("PCBB") of $50.0 million at March 31, 2024 and December 31, 2023.

The Bank had an additional unused unsecured credit line available at Wells Fargo of $25.0 million at March 31, 2024 and December 31, 2023.

Subordinated Debentures

The following table present's the Company's junior subordinated debentures outstanding, which are recorded in long-term debt on the Company's consolidated balance sheets as of the dates presented:

(dollars in thousands)
Name of Trust March 31, 2024 December 31, 2023 Interest Rate
Trust IV $ 30,928 $ 30,928
Three-month CME Term SOFR + tenor spread adjustment of 0.26% + 2.45%
Trust V 20,619 20,619
Three-month CME Term SOFR + tenor spread adjustment of 0.26% + 1.87%
Total $ 51,547 $ 51,547

In September 2004, we created a wholly-owned statutory trust, CPB Capital Trust IV ("Trust IV"). Trust IV issued $30.0 million in floating rate trust preferred securities which bore an interest rate of three-month LIBOR plus 2.45% and maturing on December 15, 2034. The principal assets of Trust IV are $30.9 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust IV trust preferred securities. Trust IV issued $0.9 million of common securities to the Company.

In December 2004, we created a wholly-owned statutory trust, CPB Statutory Trust V ("Trust V"). Trust V issued $20.0 million in floating rate trust preferred securities which bore an interest rate of three-month LIBOR plus 1.87% and maturing on December 15, 2034. The principal assets of Trust V are $20.6 million of the Company's junior subordinated debentures with an identical interest rate and maturity as the Trust V trust preferred securities. Trust V issued $0.6 million of common securities to the Company.

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 Company is not considered the primary beneficiary of Trusts IV and V. Therefore, the trusts are not considered a variable interest entity and are not consolidated in the Company's financial statements. Rather the subordinated debentures are shown as a liability on the Company's consolidated balance sheets. The Company's investments in the common securities of the trusts are included in investment in unconsolidated entities in the Company's consolidated balance sheets.

The floating trust preferred securities, the junior subordinated debentures that are the assets of Trusts IV and V and the common securities issued by Trusts IV and V are redeemable in whole or in part on any interest payment date on or after December 15, 2009 for Trust IV and V, or at any time in whole but not in part within 90 days following the occurrence of certain events. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from time to time to defer interest payments on the subordinated debentures, which would result in a deferral of distribution payments on the related trust preferred securities, for up to 20 consecutive quarterly periods without default or penalty.

The subordinated debentures may be included in Tier 1 capital, with certain limitations applicable, under current regulatory guidelines and interpretations.

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Subordinated Notes

The following table presents the Company's subordinated notes outstanding as of the dates presented:

(dollars in thousands)
Description March 31, 2024 December 31, 2023 Interest Rate
October 2020 Private Placement $ 55,000 $ 55,000
4.75% for the first five years. Resets quarterly thereafter to the then current three-month SOFR plus 456 basis points.

On October 20, 2020, the Company completed a $55.0 million private placement of ten-year fixed-to-floating rate subordinated notes, which will be used to support regulatory capital ratios and for general corporate purposes. The Company exchanged the privately placed notes for registered notes with the same terms and in the same aggregate principal amount at the end of the fourth quarter of 2020. The subordinated 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 SOFR, as published by the Federal Reserve Bank of New York, plus 456 basis points.

The subordinated notes may be included in Tier 2 capital, with certain limitations applicable, under current regulatory guidelines and interpretations. The subordinated notes had a carrying value of $54.6 million, net of unamortized debt issuance costs of $0.4 million, at March 31, 2024.

9. REVENUE FROM CONTRACTS WITH CUSTOMERS

The following table presents the Company's other operating income, segregated by revenue streams that are in-scope and out-of-scope of ASC 606, "Revenue from Contracts with Customers"for the periods presented:

Three Months Ended March 31, 2024 Three Months Ended March 31, 2023
(dollars in thousands) In-Scope Out-of-Scope Total In-Scope Out-of-Scope Total
Other operating income:
Mortgage banking income $ 72 $ 541 $ 613 $ 151 $ 375 $ 526
Service charges on deposit accounts 2,103 - 2,103 2,111 - 2,111
Other service charges and fees 4,670 591 5,261 4,379 606 4,985
Income from fiduciary activities 1,435 - 1,435 1,321 - 1,321
Income from bank-owned life insurance - 1,522 1,522 - 1,291 1,291
Other - 310 310 - 775 775
Total other operating income $ 8,280 $ 2,964 $ 11,244 $ 7,962 $ 3,047 $ 11,009

10. SHARE-BASED COMPENSATION

Restricted and Performance Stock Units

Under the Company's 2023 Stock Compensation Plan, the Company awarded restricted stock units ("RSUs") and performance stock units ("PSUs") to certain non-officer directors and senior management personnel. The awards typically vest over a two-, three- or five-year period from the date of grant and are subject to forfeiture until performance and employment targets are achieved. Compensation expense is typically measured as the market price of the stock awards on the grant date, and is recognized over the specified vesting periods.

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The following table presents the activities of RSUs and PSUs for the three months ended March 31, 2024:

(dollars in thousands, except per share data) Shares Weighted Average Grant Date Fair Value Fair Value of RSUs and PSUs That Vested During the Period
Non-vested RSUs and PSUs, beginning of period 224,579 $ 24.76
Changes during the period:
Granted 137,911 19.41
Forfeited (1,648) 20.59
Vested (70,816) 23.95 $ 1,369
Non-vested RSUs and PSUs, end of period 290,026 22.44

11. SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS

In 1995, 2001, 2004 and 2006, the Bank established Supplemental Executive Retirement Plans ("SERP"), which provide certain (current and former) officers of the Company with supplemental retirement benefits. On December 31, 2002, the 1995 and 2001 SERP were curtailed. In conjunction with the September 2004 merger with CB Bancshares, Inc. ("CBBI"), the Company assumed CBBI's SERP obligation.

The projected benefit obligation of the unfunded SERP is recorded in other liabilities on the Company's consolidated balance sheets. The projected benefit obligation was $9.2 million at March 31, 2024, which remained relatively unchanged from $9.3 million at December 31, 2023.

The following table presents the components of net periodic benefit cost for the SERP for the periods presented:

Three Months Ended March 31,
(dollars in thousands) 2024 2023
Interest cost $ 108 $ 112
Amortization of net actuarial (gain) loss - (19)
Amortization of net transition obligation - 2
Net periodic benefit cost $ 108 $ 95

All components of net periodic benefit cost are included in other operating expenses in the Company's consolidated statements of income.

12. OPERATING LEASES

We lease certain land and buildings for our bank branches and ATMs. In some instances, a lease may contain renewal options to extend the term of the lease. Renewal options that are likely to be exercised have been recognized as part of our right-of-use assets and lease liabilities in accordance with ASC 842, "Leases". Certain leases also contain variable payments that are primarily determined based on common area maintenance costs and Hawaii state tax rates. All leases are operating leases and we do not include any short-term leases in the calculation of the right-of-use assets and lease liabilities. The most significant assumption related to the Company's application of ASC 842 was the discount rate assumption. As most of the Company's lease agreements do not provide for an implicit interest rate, the Company uses the collateralized interest rate that the Company would have to pay to borrow over a similar term to estimate the Company's lease liabilities.

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The following table presents total lease cost, cash flow information, weighted-average remaining lease term and weighted-average discount rate for the periods presented:

Three Months Ended March 31,
(dollars in thousands) 2024 2023
Lease cost:
Operating lease cost $ 1,303 $ 1,325
Variable lease cost 935 888
Less: Sublease income - (17)
Total lease cost $ 2,238 $ 2,196
Other information:
Operating cash flows from operating leases $ (1,257) $ (1,390)
Weighted-average remaining lease term - operating leases 11.15 years 11.22 years
Weighted-average discount rate - operating leases 4.08 % 3.96 %

The following table presents a schedule of annual undiscounted cash flows for our operating leases and a reconciliation of those cash flows to the operating lease liabilities as of March 31, 2024, for the remainder of fiscal year 2024, the next five succeeding fiscal years and all years thereafter:

(dollars in thousands) Undiscounted Cash Flows Lease Liability Discount on Cash Flows Lease Liability
Year Ending December 31,
2024 (remainder) $ 3,568 $ 940 $ 2,628
2025 4,195 1,141 3,054
2026 4,135 1,022 3,113
2027 4,128 899 3,229
2028 3,579 784 2,795
2029 3,113 679 2,434
Thereafter 18,712 2,796 15,916
Total $ 41,430 $ 8,261 $ 33,169

In addition, the Company, as lessor, leases certain properties that it owns. All of these leases are operating leases. The following table presents lease income related to these leases that was recognized for the periods presented:

Three Months Ended March 31,
(dollars in thousands) 2024 2023
Total rental income recognized $ 509 $ 562

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The following table presents estimated lease payments, based on the Company's leases as lessor as of March 31, 2024, for the remainder of fiscal year 2024, the next five succeeding fiscal years, and all years thereafter:

(dollars in thousands)
Year Ending December 31,
2024 (remainder) $ 956
2025 1,157
2026 1,015
2027 960
2028 608
2029 553
Thereafter 1,293
Total $ 6,542

13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the components of other comprehensive income (loss) for the periods presented:

(dollars in thousands) Before Tax Tax Effect Net of Tax
Three Months Ended March 31, 2024
Net change in fair value of investment securities:
Net unrealized losses on AFS investment securities arising during the period $ (7,035) $ (1,855) $ (5,180)
Less: Amortization of unrealized losses on investment securities transferred to HTM 1,638 432 1,206
Net change in fair value of investment securities (5,397) (1,423) (3,974)
Net change in fair value of derivatives:
Net unrealized gains arising during the period 3,053 806 2,247
Net change in fair value of derivatives 3,053 806 2,247
Other comprehensive loss $ (2,344) $ (617) $ (1,727)

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(dollars in thousands) Before Tax Tax Effect Net of Tax
Three Months Ended March 31, 2023
Net change in fair value of investment securities:
Net unrealized gains on AFS investment securities arising during the period $ 15,258 $ 4,052 $ 11,206
Less: Amortization of unrealized losses on investment securities transferred to HTM 1,668 443 1,225
Net change in fair value of investment securities 16,926 4,495 12,431
Net change in fair value of derivatives:
Net unrealized losses arising during the period (1,599) (436) (1,163)
Net change in fair value of derivatives (1,599) (436) (1,163)
SERP:
Amortization of net actuarial gain (19) (5) (14)
Amortization of net transition obligation 2 - 2
SERP (17) (5) (12)
Other comprehensive income $ 15,310 $ 4,054 $ 11,256


The following tables present the changes in each component of accumulated other comprehensive income (loss), net of tax, for the periods presented:

(dollars in thousands) Investment Securities Derivatives SERP AOCI
Three Months Ended March 31, 2024
Balance at beginning of period $ (127,922) $ 5,029 $ 297 $ (122,596)
Other comprehensive income (loss) before reclassifications (5,180) 2,247 - (2,933)
Reclassification adjustments from AOCI 1,206 - - 1,206
Total other comprehensive income (loss) (3,974) 2,247 - (1,727)
Balance at end of period $ (131,896) $ 7,276 $ 297 $ (124,323)

(dollars in thousands) Investment Securities Derivatives SERP AOCI
Three Months Ended March 31, 2023
Balance at beginning of period $ (149,109) $ 4,645 $ 480 $ (143,984)
Other comprehensive income (loss) before reclassifications 11,206 (1,163) - 10,043
Reclassification adjustments from AOCI 1,225 - (12) 1,213
Total other comprehensive income (loss) 12,431 (1,163) (12) 11,256
Balance at end of period $ (136,678) $ 3,482 $ 468 $ (132,728)

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The following tables present the amounts reclassified out of each component of AOCI for the periods presented:

Amount Reclassified from AOCI Affected Line Item in the Statement Where Net Income is Presented
(dollars in thousands) Three Months Ended March 31,
Details about AOCI Components 2024 2023
Amortization of unrealized losses on investment securities transferred to HTM:
Amortization $ (1,638) $ (1,668) Interest and dividends on investment securities
Tax effect 432 443 Income tax benefit
Net of tax (1,206) (1,225)
SERP:
Amortization of net actuarial gain - 19 Other operating expense - other
Amortization of net transition obligation - (2) Other operating expense - other
Total before tax - 17
Tax effect - (5) Income tax expense
Net of tax - 12
Total reclassification adjustments from AOCI for the period, net of tax $ (1,206) $ (1,213)

14. EARNINGS PER SHARE

The following table presents the information used to compute basic and diluted earnings per share for the periods presented:

Three Months Ended March 31,
(dollars in thousands, except per share data) 2024 2023
Net income $ 12,945 $ 16,187
Weighted average common shares outstanding - basic 27,046,525 26,999,138
Dilutive effect of employee stock options and awards 52,576 122,874
Weighted average common shares outstanding - diluted 27,099,101 27,122,012
Basic earnings per share $ 0.48 $ 0.60
Diluted earnings per share $ 0.48 $ 0.60
Anti-dilutive employee stock options and awards 1,443 8,348

15. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

Disclosures about Fair Value of Financial Instruments

Fair value estimates, methods and assumptions are set forth below for our financial instruments.

Short-Term Financial Instruments

The carrying values of short-term financial instruments are deemed to approximate fair values. Such instruments are considered readily convertible to cash and include cash and due from financial institutions, interest-bearing deposits in other financial institutions, accrued interest receivable, the majority of FHLB advances and other short-term borrowings, and accrued interest payable.

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Investment Securities

The fair value of investment securities is based on market price quotations received from third-party pricing services. The third-party pricing services utilize pricing models supported with timely market data information. Where quoted market prices are not available, fair values are based on quoted market prices of comparable securities.

Loans

Fair values of loans are estimated based on discounted cash flows of portfolios of loans with similar financial characteristics including the type of loan, interest terms and repayment history. Fair values are calculated by discounting scheduled cash flows through estimated maturities using estimated market discount rates. Estimated market discount rates are reflective of credit and interest rate risks inherent in the Company's various loan types and are derived from available market information, as well as specific borrower information. The weighted average discount rate used in the valuation of loans was 7.01% and 6.86% as of March 31, 2024 and December 31, 2023, respectively. In accordance with ASU 2016-01, the fair values of loans are measured based on the notion of exit price.

Loans Held for Sale

The fair value of loans classified as held for sale are generally based upon quoted prices for similar assets in active markets, acceptance of firm offer letters with agreed upon purchase prices, discounted cash flow models that take into account market observable assumptions, or independent appraisals of the underlying collateral securing the loans. We report the fair values of Hawaii and U.S. Mainland construction and commercial real estate loans, if any, net of estimated selling costs on our consolidated balance sheets.

Deposit Liabilities

The fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits and interest-bearing demand and savings accounts, for the purposes of this disclosure, are shown to equal the carrying amount which is the amount payable on demand. The fair value of time deposits is estimated by discounting future cash flows using rates currently offered for FHLB advances of similar remaining maturities. The weighted average discount rate used in the valuation of time deposits was 5.46% and 5.48% as of March 31, 2024 and December 31, 2023, respectively.

Long-Term Debt

The fair values of our long-term debt is estimated by discounting scheduled cash flows over the contractual borrowing period at the estimated market rate for similar borrowing arrangements. The weighted average discount rate used in the valuation of long-term debt was 7.17% and 6.83% as of March 31, 2024 and December 31, 2023, respectively.

Derivatives

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

Off-Balance Sheet Financial Instruments

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

Limitations

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

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

Fair Value Measurement Using
(dollars in thousands) Carrying
Amount 		Estimated
Fair Value 		Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) 		Significant
Other
Observable
Inputs
(Level 2) 		Significant
Unobservable
Inputs
(Level 3)
March 31, 2024
Financial assets:
Cash and due from financial institutions $ 98,410 $ 98,410 $ 98,410 $ - $ -
Interest-bearing deposits in other financial institutions 214,472 214,472 214,472 - -
Investment securities 1,285,781 1,202,518 15,238 1,180,253 7,027
Loans held for sale 755 755 - 755 -
Loans 5,401,417 5,023,822 - - 5,023,822
Accrued interest receivable 21,957 21,957 402 3,964 17,591
Financial liabilities:
Deposits:
Noninterest-bearing demand 1,848,554 1,848,554 1,848,554 - -
Interest-bearing demand and savings and money market 3,502,287 3,502,287 3,502,287 - -
Time 1,268,013 1,257,777 - - 1,257,777
Long-term debt 156,163 147,900 - - 147,900
Accrued interest payable 16,654 16,654 74 - 16,580

Fair Value Measurement Using
(dollars in thousands) Notional
Amount 		Carrying
Amount 		Estimated
Fair Value 		Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) 		Significant
Other
Observable
Inputs
(Level 2) 		Significant
Unobservable
Inputs
(Level 3)
March 31, 2024
Off-balance sheet financial instruments:
Commitments to extend credit $ 1,269,856 $ - $ 1,246 $ - $ 1,246 $ -
Standby letters of credit and financial guarantees written 3,503 - 53 - 53 -
Derivatives:
Interest rate lock commitments 759 1 1 - 1 -
Risk participation agreements 35,815 - - - - -
Back-to-back swap agreements:
Assets 50,854 4,220 4,220 - - 4,220
Liabilities (50,854) (4,220) (4,220) - - (4,220)
Interest rate swap agreements 115,545 9,375 9,375 - - 9,375
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Fair Value Measurement Using
(dollars in thousands) Carrying
Amount 		Estimated
Fair Value 		Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) 		Significant
Other
Observable
Inputs
(Level 2) 		Significant
Unobservable
Inputs
(Level 3)
December 31, 2023
Financial assets:
Cash and due from financial institutions $ 116,181 $ 116,181 $ 116,181 $ - $ -
Interest-bearing deposits in other financial institutions 406,256 406,256 406,256 - -
Investment securities 1,279,548 1,212,388 - 1,205,238 7,150
Loans held for sale 1,778 1,778 - 1,778 -
Loans 5,438,982 5,089,292 - - 5,089,292
Accrued interest receivable 21,511 21,511 342 4,043 17,126
Financial liabilities:
Deposits:
Noninterest-bearing demand 1,913,379 1,913,379 1,913,379 - -
Interest-bearing demand and savings and money market 3,538,922 3,538,922 3,538,922 - -
Time 1,395,291 1,385,473 - - 1,385,473
Long-term debt 156,102 153,073 - - 153,073
Accrued interest payable 18,948 18,948 85 - 18,863

Fair Value Measurement Using
(dollars in thousands) Notional
Amount 		Carrying
Amount 		Estimated
Fair Value 		Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) 		Significant
Other
Observable
Inputs
(Level 2) 		Significant
Unobservable
Inputs
(Level 3)
December 31, 2023
Off-balance sheet financial instruments:
Commitments to extend credit $ 1,275,331 $ - $ 1,210 $ - $ 1,210 $ -
Standby letters of credit and financial guarantees written 3,301 - 50 - 50 -
Derivatives:
Interest rate lock commitments 1,807 (34) (34) - (34) -
Risk participation agreements 36,022 - - - - -
Back-to-back swap agreements:
Assets 51,059 3,547 3,547 - - 3,547
Liabilities (51,059) (3,547) (3,547) - - (3,547)
Interest rate swap agreements 115,545 6,440 6,440 - - 6,440

Fair Value Measurements

We group our financial assets and liabilities at fair value into three levels based on the markets in which the financial assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:

•Level 1 - Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities traded in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

•Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

•Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in
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pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques that requires the use of significant judgment or estimation.

We base our fair values on the price that we would expect to receive if an asset were sold, or the price that we would expect to pay to transfer a liability in an orderly transaction between market participants at the measurement date. We also maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.

We use fair value measurements to record adjustments to certain financial assets and liabilities and to determine fair value disclosures. Available-for-sale securities and derivatives are recorded at fair value on a recurring basis. Periodically, we may be required to record other financial assets at fair value on a nonrecurring basis such as loans held for sale, individually evaluated loans, mortgage servicing rights, and other real estate owned. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.

The following tables present the fair value of financial assets and liabilities measured on a recurring basis as of the dates presented:
Fair Value at Reporting Date Using
(dollars in thousands) Fair Value Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) 		Significant
Other
Observable
Inputs
(Level 2) 		Significant
Unobservable
Inputs
(Level 3)
March 31, 2024
Available-for-sale securities:
Debt securities:
States and political subdivisions $ 123,023 $ - $ 116,700 $ 6,323
Corporate securities 31,398 - 31,398 -
U.S. Treasury and other government-sponsored entities and agencies 39,906 15,238 24,668 -
Mortgage-backed securities:
Residential - U.S. government-sponsored entities and agencies 349,637 - 349,637 -
Residential - Non-government agencies 17,941 - 17,237 704
Commercial - U.S. government-sponsored entities and agencies 83,879 - 83,879 -
Commercial - Non-government agencies 15,049 - 15,049 -
Total available-for-sale investment securities 660,833 15,238 638,568 7,027
Derivatives:
Interest rate lock commitments 1 - 1 -
Interest rate swap agreements 9,375 - - 9,375
Total derivatives 9,376 - 1 9,375
Total $ 670,209 $ 15,238 $ 638,569 $ 16,402

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Fair Value at Reporting Date Using
(dollars in thousands) Fair Value Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) 		Significant
Other
Observable
Inputs
(Level 2) 		Significant
Unobservable
Inputs
(Level 3)
December 31, 2023
Available-for-sale securities:
Debt securities:
States and political subdivisions $ 126,635 $ - $ 120,199 $ 6,436
Corporate securities 31,414 - 31,414 -
U.S. Treasury and other government-sponsored entities and agencies 26,197 - 26,197 -
Mortgage-backed securities:
Residential - U.S. government-sponsored entities and agencies 378,386 - 378,386 -
Residential - Non-government agencies 18,708 - 17,994 714
Commercial - U.S. government-sponsored entities and agencies 50,914 - 50,914 -
Commercial - Non-government agencies 14,956 - 14,956 -
Total available-for-sale investment securities 647,210 - 640,060 7,150
Derivatives:
Interest rate lock commitments - - - -
Interest rate swap agreements 6,440 - - 6,440
Total derivatives 6,440 - - 6,440
Total $ 653,650 $ - $ 640,060 $ 13,590

The following table presents changes in Level 3 financial assets and liabilities measured at fair value on a recurring basis for the periods presented:
Available-For-Sale Debt Securities:
(dollars in thousands) States and Political Subdivisions Residential - Non-Government Agencies Interest Rate Swap Agreements Total
Balance at December 31, 2023 $ 6,436 $ 714 $ 6,440 $ 13,590
Principal payments received (58) (6) - (64)
Unrealized net gain (loss) included in other comprehensive income (55) (4) 2,935 2,876
Balance at March 31, 2024 $ 6,323 $ 704 $ 9,375 $ 16,402
Balance at December 31, 2022 $ 6,584 $ 684 $ 5,986 $ 13,254
Principal payments received (56) (6) - (62)
Unrealized net gain (loss) included in other comprehensive income 66 33 (1,542) (1,443)
Balance at March 31, 2023 $ 6,594 $ 711 $ 4,444 $ 11,749

Based on a discounted cash flow model that calculates the present value of estimated future principal and interest payments, the estimated aggregate fair value of Level 3 financial assets and liabilities measured at fair value on a recurring basis was $16.4 million and $13.6 million as of March 31, 2024 and December 31, 2023, respectively.

Within the states and political subdivisions available-for-sale debt securities category, the Company held two mortgage revenue bonds issued by the City & County of Honolulu, which had an aggregate fair value of $6.3 million at March 31, 2024, compared to $6.4 million at December 31, 2023.

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Within the residential non-government agency MBS category, the Company held two mortgage-backed bonds issued by Habitat for Humanity with an aggregate fair value of $0.7 million at March 31, 2024 and also remained relatively unchanged from $0.7 million at December 31, 2023.

The significant unobservable input used in the fair value measurement of the Company's two mortgage revenue bonds issued by the City & County of Honolulu and the two mortgage-backed bonds issued by Habitat for Humanity is the weighted-average discount rate. The weighted average discount rate utilized was 6.43%and 6.12% as of March 31, 2024 and December 31, 2023, respectively, which was derived by incorporating a credit spread over the FHLB Fixed-Rate Advance curve. Significant increases (decreases) in the weighted-average discount rate could result in a significantly lower (higher) fair value measurement.

The significant unobservable input used in the fair value measurement of the Company's forward starting interest rate swap is the weighted-average discount rate. The weighted average discount rate utilized was 3.91% and 3.34% as of March 31, 2024 and December 31, 2023, respectively.

There were no financial assets or liabilities measured on a nonrecurring basis as of March 31, 2024 and December 31, 2023.
16. LEGAL PROCEEDINGS

We are involved in legal proceedings that arise in the ordinary course of our business. The outcome of these matters and the timing of ultimate resolution is inherently difficult to predict. Based on information currently available to us, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our financial condition or operations.

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

Forward-Looking Statements and Factors that Could Affect Future Results

Certain statements contained in this quarterly report on Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"), notwithstanding that such statements are not specifically identified. In addition, certain statements may be contained in our future filings with the U.S. Securities and Exchange Commission ("SEC"), in press releases and in oral and written statements made by us or with our approval that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, capital expenditures, the payment or nonpayment of dividends, capital position, credit losses, and net interest margin or other financial items; (ii) statements of plans, objectives and expectations of Central Pacific Financial Corp. (the "Company") or its management or Board of Directors, including those relating to business plans, use of capital resources, products or services and regulatory developments and regulatory actions; (iii) statements of future economic performance including anticipated performance results from our business initiatives; and (iv) any statements of the assumptions underlying or relating to any of the foregoing. Words such as "believe," "plan," "anticipate," "seek," "expect," "intend," "forecast," "hope," "target," "continue," "remain," "estimate," "will," "should," "may" and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

While we believe that our forward-looking statements and the assumptions underlying them are reasonably based, such statements and assumptions are by their nature subject to risks and uncertainties, and thus could later prove to be inaccurate or incorrect. Accordingly, actual results could differ materially from those statements or projections for a variety of reasons. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

•the effects of inflation and interest rate fluctuations;
•the adverse effects of recent bank failures and the potential impact of such developments on customer confidence, deposit behavior, liquidity and regulatory responses thereto;
•the adverse effects of the COVID-19 pandemic virus (and its variants) and other pandemic viruses on local, national and international economies, including, but not limited to, the adverse impact on tourism and construction in the State of Hawaii, our borrowers, customers, third-party contractors, vendors and employees, as well as the effects of government programs and initiatives in response thereto;
•supply chain disruptions;
•the increase in inventory or adverse conditions in the real estate market and deterioration in the construction industry;
•adverse changes in the financial performance and/or condition of our borrowers and, as a result, increased loan delinquency rates, deterioration in asset quality, and losses in our loan portfolio;
•the impact of local, national, and international economies and events (including natural disasters such as wildfires, volcanic eruptions, hurricanes, tsunamis, storms, and earthquakes) on the Company's business and operations and on tourism, the military, and other major industries operating within the Hawaii market and any other markets in which the Company does business;
•deterioration or malaise in domestic economic conditions, including any destabilization in the financial industry and deterioration of the real estate market, as well as the impact of declining levels of consumer and business confidence in the state of the economy in general and in financial institutions in particular;
•changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;
•the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), changes in capital standards, other regulatory reform and federal and state legislation, including but not limited to regulations promulgated by the Consumer Financial Protection Bureau (the "CFPB"), government-sponsored enterprise reform, and any related rules and regulations which affect our business operations and competitiveness;
•the costs and effects of legal and regulatory developments, including legal proceedings and lawsuits we are or may become subject to, or regulatory or other governmental inquiries and proceedings and the resolution thereof, the results of regulatory examinations or reviews and the effect of, and our ability to comply with, any regulations or regulatory orders or actions we are or may become subject to, and the effect of any recurring or special FDIC assessments;
•the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board ("PCAOB"), the Financial Accounting Standards Board ("FASB") and other accounting standard setters and the cost and resources required to implement such changes;
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•the effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System (the "FRB" or the "Federal Reserve");
•securities market and monetary fluctuations, including the impact resulting from the elimination of the London Interbank Offered Rate Index;
•negative trends in our market capitalization and adverse changes in the price of the Company's common stock;
•the effects of any acquisitions or dispositions we may make;
•political instability;
•acts of war or terrorism;
•changes in consumer spending, borrowings and savings habits;
•technological changes and developments;
•cybersecurity and data privacy breaches and the consequence therefrom;
•failure to maintain effective internal control over financial reporting or disclosure controls and procedures;
•our ability to address deficiencies in our internal controls over financial reporting or disclosure controls and procedures;
•changes in the competitive environment among financial holding companies and other financial service providers;
•our ability to successfully implement our initiatives to lower our efficiency ratio;
•our ability to attract and retain key personnel;
•changes in our personnel, organization, compensation and benefit plans;
•our ability to successfully implement and achieve the objectives of our Banking-as-a-Service ("BaaS") initiatives,including adoption of the initiatives by customers and risks faced by any of our bank collaborations including reputational and regulatory risk; and
•our success at managing the risks involved in the foregoing items.

For further information with respect to factors that could cause actual results to materially differ from the expectations or projections stated in the forward-looking statements, please see the Company's publicly available Securities and Exchange Commission filings, including the Company's Form 10-K for the last fiscal year and in particular, the discussion of "Risk Factors" set forth therein and herein. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this document. Forward-looking statements speak only as of the date on which such statements are made. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events except as required by law.

Overview

Central Pacific Financial Corp. ("CPF") is a Hawaii corporation and a bank holding company. Our principal business is to serve as a holding company for our bank subsidiary, Central Pacific Bank. We refer to Central Pacific Bank herein as "our Bank" or "the Bank," and when we say "the Company," "we," "us" or "our," we mean the holding company on a consolidated basis with the Bank and our other consolidated subsidiaries.

Central Pacific Bank is a full-service community bank with 27 branches and 55 ATMs located throughout the State of Hawaii as of March 31, 2024.

The Bank offers traditional deposit and lending products and services to consumer and business customers such as accepting demand, money market, savings and time deposits, originating loans, including commercial loans, construction loans, commercial real estate loans, residential mortgage loans, and consumer loans and fiduciary and investment management services.

Basis of Presentation

Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements under "Part I, Item 1. Financial Statements (Unaudited)." The following discussion should also be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2023 filed with the U.S. Securities and Exchange Commission (the "SEC") on February 21, 2024, including the "Risk Factors" set forth therein.

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Critical Accounting Policies and Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") requires that management make certain judgments and use certain estimates and assumptions that affect amounts reported and disclosures made. Actual results may differ from those estimates and such differences could be material to the financial statements.

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

The Company identified a significant accounting policy, which involves a higher degree of judgment and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial statements. At March 31, 2024 and December 31, 2023, the significant accounting policy that we believed to be the most critical in preparing our consolidated financial statements is the determination of the allowance for credit losses ("ACL") on loans. This is further described in Note 1 - Summary of Significant Accounting Policies included in the accompanying notes to the consolidated financial statements, Note 1 - Summary of Significant Accounting Policies included in the accompanying notes to the consolidated financial statements for the year ended December 31, 2023, and the section titled "Critical Accounting Policies and Use of Estimates" in Management's Discussion and Analysis of Financial Condition and Operating Results included in the Company's 2023 Annual Report on Form 10-K.

Financial Summary

Net income for the three months ended March 31, 2024 was $12.9 million, or $0.48 per diluted share, compared to net income of $16.2 million, or $0.60 per diluted share for the three months ended March 31, 2023.

During the three months ended March 31, 2024, the Company recorded a provision for credit losses of $3.9 million, compared to a provision of $1.9 million during the three months ended March 31, 2023. The increase was primarily due to higher charge-offs of our U.S. Mainland unsecured consumer loan portfolio, and the outlook for continued pressure on the national consumer segment.

The Company's pre-provision net revenue ("PPNR"), a non-GAAP financial measure which excludes the provision for credit losses and income tax expense, for the three months ended March 31, 2024 was $20.9 million, compared to $23.1 million for the three months ended March 31, 2023. See the following section titled "Non-GAAP Financial Measures" for reconciliation of PPNR.

The following table presents annualized returns on average assets ("ROA") and average shareholders' equity ("ROE"), and basic and diluted earnings per share ("EPS") for the periods presented. ROA and ROE are annualized based on a 30/360 day convention.

Three Months Ended March 31,
2024 2023
Return on average assets 0.70 % 0.87 %
Return on average shareholders' equity 10.33 13.97
Basic earnings per share $ 0.48 $ 0.60
Diluted earnings per share 0.48 0.60

Non-GAAP Financial Measures

The Company uses certain non-GAAP financial measures in addition to our GAAP results 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.

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Pre-Provision Net Revenue

The Company believes that 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 presents a reconciliation of the Company's PPNR for the periods presented:

Three Months Ended March 31,
(dollars in thousands) 2024 2023
Net income $ 12,945 $ 16,187
Add: Income tax expense 3,974 5,059
Pre-tax income 16,919 21,246
Add: Provision (credit) for credit losses 3,936 1,852
PPNR
$ 20,855 $ 23,098

The lower PPNR in first quarter of 2024 was primarily due to lower net interest income of $4.0 million compared to the year-ago period. The lower net interest income was primarily due to higher average balances and rates paid on interest-bearing deposits.

Efficiency Ratio

The Company believes that the efficiency ratio, a non-GAAP financial measure, provides useful supplemental information that is important to a proper understanding of the Company's business results and operating efficiency, which is calculated by dividing total other operating expense by total revenue (net interest income and total other operating income).

The following table presents a calculation of our efficiency ratio for the periods presented:

Three Months Ended March 31,
(dollars in thousands) 2024 2023
Total other operating expense $ 40,576 $ 42,107
Net interest income $ 50,187 $ 54,196
Total other operating income 11,244 11,009
Total revenue $ 61,431 $ 65,205
Efficiency ratio 66.05 % 64.58 %

Our efficiency ratio increased slightly to 66.05% in the first quarter of 2024, compared to 64.58% in the year-ago quarter.

The higher efficiency ratio in the first quarter of 2024 was primarily due to lower net interest income, partially offset by lower other operating expense combined with higher other operating income, compared to the year-ago period.

Material Trends

The majority of our operations are concentrated in the State of Hawaii. As a result, our performance is significantly influenced by the strength of the real estate markets, economic environment and environmental conditions in Hawaii. Macroeconomic conditions also influence our performance. A favorable business environment is generally characterized by expanding gross state product, low unemployment 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. The Company did not sustain any damages to its facilities on Maui.

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Visitors to Maui decreased by approximately 57% in September 2023 compared to September 2022 but 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 February 2024, average daily visitors to Maui were down by approximately 22% compared to February 2023. The unemployment rate for the Island of Maui was 8.4% in September 2023 and has since improved to 5.8% in February 2024.

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. As of March 31, 2024, nearly all of the loan deferrals the Company provided to customers who were impacted by the wildfires have returned to current payment status with just two loans with a total principal balance of $1.3 million remaining on deferral.

Despite 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 1.5 million visitors arrived to the Hawaiian Islands during the two months ended February 29, 2024, mainly from the U.S. Mainland. For better comparability due to the leap day, statewide average daily visitors were down approximately 5% during the first two months of 2024 compared to the same prior year period and down approximately 6% from the pre-pandemic and record year in 2019. Japanese visitor arrivals continue to increase modestly, as average daily visitors were up approximately 77% during the two months ended February 29, 2024 compared to the same prior year period, but remained approximately 48% of pre-pandemic levels.

Total spending for visitors arriving in the two months ended February 29, 2024 was $3.47 billion, down 1.9% from $3.53 billion in the same period last year, and up by 15.3% from $3.00 billion in the two months ended February 28, 2019.

According to a February 2024 report by the University of Hawaii Economic Research Organization ("UHERO"), total visitor arrivals by air are expected to be approximately 9.8 million in 2024, which was an increase of approximately 2.0% from 9.6 million last year. Visitor spending is expected to decline approximately 1.9% to $20.31 billion in 2024 from last year's record year for visitor spending of $20.71 billion.

The Department of Labor and Industrial Relations reported that Hawaii's seasonally adjusted annual unemployment rate was 3.1% in the month of March 2024, compared to 2.9% in the month of March 2023 and the national seasonally adjusted unemployment rate of 3.8% in the month of March 2024. UHERO projects Hawaii's seasonally adjusted annual unemployment rate to remain low at approximately 2.7% in 2024.

Real estate lending remains one of the primary focuses for the Company, including residential mortgage and commercial mortgage loans. As a result, the Company is dependent on the strength of Hawaii's real estate market. While the Hawaii housing market continues to experience some moderation in sales activity and prices, there continues to be strong demand and low inventory. According to the Honolulu Board of Realtors, sales of Oahu single-family homes in the three months ended March 31, 2024 were up 6.1%, while sales of Oahu condominiums were down 7.1% from the same prior year period. The Oahu single-family home median price in the three months ended March 31, 2024 rose by 4.4% to $1.07 million from $1.03 million in the same prior year period. The Oahu condominium median price in the three months ended March 31, 2024 rose by 1.0% to $505,000 from $500,000 in the same prior year period.

Hawaii's economy is measured by the growth of real personal income and real gross state product. UHERO projects real personal income to grow by 1.6% and real gross state product to grow by 1.5% in 2024.

Results of Operations

Net Interest Income

Net interest income, when annualized and expressed as a percentage of average interest earning assets, is referred to as "net interest margin." Interest income, which includes loan fees and resultant yield information, is expressed on a taxable-equivalent basis using a federal statutory tax rate of 21% for the three months ended March 31, 2024 and 2023. A comparison of net interest income on a taxable-equivalent basis for the three months ended March 31, 2024 and 2023 is presented below.

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(dollars in thousands) Three Months Ended March 31,
2024 2023 Variance
Average
Balance 		Average
Yield/
Rate 		Interest
Income/
Expense 		Average
Balance 		Average
Yield/
Rate 		Interest
Income/
Expense 		Average
Balance 		Average
Yield/
Rate 		Interest
Income/
Expense
Assets
Interest earning assets:
Interest-bearing deposits in other financial institutions $ 265,418 5.47 % $ 3,611 $ 24,957 4.51 % $ 277 $ 240,461 0.96 % $ 3,334
Investment securities:
Taxable (1) 1,324,657 2.18 7,211 1,395,985 2.10 7,336 (71,328) 0.08 (125)
Tax-exempt (1) 142,830 2.32 829 153,067 2.61 1,000 (10,237) (0.29) (171)
Total investment securities 1,467,487 2.19 8,040 1,549,052 2.15 8,336 (81,565) 0.04 (296)
Loans, including loans held for sale (2) 5,400,558 4.67 62,819 5,525,988 4.26 58,269 (125,430) 0.41 4,550
FHLB stock 6,801 6.24 106 12,380 4.40 136 (5,579) 1.84 (30)
Total interest earning assets 7,140,264 4.19 74,576 7,112,377 3.80 67,018 27,887 0.39 7,558
Noninterest-earning assets 309,397 331,390 (21,993)
Total assets $ 7,449,661 $ 7,443,767 $ 5,894
Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 1,296,865 0.15 % $ 499 $ 1,415,155 0.10 % $ 363 $ (118,290) 0.05 % $ 136
Savings and money market deposits 2,218,250 1.53 8,443 2,182,942 0.63 3,386 35,308 0.90 5,057
Time deposits up to $250,000 544,279 3.21 4,339 341,396 1.35 1,137 202,883 1.86 3,202
Time deposits over $250,000 794,019 4.38 8,651 689,432 3.02 5,127 104,587 1.36 3,524
Total interest-bearing deposits 4,853,413 1.82 21,932 4,628,925 0.88 10,013 224,488 0.94 11,919
FHLB advances and other short-term borrowings - - - 64,462 4.79 761 (64,462) (4.79) (761)
Long-term debt 156,129 5.88 2,283 127,273 5.86 1,838 28,856 0.02 445
Total interest-bearing liabilities 5,009,542 1.94 24,215 4,820,660 1.06 12,612 188,882 0.88 11,603
Noninterest-bearing deposits 1,806,399 2,026,735 (220,336)
Other liabilities 132,600 132,816 (216)
Total liabilities 6,948,541 6,980,211 (31,670)
Total equity 501,120 463,556 37,564
Total liabilities and equity $ 7,449,661 $ 7,443,767 $ 5,894
Net interest income $ 50,361 $ 54,406 $ (4,045)
Interest rate spread 2.25 % 2.74 % (0.49) %
Net interest margin 2.83 % 3.08 % (0.25) %
(1) At amortized cost.
(2) Includes nonaccrual loans.

Net interest income (expressed on a taxable-equivalent basis) was $50.4 million for the first quarter of 2024, representing a decrease of $4.0 million, or 7.4% from $54.4 million in the year-ago quarter. The decrease from the year-ago quarter was primarily due to an increase in interest expense of $11.6 million, which was attributable to increases in average balances and average rates paid on interest-bearing deposits, combined with decreases in average investment securities and loans balances. These negative variances were partially offset by increases in average balances and yields earned on interest-bearing deposits in other financial institutions, combined with increases in average yields earned on investment securities and loans. The increases in average balances and average rates paid on interest-bearing deposits reflected the continued shift in the deposit portfolio composition from demand to higher cost savings and money market and time deposits.

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Interest Income

Taxable-equivalent interest income was $74.6 million for the first quarter of 2024, representing an increase of $7.6 million, or 11.3%, from $67.0 million in the year-ago quarter. The increase during the first quarter of 2024, compared to the year-ago quarter was primarily attributable to an increase in average yield earned on loans of 41 basis points ("bps"), resulting in an increase in interest income of approximately $5.8 million, combined with increases in the average balance and average yield earned on interest-bearing deposits in other financial institutions resulting in an increase in interest income of approximately $3.3 million. These were partially offset by decreases in average loan and investment securities balances of $125.4 million and $81.6 million, resulting in decreases in interest income of approximately $1.3 million and $0.5 million, respectively.

Interest Expense

Interest expense was $24.2 million for the first quarter of 2024, representing an increase of $11.6 million, or 92.0%, from $12.6 million in the year-ago quarter. Due to the high interest rate environment, average rates paid on interest-bearing deposits of 1.82% increased by 94 bps from the year-ago quarter, resulting in an increase in interest expense of approximately $10.4 million. Average interest-bearing deposit balances increased by $224.5 million from the year-ago quarter, resulting in an increase in interest expense of approximately $1.5 million.

Net Interest Margin

Our net interest margin of 2.83% for the first quarter of 2024 decreased by 25 bps from 3.08% in the year-ago quarter. The decrease in net interest margin for the first quarter of 2024 was primarily attributable to an increase in average rates paid on interest-bearing deposits, which outpaced the increases in average yields earned on interest-bearing deposits in other financial institutions, investment securities and loans.

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 and March 2024, the FRB kept the Federal Funds Rate target steady for the fourth and fifth consecutive meetings. Policymakers still indicate that there may be three rate cuts of quarter percentage point increments in 2024, however it likely 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 the Company's 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 impact the banking industry and/or the broader economy, which could impact our financial results as well as our customers' creditworthiness.

Rate-Volume Analysis

For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in average balances (volume) and (ii) changes in weighted average interest rates (rate). The change in volume is calculated as change in average balance, multiplied by prior period average yield/rate. The change in rate is calculated as change in average yield/rate, multiplied by current period volume. The change in interest income not solely due to change in volume or change in rate has been allocated proportionately to change in volume and change in average yield/rate.

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Three Months Ended March 31, 2024
Compared To March 31, 2023
Increase (Decrease) Due to:
(dollars in thousands) Volume Rate Net Change
Interest earning assets:
Interest-bearing deposits in other financial institutions $ 2,700 $ 634 $ 3,334
Investment securities:
Taxable investment securities (1) (383) 258 (125)
Tax-exempt investment securities (1) (67) (104) (171)
Total investment securities (450) 154 (296)
Loans, including loans held for sale (2) (1,268) 5,818 4,550
FHLB stock (61) 31 (30)
Total interest earning assets 921 6,637 7,558
Interest-bearing liabilities:
Interest-bearing demand deposits (29) 165 136
Savings and money market deposits 56 5,001 5,057
Time deposits up to $250,000 682 2,520 3,202
Time deposits over $250,000 798 2,726 3,524
Total interest-bearing deposits 1,507 10,412 11,919
FHLB advances and other short-term borrowings (761) - (761)
Long-term debt 437 8 445
Total interest-bearing liabilities 1,183 10,420 11,603
Net interest income $ (262) $ (3,783) $ (4,045)
(1) At amortized cost.
(2) Includes nonaccrual loans.

Other Operating Income

The following tables present components of other operating income for the periods presented:

Three Months Ended March 31,
(dollars in thousands) 2024 2023 $ Change % Change
Other operating income:
Mortgage banking income $ 613 $ 526 $ 87 16.5 %
Service charges on deposit accounts 2,103 2,111 (8) -0.4
Other service charges and fees 5,261 4,985 276 5.5
Income from fiduciary activities 1,435 1,321 114 8.6
Income from bank-owned life insurance 1,522 1,291 231 17.9
Other:
Equity in earnings of unconsolidated entities (80) 28 (108) -385.7
Income recovered on previously charged-off loans 52 288 (236) -81.9
Other recoveries 24 98 (74) -75.5
Unrealized gains (losses) on loans held for sale - 3 (3) -100.0
Commissions on sale of checks 78 80 (2) -2.5
Other 236 278 (42) -15.1
Total other operating income $ 11,244 $ 11,009 $ 235 2.1

For the first quarter of 2024, total other operating income was $11.2 million, which increased by $0.2 million, or 2.1%, from $11.0 million in the year-ago quarter. The increase was primarily due to higher other service charges and fees of $0.3 million
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and higher income from bank-owned life insurance ("BOLI") of $0.2 million, compared to the year-ago quarter, partially offset by lower income recovered on previously charged-off loans of $0.2 million.

Other Operating Expense

The following tables present components of other operating expense for the periods presented:

Three Months Ended March 31,
(dollars in thousands) 2024 2023 $ Change % Change
Other operating expense:
Salaries and employee benefits $ 20,735 $ 22,023 $ (1,288) -5.8 %
Net occupancy 4,600 4,474 126 2.8
Computer software 4,287 4,606 (319) -6.9
Legal and professional services 2,320 2,886 (566) -19.6
Equipment 1,010 946 64 6.8
Advertising 914 933 (19) -2.0
Communication 837 778 59 7.6
Other:
SERP expense 108 95 13 13.7
Charitable contributions 199 198 1 0.5
FDIC insurance assessment 959 1,086 (127) -11.7
Miscellaneous loan expenses 275 282 (7) -2.5
ATM and debit card expenses 924 787 137 17.4
Armored car expenses 483 348 135 38.8
Entertainment and promotions 406 542 (136) -25.1
Stationery and supplies 172 293 (121) -41.3
Directors' fees and expenses 338 355 (17) -4.8
Directors' deferred compensation plan expense (credit) 138 (220) 358 -162.7
Loss on disposal of fixed assets 3 2 1 50.0
Other 1,868 1,693 175 10.3
Total other operating expense $ 40,576 $ 42,107 $ (1,531) -3.6

For the first quarter of 2024, total other operating expense was $40.6 million, which decreased by $1.5 million, or 3.6%, from $42.1 million in the year-ago quarter. The decrease was primarily due to lower salaries and employee benefits of $1.3 million, lower legal and professional services of $0.6 million, and lower computer software of $0.3 million compared to the year-ago quarter, partially offset by higher directors' deferred compensation plan expense of $0.4 million. The decline in salaries and employee benefits was primarily due to lower incentive accruals, as well as tighter management of personnel count.

Income Taxes

The Company recorded income tax expense of $4.0 million for the first quarter of 2024, compared to $5.1 million in the same year-ago period. The effective tax rate for the first quarter of 2024 was 23.49%, compared to 23.81% in the same year-ago period.

The decrease in the effective tax rate for the three months ended March 31, 2024 was primarily attributable to higher tax-exempt BOLI income compared to the same year-ago period, combined with lower pre-tax income compared to the same year-ago period.

The Company's net deferred tax assets ("DTA"), net of valuation allowance, totaled $26.9 million and $29.5 million at March 31, 2024 and December 31, 2023, respectively, and was included in other assets on our consolidated balance sheets. The decrease in DTA was primarily due to projected utilization of net operating loss carryforwards, which arose in 2022 due to unrealized losses on investment securities.

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The valuation allowance on our net deferred tax assets ("DTA") at March 31, 2024 and December 31, 2023 totaled $5.6 million and $4.4 million, respectively, which related entirely to our DTA from net apportioned net operating loss ("NOL") carryforwards for California state income tax purposes, as the Company does not expect to generate sufficient income in California to utilize the DTA.

Financial Condition

Total assets were $7.41 billion at March 31, 2024 and decreased by $232.8 million, or 3.0%, from $7.64 billion at December 31, 2023, as excess liquidity was used to pay off high-cost government time deposits that matured during the quarter.

Investment Securities

Investment securities totaled $1.29 billion at March 31, 2024, which increased by $6.2 million, or 0.5%, from $1.28 billion at December 31, 2023. The increase in the investment securities portfolio reflected purchases of $32.6 million, partially offset by principal runoff of $21.0 million and a market valuation reduction on the AFS portfolio of $5.4 million. The decline in the market valuation was primarily driven by the high interest rate environment.


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Loans

The following table presents outstanding loans by category and geographic location as of the dates presented:

(dollars in thousands) March 31,
2024 		December 31,
2023 		$ Change % Change
Hawaii:
Commercial and industrial $ 420,009 $ 421,736 $ (1,727) (0.4) %
Real estate:
Construction 145,213 163,337 (18,124) (11.1)
Residential mortgage 1,924,889 1,927,789 (2,900) (0.2)
Home equity 729,210 736,524 (7,314) (1.0)
Commercial mortgage 1,103,174 1,063,969 39,205 3.7
Consumer 306,563 322,346 (15,783) (4.9)
Total loans 4,629,058 4,635,701 (6,643) (0.1)
Less: ACL (48,739) (48,189) (550) 1.1
Loans, net of ACL $ 4,580,319 $ 4,587,512 $ (7,193) (0.2)
U.S. Mainland:
Commercial and industrial $ 156,087 $ 153,971 $ 2,116 1.4
Real estate:
Construction 23,356 22,182 1,174 5.3
Commercial mortgage 319,088 318,933 155 -
Consumer 273,828 308,195 (34,367) (11.2)
Total loans 772,359 803,281 (30,922) (3.8)
Less: ACL (14,793) (15,745) 952 (6.0)
Loans, net of ACL $ 757,566 $ 787,536 $ (29,970) (3.8)
Total:
Commercial and industrial $ 576,096 $ 575,707 $ 389 0.1
Real estate:
Construction 168,569 185,519 (16,950) (9.1)
Residential mortgage 1,924,889 1,927,789 (2,900) (0.2)
Home equity 729,210 736,524 (7,314) (1.0)
Commercial mortgage 1,422,262 1,382,902 39,360 2.8
Consumer 580,391 630,541 (50,150) (8.0)
Total loans 5,401,417 5,438,982 (37,565) (0.7)
Less: ACL (63,532) (63,934) 402 (0.6)
Loans, net of ACL $ 5,337,885 $ 5,375,048 $ (37,163) (0.7)

Loans, net of deferred costs, totaled $5.40 billion at March 31, 2024, which decreased by $37.6 million, or 0.69%, from $5.44 billion at December 31, 2023. The decrease was primarily due to decreases in consumer of $50.2 million, construction of $17.0 million, home equity of $7.3 million and residential mortgage loans of $2.9 million. These decreases were partially offset by an increase in commercial mortgage of $39.4 million.

The Hawaii loan portfolio decreased by $6.6 million, or 0.1%, from December 31, 2023. The decrease reflected decreases in construction of $18.1 million, consumer of $15.8 million, home equity of $7.3 million, residential mortgage of $2.9 million and commercial and industrial of $1.7 million. These decreases were partially offset by an increase in commercial mortgage of $39.2 million.

The U.S. Mainland loan portfolio decreased by $30.9 million, or 3.8% from December 31, 2023. The decrease was primarily attributable to a decrease in consumer loans of $34.4 million, as the Company continued its strategy to let the US. Mainland unsecured consumer loan portfolio to runoff without new purchases in the current quarter. The decrease was partially offset by net increases in commercial and industrial of $2.1 million and construction loans of $1.2 million.

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Nonperforming Assets and Accruing Loans 90+ Days Past Due

The following table presents nonperforming assets and accruing loans 90+ days past due as of the dates presented:

(dollars in thousands) March 31,
2024 		December 31,
2023 		$ Change % Change
Nonperforming Assets ("NPAs")
Nonaccrual loans:
Commercial and industrial $ 357 $ 432 $ (75) (17.4) %
Real estate:
Residential mortgage 7,979 4,962 3,017 60.8
Home equity 929 834 95 11.4
Commercial mortgage 77 77 - -
Consumer 790 703 87 12.4
Total nonaccrual loans 10,132 7,008 3,124 44.6
Other real estate owned ("OREO") - - - -
Total NPAs 10,132 7,008 3,124 44.6
Accruing Loans 90+ Days Past Due
Real estate:
Construction 588 - 588 -
Residential mortgage 386 - 386 -
Home equity 560 229 331 144.5
Consumer 924 1,083 (159) (14.7)
Total accruing loans 90+ days past due 2,458 1,312 1,146 87.3
Total NPAs and accruing loans 90+ days past due $ 12,590 $ 8,320 $ 4,270 51.3
Ratio of nonaccrual loans to total loans 0.19 % 0.13 % 0.06 %
Ratio of NPAs to total assets 0.14 0.09 0.05
Ratio of NPAs and accruing loans 90+ days past due to total loans and OREO 0.23 0.15 0.08
Ratio of classified assets and OREO to tier 1 capital and ACL 3.28 3.41 (0.13)

The following table presents year-to-date activities in nonperforming assets for the period presented:

(dollars in thousands)
Balance at December 31, 2023 $ 7,008
Additions 4,792
Reductions:
Payments (263)
Return to accrual status (198)
Net charge-offs, valuation and other adjustments (1,207)
Total reductions (1,668)
Net increase 3,124
Balance at March 31, 2024 $ 10,132

Nonperforming assets, which includes nonaccrual loans, nonaccrual loans classified as held for sale (if any), and other real estate owned (if any), totaled $10.1 million, or 0.14% of total assets at March 31, 2024, compared to $7.0 million, or 0.09% of total assets at December 31, 2023. There were no nonperforming loans classified as held for sale at March 31, 2024 and
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December 31, 2023. The increase in nonperforming assets from December 31, 2023 was primarily attributable to additions to nonaccrual loans totaling $4.8 million, partially offset by $0.3 million in repayments of nonaccrual loans, $0.2 million in loans returned to accrual status and $1.2 million in net charge-offs, valuation and other adjustments. The additions to nonaccrual loans were primarily in the residential mortgage category which are well-collateralized.

Since the adoption of ASU 2022-02 on January 1, 2023 and during the three months ended March 31, 2024, the Company has not had any material modifications to loans either individually or in the aggregate for borrowers experiencing financial difficulty.

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 loan payment deferrals were not considered more than minor and thus were not reportable as loan modifications to borrowers facing financial difficulty. As of March 31, 2024, nearly all of the loan deferrals have returned to payment status with just two loans with a total principal balance of $1.3 million remaining on deferral.

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 March 31, 2024 consisted of five Hawaii loans with a combined principal balance of $0.9 million. There were $2.1 million of loans identified as TDRs prior to our adoption of ASU 2022-02 still accruing interest at March 31, 2024, none of which were more than 90 days delinquent. At December 31, 2023, there were $2.1 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 March 31, 2024 declined by $19.6 million from December 31, 2023 to $30.5 million, or 0.6% of the total loan portfolio. Special mention loans declined by $18.8 million to $6.0 million, or 0.1% of the total loan portfolio. Classified loans declined by $0.8 million to $24.4 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 was 3.28% at March 31, 2024, which decreased from 3.41% at December 31, 2023.

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Allowance for Credit Losses

The following table presents certain information with respect to the ACL as of the dates and for the periods presented:

Three Months Ended March 31,
(dollars in thousands) 2024 2023
Allowance for Credit Losses:
Balance at beginning of period $ 63,934 $ 63,738
Provision (credit) for credit losses on loans 4,121 1,615
Charge-offs:
Commercial and industrial (682) (779)
Consumer (4,838) (2,686)
Total charge-offs (5,520) (3,465)
Recoveries:
Commercial and industrial 90 250
Real estate:
Residential mortgage 8 53
Home equity 6 -
Consumer 893 908
Total recoveries 997 1,211
Net charge-offs (4,523) (2,254)
Balance at end of period $ 63,532 $ 63,099
Average loans, net of deferred fees and costs $ 5,400,558 $ 5,525,988
Ratio of annualized net charge-offs to average loans 0.34 % 0.16 %
Ratio of ACL to total loans 1.18 % 1.14 %

Our ACL totaled $63.5 million at March 31, 2024, compared to $63.9 million at December 31, 2023 and $63.1 million at March 31, 2023.

During the first quarter of 2024, we recorded a provision for credit losses on loans of $4.1 million and net charge-offs of $4.5 million.

The increase in the provision for credit losses on loans during the three months ended March 31, 2024, compared to the same year-ago period, was primarily due to higher charge-offs of our U.S. Mainland unsecured consumer loan portfolio, and the outlook for continued pressure on the national consumer segment.

Our ratio of ACL to total loans was 1.18% at March 31, 2024, compared to 1.18% at December 31, 2023 and 1.14% at March 31, 2023.

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

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Deposits

The following table presents the composition of our deposits by category as of the dates presented:

(dollars in thousands) March 31,
2024 		December 31,
2023 		$ Change % Change
Noninterest-bearing demand deposits $ 1,848,554 $ 1,913,379 $ (64,825) (3.4) %
Interest-bearing demand deposits 1,290,321 1,329,189 (38,868) (2.9)
Savings and money market deposits 2,211,966 2,209,733 2,233 0.1
Time deposits up to $250,000 544,600 533,898 10,702 2.0
Core deposits 5,895,441 5,986,199 (90,758) (1.5)
Government time deposits 235,463 374,581 (139,118) (37.1)
Other time deposits greater than $250,000 487,950 486,812 1,138 0.2
Total time deposits greater than $250,000 723,413 861,393 (137,980) (16.0)
Total deposits $ 6,618,854 $ 6,847,592 $ (228,738) (3.3)

The Company's deposit portfolio is diversified and long-tenured as it is built upon a business model based on long-term customer relationships. Approximately 50% of deposit customers have been banking with us for more than 10 years.

Our total deposits of $6.62 billion at March 31, 2024 decreased by $228.7 million, or 3.3%, from total deposits of $6.85 billion at December 31, 2023. The decreases in government time deposits of $139.1 million, noninterest-bearing demand deposits of $64.8 million and interest-bearing demand deposits of $38.9 million were partially offset by increases in time deposits up to $250,000 of $10.7 million, savings and money market deposits of $2.2 million, and other time deposits greater than $250,000 of $1.1 million. Due to the high interest rate environment, we continued to see a shift in the composition of the deposit portfolio from demand deposits to savings and money market and time deposits. The decline in government time deposits was largely due to planned runoff of high-cost government time deposits that matured during the quarter.

Our core deposits, which we define as demand deposits, savings and money market deposits, and time deposits up to $250,000, totaled $5.90 billion at March 31, 2024 and decreased by $90.8 million, from $5.99 billion at December 31, 2023. Core deposits as a percentage of total deposits was 89.1% at March 31, 2024, compared to 87.4% at December 31, 2023. Our average cost of total deposits was 132 bps during the three months ended March 31, 2024, compared to 60 bps during the year-ago period.

The Company had estimated uninsured deposits of $2.70 billion, or 41% of total deposits as of March 31, 2024, compared to an estimated $2.91 billion, or 42% of total deposits as of December 31, 2023. The Company had fully collateralized deposits of approximately $388.5 million and $536.3 million as of March 31, 2024 and December 31, 2023, respectively. The Company's estimated uninsured deposits, excluding fully collateralized deposits, totaled $2.31 billion, or 35% of total deposits as of March 31, 2024, compared to the estimated $2.37 billion, or 35% of total deposits as of December 31, 2023.

The following table presents the amount of time deposits in excess of the FDIC insurance limit of $250,000 by remaining maturity as of March 31, 2024:

(dollars in thousands) March 31, 2024
Remaining maturity:
Three months or less $ 336,961
Over three through twelve months 380,348
Over one year through three years 6,104
Over three years -
Total $ 723,413

Capital Resources

In order to ensure adequate levels of capital, we perform 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, changes in monetary and fiscal policies, and the level of risk and regulatory capital requirements. As a part of this assessment, the Board of
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Directors reviews our capital position on an ongoing basis to ensure it is adequate, including, but not limited to, the need for raising additional capital or the ability to return capital to our shareholders, including the ability to declare cash dividends or repurchase our securities.

Common Equity

Our total shareholders' equity was $507.2 million at March 31, 2024, compared to $503.8 million at December 31, 2023. The change in total shareholders' equity was primarily attributable to net income of $12.9 million, partially offset by cash dividends declared of $7.0 million, other comprehensive loss of $1.7 million, and the repurchase of $0.9 million in shares of our common stock under our stock repurchase programs in the three months ended March 31, 2024.

Our total shareholders' equity to total assets ratio was 6.84% at March 31, 2024, compared to 6.59% at December 31, 2023. Our book value per share was $18.76 and $18.63 at March 31, 2024 and December 31, 2023, respectively.

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 fund its obligations. In order to meet its ongoing obligations, on a stand-alone basis, CPF had an available cash balance of $25.0 million and $22.1 million as of March 31, 2024 and December 31, 2023, respectively.

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 $172.4 million and $169.1 million as of March 31, 2024 and December 31, 2023, respectively.

Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will allow the Company to continue to pay dividends at the same rate, or at all, in the future. Our ability to pay cash dividends to our shareholders is subject to restrictions under federal and Hawaii law, including restrictions imposed by the FRB and covenants set forth in various agreements we are a party to, including covenants set forth in our subordinated debentures and subordinated notes.

Share Repurchases

In January 2024, the Company's Board of Directors approved a new authorization to repurchase of up to $20.0 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 plan. The 2024 Repurchase Plan replaces and supersedes in its entirety the 2023 Repurchase Plan.

During the three months ended March 31, 2024, the Company repurchased 49,960 shares of common stock, at an aggregate cost of $0.9 million under the Company's share repurchase program. As of March 31, 2024, $19.1 million remained available for repurchase under the Company's 2024 Repurchase Plan.

Trust Preferred Securities

As of March 31, 2024, the Company has two statutory trusts, CPB Capital Trust IV ("Trust IV") and CPB Statutory Trust V ("Trust V"), which issued a total of $50.0 million in floating rate trust preferred securities. The trust preferred securities, the underlying floating rate junior subordinated debentures that are the assets of Trusts IV and V, and the common securities issued by Trusts IV and V are redeemable in whole or in part on any interest payment date on or after December 15, 2009 for Trust IV and V, or at any time in whole but not in part within 90 days following the occurrence of certain events.

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%
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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 each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from time to time to defer subordinated debenture interest payments, which would result in a deferral of dividend payments on the related trust preferred securities, for up to 20 consecutive quarterly periods without default or penalty.

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

Subordinated Notes

On October 20, 2020, the Company completed a $55.0 million private placement of ten-year fixed-to-floating rate subordinated notes, which was 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 SOFR, as published by the Federal Reserve Bank of New York, plus 456 bps. The subordinated notes had a carrying value of $54.6 million at March 31, 2024, which was net of unamortized debt issuance costs of $0.4 million that is being amortized over the expected life.

Regulatory Capital Ratios

The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

Federal banking agencies previously issued an interim final rule that delayed the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provided banking organizations that implement CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. The federal banking agencies subsequently issued a final rule that made certain technical changes to the interim final rule. The changes in the final rule apply only to those banking organizations that elected the CECL transition relief provided under the rule. The Company elected this option and the transition period ends for the Company on December 31, 2024.

General capital adequacy regulations adopted by the FRB and FDIC require an institution to maintain minimum leverage capital, tier 1 risk-based capital, total risk-based capital, and common equity tier 1 ("CET1") capital ratios. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. For a further discussion of capital requirements for the Company and the Bank and the effect of forthcoming changes in required regulatory capital ratios, see the discussion in the "Business - Supervision and Regulation" sections of our 2023 Form 10-K.

The following table presents the regulatory capital ratios for the Company and the Bank, as well as the minimum capital adequacy requirements applicable to all financial institutions, as of the dates presented. The leverage capital, tier 1 risk-based capital, total risk-based capital, and CET1 risk-based capital ratios for the Company and the Bank as of March 31, 2024 and December 31, 2023, were above the levels required for a "well capitalized" regulatory designation.

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Actual Minimum Required
for Capital Adequacy
Purposes 		Minimum Required
to be
Well Capitalized
(dollars in thousands) Amount Ratio Amount
Ratio [1]
Amount Ratio
Central Pacific Financial Corp.
March 31, 2024
Leverage capital $ 681,094 9.0 % $ 302,735 4.0 % N/A N/A
Tier 1 risk-based capital 681,094 12.6 325,055 6.0 N/A N/A
Total risk-based capital 803,146 14.8 433,407 8.0 N/A N/A
CET1 risk-based capital 631,094 11.6 243,792 4.5 N/A N/A
December 31, 2023
Leverage capital $ 676,536 8.8 % $ 305,843 4.0 % N/A N/A
Tier 1 risk-based capital 676,536 12.4 328,609 6.0 N/A N/A
Total risk-based capital 799,175 14.6 438,146 8.0 N/A N/A
CET1 risk-based capital 626,536 11.4 246,457 4.5 N/A N/A
Central Pacific Bank
March 31, 2024
Leverage capital $ 706,490 9.4 % $ 302,238 4.0 % $ 377,798 5.0 %
Tier 1 risk-based capital 706,490 13.1 324,309 6.0 432,411 8.0
Total risk-based capital 773,542 14.3 432,411 8.0 540,514 10.0
CET1 risk-based capital 706,490 13.1 243,231 4.5 351,334 6.5
December 31, 2023
Leverage capital $ 704,512 9.2 % $ 305,375 4.0 % $ 381,719 5.0 %
Tier 1 risk-based capital 704,512 12.9 327,902 6.0 437,203 8.0
Total risk-based capital 772,151 14.1 437,203 8.0 546,503 10.0
CET1 risk-based capital 704,512 12.9 245,926 4.5 355,227 6.5

[1]Under the Basel III Capital Rules, the Company and the Bank must also maintain a 2.5% Capital Conservation Buffer ("CCB") to avoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to management. The CCB is calculated as a ratio of CET1 capital to risk-weighted assets, and effectively increases the required minimum risk-based capital ratios.

Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency rates, commodity prices and equity prices. Our primary market risk exposure is interest rate risk that occurs when rate-sensitive assets and rate-sensitive liabilities mature or reprice during different periods or in differing amounts.

Asset/Liability Management and Interest Rate Risk

The Company is subject to interest rate risk in the normal course of business through the activities of making loans and taking deposits, as well as from our investment securities portfolio and other interest-bearing funding sources. Our earnings and capital are sensitive to risk of interest rate fluctuations. Asset/liability management attempts to coordinate our rate-sensitive assets and rate-sensitive liabilities to meet our financial objectives. Potentially adverse interest rate risk exposures are managed through the shortening or lengthening of the duration of assets and liabilities.

The Asset/Liability Management Committee ("ALCO") manages interest rate risk utilizing a detailed and dynamic simulation model to analyze earnings and capital in various interest rate scenarios and balance sheet forecasts. Earnings are typically measured by estimated changes in net interest income ("NII") 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
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liabilities represents 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.

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 the dates presented. 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 bps or 200 bps in either a gradual (defined as the stated change over a 12-month period in equal increments) or an instantaneous, parallel fashion.

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. The ALCO Policy requires that simulated changes in NII should be within certain specified ranges, or steps must be taken to reduce interest rate risk. The 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.

March 31, 2024 December 31, 2023
Estimated Net Interest Income Sensitivity Estimated Net Interest Income Sensitivity
Rate Change Gradual Instantaneous Gradual Instantaneous
+200 bps 0.38 % 0.62 % 1.00 % 1.61 %
+100bps 0.10 % 0.33 % 0.39 % 0.68 %
-100bps (1.03) % (1.93) % (1.26) % (1.73) %
-200 bps (2.33) % (4.28) % (2.53) % (3.59) %

Liquidity and Borrowing Arrangements

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

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 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 cash flows 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
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our liquidity needs, such as the Federal Home Loan Bank of Des Moines (the "FHLB"), secured repurchase agreements and the Federal Reserve discount window. On March 11, 2024, the FRB ceased making new loans under the Bank Term Funding Program ("BTFP").

As of March 31, 2024, the Company had $312.9 million in cash on its balance sheet and approximately $2.42 billion in total other liquidity sources, including available borrowing capacity and unpledged investment securities. Total available sources of liquidity as a percentage of uninsured and uncollateralized deposits was 118%. Refer to Note 8 - 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.

Information regarding our material contractual obligations is provided in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes in our cash requirements from known contractual and other obligations since December 31, 2023. We believe we will be able to meet our contractual obligations as they come due through the maintenance of adequate liquidity levels. We expect to maintain adequate liquidity levels through profitability, loan repayments and payoffs, securities repayments and maturities and continued deposit gathering activities. We also have various borrowing mechanisms in place for both short-term and long-term liquidity needs.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures regarding market risks, refer to "Market Risk" and "Asset/Liability Management and Interest Rate Risk" of Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), the Company's management, including the principal executive officer and principal financial officer, conducted an evaluation of the effectiveness and design of the Company's disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the period covered by this report, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in legal proceedings that arise in the ordinary course of our business. The outcome of these matters and the timing of ultimate resolution is inherently difficult to predict. Based on information currently available to us, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our financial condition or operations.

Item 1A. Risk Factors

There have been no material changes from the Risk Factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on February 21, 2024.

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Issuer Purchases of Equity Securities

On January 24, 2024, the Company's Board of Directors approved a new share repurchase authorization of up to $20.0 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 plan (the "2024 Repurchase Plan").

During the three months ended March 31, 2024, the Company repurchased 49,960 shares of common stock, at an aggregate cost of $0.9 million under the Company's share repurchase program.

As of March 31, 2024, $19.1 million in share repurchase authorization remained available for repurchase under the Company's 2024 Repurchase Plan. We cannot provide any assurance as to whether or not we will continue to repurchase common stock under our share repurchase program.

Issuer Purchases of Equity Securities
Period
Total
Number
of Shares
Purchased [1]
Average
Price Paid
per Share 		Total Shares
Purchased as
Part of Publicly
Announced
Programs 		Maximum Dollar
Value of
Shares That
May Yet Be
Purchased Under
the Program
January 1-31, 2024 - $ - - $ 20,000,000
February 1-29, 2024 67,299 19.11 42,660 19,190,275
March 1-31, 2024 7,300 18.54 7,300 19,054,953
Total 74,599 $ 19.05 49,960 19,054,953

[1]During the three months ended March 31, 2024, 24,639 shares were acquired from employees in connection with income tax withholding obligations related to the vesting of restricted stock and/or performance stock units. These purchases were not included within the Company's publicly announced share repurchase program.

Item 5. Other Information

Rule 10b5-1 Trading Arrangements

During the three months ended March 31, 2024, none of the Company's directors or officers (as defined in Rule 16a-1(f)) adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (in each case, as defined in item 408 of Regulation S-K) for the purchase or sale of the Company's common stock.

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Item 6. Exhibits
Exhibit No. Document
31.1
Rule 13a-14(a) Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2
Rule 13a-14(a) Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1
Section 1350 Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 **
32.2
Section 1350 Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 **
101.1
Interactive Data Files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language ("Inline XBRL") *
104
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101.1)
* Filed herewith.
** Furnished herewith.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CENTRAL PACIFIC FINANCIAL CORP.
(Registrant)
Date: April 24, 2024 /s/ Arnold D. Martines
Arnold D. Martines
President and Chief Executive Officer
(Principal Executive Officer)
/s/ David S. Morimoto
David S. Morimoto
Senior Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

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