CENTRAL PACIFIC FINANCIAL CORP annual report, FY2022

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Central Pacific Financial Corp. (CPF) — FY2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with FY2021. This is an annual filing, not a standalone fourth-quarter report. CPF is a Hawaii-based bank holding company operating Central Pacific Bank, with one reportable segment.

Business context and financial performance

  • Business: Full-service commercial banking in Hawaii. At year-end, CPF reported $7.43 billion in assets, $5.56 billion in loans, $6.74 billion in deposits, and $452.9 million in shareholders’ equity. About 76% of loans were real-estate-related.
  • Earnings: Net income was $73.9 million, down 7.5% from $79.9 million; diluted EPS was $2.68 versus $2.83. Income before taxes was $98.8 million. The effective tax rate was 25.2%.
  • Interest and revenue: Net interest income was $215.6 million, up 2.1%. Net interest margin declined to 3.09% from 3.18%; excluding PPP-related income and fees, it was 3.05% versus 2.96%. Total pre-provision revenue—net interest income plus other operating income—was $263.5 million.
  • Noninterest items: Other operating income rose 11.3% to $47.9 million, including an $8.5 million gain from selling Visa Class B shares. Other operating expense increased 1.8% to $166.0 million. The efficiency ratio improved to 63.00% from 64.16%.
  • Credit costs and asset quality: CPF recorded a $1.3 million credit to provision for credit losses, compared with a $14.6 million credit in 2021. The allowance for credit losses was $63.7 million, or 1.15% of loans, down from $68.1 million, or 1.33%. Nonperforming assets were $5.3 million (0.07% of assets), versus $5.9 million (0.08%). Net loan charge-offs rose to $4.6 million from $0.8 million.
  • Loans and deposits: Loans increased 8.9% to $5.56 billion; core loans, excluding PPP loans, grew 10.8%. Deposits increased 1.5% to $6.74 billion, while core deposits declined 1.3%. Uninsured deposits totaled $2.34 billion.
  • Cash flow: Operating cash flow was $114.1 million; investing activities used $384.5 million; financing activities provided $53.5 million. Cash and cash equivalents ended the year at $112.0 million, down from $328.9 million. Loan growth and investment activity were major uses of cash.
  • Debt and liquidity: Long-term debt was $105.9 million, including $51.5 million of subordinated debentures and $54.3 million of subordinated notes, net of issuance costs. Short-term borrowings were $5.0 million. The bank had $2.19 billion available on its $2.23 billion FHLB line and $75.9 million available at the Federal Reserve discount window; no discount-window advances were outstanding. The loan-to-deposit ratio increased to 82.5% from 76.8%.
  • Capital and shareholder returns: CPF and the bank were reported well-capitalized. The bank’s CET1 ratio was 11.9% and total risk-based capital ratio 13.1%; CPF’s CET1 ratio was 10.5%. CPF paid $1.04 per share in declared dividends, repurchased 868,613 shares for $20.7 million, and reported book value per share of $16.76, down from $20.14.

Material changes, outlook, and risks

  • Rate and securities effects: The Federal Reserve raised rates repeatedly in 2022. Higher asset yields and loan balances supported interest income, but rising deposit and borrowing costs increased interest expense to $17.1 million from $7.7 million and weighed on reported margin. CPF reported $136.0 million of other comprehensive loss, primarily reflecting unrealized investment-securities losses; accumulated other comprehensive loss reached $144.0 million. CPF transferred securities with $762.7 million amortized cost to held-to-maturity classification during 2022 to limit future AOCI effects. Management said the unrealized losses were primarily rate-related, not credit-related, and that it did not expect to have to sell the securities before recovery.
  • Unusual items: The defined-benefit retirement plan termination generated a one-time, noncash settlement charge of approximately $4.9 million. The Visa-share sale generated an $8.5 million gain. Both affected year-over-year comparisons.
  • Management outlook: No specific earnings or financial guidance is provided. Management expected average loan yields to continue rising in the rate environment, while deposit and borrowing costs were also expected to increase; the net effect on margin depends on competition and the ability to retain and grow lower-cost deposits. Management cited a UHERO forecast of approximately 9.7 million Hawaii visitor arrivals and $20.9 billion of visitor spending in 2023.
  • Strategic initiative: CPF launched a Banking-as-a-Service initiative and invested $2.0 million in Swell Financial. Swell launched a consumer banking application in Q4 2022, with the bank acting as sponsor; management said Swell had no material effect on FY2022 financial statements. The filing identifies execution, partner compliance, credit, reputation, and regulatory risks.
  • Principal risks: Geographic and real-estate concentration in Hawaii; potential deterioration in borrower credit quality and collateral values; deposit competition and liquidity pressures; sensitivity to interest rates; securities valuation losses; consumer-loan portfolio performance; cybersecurity and third-party risks; and evolving regulatory requirements. Management said COVID-related payment forbearances and deferrals had ended by year-end.
  • Contingencies and controls: Management said ordinary-course litigation was not expected to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements and internal controls; the allowance for credit losses and its economic forecasts were identified as a critical audit matter.
  • Subsequent event: In January 2023, the board authorized a new $25 million share-repurchase program, replacing the 2022 plan. A 1% federal excise tax on qualifying net stock repurchases applies beginning in 2023.

Important facts for investors to verify

  1. Whether loan growth—particularly commercial real estate, construction, home equity, and purchased consumer loans—continues without a material increase in delinquencies, charge-offs, or required reserves.
  2. How uninsured deposits, deposit pricing, and the 2023 maturities of large time deposits affect funding costs, liquidity, and the loan-to-deposit ratio.
  3. How rising rates affect net interest margin and the fair value or eventual realization of the securities portfolio, including securities transferred to held-to-maturity.
  4. Whether the $8.5 million Visa gain and $4.9 million pension settlement charge distort comparisons with recurring earnings; review results excluding these items where appropriate.
  5. Whether CPF’s capital, dividends, and planned repurchases remain sustainable given AOCI losses, regulatory restrictions, and the bank’s reliance on subsidiary dividends.
  6. How Swell and other BaaS relationships perform, including partner oversight, compliance costs, and any credit exposure or reputational effects.