Central Pacific Financial Corp. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. The company is a Hawaii-based bank holding company operating Central Pacific Bank, with one reportable segment. The filing was signed February 21, 2024. Amounts below are U.S. dollars.
Business context and key financial metrics
The Bank provides commercial banking, lending, deposit, mortgage and wealth-management services primarily in Hawaii. At year-end, it had 27 branches and 58 ATMs. Its results are particularly exposed to Hawaii’s economy, tourism and real estate markets; about 78% of loans were real-estate-related.
| Metric | 2023 | 2022 |
|---|---|---|
| Total assets | $7.64 billion | $7.43 billion |
| Loans, net of deferred fees and costs | $5.44 billion | $5.56 billion |
| Deposits | $6.85 billion | $6.74 billion |
| Net interest income | $210.0 million | $215.6 million |
| Other operating income | $46.7 million | $47.9 million |
| Other operating expense | $164.1 million | $166.0 million |
| Provision for credit losses | $15.7 million | Credit of $1.3 million |
| Net income | $58.7 million | $73.9 million |
| Diluted EPS | $2.17 | $2.68 |
| Net interest margin | 2.94% | 3.09% |
| Return on average assets / equity | 0.78% / 12.38% | 1.01% / 15.47% |
| Cash and cash equivalents, year-end | $522.4 million | $112.0 million |
Net cash provided by operating activities was $105.1 million; investing activities provided $179.7 million and financing activities provided $125.6 million. Cash and cash equivalents increased by $410.4 million during the year. Cash dividends declared were $1.04 per share; the company repurchased 130,010 shares for $2.6 million.
Year-end long-term debt was $156.1 million, including $50.0 million of FHLB advances, $51.5 million of subordinated debentures and $54.6 million of subordinated notes. There were no short-term borrowings outstanding at year-end. Shareholders’ equity was $503.8 million, or 6.6% of assets. Company regulatory capital ratios were 8.8% leverage, 12.4% Tier 1 risk-based, 14.6% total risk-based and 11.4% CET1; the Bank was also reported well-capitalized.
Material changes versus 2022
- Net income fell 20.6%, while net interest income declined 2.6%. Deposit and debt funding costs rose faster than asset yields; interest expense increased to $72.7 million from $17.1 million.
- Credit costs increased materially: net loan charge-offs rose to $15.0 million from $4.6 million, driven chiefly by U.S. Mainland consumer loans. The allowance for credit losses was $63.9 million, 1.18% of loans, versus $63.7 million and 1.15% a year earlier.
- Total loans declined 2.1%, mainly from planned runoff of purchased U.S. Mainland consumer loans and lower origination activity. Hawaii loans grew 0.9%. Deposits grew 1.7%, but core deposits declined 1.5% as customers shifted from demand deposits to time deposits and off-balance-sheet money-market accounts.
- Nonperforming assets increased to $7.0 million, or 0.09% of assets, from $5.3 million, or 0.07%. Accruing loans at least 90 days delinquent declined to $1.3 million from $1.8 million.
- Other operating income included a $5.1 million gain on sale of an office property and a $2.1 million net loss on investment-security sales; 2022 included an $8.5 million Visa share-sale gain. The 2023 securities repositioning generated $1.9 million in realized losses.
- Accumulated other comprehensive loss improved to $122.6 million from $144.0 million, largely reflecting a recovery in unrealized securities values. The HTM portfolio’s fair value was $565.2 million against $632.3 million amortized cost at year-end.
Outlook, management commentary and risks
- Management described 2023 as challenging amid regional-bank failures, market volatility, high interest rates, an inverted yield curve and the August Maui wildfires. It characterized capital and liquidity as solid and said it continued to monitor liquidity. No company-specific earnings or margin guidance was provided.
- Management cited expectations that interest rates could begin to decline in 2024, while deposit rates might continue to rise slightly as time deposits mature and reprice. These are expectations, not assured outcomes.
- At year-end, cash was $522.4 million and additional liquidity sources—including borrowing capacity and unpledged securities—were approximately $2.45 billion. Available liquidity was about 125% of uninsured, uncollateralized deposits. Approximately 65% of deposits were FDIC-insured or collateralized; reported uninsured deposits were 42% of total deposits before collateralization.
- The Maui wildfires prompted 146 loan payment deferrals covering $31.6 million in balances. The company reported approximately $103 million of loans to Lahaina borrowers; it estimated $90 million were not impacted and $11 million with damage were covered by insurance and/or land.
- Interest-rate, funding and securities-value risks remain important. Rising rates reduced the market value of fixed-rate assets, and forced sales could realize losses. Hawaii concentration, real-estate exposure, consumer-credit losses, deposit competition, regulatory changes, cybersecurity and third-party risks are also highlighted.
- The BaaS initiative had no material financial-statement impact in 2023. Swell repurchased the company’s investment for $0.5 million in cash plus intellectual property and a platform-fee agreement valued at up to $1.5 million; collection of future fees is uncertain.
- Management and the auditor concluded internal control over financial reporting was effective; the auditor issued an unqualified opinion. The allowance for credit losses was the audit’s critical audit matter, including management’s forecasts and a 2023 change to the discounted-cash-flow methodology. Ordinary-course legal matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- How consumer-loan charge-offs and credit performance develop, particularly in the U.S. Mainland purchased portfolio, and whether the allowance remains adequate.
- Deposit retention, repricing and concentration: core deposits fell, while a substantial portion of deposits was uninsured before collateralization and many large time deposits mature in 2024.
- Liquidity assumptions and the availability of contingent funding, including the effect of the Bank Term Funding Program ending new lending on March 11, 2024.
- Realized versus unrealized securities losses, the HTM fair-value shortfall, and the consequences if liquidity needs require asset sales.
- The Maui loan exposure and deferrals, and whether the regional economic and tourism recovery matches management’s expectations.
- Whether 2024 dividends and the newly authorized $20 million repurchase plan remain consistent with capital, liquidity and regulatory constraints.
- Future results from the Swell platform-fee agreement and any new BaaS relationships, including compliance obligations and actual revenue.