Business context and reporting period
Central Pacific Financial Corp. is a Hawaii bank holding company whose subsidiary, Central Pacific Bank, operated 27 branches and 65 ATMs in Hawaii. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022; comparisons are with the same 2021 periods unless noted. Amounts are in U.S. dollars.
Financial performance and condition
- Earnings: Third-quarter net income was $16.7 million ($0.61 diluted EPS), down from $20.8 million ($0.74). Nine-month net income was $53.7 million ($1.94 diluted EPS), down from $57.6 million ($2.03).
- Net interest: Third-quarter net interest income was $55.4 million, down 1.3%; reported net interest margin was 3.17%, versus 3.31%. Nine-month net interest income was $159.3 million, up 0.8%, while margin was 3.06%, versus 3.22%. Excluding PPP effects, margin was 3.13% for Q3 and 3.01% for nine months.
- Noninterest income and expense: Other operating income was $9.6 million in Q3, down 6.1%, and $36.3 million for nine months, up 15.3%, including an $8.5 million gain from selling Visa Class B shares. Operating expense rose 1.6% to $42.0 million in Q3 and 4.1% to $125.6 million for nine months. Efficiency ratio was 64.62% for Q3 and 64.19% for nine months.
- Credit: The company recorded a $0.4 million provision for credit losses in Q3, compared with a $2.6 million credit in Q3 2021; for nine months, it recorded a $1.8 million credit, versus $6.9 million. Net charge-offs were $1.6 million in Q3 and $3.0 million year to date. The allowance for credit losses was $64.4 million, or 1.19% of loans. Nonperforming assets were $4.2 million, down from $5.9 million at year-end 2021.
- Cash flow: Operating cash flow was $82.0 million for the first nine months, versus $74.9 million. Investing activities used $267.9 million and financing activities used $4.3 million. Cash and cash equivalents ended at $138.7 million, compared with $328.9 million at the start of 2022.
- Balance sheet and funding: Total assets were $7.34 billion, down 1.1% from year-end 2021. Loans were $5.42 billion, up 6.3%; deposits were $6.56 billion, down 1.2%. The company had $115 million in short-term FHLB borrowings and $105.8 million in long-term debt. Its FHLB line had $2.03 billion undrawn, with a further $76.9 million available at the Federal Reserve discount window.
- Capital: Shareholders’ equity was $438.5 million, down from $558.2 million; equity-to-assets was 5.98%, versus 7.52%, and book value per share was $16.08, versus $20.14. The filing attributes much of the decline to unrealized securities losses in accumulated other comprehensive loss. At September 30, company and bank capital ratios remained above applicable well-capitalized thresholds; bank CET1 was 12.2%.
Material changes versus prior periods
- Q3 earnings fell as PPP-related interest and fee income declined sharply and funding costs increased. Core loan and securities balances and yields partly offset the PPP runoff.
- Deposit and borrowing costs rose amid Federal Reserve rate increases. Average interest-bearing deposit rates and short-term borrowings contributed to higher interest expense.
- In March and May, the company transferred securities with $762.7 million amortized cost from available-for-sale to held-to-maturity, citing the desire to reduce future capital volatility from rising rates. At quarter-end, HTM securities had $71.9 million of unrealized losses; AFS securities had $133.3 million. Management attributed AFS losses primarily to interest rates and market volatility and recorded no credit-loss allowance.
- Loan growth was led by consumer, commercial mortgage and home-equity lending. U.S. Mainland loans grew 32.4%, partly through purchased consumer portfolios; Hawaii loans grew 2.1%.
- The nine-month results included the $8.5 million Visa share-sale gain and a $4.9 million noncash pension settlement charge. The defined-benefit plan was terminated and settled in Q2 2022.
Outlook, commentary, risks and contingencies
Management expects loan yields to continue rising but also anticipates higher deposit and borrowing costs; the net effect on margin depends on competition and the ability to retain and grow lower-cost deposits. No formal earnings or financial guidance is provided in the filing. Management says ongoing investment in digital banking, technology and Banking-as-a-Service is intended to support profitability and shareholder returns. Shaka had approximately 3,600 personal checking accounts at September 30; Swell, a fintech investment and bank-sponsor collaboration, was in an alpha pilot and had no material financial-statement impact.
Management describes Hawaii’s visitor recovery as continuing, while visitor arrivals remained below 2019 levels through August 2022. Oahu home prices were higher year over year, but sales activity had begun to moderate. Key risks include inflation and rising rates, changes in deposit behavior and funding costs, Hawaii tourism and real-estate conditions, borrower deterioration and credit losses, securities valuation and liquidity, and execution and regulatory risks related to BaaS and fintech collaborations. Management identifies the loan-loss allowance as a critical estimate. It reported no material change in previously disclosed risk factors, no material adverse effect expected from pending ordinary-course litigation, and effective disclosure controls.
The Board declared a $0.26-per-share dividend on October 20, 2022. The company repurchased 627,410 shares for $15.8 million during the first nine months and had $15.2 million of authorization remaining at September 30; future repurchases and dividends are not assured. The company stated it believed liquidity was adequate to meet obligations, but noted access to secondary funding sources can be affected by market conditions or its financial position.
Most important facts for investors to verify
- Whether rising asset yields outpace deposit and borrowing costs, and how reported and PPP-adjusted net interest margin evolve.
- Whether deposit outflows continue and how the bank uses FHLB or other borrowings to fund loan growth.
- Whether unrealized securities losses, including losses on HTM holdings, affect capital, liquidity or the ability to hold securities to maturity.
- Whether loan growth and purchased consumer portfolios lead to higher delinquencies, charge-offs or allowance needs.
- Whether one-time Visa and pension items obscure underlying earnings trends, and whether operating costs and the efficiency ratio improve.
- Whether digital and BaaS initiatives gain customers while meeting financial, operational and regulatory objectives.