Central Pacific Financial Corp. — Q1 2022 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Central Pacific Financial is a Hawaii bank holding company operating Central Pacific Bank, a community bank with 30 branches and 65 ATMs in Hawaii.
Financial performance and condition
- Profit: Net income was $19.4 million, or $0.70 per diluted share, versus $18.0 million and $0.64 in Q1 2021. Return on average assets was 1.06% (1.07%); return on average equity was 14.44% (13.07%).
- Revenue and margins: Net interest income was $50.9 million, up from $49.8 million. Taxable-equivalent net interest income was $51.1 million. Net interest margin declined to 2.97% from 3.19%, partly reflecting lower PPP fee income and loan and securities yields. Total other operating income fell 10.8% to $9.6 million; operating expenses rose 0.9% to $38.2 million. Efficiency ratio increased to 63.16% from 62.54%.
- Credit costs: The company recorded a $3.2 million credit to provision for credit losses, compared with a $0.8 million credit in Q1 2021. Net charge-offs were $0.4 million; the allowance for credit losses was $64.8 million, or 1.25% of loans, versus $68.1 million and 1.59% a year earlier.
- Loans and asset quality: Loans, net of deferred fees and before allowance, increased 1.4% from year-end to $5.17 billion; core loans excluding PPP increased 2.4%. Nonperforming assets were $5.3 million, or 0.10% of loans, down from $5.9 million at year-end. Criticized loans rose $3.0 million from year-end to $79.0 million, excluding PPP loans.
- Balance sheet and liquidity: Total assets were $7.30 billion, down $120.3 million from December 31, 2021. Deposits were $6.60 billion, down $40.1 million (0.6%); core deposits were $6.12 billion. Cash and cash equivalents declined $126.8 million during the quarter to $202.1 million. Operating cash flow was $9.4 million, investing cash flow was negative $82.8 million, and financing cash flow was negative $53.4 million.
- Debt and capital: Long-term debt was $105.7 million, including $51.5 million in junior subordinated debentures and $54.1 million carrying value in subordinated notes. Shareholders’ equity fell to $486.3 million from $558.2 million, primarily due to investment-security valuation losses. The company’s total shareholders’ equity-to-assets ratio was 6.66%, down from 7.52%. Company and bank regulatory capital ratios remained above applicable well-capitalized thresholds.
- Dividends and repurchases: The company repurchased 234,981 shares for $6.7 million in Q1; $24.3 million remained under its $30 million 2022 authorization. The board declared a $0.26-per-share dividend on April 19, 2022.
Material changes and unusual items
- Rising interest rates drove a substantial decline in the fair value of available-for-sale securities. The company reported $79.4 million of after-tax other comprehensive loss for the quarter, chiefly from securities, and accumulated other comprehensive loss widened to $87.3 million from $8.0 million at year-end.
- The company transferred 41 securities with $361.8 million amortized cost and $329.5 million fair value from available-for-sale to held-to-maturity. The transfer recognized a $32.3 million unrealized loss in accumulated other comprehensive loss, with no immediate effect on net income. Management said it intended and was able to hold the securities to maturity.
- Q1 2022 included $1.9 million of PPP net interest income and fees, versus $5.2 million in Q1 2021. Remaining PPP loans were $45.9 million, with $1.7 million in net deferred fees.
- Management expects a one-time pension settlement expense of approximately $4.5 million to $6.5 million when it settles its defined benefit plan, which it intended to complete in Q2 2022.
- The company invested $2.0 million in fintech firm Swell Financial, which plans to launch an integrated checking and credit product with Central Pacific Bank as sponsor. The company also reported about 3,900 Shaka digital checking accounts opened since launch in November 2021.
Outlook, commentary, and risks
The filing provides no formal earnings guidance. Management described Hawaii’s economy as recovering and noted that pandemic-related state restrictions ended March 26, 2022. Visitor activity and real estate conditions had improved, but remained below some pre-pandemic levels. Management cited a UHERO forecast of approximately 8.7 million visitors and $17.12 billion in visitor spending for 2022; this is an external forecast, not company guidance.
Management said inflation and expected interest-rate increases may affect loan originations, mortgage sales, funding costs, net interest income, margins, and profitability. The filing’s modeled net interest income sensitivity was +2.48% under a gradual +100-basis-point scenario and -1.86% under a gradual -100-basis-point scenario; instantaneous scenarios were +4.67% and -4.33%, respectively. The company identified Hawaii’s tourism and real estate exposure, borrower credit deterioration, deposit runoff, market volatility, cybersecurity, regulatory and execution risks, and BaaS adoption and partner risks among factors that could affect results. Management stated that liquidity and capital were strong; available funding included $1.89 billion undrawn on its FHLB line and $84.3 million at the Federal Reserve discount window.
The company said COVID-related borrower deferrals had declined to $0.1 million. It believes remaining PPP loans will largely be forgiven or repaid, but noted related risks and liabilities cannot currently be determined. Ordinary-course legal claims were not expected by management to have a material adverse effect. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- How rising rates and further market-value declines in securities could affect accumulated other comprehensive loss, tangible capital, and reported equity; also monitor the held-to-maturity portfolio and ability to hold securities to maturity.
- Whether net interest margin stabilizes as PPP income fades and deposit costs respond to higher rates; compare actual results with management’s rate-sensitivity assumptions.
- Whether loan growth, asset quality, criticized loans, and allowance adequacy hold up as economic conditions and Hawaii tourism and real estate markets change.
- Whether deposit trends, cash levels, and available borrowing capacity remain sufficient as stimulus-related deposit inflows unwind.
- Whether the pension settlement occurs as planned and whether its expense falls within the stated $4.5 million to $6.5 million range; track execution and risks for Swell and other BaaS initiatives.
- Confirm subsequent capital distributions, including dividends and repurchases, and any changes to regulatory capital or legal contingencies.