Central Pacific Financial Corp. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Central Pacific Financial is a Hawaii bank holding company operating Central Pacific Bank, a full-service community bank with 31 branches and 70 ATMs in Hawaii.
Financial performance and condition
| Metric | Q2 2021 | Six months 2021 | Comparison |
|---|---|---|---|
| Net income | $18.7 million | $36.8 million | Up from $9.9 million and $18.2 million, respectively, in 2020 |
| Diluted EPS | $0.66 | $1.29 | Compared with $0.35 and $0.65 in 2020 |
| Net interest income (GAAP) | $52.1 million | $101.9 million | Up 5.7% and 4.9%, respectively |
| Net interest margin | 3.16% | 3.18% | Down 10 and 16 basis points, respectively |
| Other operating income | $10.5 million | $21.2 million | Down 1.5% for the quarter; up 8.5% for six months |
| Other operating expense | $41.4 million | $79.3 million | Up 15.6% and 12.8%, respectively |
| Efficiency ratio | 66.20% | 64.40% | Worsened from 59.81% and 60.25% |
Net interest income growth reflected PPP loan fees and lower deposit costs, partly offset by lower yields on earning assets. PPP income and fees were $7.9 million in Q2 and $13.1 million for the first half. Pre-tax, pre-provision income was $21.2 million for Q2 and $43.8 million for the first half, below the comparable 2020 periods.
- Balance sheet: Total assets were $7.18 billion, up $583.9 million from year-end 2020. Loans, net of deferred fees and before the allowance, were $5.08 billion, up 2.3%; deposits were $6.40 billion, up 10.4%.
- Credit and provision: The allowance for credit losses was $77.8 million, or 1.53% of total loans (1.68% excluding SBA-guaranteed PPP loans). The company recorded a $3.4 million provision credit in Q2 and a $4.3 million credit for the first half, versus provisions of $11.2 million and $22.3 million in 2020. First-half net charge-offs were $1.6 million.
- Cash flow: First-half operating cash flow was $59.1 million; investing activities used $385.2 million and financing activities provided $562.5 million. Cash and cash equivalents ended at $340.5 million.
- Debt and liquidity: Long-term debt was $105.5 million; short-term borrowings were zero. The company reported $1.58 billion undrawn on its $1.81 billion FHLB line and $64.4 million of additional unused Federal Reserve discount-window capacity. The FHLB line is secured by real estate loans.
- Capital and shareholder returns: Shareholders’ equity was $552.8 million, or 7.70% of assets. The bank’s total risk-based capital ratio was 14.6%, above the 10.0% well-capitalized threshold. The company repurchased 156,600 shares for $4.3 million in Q2 and declared a $0.24-per-share dividend in July.
Material changes versus comparable periods
- Profit increased substantially year over year, aided by a shift from large 2020 credit-loss provisions to 2021 provision credits.
- Net interest margin fell despite higher net interest income, reflecting lower asset yields; deposit costs also declined.
- Operating costs rose, especially salaries, software, advertising, and card-related expenses, pushing the efficiency ratio higher.
- Unrealized losses on available-for-sale securities reduced first-half other comprehensive income by $15.6 million after tax; accumulated other comprehensive income fell to $4.9 million from $20.1 million at year-end.
- COVID-related active loan deferrals declined to $3.5 million, or 0.1% of loans, from $120.2 million at year-end. Criticized loans also declined, though nonperforming assets increased modestly to $6.7 million.
Outlook, risks, and unusual items
- No specific financial guidance was provided. Management expected limited new or extended loan deferrals in the second half of 2021 as Hawaii’s recovery progressed. It cited improving tourism and real estate activity, while noting that the pandemic’s duration and effects remained uncertain.
- Key exposures include Hawaii tourism and employment, real estate and construction conditions, borrower credit deterioration, interest-rate changes, deposit inflows that may reverse, and regulatory or market developments. Management’s rate simulation estimated net interest income sensitivity of +4.10% for a 100-basis-point increase and -3.86% for a 100-basis-point decrease.
- The company sold $175.0 million of available-for-sale securities during the first half, recording a $50,000 gain. It attributed unrealized securities losses primarily to interest-rate and market movements and recorded no related credit-loss allowance.
- Two PPP loans of $10 million and $3 million are under investigation for alleged borrower fraud or misrepresentations. The company stated it expects repayment through forgiveness, borrower payment, SBA guarantee, or a combination, and continues to report the loans as performing.
- The PPPLF facility expired July 30, 2021. The company also noted that its $55 million subordinated notes carry a fixed 4.75% rate for five years, then reset to three-month SOFR plus 456 basis points.
- Management said ordinary-course legal matters were not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective, with no material change in internal control reported.
Important facts for investors to verify
- How much of earnings and net interest income depends on PPP fee recognition and forgiveness timing, and how the remaining PPP portfolio performs.
- Whether Hawaii’s recovery, tourism, and borrower payment trends continue, and whether credit grades and the allowance remain appropriate.
- Whether deposit balances persist as stimulus and PPP funds are spent, and how deposit pricing and asset yields affect future margins.
- Whether rising operating expenses translate into the efficiency and profitability improvements management expects from strategic investments.
- The status and eventual resolution of the two investigated PPP loans, and the effects of securities valuation changes, capital distributions, and the SOFR transition on future results.