Central Pacific Financial Corp. — FY 2021 Form 10-K
Reporting period: Year ended December 31, 2021; filed February 23, 2022. This is an annual report, not a standalone fourth-quarter filing. Central Pacific Financial is a Hawaii-focused bank holding company operating through Central Pacific Bank, with one reportable segment.
Business context and financial highlights
The bank provides commercial banking, lending, deposit, mortgage, wealth-management and digital services in Hawaii. Its results are particularly exposed to Hawaii tourism and real estate. At year-end, it had 30 branches, 69 ATMs and approximately 820 employees.
| Metric | FY 2021 / Dec. 31, 2021 | Prior comparable period |
|---|---|---|
| Net income; diluted EPS | $79.9 million; $2.83 | 2020: $37.3 million; $1.32 |
| Net interest income (GAAP) | $211.0 million | 2020: $197.7 million |
| Net interest margin | 3.18% | 2020: 3.30% |
| Credit-loss provision | $14.6 million credit | 2020: $42.1 million expense |
| Other operating income / expense | $43.1 million / $163.0 million | 2020: $45.2 million / $151.7 million |
| Total assets | $7.42 billion | 2020: $6.59 billion |
| Total loans / deposits | $5.10 billion / $6.64 billion | 2020: $4.96 billion / $5.80 billion |
| Shareholders’ equity | $558.2 million; 7.5% of assets | 2020: $546.7 million; 8.3% of assets |
| Net cash from operating activities | $110.5 million | 2020: $76.8 million |
Revenue, profitability, credit and liquidity
- Net income more than doubled, with the reduction from a $42.1 million credit-loss expense in 2020 to a $14.6 million credit in 2021 a major contributor. Management attributed the 2021 credit to improved economic forecast assumptions, better portfolio credit quality and lower net charge-offs.
- Net interest income increased 6.7%. PPP loan interest and fees were $26.4 million, versus $12.2 million in 2020, and lower deposit and borrowing costs helped; lower yields on loans and securities partly offset these benefits. Net interest margin compressed 12 basis points.
- Operating expenses increased 7.5%, mainly from salaries and benefits, legal and professional services, advertising and directors’ deferred compensation. The efficiency ratio rose to 64.16% from 62.47%.
- Core loans, excluding PPP, grew $462.6 million, or 10.2%; total loans grew 2.8% as PPP balances ran off. Real estate-related lending represented approximately 75.6% of loans. Consumer loans grew 30.1%, including purchased mainland portfolios.
- Core deposits grew $1.02 billion, or 19.9%; total deposits rose 14.5%. Noninterest-bearing deposits were $2.29 billion. Management cautioned that pandemic-related stimulus and precautionary deposit inflows may not persist.
- Asset quality remained strong by reported measures: nonperforming assets were $5.9 million, or 0.08% of assets, versus $6.2 million, or 0.09%, in 2020. Net loan charge-offs were $0.8 million, compared with $7.2 million. The allowance for credit losses was $68.1 million, 1.33% of loans versus 1.68% a year earlier.
- Cash provided by operating activities was $110.5 million; investing activities used $662.3 million, including substantial securities purchases; financing activities provided $776.6 million, principally from deposit growth. Cash and cash equivalents ended at $328.9 million.
- The loan-to-deposit ratio declined to 76.8% from 85.6%. The bank had no short-term borrowings outstanding at year-end and reported $1.80 billion available on its FHLB line and $55.4 million available at the Federal Reserve discount window.
- Long-term debt was $105.6 million, comprising $51.5 million of subordinated debentures and $54.1 million of subordinated notes, net of issuance costs. The company and bank were reported well-capitalized; company CET1, Tier 1 risk-based and total risk-based capital ratios were 11.2%, 12.2% and 14.5%, respectively.
Material changes, outlook and notable items
- Fourth-quarter 2021 net income was $22.3 million, diluted EPS was $0.80, and net interest margin was 3.08%. The quarter included a $7.7 million credit to the provision for credit losses.
- In 2021, the company repurchased 696,894 shares for $18.7 million and declared dividends of $0.96 per share, up from $0.92 in 2020. A new authorization for up to $30 million of repurchases was approved in January 2022.
- Management described Hawaii’s economy as recovering, with tourism rebounding but remaining below 2019 levels. The filing cites third-party projections for 8.3 million visitor arrivals and $16.5 billion visitor spending in Hawaii in 2022; these are not company guidance. Management expected interest rates and deposit rates to rise in 2022, while noting possible pressure on loan demand and funding costs.
- The company launched its Shaka digital checking account in November 2021; more than 3,500 accounts had opened by February 18, 2022. A BaaS initiative with Swell Financial and Elevate Credit was planned, with Swell’s first product scheduled for mid-2022. The filing identifies partner execution, compliance and credit exposure as risks.
- PPP lending totaled approximately $879.8 million across 2020 and 2021; $784.9 million had been forgiven or repaid by year-end, leaving $94.9 million outstanding. A $10 million loan under investigation was repaid by the SBA guarantee; another investigated $3 million loan had $0.3 million remaining at year-end.
- Unrealized losses on available-for-sale securities contributed to a $28.1 million other comprehensive loss in 2021 and reduced accumulated other comprehensive income to a $8.0 million loss. The company said losses primarily reflected interest-rate changes, did not record a credit-loss allowance on those securities, and had no intent to sell them before recovery.
- The defined benefit pension plan was being terminated, with settlement expected in 2022 and a projected one-time expense of approximately $4.5–$6.5 million. The company also planned three additional branch consolidations in 2022, following prior consolidations.
- Management identified the allowance for credit losses as a critical estimate. The auditor issued an unqualified opinion on the financial statements and internal control; the reasonable-and-supportable economic forecasts used for the loan-loss allowance were the critical audit matter. Management reported effective disclosure controls and internal control over financial reporting.
Key risks and contingencies
- Concentration in Hawaii and in real estate-related loans leaves results sensitive to tourism, property values, construction conditions and local economic recovery.
- Interest-rate changes may affect asset yields, deposit costs, loan demand, securities values and net interest margin. The company also had LIBOR-linked debt and exposures and was managing the transition to alternative reference rates.
- Deposit growth partly reflected PPP proceeds, government assistance and pandemic-related uncertainty; withdrawals or competition for deposits could increase funding costs. Dividends and capital distributions are subject to regulatory, statutory and contractual limits.
- Future credit losses could exceed the allowance, notwithstanding the 2021 credit to provision. BaaS partner performance, partner compliance and collateral or guarantee adequacy could create additional risk.
- Cybersecurity, third-party technology, regulatory compliance, litigation and natural disasters are disclosed risks. Management said ordinary-course legal matters were not expected to have a material adverse effect; the filing does not identify a material pending contingency.
Investor verification priorities
- Assess whether the 2021 provision credit and unusually low charge-offs are sustainable, and review allowance assumptions, criticized loans and subsequent credit performance.
- Test deposit stability and funding costs as stimulus-related balances run off and interest rates rise; review liquidity availability and deposit concentration.
- Evaluate the high real estate and Hawaii exposure against tourism recovery, property valuations and commercial real estate conditions.
- Monitor net interest margin, securities duration and unrealized losses under changing rates, including completion of the LIBOR transition.
- Track BaaS launch performance, partner oversight and credit protections, along with the costs and benefits of RISE2020 and branch changes.
- Confirm the timing and actual expense of the pension settlement, the status of PPP investigations and forgiveness, and the use of the new share-repurchase authorization.