Central Pacific Financial Corp. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Central Pacific is a Hawaii-based bank holding company; its subsidiary operates a full-service community bank with 35 branches and 103 ATMs across Hawaii. Unless otherwise stated, financial amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net interest income | $39.6 million | $37.3 million | $78.8 million | $73.5 million |
| Other operating income | $11.7 million | $8.1 million | $21.9 million | $19.3 million |
| Net income | $12.1 million | $12.3 million | $23.3 million | $22.7 million |
| Diluted EPS | $0.39 | $0.39 | $0.74 | $0.68 |
| Net interest margin, taxable-equivalent | 3.29% | 3.32% | 3.31% | 3.30% |
- Q2 net income declined about 1.6% year over year, while first-half net income rose about 2.6%. First-half diluted EPS increased from $0.68 to $0.74.
- Q2 and first-half net interest income on a taxable-equivalent basis grew 6.1% and 7.1%, respectively, mainly from higher average loan balances. Higher deposit funding costs partially offset the growth.
- Operating expenses were $34.2 million in Q2, up 5.4%; first-half expenses were $67.1 million, up 0.9%. Management cited higher compensation and mortgage-servicing-rights amortization, partly offset by lower charitable contributions and other costs.
- Q2 provision for loan losses was a $1.4 million credit, versus a $7.3 million credit a year earlier; first-half provision was a $2.1 million credit, versus a $10.1 million credit. The company attributed the credits primarily to improving credit-quality trends.
Balance sheet, liquidity and capital
- At June 30, total assets were $5.28 billion, up $151.7 million from year-end 2015. Loans and leases were $3.40 billion, up 6.0%; growth included commercial mortgages, residential mortgages, consumer loans and construction loans.
- Total deposits were $4.41 billion, down 0.6% from December 31, 2015. Cash and cash equivalents were $90.7 million. Shareholders’ equity was $517.6 million.
- Short-term borrowings rose to $226.0 million from $69.0 million at year-end; long-term debt was $92.8 million. The bank reported access to FHLB and Federal Reserve borrowing facilities. The filing gives different undrawn FHLB availability figures in different sections ($1.09 billion and approximately $1.2 billion).
- The allowance for loan and lease losses was $60.8 million, or 1.79% of loans and leases, compared with $63.3 million, or 1.97%, at year-end. Nonperforming assets were $14.9 million, down 8.2% from year-end; nonaccrual loans were 0.41% of loans and leases.
- Company and bank capital ratios exceeded the disclosed “well-capitalized” thresholds. At the bank, the leverage ratio was 10.2%, total risk-based capital was 15.1%, and CET1 was 13.8%.
- First-half operating cash flow was $50.7 million; investing cash flow was negative $149.8 million and financing cash flow was positive $109.6 million. Cash and cash equivalents increased $10.5 million over the period.
Material changes and notable items
- Loan growth was supported in part by purchased consumer portfolios, including direct auto and unsecured loans. These purchases increased consumer lending exposure, including loans with multi-year remaining terms.
- Other income benefited from higher bank-owned life insurance income, including $0.5 million of death-benefit proceeds in Q2. The year-earlier comparison included a $1.9 million investment-securities loss from a portfolio repositioning.
- The company repurchased 492,922 shares for $10.5 million in the first half under a $30 million authorization, with $19.5 million remaining at June 30. First-half dividends declared were $0.28 per share. After quarter-end, the board declared a $0.16-per-share dividend on July 27.
- Accumulated other comprehensive income increased to $18.4 million, primarily reflecting unrealized investment-security gains; this contributed to the increase in equity.
- The filing says the company consolidated One Hawaii HomeLoans, LLC, a 50%-owned mortgage origination and brokerage company, as a variable interest entity for which it determined the bank was primary beneficiary.
Outlook, commentary and risks
- Management expected the federal funds rate to remain low through 2016 and the yield curve to remain relatively unchanged. It expected net interest margin to remain relatively stable and expand modestly as rates rise and the economy recovers. No specific earnings or revenue guidance was provided.
- Management considered Hawaii’s real estate market stable, citing continued growth in local home sales and prices, but cautioned there was no assurance that stability would continue. Tourism remained a key economic driver; visitor arrivals were up 3.3% and spending up 1.7% in the first half, with a stronger U.S. dollar cited as a factor weighing on spending growth.
- Key risks include the company’s concentration in Hawaii, real-estate and borrower credit deterioration, economic or tourism weakness, interest-rate changes, deposit competition and funding access, regulatory and legal developments, and the possibility that allowance estimates prove insufficient. The company noted that external events could affect Hawaii through tourism and federal spending.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Reconcile the filing’s differing statements of undrawn FHLB credit availability and confirm current borrowing capacity and collateral requirements.
- Assess whether loan growth and purchased consumer portfolios are generating returns commensurate with their credit risk, funding costs and terms.
- Track deposit trends, short-term borrowing growth and the effect of rising deposit rates on net interest margin.
- Evaluate allowance coverage, nonperforming assets, delinquencies, and concentrations in Hawaii commercial and residential real estate.
- Separate recurring earnings from unusual items, including BOLI death benefits, prior-year securities losses, charitable contributions and prior-year compensation accrual reversal.
- Review the July 2016 dividend declaration alongside statutory dividend limits, regulatory capital requirements and the remaining share-repurchase authorization.