Central Pacific Financial Corp. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013. The company is a Hawaii bank holding company whose subsidiary, Central Pacific Bank, operates 36 branches and 115 ATMs in Hawaii.
Financial performance and condition
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior year-end |
|---|---|---|
| Net income | $9.8 million; diluted EPS $0.23 | Q1 2013: $137.3 million; diluted EPS $3.25 |
| Net interest income | $35.8 million GAAP; $36.3 million taxable-equivalent | Q1 2013: $30.7 million GAAP; $31.2 million taxable-equivalent |
| Net interest margin | 3.31% taxable-equivalent | Q1 2013: 3.06% |
| Provision for loan losses | $1.3 million credit | Q1 2013: $6.6 million credit |
| Other operating income / expense | $10.1 million / $31.9 million | Q1 2013: $13.0 million / $32.8 million |
| Operating cash flow | $19.0 million | Q1 2013: $32.7 million |
| Total assets / deposits | $4.83 billion / $3.99 billion | December 31, 2013: $4.74 billion / $3.94 billion |
| Loans and leases, gross | $2.70 billion | December 31, 2013: $2.63 billion |
| Allowance for loan and lease losses | $83.2 million; 3.08% of loans | December 31, 2013: $83.8 million; 3.19% |
| Nonperforming assets | $54.0 million; 1.99% of loans, loans held for sale and other real estate | December 31, 2013: $46.8 million; 1.77% |
| Equity / borrowings | Total equity $608.5 million; short-term borrowings $102.0 million; long-term debt $92.8 million | December 31, 2013: equity $660.2 million; short-term borrowings $8.0 million; long-term debt $92.8 million |
| Cash and cash equivalents | $91.3 million at quarter-end | Q1 2013: $214.5 million |
Changes and notable items
- Reported net income fell sharply year over year, but the comparison is distorted by Q1 2013’s $119.8 million noncash tax benefit from releasing a deferred-tax-asset valuation allowance. Excluding that benefit, Q1 2013 net income was $17.5 million, or $0.41 diluted EPS, versus $9.8 million, or $0.23, in Q1 2014.
- Taxable-equivalent net interest income rose 16.4%, and margin expanded 25 basis points. Management attributed the improvement primarily to loan growth and a prior-quarter securities portfolio repositioning; higher taxable securities yields were partly offset by lower loan yields.
- Other operating income declined 22.1%, chiefly because gains on residential loan sales were lower. Operating expenses decreased modestly, with lower compensation and intangible amortization partly offset by higher other expenses.
- Loans grew 2.5% from year-end, while deposits increased 1.3%. Net loan recoveries were $0.7 million, compared with $3.0 million of net charge-offs in Q1 2013.
- Nonperforming assets increased by $7.3 million from year-end. The filing attributes the main addition to two U.S. Mainland commercial loans to one borrower, totaling $13.6 million, placed on nonaccrual.
- The company repurchased 3.41 million shares for $68.8 million in a tender offer completed March 28. A further $56.2 million private repurchase closed April 7, 2014, after quarter-end; together, the repurchases totaled $125 million, or 14.7% of pre-transaction shares.
Outlook, risks and contingencies
- Management expected modest near-term net interest margin expansion, based on its view that asset yields would adjust upward faster than funding costs. The filing provides no specific earnings or revenue guidance.
- Management described Hawaii’s economy as improving, but noted slower visitor arrivals and spending in Q1. The company is materially exposed to Hawaii real estate and lending conditions; deterioration could increase delinquencies, credit losses and required reserves.
- The bank remains subject to an FDIC Compliance Memorandum of Understanding requiring enhancements to compliance oversight, controls, audits, training and third-party management. The company cannot say when it will be in full compliance or when the MOU may end; noncompliance could bring further restrictions or penalties.
- Disclosure controls were reported as ineffective because of a previously identified material weakness in internal control over financial reporting concerning the allowance methodology. Remediation steps were underway, but management said they needed evaluation over several quarters.
- Company capital ratios remained above “well-capitalized” thresholds at quarter-end, but declined after the tender offer: Tier 1 risk-based 18.63%, total risk-based 19.90%, and leverage 12.62%. The subsequent private repurchase occurred after quarter-end.
- Other risks include interest-rate exposure, reliance on external funding access, mortgage-loan repurchase obligations, and potential limitations on use of tax benefits following an ownership change. The residential mortgage repurchase reserve was $3.1 million.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Separate recurring operating performance from the $119.8 million one-time Q1 2013 tax benefit when comparing earnings.
- Review the subsequent-event accounting and capital impact of the April 7 private repurchases, including updated share count and regulatory capital ratios.
- Track the new $13.6 million nonaccrual borrower exposure, total nonperforming assets, and allowance coverage as credit quality evolves.
- Monitor progress in remediating the material weakness and satisfying the FDIC Compliance MOU.
- Assess the sustainability of margin improvement, loan and deposit growth, dividends, and access to secured borrowing facilities.