Central Pacific Financial Corp. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Central Pacific Bank is a Hawaii-focused community bank with 35 branches and 78 ATMs. Unless otherwise noted, figures below are in millions of dollars.
Financial results and key metrics
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net interest income (GAAP) | $45.4 | $42.7 | $90.5 | $85.0 |
| Net interest margin (taxable-equivalent) | 3.33% | 3.20% | 3.33% | 3.20% |
| Provision for loan losses | $1.4 | $0.5 | $2.7 | $0.3 |
| Other operating income | $10.1 | $9.6 | $21.8 | $18.6 |
| Other operating expense | $36.1 | $33.6 | $70.5 | $67.0 |
| Net income | $13.5 | $14.2 | $29.6 | $28.5 |
| Diluted EPS | $0.47 | $0.48 | $1.03 | $0.95 |
| Efficiency ratio | 65.09% | 64.26% | 62.76% | 64.70% |
- Q2 earnings declined year over year despite higher net interest income: loan growth and improved asset yields were offset by higher funding costs, increased provision, and operating expenses.
- First-half net income rose 3.8%; results included a $2.6 million first-quarter gain from selling converted MasterCard shares carried at zero cost basis. The gain helped the first-half efficiency ratio.
- Q2 other income increased 4.8%, helped by bank-owned life insurance income and investment-service fees. First-half other income rose 17.1%, substantially reflecting the MasterCard gain and higher bank-owned life insurance income.
- Q2 operating expenses increased 7.4%, notably salaries and benefits, campaign-related entertainment and promotion, and software costs. First-half expenses rose 5.1%. The company reported a 24.7% Q2 effective tax rate versus 21.7% a year earlier.
Balance sheet, funding, and credit quality
- Total assets were $5.92 billion at June 30, up $113.0 million from year-end 2018. Loans and leases were $4.25 billion, up 4.1%; residential and commercial mortgage lending accounted for much of the increase. Investment securities were $1.26 billion, down 7.3%, reflecting portfolio runoff partly offset by higher market values.
- Deposits totaled $4.98 billion, up $30.4 million. Core deposits increased 2.1% to $4.10 billion and represented 82.4% of deposits. Noninterest-bearing demand deposits fell $85.8 million, while savings and money-market balances rose $125.5 million.
- Cash and cash equivalents were $98.7 million at June 30, versus $102.2 million at year-end. First-half operating cash flow was $38.0 million, investing cash outflow $48.6 million, and financing cash inflow $7.2 million.
- Short-term borrowings were $221.0 million and long-term debt $101.5 million. The company repaid $20.6 million of long-term debt and redeemed $20.0 million of trust preferred securities in January. The FHLB line was $1.74 billion, with $1.40 billion undrawn; additional Federal Reserve discount-window capacity was $67.7 million.
- The allowance for loan and lease losses was $48.3 million, or 1.14% of loans, versus $47.9 million and 1.17% at year-end. First-half net charge-offs were $2.3 million. Nonperforming assets were $1.3 million, down from $2.7 million; the filing attributes the reduction mainly to repayments.
- Shareholders’ equity was $515.7 million; equity/assets were 8.71%. The bank and company reported regulatory capital ratios above applicable well-capitalized thresholds. First-half repurchases totaled 490,700 shares for $14.0 million; $29.9 million remained under the newly authorized $30 million repurchase plan. The board declared a $0.23-per-share dividend in July.
Outlook, management commentary, and risks
- RISE2020 began in Q2 to improve customer experience, growth, profitability, shareholder returns, and efficiency. The company expects to invest approximately $40 million through 2020; full implementation is expected to add about $7 million to annual operating expense. Management forecast an efficiency ratio of 63%–65% in 2019 and 2020, with longer-term targets of 57% efficiency and 15% return on average equity by end-2022. These are management expectations, not guaranteed outcomes.
- Management reported slower Hawaii economic growth and lower visitor spending in the first half, despite increased visitor arrivals. Oahu home-sale volumes and median prices also weakened year over year. The company’s concentration in Hawaii and real estate lending exposes results to local economic, tourism, property-market, and natural-disaster conditions.
- Interest-rate risk remains material. The company’s modeled one-year net interest income sensitivity was +1.54% for a 100-basis-point rate increase and -4.24% for a 100-basis-point decrease. The Federal Reserve cut rates by 25 basis points in July, after quarter-end.
- CECL was scheduled for adoption January 1, 2020. Management was developing models and controls but had not quantified the adoption’s financial impact. The filing also identifies implementation and cost risks for RISE2020, credit deterioration, funding and liquidity access, regulation, and LIBOR replacement.
- Lease accounting adoption added a $55.9 million right-of-use asset and lease liability at January 1, 2019; at June 30, the balances were $53.7 million and $53.8 million. Management said ordinary-course legal matters were not expected to materially affect the financial statements. Disclosure controls were reported effective, with no material change in internal control during the quarter.
Important facts for investors to verify
- Whether loan growth and higher yields continue to offset rising deposit and borrowing costs, and how net interest margin responds to rate changes.
- Whether RISE2020 spending stays within plan and produces the forecast revenue, efficiency, and shareholder-return improvements.
- The final CECL transition impact, allowance adequacy, and trend in charge-offs, delinquency, and credit quality—especially across Hawaii real estate exposures.
- The sustainability of earnings excluding the MasterCard gain and variable bank-owned life insurance income, alongside rising operating expenses.
- Deposit mix and funding needs, capital levels, and the company’s capacity to maintain dividends and repurchases while funding strategic investments.