Central Pacific Financial Corp. — Q2 2018 Form 10-Q
Business and period: Hawaii-based bank holding company operating through Central Pacific Bank, with 35 branches and 78 ATMs in Hawaii. This unaudited filing covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods unless noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $42.7 million | $41.6 million | $85.0 million | $82.9 million |
| Net income | $14.2 million | $12.0 million | $28.5 million | $25.1 million |
| Diluted EPS | $0.48 | $0.39 | $0.95 | $0.81 |
| Net interest margin, taxable-equivalent | 3.20% | 3.29% | 3.20% | 3.29% |
| Efficiency ratio | 64.48% | 65.32% | 64.92% | 63.31% |
Q2 total revenue, defined by management as net interest income plus other operating income, was $52.3 million, up from $49.5 million. Net income increased as net interest and other operating income improved and income tax expense declined. The six-month effective tax rate was 20.86%, versus 36.18% a year earlier; the lower federal corporate rate under Tax Reform was a principal factor.
Interest expense rose 69% in Q2 and 69% for the six-month period, chiefly due to higher rates on large time deposits. Loan growth and higher loan yields supported interest income, but deposit costs increased faster than asset yields, compressing net interest margin by 9 basis points year over year. Six-month operating expenses increased 5.4%, contributing to a higher efficiency ratio.
Balance sheet, cash flow and capital
- Assets and lending: Total assets were $5.68 billion at June 30, up $57.8 million from year-end 2017. Loans and leases were $3.88 billion, up $111.0 million (2.9%); growth included commercial mortgage, residential mortgage and home equity lending.
- Deposits and liquidity: Deposits totaled $4.98 billion, up $22.7 million from year-end. Cash and cash equivalents were $89.5 million at June 30, versus $82.3 million at the beginning of 2018. The bank had $1.53 billion of undrawn FHLB capacity and $71.5 million of additional available Federal Reserve discount-window borrowings.
- Debt: Short-term borrowings rose to $87.0 million from $32.0 million at year-end; long-term debt was unchanged at $92.8 million. FHLB advances were secured by certain real estate loans.
- Cash flow, six months: Operating activities provided $49.7 million, investing activities used $90.3 million and financing activities provided $47.8 million. Cash and cash equivalents increased $7.2 million during the period.
- Credit quality: The allowance for loan and lease losses was $48.2 million, or 1.24% of loans and leases, compared with $50.0 million and 1.33% at year-end. Six-month net charge-offs were $2.1 million, versus $1.4 million a year earlier. Nonperforming assets were $3.5 million, slightly below year-end; nonaccrual loans were 0.08% of loans.
- Capital and shareholder returns: Shareholders’ equity was $480.7 million; tangible common equity ratio was 8.45%, down from 8.86% at year-end. The bank’s CET1 ratio was 14.0%, and the filing states company and bank capital ratios exceeded well-capitalized thresholds. The company repurchased 614,247 shares for $18.1 million and paid $11.9 million in dividends during the first half. A $0.21-per-share dividend was declared July 24.
Changes, outlook and risks
- Available-for-sale securities declined $57.7 million from year-end, including a $25.9 million decrease in market valuation. Six-month other comprehensive loss was $18.2 million, primarily reflecting unrealized investment-securities losses; accumulated other comprehensive loss reached $21.2 million.
- Q2 other operating income rose 22.4%, largely because the prior-year quarter included a $1.6 million investment-securities loss from a portfolio repositioning. No available-for-sale securities were sold in the first half of 2018.
- Management described Hawaii’s economic outlook as positive for the remainder of 2018, citing tourism and a strong labor market. This is commentary, not company earnings guidance; the filing provides no specific financial forecast.
- Management expected further Federal Reserve rate increases during the remainder of 2018. Its one-year sensitivity analysis estimated net interest income would increase 0.95% under a 100-basis-point rate rise and decrease 2.61% under a 100-basis-point decline, assuming no balance-sheet growth.
- The company was monitoring the Mount Kilauea eruption. Six damaged residential properties had $1.6 million in aggregate outstanding balances and, according to the company, adequate insurance coverage. The filing emphasizes exposure to Hawaii real estate, tourism and natural disasters, as well as interest-rate, credit, funding and regulatory risks.
- CECL adoption was planned for January 1, 2020. Management could not yet reasonably estimate its financial impact and expected significant operational and process changes. Legal matters arising in the ordinary course were not expected by management to have a material adverse effect. Management reported disclosure controls were effective and no material quarterly change in internal control.
Important facts for investors to verify
- Whether loan and deposit repricing trends continue to pressure net interest margin and earnings as rates change.
- Credit performance, particularly consumer charge-offs, delinquency trends and the adequacy of the allowance as the loan portfolio grows.
- Investment-securities valuation changes and their potential effect on accumulated other comprehensive loss, equity and capital ratios.
- The impact of Hawaii economic conditions and natural disasters, including subsequent developments related to Kilauea and insurance recoveries.
- Future dividend and repurchase capacity, including applicable regulatory restrictions and the remaining $35.4 million repurchase authorization at June 30, 2018.
- CECL implementation progress and eventual estimated adoption impact; the filing does not provide a clear numerical estimate.