Central Pacific Financial Corp. — Q1 2019 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. Central Pacific Financial is a Hawaii bank holding company; its bank operated 35 branches and 79 ATMs in Hawaii. Balance-sheet comparisons are with December 31, 2018. Dollar amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparison |
|---|---|---|
| Net interest income | $45.1 GAAP; $45.3 taxable-equivalent | $42.3 GAAP; $42.6 taxable-equivalent in Q1 2018 |
| Net interest margin | 3.34% | 3.21% in Q1 2018 |
| Net income | $16.0; diluted EPS $0.55 | $14.3; diluted EPS $0.48 in Q1 2018 |
| Revenue and efficiency | Other operating income $11.7; operating expense $34.3; efficiency ratio 60.49% | Income $9.0; expense $33.4; ratio 65.15% in Q1 2018 |
| Cash flow | Operating cash flow $25.9; investing cash flow reported as positive $20.9; financing cash flow $(50.7); ending cash and cash equivalents $98.2 | Operating $29.9; investing $(78.7); financing $32.3; ending cash and cash equivalents $65.8 in Q1 2018 |
| Assets and loans | Total assets $5,841.4; loans and leases $4,101.6 gross and $4,054.3 net of allowance | Assets $5,807.0; loans and leases $4,078.4 at December 31, 2018 |
| Deposits and borrowings | Deposits $4,948.1; short-term borrowings $179.0; long-term debt $101.5 | Deposits $4,946.5; short-term borrowings $197.0; long-term debt $122.2 at December 31, 2018 |
| Equity and capital | Shareholders’ equity $502.6; tangible common equity ratio 8.60%. Bank regulatory ratios included 9.3% leverage, 12.7% Tier 1 and CET1, and 13.8% total risk-based capital. | Equity $491.7; tangible common equity ratio 8.47% at December 31, 2018. Company and bank ratios exceeded applicable “well-capitalized” thresholds. |
Material changes and operating trends
- Net interest income increased 6.5% on a taxable-equivalent basis. Higher loan balances and yields supported growth; interest expense rose 60.9%, notably due to higher rates paid on large time deposits and increased short-term borrowing.
- Loans grew 0.6% from year-end, led by residential and commercial mortgage lending. Deposits were nearly unchanged; core deposits increased 1.1% to $4,060.3 million and represented 82.1% of deposits.
- Other operating income rose 30.4%, primarily from a $2.6 million gain on the sale of converted MasterCard shares and $0.6 million higher bank-owned life insurance income. The efficiency ratio improvement was positively affected by the MasterCard gain.
- Operating expenses increased 2.8%, driven mainly by compensation and software costs. Net income also benefited from higher net interest income.
- Other comprehensive income was $11.2 million, versus a $14.7 million loss in Q1 2018, largely reflecting a favorable change in unrealized securities gains/losses.
Outlook, risks, and notable items
- No company-specific earnings or financial guidance is provided. Management cited DBEDT forecasts for continued Hawaii economic growth in 2019 and 2020; these are external forecasts, not company guidance.
- Management highlighted the company’s concentration in Hawaii and its exposure to real estate, tourism, local economic conditions, natural disasters, and changing interest rates. Q1 visitor arrivals increased 2.6% year over year, while visitor spending declined 6.3%.
- Credit quality indicators warrant monitoring: nonperforming assets rose to $3.3 million from $2.7 million at year-end; net charge-offs increased to $1.9 million from $0.6 million in Q1 2018. The allowance was $47.3 million, or 1.15% of loans, versus $47.9 million and 1.17% at year-end.
- The company adopted lease accounting (ASC 842), recording a $54.8 million right-of-use asset and $54.9 million lease liability at quarter-end. It also moved its entire held-to-maturity securities portfolio to available-for-sale following adoption of a hedging standard; adoption reduced opening AOCI by $3.1 million.
- CECL is scheduled for implementation January 1, 2020. Management had not estimated the adoption impact and noted that it will depend on portfolio composition, credit quality, historical experience, and economic forecasts.
- The company redeemed $20.0 million of trust preferred securities in January. It repurchased 277,000 shares for $7.7 million and paid $6.1 million in dividends during Q1. After quarter-end, the board declared a $0.23-per-share dividend.
- The filing reports ordinary-course legal proceedings that management does not expect to have a material adverse effect. It reports no material changes to previously disclosed risk factors and says disclosure controls were effective.
Important facts for investors to verify
- Whether net interest margin can hold up as deposit and borrowing costs rise.
- Drivers of the increase in nonperforming assets and net charge-offs, and whether allowance coverage remains appropriate.
- Underlying operating income and efficiency excluding the one-time MasterCard gain and fluctuating bank-owned life insurance income.
- Liquidity and funding resilience, including use of secured borrowing capacity and deposit mix; the filing reports $1.42 billion of undrawn FHLB capacity and $70.6 million available at the Federal Reserve discount window.
- The potential CECL adoption effect and the scale and timing of outstanding LIHTC commitments ($10.8 million).
- The cash-flow statement labels investing cash flow as “used” while reports a positive $20.9 million amount; confirm presentation against the filed statements.