Central Pacific Financial Corp. — Q1 2023 Form 10-Q
Business context and period. The Hawaii-based bank holding company reported unaudited results for the three months ended March 31, 2023, with comparisons to Q1 2022. Central Pacific Bank operates 27 branches and 61 ATMs in Hawaii.
Financial performance and condition
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net income; diluted EPS | $16.2 million; $0.60 | Q1 2022: $19.4 million; $0.70 |
| Net interest income | $54.2 million GAAP; $54.4 million taxable-equivalent | Q1 2022: $50.9 million GAAP; $51.2 million taxable-equivalent |
| Net interest margin | 3.08% | 2.97% in Q1 2022 |
| Provision for credit losses | $1.9 million expense | Q1 2022: $3.2 million credit |
| Other operating income / expense | $11.0 million / $42.1 million | Q1 2022: $9.6 million / $38.2 million |
| Efficiency ratio; return on average assets / equity | 64.58%; 0.87% / 13.97% | Q1 2022: 63.16%; 1.06% / 14.44% |
| Total assets; loans, net of allowance | $7.52 billion; $5.49 billion | December 31, 2022: $7.43 billion; $5.49 billion |
| Total deposits | $6.75 billion | December 31, 2022: $6.74 billion |
| Cash and cash equivalents | $198.8 million | December 31, 2022: $112.0 million |
| Borrowings and long-term debt | $25.0 million short-term FHLB borrowings; $155.9 million long-term debt | December 31, 2022: $5.0 million and $105.9 million |
| Shareholders’ equity | $470.9 million; 6.26% of assets | December 31, 2022: $452.9 million; 6.09% of assets |
- Cash flow: Operating activities generated $18.3 million; investing activities used $3.0 million; financing activities provided $71.5 million. Cash and cash equivalents increased $86.7 million during the quarter.
- Credit quality: Allowance for credit losses was $63.1 million, or 1.14% of loans. Net charge-offs were $2.3 million, compared with $0.4 million in Q1 2022. Nonperforming assets were $5.3 million, 0.10% of loans and other real estate owned.
- Capital and liquidity: Company regulatory ratios were 8.6% leverage, 11.5% Tier 1 risk-based, 13.6% total risk-based, and 10.6% CET1; each exceeded the applicable well-capitalized standards. Management reported $2.83 billion of other liquidity sources, including borrowing capacity and unpledged securities, and $1.94 billion undrawn on its FHLB line. About 66% of deposits were FDIC-insured or collateralized.
- Securities: Available-for-sale securities had $114.3 million of gross unrealized losses; held-to-maturity securities had $59.4 million of unrecognized losses. The company attributed these primarily to interest rates and market volatility, reported no securities credit-loss allowance, and said it did not intend or expect to be required to sell the securities before recovery.
Material changes and management commentary
- Net income declined 16.7% year over year, despite higher net interest income. Higher loan yields and average loan balances increased interest income, but interest expense rose by $10.7 million as deposit and borrowing costs increased. Net interest margin improved 11 basis points.
- Pre-provision net revenue was $23.1 million versus $22.3 million a year earlier; excluding PPP-related net interest income and fees, it was $23.1 million versus $20.3 million. PPP income fell to $41,000 from $1.9 million.
- Operating expenses increased 10.2%, notably from software, compensation, occupancy, and FDIC assessment costs. The efficiency ratio worsened to 64.58% from 63.16%.
- Deposits rose only $10.7 million overall, while core deposits fell $103.3 million and their share of deposits declined to 88.5% from 90.2%. Growth in time deposits offset declines in demand and savings balances.
- Management said it expects loan yields to continue rising in the higher-rate environment, while deposit and borrowing costs are also expected to increase. Future margin performance depends in part on competition and the ability to retain and grow lower-cost deposits. The filing provides no specific quantified earnings or margin guidance.
- The company temporarily suspended share repurchases in mid-March to preserve capital and liquidity; $23.8 million remained under the authorization at quarter-end. The Board declared a $0.26-per-share dividend on April 25, 2023, subject to the usual discretion and legal restrictions.
Outlook, risks, and unusual items
- Management described the balance sheet, asset quality, liquidity, and capital as solid following March 2023 banking-sector disruptions, while noting proactive customer outreach, contingency planning, and increased liquidity monitoring.
- Key stated risks include deposit outflows or reduced customer confidence after bank failures, inflation and rising rates, higher funding costs, Hawaii tourism and real estate conditions, borrower deterioration, and execution, reputational, or regulatory risks from Banking-as-a-Service initiatives.
- Hawaii visitor arrivals were reported at about 97% of the same pre-pandemic 2019 period through February 2023. Oahu home sales and median prices were lower year over year in Q1, though management characterized the housing market as healthy and resilient. These are economic indicators, not company guidance.
- The company recorded $11.3 million of other comprehensive income in Q1, largely reflecting improvement in available-for-sale securities valuations; accumulated other comprehensive loss remained $132.7 million at quarter-end. The 2022 transfers of securities from available-for-sale to held-to-maturity continue to generate amortization of transferred unrealized losses.
- Legal matters arise in the ordinary course; management does not expect their ultimate costs to materially adversely affect financial condition or operations. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Deposit composition, uninsured exposure, and deposit pricing trends, especially given the decline in core deposits and industry liquidity concerns.
- Net interest margin and funding-cost trends as rates and deposit competition evolve.
- Unrealized securities losses, liquidity needs, and the company’s ability to hold securities to recovery without forced sales.
- Credit trends, including consumer charge-offs, criticized loans, and changes in the allowance for credit losses.
- Capital and liquidity metrics, and whether the share-repurchase suspension or dividend policy changes.