Central Pacific Financial Corp. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Central Pacific Financial is a Hawaii bank holding company; its subsidiary, Central Pacific Bank, operates 27 branches and 58 ATMs in Hawaii. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $51.9 million | $55.4 million | $158.9 million | $159.3 million |
| Net interest margin, taxable-equivalent | 2.88% | 3.17% | 2.98% | 3.06% |
| Net income | $13.1 million | $16.7 million | $43.8 million | $53.7 million |
| Diluted EPS | $0.49 | $0.61 | $1.62 | $1.94 |
| Total revenue: net interest income plus other operating income | $62.0 million | $65.0 million | $190.3 million | $195.6 million |
| Pre-provision net revenue (non-GAAP) | $22.4 million | $23.0 million | $68.7 million | $70.0 million |
| Efficiency ratio (non-GAAP) | 63.91% | 64.62% | 63.89% | 64.19% |
Q3 net income fell 21% year over year. Higher loan yields and interest income were more than offset by sharply higher deposit and debt costs; quarterly interest expense rose to $20.5 million from $4.3 million. Average cost of interest-bearing deposits increased, while deposit balances shifted toward higher-cost savings, money-market and time deposits. Nine-month reported earnings also reflect comparison with 2022, which included an $8.5 million Visa share-sale gain and a $4.9 million noncash pension settlement charge.
- Credit: Q3 provision for credit losses was $4.9 million versus $0.4 million; nine-month provision was $11.0 million versus a $1.8 million credit in 2022. Management attributed the increase chiefly to higher charge-offs in the U.S. Mainland unsecured consumer portfolio and continued pressure expected in that segment. Nine-month net charge-offs were $9.5 million versus $3.0 million.
- Operating costs and other income: Q3 operating expenses declined 5.7% to $39.6 million, mainly on lower compensation, partly offset by higher FDIC assessments and software costs. Nine-month other operating income fell 13.3%, primarily because the prior-year period included the Visa gain; lower mortgage banking income was partly offset by higher bank-owned life insurance income.
Financial position, liquidity and capital
- Total assets were $7.64 billion at September 30, 2023, up 2.8% from year-end 2022. Loans net of allowance were $5.44 billion, down 0.9%; consumer loans declined $115.5 million, while construction loans increased $44.8 million.
- Total deposits were $6.87 billion, up 2.1% since year-end. Core deposits were $5.99 billion, down $84.7 million, and their share of deposits declined to 87.1% from 90.2%. Estimated uninsured deposits were 43% of deposits; uninsured and uncollateralized deposits were estimated at $2.38 billion, or 35%.
- Cash and cash equivalents were $438.7 million at quarter-end. The company reported approximately $2.47 billion of additional liquidity sources, including borrowing capacity and unpledged securities; total available liquidity was 122% of uninsured and uncollateralized deposits. The FHLB line was $1.94 billion, of which $1.82 billion was undrawn; additional unused Federal Reserve capacity was $290.3 million.
- Long-term debt was $156.0 million, including $50 million of FHLB borrowing and subordinated debt. There were no short-term borrowings at quarter-end. Nine-month cash from operating activities was $83.5 million; investing activities provided $83.4 million and financing activities provided $159.8 million. Cash increased $326.7 million over the nine-month period.
- Shareholders’ equity was $468.6 million; book value per share was $17.33. Company regulatory capital ratios were 8.7% leverage, 11.9% Tier 1 risk-based, 14.1% total risk-based and 11.0% CET1, all above applicable well-capitalized standards. A quarterly dividend of $0.26 per share was declared after quarter-end.
- Investment securities totaled $1.27 billion. The filing reports $147.1 million of unrealized losses on available-for-sale securities and $108.2 million of unrecognized losses on held-to-maturity securities, primarily attributed to interest rates and market volatility rather than credit quality. Accumulated other comprehensive loss was $149.5 million.
Material changes, outlook and risks
- Management said it expects loan yields to continue rising, but deposit and borrowing costs may also increase; the effect on net interest margin depends on competition and the ability to retain and grow lower-cost deposits. The filing provides no specific earnings or margin guidance.
- Following regional bank failures and industry volatility, the company increased liquidity monitoring and contingency planning. Management described liquidity, asset quality and capital as solid, while warning that customer confidence, deposit behavior and access to funding could be affected by industry stress.
- The August 2023 Maui wildfires created regional economic and credit uncertainty. The company estimated $107 million of loans to Maui borrowers, of which $78 million were not impacted based on information then available. It granted 142 case-by-case payment deferrals covering $32.7 million of loan balances. Management cautioned that the estimates may change as information develops.
- The company is allowing its U.S. Mainland unsecured consumer portfolio to run off as a prudent measure. Hawaii real estate, tourism and construction conditions, inflation, interest rates, economic weakness, deposit competition and credit deterioration are identified risks.
- The Banking-as-a-Service relationship with Swell ended after its accounts were closed in June. Swell repurchased the company’s equity investment in Q3 for $0.5 million in cash, intellectual property and a platform-fee agreement of up to $1.5 million; collection of fees is not assured. The initiative is not expected to materially affect 2023 financial statements.
- Management changed the loan allowance methodology for most segments to discounted cash flow during Q3 and said the change did not materially affect the financial statements. Ordinary-course legal proceedings are not expected by management to have a material adverse effect. Disclosure controls were deemed effective, with no material change in internal control reported.
Most important facts for investors to verify
- Whether deposit pricing and mix continue to pressure net interest margin, and whether deposit balances remain stable.
- Subsequent charge-offs, delinquencies and allowance adequacy, especially for U.S. Mainland unsecured consumer loans.
- Actual credit and deposit impacts of the Maui wildfires, including the status of the $32.7 million in payment deferrals.
- Liquidity access and the market value or potential capital effects of securities losses if securities must be sold.
- Whether Swell-related platform fees are collected and whether any new BaaS activity develops.
- Dividend and repurchase decisions: the board declared a $0.26 dividend, while the company had reduced share repurchases amid elevated market risks.