CENTRAL PACIFIC FINANCIAL CORP quarterly report, Q3 FY2021

Central Pacific Financial Corp. — Q3 2021 Form 10-Q

Business and period: Hawaii-based bank holding company Central Pacific Financial Corp. reported unaudited results for the quarter and nine months ended September 30, 2021. Its subsidiary, Central Pacific Bank, operated 31 branches and 70 ATMs in Hawaii.

Financial performance and condition

Metric	Q3 2021	Comparable period / change
Net income	$20.8 million; diluted EPS $0.74	$6.9 million; $0.24 diluted EPS in Q3 2020
Net interest income	$56.1 million GAAP; $56.2 million taxable-equivalent	Up 14.1% taxable-equivalent year over year
Net interest margin	3.31%	3.19% in Q3 2020
Provision for credit losses	$2.6 million credit	$14.9 million expense in Q3 2020
Other operating income / expense	$10.3 million / $41.3 million	Income down 11.3%; expense up 12.5% year over year
Efficiency ratio	62.32%	60.56% in Q3 2020

• Nine-month results: Net income was $57.6 million, or $2.03 diluted EPS, versus $25.1 million, or $0.89, in 2020. Taxable-equivalent net interest income rose 7.9% to $158.3 million; net interest margin declined to 3.22% from 3.29%. Credit-loss provision was a $6.9 million credit, versus $37.2 million of expense in the prior-year period.
• Balance sheet at September 30: Assets were $7.30 billion, up $703.6 million from December 31, 2020. Loans were $5.05 billion, up 1.6%; excluding PPP loans, core loans grew 6.1% to $4.83 billion. Deposits increased 12.4% to $6.52 billion, with core deposits up 18.6% to $6.09 billion.
• Credit quality: Allowance for credit losses was $74.6 million, 1.48% of total loans (1.55% excluding PPP loans), down from $83.3 million at year-end. Nonperforming assets were $7.2 million, or 0.14% of loans, compared with $6.2 million and 0.12% at year-end. Net charge-offs were $0.2 million in Q3 and $1.8 million for nine months.
• Cash flow and liquidity: Nine-month operating cash flow was $74.9 million; investing cash outflow was $498.7 million and financing cash inflow was $668.5 million. Cash and cash equivalents ended at $348.8 million, versus $95.2 million a year earlier. The bank had no short-term borrowings at quarter-end and $1.81 billion available under its FHLB line, plus $66.4 million of unused Federal Reserve discount-window capacity.
• Debt and capital: Long-term debt was $105.6 million, including $55 million of subordinated notes. Company total risk-based capital was 14.6%; bank total risk-based capital was 14.3%, and the bank’s CET1 ratio was 13.0%. Both were above applicable well-capitalized requirements. Shareholders’ equity was $555.4 million; the equity-to-assets ratio was 7.61%, down from 8.29% at year-end.
• Other comprehensive income: Nine-month comprehensive income was $35.7 million versus $40.2 million in 2020, reflecting a $21.9 million after-tax OCI loss, primarily from unrealized investment-security losses. Management attributed security-value declines mainly to interest rates and market volatility and recorded no related credit-loss allowance.

Material changes and management commentary

• Earnings improved substantially year over year, helped by PPP loan fee recognition, higher investment-security balances, lower deposit costs, and a shift from credit-loss expense to provision credits. Q3 PPP-related net interest income and fees were $8.6 million; nine-month PPP-related income and fees were $21.7 million.
• COVID-related active loan deferrals fell to $1.3 million, or 0.03% of loans, from $120.2 million at December 31, 2020. Management said most borrowers had resumed payments and no further deferrals were being granted.
• PPP balances remaining were $226.6 million at quarter-end. The company reported more than $653.2 million in PPP forgiveness payments and borrower repayments to date. It disclosed prior investigations involving two PPP loans: the $10 million loan was repaid by the SBA under its guarantee; the $3 million loan was partially forgiven, with the borrower paying the balance under loan terms.
• Operating expenses rose amid strategic investments, higher compensation, technology, advertising, and other costs; management said these investments are intended to support longer-term profitability and shareholder returns. Mortgage banking income declined, while other service charges and fees increased.
• The company repurchased 234,700 shares for $5.9 million in Q3; $14.8 million remained under its $25 million authorization. The board declared a subsequent quarterly dividend of $0.25 per share on October 26, 2021.

Outlook, risks, and contingencies

• The filing provides no formal earnings or financial guidance. Management described Hawaii’s economy as improving but still exposed to COVID-19 and variants, tourism volatility, unemployment, and changing travel restrictions. The filing cites a September 2021 increase in Delta-variant cases and a decline in visitor activity that month.
• Key sensitivities include Hawaii tourism and real estate conditions, borrower performance and credit losses, deposit flows that may reflect temporary stimulus and PPP funds, and interest-rate changes. Management’s modeled net interest income sensitivity was +4.88% under a 100-basis-point rate increase and -5.24% under a 100-basis-point decrease.
• Management stated that securities in unrealized-loss positions were investment grade, it did not intend to sell them, and it did not expect to be required to sell before recovery. A reversal in that assessment or further market-rate movements could affect reported equity and liquidity considerations.
• The company disclosed ordinary-course legal claims that management did not expect to have a material adverse effect. It reported no material change in risk factors from its 2020 Form 10-K. COVID-related effects remain uncertain; management also noted that dividend payments depend on regulatory and other restrictions and are not assured at the same level in the future.

Investor facts to verify

• Whether earnings growth is sustainable as PPP fee income runs off, and how core net interest margin performs.
• Whether deposit growth persists or reverses as stimulus and PPP-related funds are spent, and the resulting funding costs and liquidity needs.
• Credit trends in Hawaii commercial real estate, tourism-linked borrowers, and consumer portfolios; assess the allowance against changing forecasts and loan quality.
• Interest-rate exposure and the effect of securities valuation changes on accumulated other comprehensive income and capital.
• Expense growth, efficiency-ratio trajectory, and returns from strategic investments, alongside capital needs, repurchases, and dividend capacity.