Central Pacific Financial Corp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 5, 2020. CPF is a Hawaii bank holding company operating Central Pacific Bank, a community bank with 35 branches. Thirteen branches were temporarily closed in response to COVID-19.
Financial performance
- Profit: Net income was $8.3 million, down 48% from $16.0 million in Q1 2019. Diluted EPS was $0.29 versus $0.55; annualized return on assets was 0.55% versus 1.10%.
- Revenue and margin: Net interest income was $47.8 million, up from $45.1 million. On a taxable-equivalent basis, net interest income was $48.0 million, up 5.9%, and net interest margin improved to 3.43% from 3.34%. Total revenue before credit-loss provision was $56.7 million, approximately flat with $56.8 million a year earlier.
- Credit costs: Loan-loss provision was $9.3 million, versus $1.3 million in Q1 2019. The company also recorded $1.8 million of provision for off-balance-sheet credit exposures. Net charge-offs were $1.2 million, down from $1.9 million.
- Other income and expenses: Other operating income fell to $8.9 million from $11.7 million, partly because Q1 2019 included a $2.6 million MasterCard share-sale gain. Operating expenses rose 5.5% to $36.2 million. The efficiency ratio increased to 63.90% from 60.49%.
- Cash flow: Operating activities provided $31.2 million, investing activities used $118.0 million, and financing activities provided $76.8 million. Cash and cash equivalents declined $10.0 million during the quarter to $93.0 million.
Financial position and liquidity
- Total assets were $6.11 billion at March 31, up $95.9 million from December 31, 2019. Loans were $4.51 billion, up 1.4%; deposits were $5.14 billion, up 0.3%.
- The allowance for credit losses was $59.6 million, or 1.32% of loans, compared with $48.0 million at year-end. The increase reflects adoption of CECL and the quarter’s provision.
- Short-term borrowings were $222 million and long-term debt was $101.5 million. The bank had $1.41 billion undrawn on its $1.87 billion FHLB line and $60.3 million of additional unused Federal Reserve discount-window capacity.
- Total equity was $533.8 million. The bank’s March 31 capital ratios included 9.3% leverage, 12.1% Tier 1 risk-based, 13.2% total risk-based and 12.1% CET1; the filing states the company and bank exceeded applicable well-capitalized levels. CPF elected the permitted two-year delay in reflecting CECL’s regulatory-capital effect.
- The company declared a $0.23-per-share quarterly dividend. It repurchased $4.7 million of shares in Q1, then temporarily suspended its repurchase program in March.
Material changes and unusual items
- CPF adopted CECL on January 1, 2020, recording a $3.2 million after-tax reduction to retained earnings. Because prior-year figures remain under the former accounting method, credit-loss comparisons are not fully like-for-like.
- Loan growth and lower funding costs supported net interest income, while investment securities balances and asset yields declined. Lower mortgage banking income included higher mortgage-servicing-rights amortization; market volatility also affected bank-owned life insurance and deferred-compensation results. A $1.3 million gain related to a risk participation agreement partially offset weaker other income.
- Nonperforming assets rose to $3.6 million from $1.7 million at year-end, though reported nonperforming assets remained 0.08% of loans and OREO. The company downgraded approximately $65 million of commercial loans from pass to special mention after its initial COVID-19 review.
Outlook, COVID-19 and risks
- The filing gives no quantitative earnings or full-year financial guidance. Management said the pandemic’s effects and the probability and scale of future credit losses could not be reliably projected.
- Management cited severe disruption to Hawaii tourism and employment, with visitor counts down about 98% in early April and the state unemployment rate reported at approximately 37%. The company warned of possible higher delinquencies, defaults, credit provisions, lower collateral values, and reduced interest and fee income.
- Loan deferrals covered approximately $65 million of balances through March 31 and approximately $453 million by April 30, about 10% of the loan portfolio. Short-term deferrals were not then classified as TDRs, and interest continued to accrue; management cautioned that accrued interest might later need to be reversed if collection becomes doubtful. Further deferral requests were expected in Q2.
- As a subsequent event, the SBA had approved over 5,600 CPF PPP loans totaling approximately $541 million through April 30. Loans may be cancelled or withdrawn before funding, and the company noted that participation risks and liabilities were not yet determinable.
- Management described liquidity and capital as strong but warned that deposit withdrawals, reduced loan-payment cash flows, credit losses and funding-market volatility could pressure liquidity, capital, margins and profitability. It also highlighted risks to Hawaii real estate, tourism-related borrowers, collateral valuations, and servicing advances on certain third-party mortgage loans.
Important facts for investors to verify
- How the $453 million of COVID-related deferrals perform after relief periods end, and whether accrued interest remains collectible.
- Subsequent-quarter changes in criticized loans, delinquencies, charge-offs, the CECL allowance and off-balance-sheet reserves.
- How much of the approximately $541 million in PPP approvals was ultimately funded, retained, forgiven, or generated processing-fee income.
- Whether deposits, available borrowing capacity and capital remain adequate as customer liquidity needs and credit losses evolve.
- Whether the dividend remains sustainable and when, if ever, share repurchases resume; the filing provides no assurance on either outcome.