Central Pacific Financial Corp. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also provides fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Business context
Central Pacific Financial is a Hawaii-focused bank holding company operating through Central Pacific Bank, with 35 branches and 79 ATMs. Its primary activities are commercial banking, lending, deposit-taking and related services. At year-end, it had $5.62 billion in assets, $3.77 billion in loans and $4.96 billion in deposits.
Key financial metrics
| Metric | FY 2017 / year-end | Prior comparable period |
|---|---|---|
| Net interest income | $167.7 million | $158.0 million in 2016 |
| Other operating income | $36.5 million | $42.3 million in 2016 |
| Income before taxes | $75.1 million | $72.2 million in 2016 |
| Net income / diluted EPS | $41.2 million / $1.34 | $47.0 million / $1.50 in 2016 |
| Net interest margin | 3.28% | 3.27% in 2016 |
| Net cash from operating activities | $96.8 million | $76.5 million in 2016 |
| Cash and cash equivalents | $82.3 million | $84.3 million at year-end 2016 |
| Total shareholders’ equity | $500.0 million | $504.7 million at year-end 2016 |
Net interest income is the principal source of earnings. The filing reports no separate conventional revenue total; net interest income plus other operating income was $204.2 million, versus $200.3 million in 2016. The efficiency ratio, a non-GAAP measure, improved to 64.55% from 66.69%.
Loans grew 7.0% to $3.77 billion, while deposits grew 7.6% to $4.96 billion. Core deposits rose 7.5% to $3.99 billion. The year-end loan-to-deposit ratio was 76.1%. Short-term borrowings were $32.0 million and long-term debt was $92.8 million, consisting of subordinated debentures. The company reported $1.47 billion of remaining availability under its $1.50 billion FHLB line.
Regulatory capital ratios remained above well-capitalized thresholds: company CET1 was 12.4%, total risk-based capital 15.9%, and leverage 10.4%; the bank’s corresponding ratios were 14.4%, 15.6%, and 10.1%.
Changes versus 2016
- Net interest income increased 6.2%, mainly from loan growth and improved yields; interest expense rose 61.7% as deposit and borrowing costs increased.
- Net income declined 12.3% despite higher pretax income. A $7.4 million one-time, non-cash tax expense to revalue deferred tax assets after federal tax reform was a major factor; the effective tax rate rose to 45.1% from 34.9%.
- Other operating income fell $5.8 million, including the absence of a $3.5 million branch-property sale gain recorded in 2016 and $1.4 million of 2017 investment-securities losses.
- Asset quality improved: nonperforming assets declined to $3.6 million from $9.2 million. The allowance for loan and lease losses fell to $50.0 million, or 1.33% of loans, from $56.6 million, or 1.61%. Net charge-offs increased to $4.0 million from $1.2 million.
- Shareholders’ equity decreased 0.9%, reflecting $26.6 million of share repurchases and $21.3 million of dividends, partly offset by net income. Annual dividends declared per share increased to $0.70 from $0.60.
Outlook, risks and unusual items
- Management cited favorable Hawaii conditions in 2017 and expected gradual Federal Reserve rate increases in 2018. It anticipated deposit rates would rise, and estimated tax reform would reduce net interest margin by about 2 basis points from 2018. No specific earnings or revenue guidance was provided.
- Management expected Hawaii tourism and real estate conditions to remain strong, while noting that this outlook was not assured. The business is geographically concentrated: 88.7% of loans were in Hawaii, and 74.1% were real-estate-related.
- Interest-rate sensitivity modeling estimated a 1.48% increase in one-year net interest income under a 100-basis-point rate rise and a 3.42% decrease under a 100-basis-point decline. The filing cautions that this model is assumption-dependent and is not a forecast.
- Tax reform reduced the federal corporate tax rate to 21% beginning in 2018. The company paid one-time bonuses to most employees, raised starting pay effective January 2018, increased the quarterly dividend to $0.19 payable in March 2018, and said it would assess further uses of tax savings.
- Key risks include Hawaii real estate and tourism exposure, borrower credit deterioration, rising funding costs, interest-rate risk, deposit competition, regulatory changes, cybersecurity and technology risks, and the possible effect of the expected-credit-loss standard (CECL), scheduled to apply beginning in 2020.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- How much of the decline in net income was attributable to the one-time tax-reform charge, and whether deferred-tax estimates changed after filing.
- Whether loan growth—particularly commercial real estate, home equity and purchased auto loans—continues without weakening underwriting or asset quality.
- Whether the reduced allowance remains adequate as loans grow and CECL implementation approaches.
- How deposit repricing and market rates affect net interest margin, funding costs and modeled rate sensitivity.
- Whether dividends and share repurchases remain supportable given capital, bank-dividend restrictions and the parent company’s reliance on bank dividends.