Central Pacific Financial Corp. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; quarterly results are also disclosed. The company is a Hawaii-based bank holding company operating Central Pacific Bank, with 34 branches and 116 ATMs in Hawaii.
Financial performance and condition
Amounts below are in U.S. dollars; financial statement amounts are consolidated.
| Metric | FY 2012 / Dec. 31, 2012 | Comparison |
|---|---|---|
| Net interest income | $119.7 million | Up from $117.8 million in 2011 |
| Net interest margin | 3.10% | 3.09% in 2011 |
| Other operating income | $55.7 million | Up from $50.2 million |
| Other operating expense | $146.9 million | Down from $172.1 million |
| Provision for loan losses | $18.9 million credit | $40.7 million credit in 2011 |
| Net income | $47.4 million; diluted EPS $1.13 | $36.6 million in 2011; diluted EPS $3.31, including an $85.1 million one-time TARP Exchange accounting benefit in income available to common shareholders |
| Total assets | $4.37 billion | Up 5.7% year over year |
| Loans and leases | $2.20 billion | Up 6.8% |
| Deposits | $3.68 billion | Up 6.9%; core deposits up 7.9% to $3.01 billion |
| Shareholders’ equity | $504.8 million | Up from $456.4 million |
| Cash and cash equivalents | $177.4 million | Down $79.7 million during the year |
| Nonperforming assets | $90.0 million | Down from $195.6 million; 4.00% of loans, loans held for sale and other real estate |
- The loan-loss allowance was $96.4 million, or 4.37% of loans and leases, versus $122.1 million and 5.91% a year earlier. Net charge-offs were $6.8 million, or 0.32% of average loans.
- Reported cash from operating activities was $39.4 million. Investing activities used $306.3 million; financing activities provided $187.2 million.
- Long-term debt was $108.3 million, principally $108.2 million of subordinated debentures. Trust preferred securities had $105.0 million face value and $12.2 million of accrued, deferred interest. FHLB borrowings were $32,000 at year-end.
- Company capital ratios were 22.54% Tier 1 risk-based, 23.83% total risk-based and 14.32% leverage; the bank was also above “well-capitalized” thresholds.
- The efficiency ratio was 78.89% (a non-GAAP measure). No income tax expense or benefit was recorded because a full deferred-tax-asset valuation allowance remained in place.
Material changes versus 2011
- Net income increased by $10.9 million, while reported diluted EPS declined because 2011 EPS included the substantial one-time TARP Exchange accounting benefit.
- Credit quality improved: nonperforming assets fell by $105.6 million, and construction and development loans declined to $96.2 million, or 4.4% of total loans, from $161.1 million, or 7.8%.
- Loan growth reflected increases in residential mortgage, commercial and consumer lending, partly offset by a 40.3% reduction in construction and development loans.
- Interest expense fell 53.1% to $8.7 million, supporting net interest income despite lower asset yields. Investment securities increased to $1.70 billion.
- Operating expense fell 14.6%, partly due to lower foundation contributions and credit-related charges; salaries and benefits rose $5.7 million.
- Operating cash flow increased from $23.1 million to $39.4 million. Cash declined as the company invested in securities and funded loan growth.
Outlook, management commentary and risks
- Management described 2012 as continued recovery, citing eight consecutive profitable quarters, improved asset quality, loan and core-deposit growth, and strong capital. It plans to continue improving credit quality, banking profitability and operating efficiency.
- No specific earnings or revenue guidance was provided. Management expected continued low deposit rates in 2013, but warned that net interest margin could compress in the near term as asset yields fall with limited further scope to reduce funding costs.
- Management cited a positive but modest Hawaii outlook, supported by stronger tourism and improving employment and real estate indicators. Those forecasts are third-party estimates, not company guidance.
- Credit remains a central risk: approximately 82% of loans were real-estate-related, and the company retained $90.0 million of nonperforming assets. Further deterioration in Hawaii or California property markets, borrower condition or collateral values could increase losses and require higher provisions.
- The bank remained subject to an FDIC Compliance MOU entered into in October 2012 covering consumer-compliance controls, oversight, audits, third-party payment processing and overdraft practices. Management could not predict when it would be terminated. The earlier Bank MOU ended October 26, 2012; the Federal Reserve/DFI Written Agreement ended February 12, 2013.
- The company had deferred trust-preferred interest payments since 2009. On February 25, 2013, it announced its intention to pay all deferred interest and resume quarterly payments; this was a post-year-end announcement, not a completed payment reported for 2012. Common dividends had not been declared since 2009, and any resumption remained subject to board, regulatory and contractual conditions.
- Other notable risks include interest-rate sensitivity, liquidity and deposit competition, evolving capital and regulatory requirements, mortgage-loan repurchase claims, and possible restrictions on using net operating losses after an ownership change. The $147.5 million deferred-tax valuation allowance could be reconsidered if profitability continues.
- The 2012 financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting as of year-end. Ordinary-course legal matters were not expected by management to have a material adverse effect.
Most important facts for investors to verify
- Whether profits remain durable if loan-loss provision credits diminish or reverse, and how credit migration, charge-offs and nonperforming assets develop.
- Whether the Compliance MOU is satisfied and terminated, and whether any further regulatory restrictions or capital requirements arise.
- Whether deferred trust-preferred interest was paid as announced, and the effects on holding-company liquidity, debt service and any future common dividends.
- Whether net interest margin holds up amid low rates, securities reinvestment and changing deposit costs; review the interest-rate sensitivity assumptions.
- Whether the allowance remains adequate given real-estate concentration, restructured loans and the $3.6 million mortgage repurchase reserve.
- Whether the deferred-tax valuation allowance can be released and whether ownership-change limits constrain use of the company’s tax attributes.