Central Pacific Financial Corp. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020 unless otherwise noted. Central Pacific Financial is a Hawaii bank holding company operating Central Pacific Bank, with 31 branches and 69 ATMs in Hawaii.
Financial results and condition
| Metric | Q1 2021 | Comparable / change |
|---|---|---|
| Net interest income | $49.8 million GAAP; $49.9 million taxable-equivalent | Taxable-equivalent income rose 4.0% from $48.0 million |
| Net interest margin | 3.19% | Down 24 basis points from 3.43% |
| Other operating income | $10.7 million | Up 20.5% year over year |
| Operating expenses | $37.8 million | Up 9.9% year over year |
| Provision for credit losses | $0.8 million credit | Compared with $11.1 million expense in Q1 2020 |
| Net income / diluted EPS | $18.0 million / $0.64 | Compared with $8.3 million / $0.29 |
| Efficiency ratio | 62.54% | Compared with 60.73% |
| Net cash from operating activities | $19.7 million | Compared with $31.2 million |
Pre-tax, pre-provision income was $22.7 million, versus $22.3 million a year earlier. The return on average assets was 1.07%, and return on average shareholders’ equity was 13.07%. The declared quarterly dividend was $0.23 per share.
Total assets were $6.98 billion, up $384.7 million from year-end. Loans, net of deferred fees and costs, were $5.14 billion, up $173.7 million; deposits were $6.21 billion, up $412.8 million. Cash and cash equivalents ended at $259.9 million, versus $104.1 million at year-end. Investing activities used $249.1 million, largely reflecting loan growth and securities purchases; financing activities provided $385.2 million, mainly from deposit growth.
The allowance for credit losses was $81.6 million, or 1.59% of loans (1.80% excluding PPP loans), compared with $83.3 million at year-end. Net charge-offs were $0.7 million. Nonperforming assets were $7.2 million, or 0.14% of loans and other real estate owned. Total shareholders’ equity was $542.9 million; equity to assets was 7.78%, down from 8.29%, principally because of asset growth. The company and bank reported regulatory capital ratios above well-capitalized thresholds; the bank’s total risk-based capital ratio was 15.0% and CET1 ratio was 13.9%.
Long-term debt was $105.4 million, including $55.0 million principal of subordinated notes and $51.5 million of subordinated debentures; there were no short-term borrowings at quarter-end. The bank had $1.56 billion undrawn under its $1.80 billion FHLB line and $65.9 million available at the Federal Reserve discount window.
Material changes and notable items
- Net income more than doubled year over year, benefiting from the much lower credit-loss provision, lower deposit funding costs, higher PPP-related income and stronger mortgage banking income. Lower yields on loans and securities weighed on interest income and margin.
- Q1 included $5.2 million of PPP net interest income and net loan fees. Forgiveness of about $100.6 million in PPP loans accelerated recognition of $2.4 million in net loan fees.
- The company funded more than 3,600 PPP loans totaling over $292 million in Q1. At quarter-end, PPP balances were $618.1 million, with $20.3 million in net deferred fees; more than $233 million in forgiveness payments had been received since the program began.
- Unrealized losses on available-for-sale securities contributed to a $17.1 million after-tax other comprehensive loss. Comprehensive income was $0.9 million, despite net income of $18.0 million. Management attributed the securities declines primarily to interest rates and market volatility and recorded no related credit-loss allowance.
- Deposits rose 7.1% from year-end, with management attributing much of the increase to PPP proceeds, government stimulus and market uncertainty; some of these balances may be temporary. The company did not repurchase shares in Q1, but had a new $25 million authorization.
Outlook, risks and contingencies
The filing provides no formal earnings guidance. Management said it anticipated limited new or extended loan deferrals in Q2 as Hawaii’s recovery progressed. Management cited improving visitor activity and declining unemployment, but Hawaii tourism and employment remained materially below pre-pandemic conditions. The filing references state projections of 5.5 million visitor arrivals in 2021; these are third-party projections, not company guidance.
COVID-19 remains a central uncertainty, particularly its effects on Hawaii tourism, borrowers, collateral values, credit losses, liquidity and earnings. Active COVID-related forbearance or deferrals declined to $39.5 million, or 0.8% of loans (0.9% excluding PPP), from $120.2 million at year-end. Credit risks include possible deterioration as deferrals end or stimulus wanes. Low interest rates may pressure net interest margin; the company’s modeled net interest income sensitivity was +4.28% for a 100-basis-point increase and -5.11% for a 100-basis-point decrease.
A federal investigation and pending charges concern alleged fraud by a borrower on a $10 million PPP loan. The company and bank are not parties to the complaint, are cooperating with authorities, and expect the SBA guarantee to remain in effect and repayment in full; the loan remained classified as performing. The filing also notes ordinary-course legal matters that management does not expect to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Other items to monitor include possible credit or valuation effects from the pandemic, the collectibility of interest on modified loans, PPP forgiveness and related guarantee risks, deposit stability, and the effects of LIBOR transition on floating-rate debt. The board declared a $0.24-per-share dividend on April 27, 2021, payable at its discretion and subject to legal and contractual limits. RISE2020 was reported complete; the company anticipates approximately $1.8 million in annual expense savings from four 2020 branch consolidations.
Key facts for investors to verify
- PPP portfolio status: outstanding balances, fee recognition, forgiveness pace, SBA guarantee performance and the outcome of the investigation involving the $10 million loan.
- Credit trends as borrower deferrals expire, including criticized and classified loans, nonperforming assets, charge-offs and adequacy of the allowance.
- Whether stimulus-related deposit growth persists and how loan growth and funding costs affect liquidity and net interest margin.
- Available-for-sale securities valuation and accumulated other comprehensive income as interest rates and markets change.
- Actual execution of the $25 million repurchase authorization, dividend capacity, and delivery of projected branch-consolidation savings.