Central Pacific Financial Corp. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Central Pacific Financial is a Hawaii bank holding company; its subsidiary, Central Pacific Bank, operates 27 branches and 57 ATMs in Hawaii.
Financial performance and position
- Q2 earnings: Net income was $14.5 million, or $0.53 per diluted share, versus $17.6 million, or $0.64, a year earlier. Six-month net income was $30.7 million, or $1.13 per diluted share, versus $37.0 million, or $1.33.
- Interest income and margin: Q2 interest income was $69.3 million, up from $55.1 million; interest expense rose to $16.6 million from $2.1 million. GAAP net interest income was $52.7 million versus $53.0 million. Taxable-equivalent net interest margin was 2.96%, down from 3.05%. For the first half, GAAP net interest income was $106.9 million versus $103.9 million, and taxable-equivalent margin was 3.02% versus 3.01%.
- Other income and expenses: Q2 other operating income was $10.4 million, down 39.1%, primarily because the prior-year quarter included an $8.5 million Visa share-sale gain. Operating expenses fell 12.0% to $39.9 million, partly because the prior-year quarter included a $4.9 million pension settlement charge. Q2 efficiency ratio improved to 63.17% from 64.68%.
- Credit costs: Q2 provision for credit losses was $4.3 million, compared with $1.0 million; first-half provision was $6.2 million, versus a $2.2 million credit. First-half net charge-offs were $5.6 million versus $1.4 million, driven mainly by U.S. Mainland unsecured consumer loans. ACL was $63.8 million, or 1.16% of loans.
- Balance sheet and funding: Assets were $7.57 billion at June 30, up 1.8% from year-end. Loans were $5.52 billion, down 0.6%; deposits were $6.81 billion, up 1.0%. Deposit mix shifted toward time deposits as demand and savings balances declined. Core deposits were $5.98 billion, 87.9% of deposits, compared with 90.2% at year-end.
- Cash, liquidity and debt: Cash and cash equivalents were $311.0 million. First-half operating cash flow was $48.3 million and ending cash equivalents increased by $198.9 million. Long-term debt was $156.0 million, including $50.0 million of FHLB borrowings added during the half; there were no short-term FHLB advances at quarter-end. Management reported approximately $2.72 billion in other available liquidity sources, equal to 128% of uninsured and uncollateralized deposits.
- Capital: Company leverage, Tier 1 risk-based, total risk-based and CET1 ratios were 8.7%, 11.8%, 13.9% and 10.9%, respectively; the Bank’s corresponding ratios were 9.1%, 12.3%, 13.5% and 12.3%. Management said capital exceeded applicable well-capitalized standards for the Bank.
Material changes versus comparable periods
- Rising funding costs substantially offset higher loan yields: Q2 deposit and borrowing expense increased sharply, and margin declined year over year.
- First-half net income declined despite higher net interest income, reflecting higher credit-loss provision and the absence of the prior-year Visa gain, among other items. Prior-year results also included the pension settlement charge.
- Nonperforming assets increased to $11.1 million from $5.3 million at year-end; nonaccrual loans were 0.20% of loans versus 0.09%. Accruing loans at least 90 days past due rose to $3.3 million from $1.8 million.
- Unrealized losses remained significant in securities: $122.5 million on AFS securities and $68.7 million on HTM securities at quarter-end. The company attributed losses primarily to interest rates and market volatility, said it did not intend or expect to be required to sell before recovery, and recorded no securities credit-loss allowance. Accumulated other comprehensive loss was $135.3 million.
Outlook, commentary and risks
- No specific company earnings or margin guidance was provided. Management expected loan yields to continue rising but also anticipated higher deposit and borrowing costs; future margin depends partly on competition and retaining lower-cost deposits. The filing cited market expectations at the time for two further quarter-point Federal Reserve increases in 2023.
- Management described liquidity, asset quality and capital as solid amid banking-industry volatility. About 65% of deposits were FDIC-insured or collateralized. Risks include deposit outflows and customer-confidence shocks, higher rates and inflation, Hawaii economic and real-estate conditions, consumer credit pressure, and concentration in the Hawaii market.
- The U.S. Mainland consumer portfolio continued to run off as a precaution; its higher charge-offs contributed to credit costs. The filing also identifies borrower deterioration, real-estate and construction weakness, and natural disasters as risks.
- The Swell fintech account portfolio was closed in June 2023, and the Bank stopped serving as sponsor. The company anticipated a third-quarter transaction involving repayment of its investment for cash of up to $0.5 million, intellectual property and potential platform-use fees valued at up to $1.5 million; completion and terms were not assured. BaaS was not expected to materially affect 2023 financial statements.
- The Board declared a $0.26-per-share dividend in July. Share repurchases were temporarily paused in March and resumed modestly in May; $23.5 million remained authorized at quarter-end. The company cautioned that future dividends and repurchases are not assured.
- Management did not expect ordinary-course legal proceedings to materially harm financial condition or operations. Disclosure controls were judged effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether deposit pricing and mix continue to pressure net interest margin, and whether lower-cost deposits can be retained.
- Trends in U.S. Mainland consumer charge-offs, nonperforming assets, delinquencies and the adequacy of the ACL.
- Available liquidity under stressed deposit-outflow scenarios, including the availability and terms of borrowing facilities.
- Changes in the fair value of AFS and HTM securities and any implications for liquidity or capital if securities must be sold.
- Whether the proposed Swell transaction closes and what value, if any, is ultimately realized.
- Future dividend and repurchase decisions, given capital, liquidity and regulatory constraints.