Central Pacific Financial Corp. — Q1 2015 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014. Central Pacific Financial is a Hawaii bank holding company; its subsidiary, Central Pacific Bank, operates 36 branches and 110 ATMs in Hawaii. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q1 2015 / March 31, 2015 | Comparable period / Dec. 31, 2014 |
|---|---|---|
| Net income | $10.4 | $9.8 in Q1 2014 |
| Diluted EPS | $0.29 | $0.23 in Q1 2014 |
| Net interest income | $36.2 reported; $36.8 taxable-equivalent | $35.8 reported; $36.3 taxable-equivalent in Q1 2014 |
| Net interest margin | 3.28% | 3.31% in Q1 2014 |
| Operating cash flow | $15.7 | $19.0 in Q1 2014 |
| Total assets | $4,965.9 | $4,853.0 |
| Loans and leases, net of deferred costs | $2,967.8 | $2,932.2 |
| Total deposits | $4,188.6 | $4,110.3 |
| Short-term borrowings / long-term debt | $70.0 / $92.8 | $38.0 / $92.8 |
| Cash and cash equivalents | $85.2 | $86.0 at period start; $91.3 at March 31, 2014 |
Performance and changes versus prior year
- Net income increased 6% year over year. Diluted EPS rose to $0.29 from $0.23, while average diluted shares fell to 35.5 million from 42.5 million.
- Taxable-equivalent net interest income rose 1.2%, mainly as average loans grew $289.7 million. Net interest margin narrowed 3 basis points; management attributed the pressure to the low-rate environment and lower loan yields.
- Other operating income increased 10.3% to $11.2 million, including higher residential loan-sale gains and gains on loans held for sale and rate locks. Operating expense increased 6.5% to $34.0 million, including higher mortgage-servicing amortization, software costs, and legal/professional expense.
- The loan-loss provision was a $2.7 million credit, versus a $1.3 million credit in Q1 2014, reflecting management’s assessment of improving credit quality. Net recoveries were $0.1 million, compared with $0.7 million a year earlier.
- Nonperforming assets decreased to $40.8 million from $42.0 million at year-end; nonaccrual loans were 1.26% of loans and leases. TDRs still accruing interest declined to $19.8 million from $29.5 million.
- Operating cash flow was positive, while investing activities used $113.4 million, chiefly reflecting securities purchases. Financing provided $96.9 million, including deposit growth and increased short-term borrowings. Cash and cash equivalents ended the quarter at $85.2 million.
Capital, liquidity and distributions
- At March 31, the company reported a 12.79% leverage ratio, 17.29% Tier 1 risk-based ratio, 18.54% total risk-based ratio, and 14.78% CET1 ratio; management said capital exceeded “well-capitalized” levels.
- The bank had a $965.4 million FHLB credit line, with $895.4 million undrawn, and $34.0 million of additional unused Federal Reserve discount-window borrowing capacity. Access to these sources is not assured under adverse market or financial conditions.
- Shareholders’ equity was $572.9 million. The company repurchased 473,829 shares for $9.3 million during Q1 and paid a $0.12-per-share dividend. The board declared another $0.12 dividend for payment in June 2015.
- On April 1, 2015, after quarter-end, the company repurchased 3,259,452 shares for approximately $75 million as part of a transaction in which major shareholders sold shares. The company received no proceeds from the secondary sale; $29.2 million remained available under its repurchase authorization after the transaction.
Outlook, risks and contingencies
- No specific company earnings or revenue guidance is provided. Management expected the federal funds rate to remain low through 2015 and said it believed Hawaii real estate conditions would continue improving, while cautioning that this was not assured.
- Management highlighted Hawaii’s importance to results and exposure to real estate, borrower credit, tourism, military and other local economic activity. It cited risks from economic weakness, natural disasters, interest-rate changes, regulation, competition, and execution of efficiency initiatives.
- Management continued to focus on lowering the efficiency ratio and growing its Hawaii market share, including technology outsourcing, staff right-sizing, and development of data-warehouse and customer-relationship-management systems.
- The $2.6 million mortgage-loan repurchase reserve reflects estimated exposure under loan-sale representations and warranties. Actual claims and losses could differ from estimates. Management said ordinary-course legal matters were not expected to materially affect the financial statements.
- Allowance estimates depend on management judgments and economic assumptions; incorrect assumptions could require higher provisions. The filing also notes risks to mortgage-servicing-right valuations from changes in prepayment speeds and interest rates.
Most important facts for investors to verify
- Whether loan growth and improved credit trends persist, and whether the allowance remains adequate as the portfolio changes.
- Whether margin pressure continues if low interest rates persist or asset yields decline.
- The financial and capital effects of the April 1 share repurchase, and the company’s remaining repurchase capacity and dividend flexibility.
- Whether higher operating expenses are offset by the efficiency initiatives management described.
- Developments in Hawaii real estate, tourism and employment, and any changes in mortgage repurchase claims or other contingencies.