Central Pacific Financial Corp. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; comparison periods are the corresponding 2021 periods unless otherwise noted. Central Pacific is a Hawaii-based bank holding company; its bank had 28 branches and 65 ATMs in Hawaii.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income (GAAP) | $53.0m | $52.1m | $103.9m | $101.9m |
| Total other operating income | $17.1m | $10.5m | $26.7m | $21.2m |
| Net income | $17.6m | $18.7m | $37.0m | $36.8m |
| Diluted EPS | $0.64 | $0.66 | $1.33 | $1.29 |
| Net interest margin (taxable-equivalent) | 3.05% | 3.16% | 3.01% | 3.18% |
| Efficiency ratio | 64.68% | 66.20% | 63.98% | 64.40% |
Q2 pre-tax, pre-provision income was $24.8m versus $21.2m; six-month pre-tax, pre-provision income was $47.0m versus $43.8m. Q2 return on average assets was 0.96% and return on average equity was 14.93%; six-month figures were 1.01% and 14.67%, respectively.
Balance sheet, liquidity and capital
- At June 30, total assets were $7.30bn, down 1.6% from year-end 2021. Loans, net of deferred fees and before allowance, were $5.30bn, up 3.9%; deposits were $6.62bn, down 0.3%.
- Cash and cash equivalents were $131.1m at June 30, versus $328.9m at the start of the year. Six-month operating cash flow was $47.6m; investing cash use was $203.6m and financing cash use was $41.7m.
- Long-term debt was $105.7m. The bank reported no FHLB borrowings and $1.90bn undrawn on its $1.93bn FHLB line; unused Federal Reserve discount-window borrowing capacity was $81.8m.
- Shareholders’ equity was $455.1m, down from $558.2m at year-end 2021; the equity-to-assets ratio fell to 6.23% from 7.52%, and book value per share to $16.57 from $20.14. Management attributed the decline mainly to unrealized available-for-sale securities losses from rising rates.
- Company and bank regulatory capital ratios remained above applicable well-capitalized thresholds. The bank’s total risk-based capital ratio was 13.5% and CET1 ratio was 12.2% at June 30.
- The board declared a $0.26 per-share dividend on July 26, 2022. The company repurchased $10.9m of shares in the first half; $20.1m remained authorized at quarter-end.
Material changes and unusual items
- Q2 other income included an $8.5m pre-tax gain from selling all Visa Class B shares, carried at zero cost basis. This was a one-time gain and materially lifted reported noninterest income.
- Q2 expenses included a $4.9m noncash settlement charge from terminating the defined-benefit pension plan. The plan settlement was completed in Q2; no further defined-benefit plan liability or ongoing pension expense remained at June 30.
- Six-month other comprehensive loss was $118.5m, primarily reflecting falling market values of available-for-sale securities as interest rates rose. The company transferred securities with $762.7m amortized cost from available-for-sale to held-to-maturity in two transactions; the transfers did not affect net income but preserve the accumulated unrealized losses in AOCI as the securities are held to maturity.
- Loan growth was led by consumer, commercial mortgage and home-equity balances. Mainland loans grew 22.3% from year-end, including purchased consumer portfolios; Hawaii loans grew 1.0%.
- Provision for credit losses was a $1.0m expense in Q2 versus a $3.4m credit in Q2 2021; for the first half it was a $2.2m credit versus a $4.3m credit. The loan allowance was $65.2m, or 1.23% of loans, at June 30.
Outlook, commentary and risks
- Management expects net interest margin to trend upward if loan yields rise faster than deposit costs. It also noted that further Federal Reserve rate increases were likely, while higher rates may pressure funding costs and loan origination and sales.
- Management described Hawaii’s economy as recovering, with visitor arrivals improving but still below 2019 levels through May 2022. The company remains exposed to Hawaii tourism, real estate and broader economic conditions; it cautioned that strong real estate collateral values may not persist.
- The company’s new Banking-as-a-Service strategy includes its Shaka digital account and an investment/collaboration with Swell Financial. Swell planned a product launch in the second half of 2022; execution, customer adoption, reputational and regulatory risks remain.
- There were no active COVID-related payment forbearances or deferrals at June 30. PPP loans outstanding were $21.1m; management believes most remaining loans will be forgiven or repaid, but stated related risks and liabilities cannot currently be determined.
- Interest-rate risk is material. The company reported modeled net interest income sensitivity of +3.26% for a gradual +100bp scenario and -5.77% for an instantaneous -100bp scenario. Investment securities had substantial unrealized losses; management attributed them primarily to rates and said it did not intend, and was not more likely than not required, to sell the affected securities before recovery.
- Management said pending ordinary-course legal matters were not expected to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting; no material risk-factor changes from the 2021 Form 10-K were reported.
Important facts for investors to verify
- How quickly net interest margin and deposit costs respond to further rate changes, and whether loan-yield increases outpace funding costs.
- The size and capital implications of securities valuation losses, including the AFS-to-HTM transfers and the company’s capacity to hold those securities to maturity.
- Underlying earnings excluding the Visa gain and pension settlement charge, and the sustainability of lower mortgage banking income and BOLI results.
- Credit quality trends, including the increase in criticized and special-mention loans, charge-offs, and performance of purchased mainland consumer loans.
- Deposit stability, available borrowing capacity, and capital and dividend flexibility if liquidity, market or economic conditions deteriorate.
- Execution and adoption of the BaaS initiatives, Swell launch plans, and remaining PPP forgiveness or repayment exposure.