Central Pacific Financial Corp. — Q3 2015 Form 10-Q
Business context and reporting period. Hawaii-based bank holding company operating Central Pacific Bank, a full-service community bank with 36 branches and 103 ATMs. This unaudited report covers the quarter and nine months ended September 30, 2015; balance-sheet comparisons are with December 31, 2014. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and condition
| Metric | Q3 / September 30, 2015 | Comparable period / prior date |
|---|---|---|
| Net income | $12.2 million; diluted EPS $0.38 | Q3 2014: $8.2 million; diluted EPS $0.23 |
| Nine-month net income | $34.9 million; diluted EPS $1.06 | Nine months 2014: $27.2 million; diluted EPS $0.71 |
| Net interest income | Q3: $37.8 million GAAP; $38.3 million taxable-equivalent. Nine months: $111.3 million GAAP; $113.0 million taxable-equivalent. | Q3 2014: $35.5 million GAAP; $36.1 million taxable-equivalent. Nine months 2014: $107.2 million GAAP; $108.8 million taxable-equivalent. |
| Net interest margin | Q3: 3.31%; nine months: 3.31% | Q3 2014: 3.30%; nine months 2014: 3.32% |
| Provision for loan losses | Credits of $3.6 million in Q3 and $13.7 million for nine months | Credits of $1.7 million in Q3 2014 and $1.0 million for nine months 2014 |
| Total assets | $5.02 billion | $4.85 billion at December 31, 2014 |
| Loans and leases | $3.10 billion | $2.93 billion at December 31, 2014 |
| Deposits | $4.23 billion | $4.11 billion at December 31, 2014 |
| Cash and cash equivalents | $84.0 million at period end | $86.0 million at beginning of 2015 |
| Shareholders’ equity | $503.3 million | $568.0 million at December 31, 2014 |
- Profitability and margins: Q3 net income increased year over year, supported by higher net interest income, a larger loan portfolio, a loan-loss provision credit, and lower operating expenses. Nine-month net interest margin edged down one basis point year over year. Reported returns on average assets were 0.98% for Q3 and 0.94% for nine months.
- Revenue and expenses: Other operating income declined 14.3% in Q3 and 13.3% for nine months year over year. Nine-month results included a $1.9 million securities-sale loss, compared with a $0.2 million gain in 2014. Total operating expenses fell 8.7% in Q3 and 1.4% for nine months; higher software costs, charitable contributions, and intangible amortization partly offset reductions elsewhere.
- Credit quality: Nonperforming assets were $14.0 million, down from $42.0 million at year-end 2014; the nonperforming-assets ratio fell to 0.45% from 1.43%. The allowance was $66.6 million, or 2.15% of loans and leases, versus $74.0 million and 2.53% at year-end. Nine-month net recoveries were $6.3 million. Management attributed the provision credits principally to improving credit trends and recoveries.
- Cash flow: Nine-month operating cash flow was $61.9 million; investing activities used $195.9 million and financing activities provided $132.0 million. Cash and cash equivalents decreased $2.0 million over the period.
- Debt and liquidity: Short-term borrowings rose to $155.0 million from $38.0 million at year-end; long-term debt was $92.8 million. The bank reported a $1.2 billion FHLB credit line, with $1.0 billion undrawn, and $44.2 million of additional Federal Reserve discount-window borrowing availability. These facilities are subject to collateral and access conditions.
- Capital: At September 30, company ratios were 10.87% leverage, 15.00% Tier 1 risk-based, 16.27% total risk-based, and 13.32% CET1. Management said the ratios exceeded well-capitalized thresholds. Equity declined mainly due to $93.3 million of stock repurchases and $11.7 million in dividends.
Material changes versus prior periods
- Loans and leases grew 5.8% from year-end, driven largely by residential mortgages, commercial lending, and consumer loans. Deposits increased 2.9%.
- Net interest income rose as average loans increased, partly offset by lower loan and securities yields. Q3 NIM was slightly higher year over year, while the nine-month margin was slightly lower.
- Credit indicators improved substantially, with lower nonperforming assets and net recoveries. The allowance fell despite loan growth; changes in estimates and subsequent credit performance remain important.
- Shareholders’ equity and outstanding shares declined following significant repurchases. Selling shareholders completed secondary offerings, including their remaining stake in August; the company received no proceeds from those sales.
- The company repositioned part of its securities portfolio in Q2, selling lower-yield securities and reinvesting in longer-life, higher-yield securities, recording a $1.9 million realized loss.
Outlook, commentary, risks, and unusual items
- No company-wide earnings or revenue guidance is provided. Management expected the federal funds target rate to remain low through the remainder of 2015 and said it expected Hawaii real estate conditions to continue improving, while noting there was no assurance.
- Management cited Hawaii economic forecasts for 2015–2016 and improving local unemployment, visitor arrivals, and real estate sales. Results remain particularly sensitive to Hawaii’s economy, tourism, real estate, loan demand, deposit competition, and interest rates.
- The company did not intend to make further repurchases during the remainder of 2015 to help protect tax benefits from a potential ownership change; it expected to reestablish the program in Q1 2016. On October 28, 2015, the board declared a $0.14 quarterly dividend and a $0.32 special dividend, payable December 15, subject to applicable restrictions.
- Management identified uncertainty in the global economy, low inflation, weak business investment and manufacturing, interest-rate movements, borrower deterioration, regulatory changes, and execution of efficiency initiatives among risks. The allowance, mortgage-servicing-rights valuations, and mortgage repurchase reserves involve significant estimates.
- The mortgage repurchase reserve fell to approximately $1.0 million from $2.7 million at year-end after the company eliminated an unallocated reserve component. Management noted future investor demands and loss severities could differ from estimates.
- Executive leadership changes occurred during 2015, including a new CEO and CFO effective July 1 and an interim chief credit officer following a resignation. The company reported effective disclosure controls, no material change in internal control over financial reporting, and no material change in previously disclosed risk factors. Routine legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether loan growth, credit quality, and recoveries remain strong enough to support the reduced allowance and provision credits.
- The sustainability of earnings as loan yields, securities income, noninterest revenue, and operating expenses evolve.
- Liquidity and funding trends, particularly higher short-term borrowings and the collateral and availability terms of borrowing facilities.
- Capital and dividend capacity after repurchases, including the effect of regulatory restrictions and the company’s tax-benefit preservation measures.
- Potential sensitivity of credit losses and portfolio values to Hawaii economic conditions, interest rates, mortgage prepayments, and real estate markets.