Central Pacific Financial Corp. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Central Pacific Financial is a Hawaii bank holding company whose principal subsidiary operates a full-service community bank.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $39.4 | $37.8 | $118.2 | $111.3 |
| Net interest margin | 3.25% | 3.31% | 3.29% | 3.31% |
| Other operating income | $11.0 | $9.8 | $32.8 | $29.1 |
| Other operating expense | $33.3 | $32.2 | $100.4 | $98.7 |
| Net income | $11.5 | $12.2 | $34.8 | $34.9 |
| Diluted earnings per share | $0.37 | $0.38 | $1.11 | $1.06 |
- Q3 net income declined about 6% year over year, while nine-month net income was nearly flat. Nine-month diluted EPS rose from $1.06 to $1.11, aided in part by fewer weighted-average shares.
- Taxable-equivalent net interest income was $40.0 million in Q3 and $119.9 million for nine months, up 4.2% and 6.1%, respectively. Management attributed growth primarily to higher average loan balances; higher rates on large time deposits partly offset the benefit.
- Q3 and nine-month return on average assets were 0.87% and 0.89%, respectively; return on average shareholders’ equity was 8.81% and 9.05%.
- At September 30, total assets were $5.32 billion, up $188.7 million from year-end 2015. Loans and leases were $3.44 billion, up 7.1%; total deposits were $4.52 billion, up 1.9%.
- Shareholders’ equity was $519.5 million, versus $494.6 million at December 31, 2015. The allowance for loan and lease losses was $59.4 million, or 1.73% of loans, compared with $63.3 million, or 1.97%, at year-end.
- Cash and cash equivalents increased $23.2 million during the nine months to $103.4 million. Operating cash flow was $69.0 million; investing cash use was $184.8 million and financing cash provided was $139.0 million.
- Short-term borrowings were $150.0 million, up from $69.0 million at year-end; long-term debt was $92.8 million. The bank reported $1.24 billion of undrawn capacity under its $1.39 billion FHLB line and $68.4 million of additional Federal Reserve discount-window capacity.
- Company and bank capital ratios exceeded “well-capitalized” thresholds. At the bank, the leverage, Tier 1 risk-based, total risk-based, and CET1 ratios were 10.6%, 14.1%, 15.3%, and 14.1%, respectively.
Material changes versus comparable periods
- Net interest income improved with loan growth, but margins compressed: Q3 NIM fell 6 basis points and nine-month NIM fell 2 basis points year over year.
- Loan growth was concentrated in Hawaii, where loans rose 8.7% from year-end. Commercial mortgage loans increased $102.0 million and home-equity loans $49.3 million. U.S. Mainland loans declined 3.3%.
- Credit quality indicators improved overall: nonperforming assets declined 28.1% from year-end to $11.7 million, and the ratio of nonperforming assets to loans and OREO fell to 0.34% from 0.51%. Accruing loans 90 days or more past due increased to $0.4 million from $0.3 million.
- The company recorded a $0.7 million provision credit in Q3 and a $2.9 million credit for nine months, smaller credits than in 2015. Nine-month 2016 net charge-offs were $1.1 million, compared with net recoveries of $6.3 million in 2015.
- Nine-month other operating income increased 12.7%, including the absence of the prior-year $1.9 million securities-sale loss, higher mortgage-sale gains, and $0.5 million in bank-owned life-insurance death-benefit proceeds. Nine-month expenses increased 1.7%; the comparison was affected by a prior-year $2.0 million charitable contribution and a $2.4 million reversal of a former executive retirement-benefit accrual.
Outlook, risks, contingencies, and unusual items
- Management expected the federal funds target to remain low and the yield curve to be relatively unchanged through the remainder of 2016, and expected NIM to remain relatively unchanged. The filing gives no specific earnings or revenue guidance.
- Management viewed Hawaii’s economy and real estate market as generally favorable and expected the market to remain stable for the rest of 2016, while cautioning there was no assurance. Tourism and real estate are important drivers of the company’s market and loan performance.
- Key exposures include Hawaii economic conditions and real estate, borrower deterioration and credit losses, interest-rate movements and deposit pricing, regulatory changes, and access to funding in stressed markets. The filing notes that actual allowance needs may differ materially from management estimates.
- The bank’s allowance methodology was scheduled for enhancement in Q4 2016. The new expected-credit-loss accounting standard was still under evaluation and was due to take effect for the company in 2020.
- At September 30, $3.8 million of TDRs were included in nonperforming assets; a further $17.8 million of TDRs remained accruing. Management reported no material effect from TDR modifications on provision or allowance. Ordinary-course legal proceedings were not expected by management to have a material adverse effect.
- The board authorized up to $30.0 million of share repurchases; $14.1 million had been spent through September 30, leaving $15.9 million available. Nine-month dividends declared were $0.44 per share; the board declared a further $0.16 per-share dividend on October 26, 2016. Future dividends remain subject to board discretion and legal and contractual limits.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether loan growth and deposit funding can be sustained without further NIM pressure, particularly as large time-deposit rates rise.
- Whether improving nonperforming-asset trends persist, while monitoring commercial real estate concentrations, delinquency changes, and the lower allowance-to-loan ratio.
- How the Q4 allowance-methodology changes affect reserve estimates and whether the allowance remains adequate as the portfolio grows.
- Availability and terms of FHLB and Federal Reserve borrowing capacity, as short-term borrowings increased materially from year-end.
- Whether mortgage servicing rights, mortgage-sale income, and share repurchases remain sustainable under changing interest rates and housing-market conditions.