Business context and reporting period
Central Pacific Financial Corp. filed this Form 10-K for the fiscal year ended December 31, 2013. The Hawaii-based bank holding company operates Central Pacific Bank, a commercial bank focused primarily on Hawaii. The bank reported 35 branches and 112 ATMs at year-end; it opened a 36th branch in January 2014.
Financial performance and condition
Amounts below are in millions of dollars unless noted. Comparisons are with fiscal 2012.
| Metric | 2013 | 2012 |
|---|---|---|
| Total interest income | $140.3 | $128.4 |
| Net interest income | $133.1 | $119.7 |
| Net interest margin, taxable-equivalent | 3.19% | 3.10% |
| Other operating income | $54.9 | $60.7 |
| Other operating expense | $139.5 | $151.9 |
| Income before tax | $59.8 | $47.4 |
| Net income | $172.1 | $47.4 |
| Diluted EPS | $4.07 | $1.13 |
| Net cash from operating activities | $84.5 | $39.4 |
- 2013 net income included a non-cash income tax benefit of $119.8 million from reversing much of a deferred-tax-asset valuation allowance. Excluding that benefit, management reported net income of $52.3 million, or $1.24 per diluted share.
- Credit for loan and lease losses was $11.3 million, versus a credit of $18.9 million in 2012. Net charge-offs fell to $1.3 million from $6.8 million.
- Efficiency ratio, a company-defined non-GAAP measure, improved to 74.97% from 78.89%.
- Total assets were $4.74 billion, up 8.5%; loans and leases were $2.63 billion, up 19.4%; and deposits were $3.94 billion, up 6.9%. Core deposits rose 2.9% to $3.09 billion.
- Nonperforming assets declined to $46.8 million from $90.0 million; their share of loans, loans held for sale and other real estate fell to 1.77% from 4.00%. The allowance was $83.8 million, or 3.19% of loans, compared with $96.4 million, or 4.37%, a year earlier.
- Shareholders’ equity was $660.1 million, up from $504.8 million. Company regulatory capital ratios were 20.30% Tier 1 risk-based, 21.57% total risk-based and 13.68% leverage; management said the Company and bank exceeded well-capitalized thresholds.
- Year-end cash and cash equivalents were $49.3 million, versus $177.4 million. Investing activities used $442.1 million, chiefly reflecting loan growth; financing activities provided $229.5 million, largely from deposit growth. The loan-to-deposit ratio rose to 66.8% from 59.9%.
- Year-end long-term debt was $92.8 million and short-term borrowings were $8.0 million. The bank had $934.2 million of unused FHLB borrowing capacity and a $46.5 million Federal Reserve discount-window line, with no discount-window advances outstanding.
Material changes, outlook and risks
- Net interest income rose 11.9%, supported by loan growth and redeployment of excess liquidity; lower funding costs also helped. A fourth-quarter securities swap exchanged $271.5 million of lower-yield securities for higher-yield investments, increasing weighted-average life from 2.9 to 7.4 years.
- Real-estate-related loans represented approximately 73% of the portfolio, and 86% of loans were concentrated in Hawaii. Management cited improving Hawaii tourism, employment and real estate conditions, but noted that deterioration in local property markets or borrower finances could increase losses.
- Management expected modest near-term net interest margin expansion and persistently low deposit rates in 2014. It cited Hawaii economic growth as its outlook, but provided no company-specific earnings guidance.
- Two prior regulatory orders were terminated, but the bank remained subject to an FDIC Compliance MOU covering consumer compliance, board oversight, monitoring, third-party relationships and overdraft practices. The filing gives no assurance as to when it will be terminated.
- Auditors issued an unqualified opinion on the financial statements, but an adverse opinion on internal control over financial reporting. A material weakness involved ineffective review of certain data used in the allowance calculation; a preliminary misstatement was corrected before issuance. Management described remediation steps.
- In February 2014, the Company announced a tender offer of up to $68.8 million and agreements to repurchase up to $56.2 million from its two largest shareholders, for potential aggregate repurchases of $125 million. Completion, pricing and share count were uncertain at filing. These transactions could reduce public float and liquidity.
- Other significant exposures include interest-rate sensitivity, mortgage repurchase obligations, deferred-tax-asset realization and off-balance-sheet credit commitments of $652.7 million. Management said pending ordinary-course legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- How much of ongoing earnings is sustainable apart from the $119.8 million tax benefit, and what assumptions support realization of the remaining $137.2 million net deferred tax asset?
- Whether the allowance-control material weakness has been fully remediated and whether subsequent reviews identify any further issues.
- Whether nonperforming assets and credit costs continue to decline as loans grow, particularly in real-estate-related portfolios and recently expanded consumer lending.
- The final completion, purchase price, share count and effects on capital, liquidity and public float of the announced $125 million potential buyback.
- The status of the Compliance MOU, and any restrictions on dividends, repurchases or bank-to-parent distributions.
- Actual 2014 net interest margin, deposit pricing and liquidity trends against management’s qualitative outlook.