Central Pacific Financial Corp. — FY2019 Form 10-K
Business and reporting period. Central Pacific Financial Corp. is a Hawaii-based bank holding company operating Central Pacific Bank. This annual report covers the fiscal year ended December 31, 2019; quarterly figures below compare Q4 2019 with Q4 2018. The bank had 35 branches and 77 ATMs, with a business concentrated in Hawaii.
Financial performance and condition
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total interest income | $216.4 million | $198.3 million |
| Net interest income | $184.1 million | $173.0 million |
| Net interest margin, taxable-equivalent | 3.35% | 3.22% |
| Provision for loan losses | $6.3 million | Credit of $1.1 million |
| Other operating income | $41.8 million | $38.8 million |
| Other operating expense | $141.6 million | $134.7 million |
| Income before taxes | $77.9 million | $78.2 million |
| Net income | $58.3 million | $59.5 million |
| Diluted earnings per share | $2.03 | $2.01 |
| Return on average assets / equity | 0.99% / 11.36% | 1.05% / 12.22% |
| Efficiency ratio | 62.70% | 63.59% |
- Q4 comparison: Net income was $14.2 million, or $0.50 diluted EPS, versus $15.8 million, or $0.54, in Q4 2018. Net interest income rose to $47.9 million from $44.7 million; the loan-loss provision was $2.1 million versus a $1.4 million credit.
- Balance sheet at year-end: Assets were $6.01 billion, loans and leases $4.45 billion, deposits $5.12 billion, and shareholders’ equity $528.5 million. Loans grew 9.1% and core deposits 6.1% year over year. Investment securities declined 16.7% to $1.13 billion.
- Credit quality: Nonperforming assets fell to $1.7 million from $2.7 million; net charge-offs increased to $6.3 million from $1.0 million. The allowance was $48.0 million, or 1.08% of loans, versus 1.17% a year earlier.
- Cash flow and liquidity: Operating cash flow was $72.2 million; investing activities used $129.0 million; financing activities provided $57.6 million. Cash and cash equivalents ended at $103.0 million. The loan-to-deposit ratio rose to 86.9% from 82.4%. The company reported $1.57 billion available under its $1.84 billion FHLB line and $65.3 million available at the Federal Reserve discount window.
- Debt and capital: Year-end short-term borrowings were $150.0 million and long-term debt $101.5 million, including $50.0 million of FHLB advances and $51.5 million of subordinated debentures. The bank’s regulatory leverage, Tier 1 risk-based, total risk-based and CET1 ratios were 9.3%, 12.3%, 13.4% and 12.3%, respectively; the bank was categorized as well-capitalized. The tangible common equity ratio was 8.79%.
Material changes and unusual items
- Net interest income increased 6.3% on a taxable-equivalent basis, primarily reflecting loan growth, higher loan yields and recoveries, partly offset by higher deposit and borrowing costs. Net interest margin improved 13 basis points.
- Net income declined about 2%, as higher net interest income and other income were offset by the return to a loan-loss provision and higher operating expenses. Other income included a one-time $2.6 million gain from the sale of converted MasterCard shares.
- The company repurchased 797,003 shares for $22.8 million and paid $25.7 million in common dividends. Dividends declared per share rose to $0.90 from $0.82. A new $30 million repurchase authorization was approved in January 2020.
- Adoption of lease accounting in 2019 added a $52.6 million lease liability and a $52.3 million right-of-use asset at year-end. The company also transferred its held-to-maturity securities to available-for-sale at adoption of a hedge-accounting standard, reducing opening accumulated other comprehensive income by $3.1 million.
Outlook, management commentary, and risks
- RISE2020: The company planned approximately $40 million of investment in 2019–2020 to modernize branches, ATMs and digital services and improve growth and efficiency; it recorded about $3.5 million of related expense in 2019. Management forecast a 2020 efficiency ratio of 63%–65% and targeted 15% return on average equity and a 57% efficiency ratio by Q4 2022. These are targets, not guarantees.
- Management described Hawaii conditions as generally healthy but slower-growing in 2019, with tourism and low unemployment supporting activity. It noted continued dependence on tourism and real estate conditions.
- Credit concentration is material: about 74.4% of loans were real-estate-related and 88.2% were in Hawaii. A downturn in Hawaii property markets, tourism or the local economy could impair borrowers and collateral values.
- CECL was scheduled to take effect January 1, 2020. Preliminary estimates indicated an increase of roughly 0%–15% in the allowance for credit losses, including unfunded commitments; the final impact was not yet determined.
- Other identified risks include interest-rate and funding-cost changes, LIBOR transition exposure, cybersecurity and third-party systems, regulatory and compliance costs, execution of RISE2020, and reliance on the bank for parent-company dividends. The filing reported no material adverse effect expected from ordinary-course litigation. Management and the auditor concluded internal control over financial reporting was effective; the auditor highlighted allowance qualitative adjustments as a critical audit matter.
Important facts for investors to verify
- Whether loan growth and the improvement in net interest margin can persist as funding costs, deposit competition and interest rates change.
- Credit performance and allowance adequacy, particularly for Hawaii real estate, construction, commercial mortgage and expanded consumer-loan portfolios; also the final CECL adoption effect.
- Progress, total costs and realized benefits of RISE2020 against management’s 2020 and 2022 efficiency and return targets.
- Liquidity and refinancing needs, including the loan-to-deposit ratio, large time-deposit maturities, FHLB borrowings and subordinated debt tied to LIBOR.
- Capital and shareholder distributions: regulatory buffers, bank dividend capacity, and the effect of repurchases and dividends on capital.