Central Pacific Financial Corp. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Central Pacific Financial Corp. is a Hawaii bank holding company whose principal subsidiary, Central Pacific Bank, operates 35 branches and 103 ATMs in Hawaii.
Financial results and condition
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end |
|---|---|---|
| Total revenue (net interest income plus other operating income) | $51.3 million | $47.9 million in Q1 2016 |
| Net income | $13.1 million; diluted EPS $0.42 | $11.2 million; diluted EPS $0.35 in Q1 2016 |
| Net interest income, taxable-equivalent | $41.8 million | $39.7 million in Q1 2016 |
| Net interest margin | 3.30% | 3.33% in Q1 2016 |
| Other operating income / expense | $10.0 million / $31.5 million | $8.7 million / $31.4 million in Q1 2016 |
| Cash flow | Operating +$45.2 million; investing −$70.3 million; financing +$46.8 million; cash and cash equivalents ended at $106.0 million | Cash and cash equivalents ended at $92.7 million in Q1 2016 |
| Total assets / total equity | $5.44 billion / $511.6 million | $5.38 billion / $504.7 million at December 31, 2016 |
| Loans and leases, net of allowance | $3.49 billion | $3.47 billion at December 31, 2016 |
| Deposits | $4.78 billion | $4.61 billion at December 31, 2016 |
| Borrowings | Short-term $21.0 million; long-term debt $92.8 million | Short-term $135.0 million; long-term debt $92.8 million at December 31, 2016 |
| Capital and liquidity | Tangible common equity ratio 9.33%; bank regulatory capital ratios above “well capitalized” thresholds; $1.42 billion undrawn FHLB capacity | Tangible common equity ratio 9.29% at December 31, 2016 |
Material changes and credit quality
- Net income increased about 17% year over year. Higher average loan balances and deposit-funded growth lifted net interest income, while interest expense rose 45%, mainly due to higher balances and rates on large time deposits.
- The 3-basis-point decline in net interest margin reflected lower investment-securities yields and higher rates paid on large time deposits. Management reported that average earning-asset yields rose 4 basis points year over year, while average interest-bearing funding costs rose 10 basis points.
- Other operating income rose 15.7%, led by mortgage banking income, bank-owned life insurance income, and recoveries on previously charged-off nonaccrual loans. The quarter included $0.6 million of BOLI death-benefit income and $0.6 million of recoveries on previously charged-off loans.
- The efficiency ratio improved to 61.36% from 65.53%; management attributed the improvement partly to revenue growth and the BOLI death benefit.
- The allowance for loan and lease losses declined to $55.4 million from $56.6 million. The company recorded an $0.08 million provision credit, while net charge-offs increased to $1.2 million from $0.4 million a year earlier. Allowance coverage was 1.56% of loans, versus 1.61% at year-end.
- Nonperforming assets fell to $8.8 million from $9.2 million; nonaccrual loans were $8.0 million. Accruing loans 90 days or more past due declined to $0.2 million from $1.4 million. Total nonperforming assets, severely delinquent accruing loans, and accruing troubled debt restructurings were $24.4 million, down 8.7% from year-end.
- Deposits increased 3.7% during the quarter. Loan growth was modest overall, with increases in auto, residential mortgage, home-equity and commercial-mortgage balances partly offset by declines in other consumer, construction and commercial/agricultural lending.
Outlook, risks and other notable matters
- The filing provides no specific full-year earnings or revenue guidance. Management expected gradual Federal Reserve rate increases and a moderately rising yield curve during 2017, while noting potential interest-rate volatility as policy develops.
- Management described Hawaii’s economy, tourism and real estate market as supportive, citing positive growth expectations and strong visitor activity, but cautioned that continued strength in Hawaii real estate was not assured. The company’s concentration in Hawaii makes results sensitive to local economic and property-market conditions.
- Interest-rate risk is the principal market risk. Management’s simulation indicated projected net interest income changes remained within established policy limits at March 31, 2017.
- Control weakness: Management concluded disclosure controls and procedures were not effective because of a previously reported material weakness involving completeness and accuracy of data used in the loan-loss allowance model. Remediation and independent review were underway; management said effectiveness may require evaluation over several quarters before concluding the weakness is resolved.
- The company reported $1.5 million of residential mortgage loans in foreclosure proceedings and $3.5 million of TDRs included in nonperforming assets. It reported no material adverse effect expected from ordinary-course legal matters.
- The Board declared a $0.18 per-share dividend on April 25, 2017, above the $0.16 per share declared in Q1. The company repurchased 113,750 shares for $3.5 million and had $26.5 million remaining under its $30 million repurchase authorization.
- Accounting-standard changes remain under evaluation, including the expected-credit-loss standard effective for the company in 2020. Management did not expect material effects from several other standards discussed, based on its preliminary assessments.
Important facts for investors to verify
- Track remediation and independent validation of the allowance-model data weakness, and whether management later concludes the material weakness is remediated.
- Monitor loan-loss trends: net charge-offs rose despite a provision credit, and the allowance-to-loan ratio declined.
- Assess deposit pricing and mix, particularly growth and repricing of large time deposits, and the effect on net interest margin as rates change.
- Separate recurring earnings from quarter-specific contributions, especially BOLI death-benefit income and recoveries on previously charged-off loans.
- Review Hawaii real estate, tourism and broader economic conditions, given the company’s geographic and real-estate lending concentration.
- Confirm the sustainability of the dividend and repurchases against capital, liquidity, regulatory restrictions and the holding company’s reliance on bank dividends.