Central Pacific Financial Corp. — Q1 2016 Form 10-Q
Business context and reporting period. The Hawaii-based bank holding company reported unaudited results for the three months ended March 31, 2016. Its principal subsidiary, Central Pacific Bank, operates 35 branches and 103 ATMs in Hawaii. Unless otherwise noted, amounts below are in millions of dollars.
Key financial results
| Metric | Q1 2016 | Q1 2015 / prior quarter-end |
|---|---|---|
| Total interest income | $41.2 | $37.8 in Q1 2015 |
| Net interest income | $39.2 GAAP; $39.7 taxable-equivalent | $36.2 GAAP; $36.8 taxable-equivalent in Q1 2015 |
| Net interest margin | 3.33% | 3.28% in Q1 2015 |
| Provision for loan and lease losses | Credit of $0.7 | Credit of $2.7 in Q1 2015 |
| Other operating income / expense | $10.2 / $32.9 | $11.2 / $34.0 in Q1 2015 |
| Income before taxes / tax expense | $17.2 / $6.1 | $16.2 / $5.8 in Q1 2015 |
| Net income | $11.2 | $10.4 in Q1 2015 |
| Diluted earnings per share | $0.35 | $0.29 in Q1 2015 |
| Cash dividends declared per share | $0.14 | $0.12 in Q1 2015 |
| Total assets | $5,242.2 | $5,131.3 at Dec. 31, 2015 |
| Loans and leases, net of deferred costs | $3,309.0 | $3,211.5 at Dec. 31, 2015 |
| Total deposits | $4,496.6 | $4,433.4 at Dec. 31, 2015 |
| Short-term borrowings / long-term debt | $106.0 / $92.8 | $69.0 / $92.8 at Dec. 31, 2015 |
| Shareholders’ equity | $509.4 | $494.6 at Dec. 31, 2015 |
Q1 operating cash flow was $24.2, investing cash outflow was $102.7, and financing cash inflow was $91.0. Cash and cash equivalents ended the quarter at $92.7, up $12.5 from the beginning of the period. The filing reports annualized return on average assets of 0.87%, return on average shareholders’ equity of 8.85%, and return on average tangible equity of 8.98%.
Changes and notable developments
- Net income rose about 7.6% year over year, and diluted EPS increased from $0.29 to $0.35. The share count was lower, reflecting prior and current repurchases.
- Net interest income increased 8.1% on a taxable-equivalent basis, primarily as average loans and leases grew $303.3. The margin rose 5 basis points; higher funding costs, particularly on large time deposits, partially offset asset growth and yield gains.
- Total loans and leases increased 3.0% from year-end. Consumer loans grew $31.9, including purchases of $23.2 in auto loans and $29.2 in unsecured consumer loans during the quarter. The unsecured portfolio carried a stated weighted-average yield of 7.55%; the auto portfolio, 3.88%.
- Deposits increased 1.4%, with growth concentrated in savings and money-market accounts and interest-bearing demand deposits. Core deposits increased 2.3%.
- The allowance for loan and lease losses declined to $62.1, or 1.88% of loans, from $63.3, or 1.97%, at year-end. Net charge-offs were $0.4, versus net recoveries of $0.1 in Q1 2015.
- Nonperforming assets were $15.9, down from $16.2 at year-end; the nonperforming-assets ratio fell to 0.48% from 0.51%. Nonaccrual loans were $14.7. Accruing loans 90 days or more past due increased to $0.8 from $0.3.
- Available-for-sale securities recorded unrealized gains that contributed $11.9 of after-tax other comprehensive income. Total equity increased to $509.4.
- The company repurchased 233,722 shares for $4.7 under a new $30.0 million authorization, leaving $25.3 available at quarter-end. The board declared a $0.14-per-share dividend on April 27, 2016.
Outlook, risks, and contingencies
- Management expected the federal funds rate and yield curve to remain relatively low and stable through 2016, with net interest margin relatively unchanged and potentially expanding modestly with economic recovery. This is management’s expectation, not a quantified earnings or revenue forecast.
- Management cited Hawaii’s economic growth, low unemployment, and continued strength in tourism and real estate, while noting uncertainty in global conditions. The company is substantially exposed to Hawaii’s economy, real estate markets, tourism, and federal spending; deterioration in these areas could weaken loan demand and asset quality.
- Credit-loss estimates depend on assumptions and judgment; management cautioned that the allowance may prove insufficient if assumptions are wrong. Other identified risks include interest-rate movements, regulatory and legal developments, competition, technology, and execution of efficiency initiatives.
- At March 31, the bank reported $1.16 billion of undrawn capacity under its $1.26 billion FHLB line and $35.1 million of additional Federal Reserve discount-window capacity. The company and bank reported regulatory capital ratios above the applicable “well-capitalized” thresholds.
- The company reported $90.0 million of trust preferred securities and stated that dividend payments are subject to legal, regulatory, and contractual restrictions. The bank had $65.6 million of statutory retained earnings.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. No material changes to previously disclosed risk factors or contractual obligations were reported. The 2010 Tax Benefits Preservation Plan expired February 18, 2016, and the related charter transfer restriction was scheduled to expire May 2, 2016.
Important facts for investors to verify
- Whether loan growth—especially purchased consumer lending—continues at acceptable yields and credit quality.
- Whether deposit pricing and funding costs pressure the 3.33% net interest margin as rates and competition change.
- Trends in delinquencies, nonperforming assets, charge-offs, and the adequacy of the $62.1 million allowance.
- The sustainability of earnings given lower noninterest income year over year and increased computer software expense.
- Capital, liquidity, and dividend capacity, including restrictions on bank-to-parent distributions and remaining share-repurchase authorization.
- The filing states that controls were effective and that no material internal-control changes occurred during the quarter; investors may verify subsequent disclosures and developments.