Central Pacific Financial (CPF) - 2019 Q1 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (Unaudited) Unaudited Q1 2019 financial statements report $5.84 billion in total assets and $16.0 million net income, incorporating new lease and hedging accounting standards Consolidated Balance Sheets Total assets increased to $5.84 billion by March 31, 2019, with liabilities at $5.34 billion and shareholders' equity growing to $502.6 million Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--- | :--- | :--- | | Total Assets | $5,841,352 | $5,807,026 | | Net loans and leases | $4,054,304 | $4,030,450 | | Total investment securities | $1,320,360 | $1,354,812 | | Total Liabilities | $5,338,714 | $5,315,301 | | Total deposits | $4,948,128 | $4,946,490 | | Total Shareholders' Equity | $502,638 | $491,725 | - The company adopted a new lease accounting standard (ASU 2016-02), resulting in the recognition of a Right of use lease asset of $54.8 million and a corresponding Lease liability of $54.9 million as of March 31, 2019[9][37] Consolidated Statements of Income Q1 2019 net income increased to $16.0 million, fueled by a 6.6% rise in net interest income to $45.1 million and a $2.6 million gain from MasterCard stock sale Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Q1 2019 (in thousands) | Q1 2018 (in thousands) | | :--- | :--- | :--- | | Net Interest Income | $45,113 | $42,322 | | Provision (credit) for loan and lease losses | $1,283 | $(211) | | Total other operating income | $11,673 | $8,954 | | Net Income | $16,037 | $14,277 | | Diluted EPS | $0.55 | $0.48 | - Other operating income in Q1 2019 was significantly boosted by a $2.6 million gain from the sale of MasterCard stock, which was carried at a zero cost basis[58][212] Consolidated Statements of Comprehensive Income Q1 2019 comprehensive income reached $27.3 million, a significant improvement from a prior-year loss, driven by $16.0 million net income and $11.2 million in other comprehensive income Comprehensive Income (Loss) (in thousands) | Component | Q1 2019 (in thousands) | Q1 2018 (in thousands) | | :--- | :--- | :--- | | Net Income | $16,037 | $14,277 | | Other comprehensive income (loss), net of tax | $11,238 | $(14,715) | | Comprehensive income (loss) | $27,275 | $(438) | Consolidated Statements of Changes in Equity Shareholders' equity increased to $502.6 million by March 31, 2019, driven by $16.0 million net income and $11.2 million other comprehensive income, partially offset by dividends and repurchases - Key changes in equity for Q1 2019 included net income of $16.0 million, other comprehensive income of $11.2 million, cash dividends of $6.1 million, and the repurchase and retirement of 277,000 shares for $7.7 million[18] Consolidated Statements of Cash Flows Cash and cash equivalents decreased by $4.0 million in Q1 2019, with $25.9 million from operations, $20.9 million from investing, and $50.7 million used in financing activities Net Cash Flow Summary (in thousands) | Activity | Q1 2019 (in thousands) | Q1 2018 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $25,883 | $29,884 | | Net cash (used in) provided by investing activities | $20,851 | $(78,693) | | Net cash (used in) provided by financing activities | $(50,741) | $32,296 | | Net (decrease) in cash and cash equivalents | $(4,007) | $(16,513) | Notes to Consolidated Financial Statements Notes detail significant accounting policies, including 2019 adoption of ASU 2016-02 for leases ($55.9 million impact) and ASU 2017-12 for hedging ($144.3 million reclassification), and prepare for CECL adoption - Effective January 1, 2019, the company adopted ASU 2016-02 (Leases), recognizing a right-of-use lease asset and corresponding liability of $55.9 million[37] - Effective January 1, 2019, the company adopted ASU 2017-12 (Hedging), transferring its entire held-to-maturity investment portfolio with a fair value of $144.3 million to the available-for-sale category[38] - The company is preparing for the adoption of the Current Expected Credit Loss (CECL) standard (ASU 2016-13) effective January 1, 2020, which is expected to have a significant impact on processes for calculating credit loss reserves[39][41][42] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q1 2019 net income of $16.0 million to higher net interest income and a MasterCard stock sale gain, with net interest margin at 3.34% and total assets at $5.84 billion Financial Summary and Material Trends Q1 2019 net income was $16.0 million ($0.55 diluted EPS), reflecting Hawaii's economy with 2.6% visitor arrival growth but 6.3% spending decrease, and a low 2.8% unemployment rate Q1 Financial Performance | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net Income | $16.0M | $14.3M | | Diluted EPS | $0.55 | $0.48 | | Return on average assets | 1.10% | 1.01% | | Return on average shareholders' equity | 12.97% | 11.60% | - Hawaii's economy continues to grow, but at a slower pace. Tourism remains a key driver, with visitor arrivals up 2.6% but spending down 6.3% in Q1 2019 compared to the prior year[187][190] Results of Operations Q1 2019 net interest income (tax-equivalent) rose 6.5% to $45.3 million, expanding net interest margin to 3.34%, with other operating income surging 30.4% to $11.7 million due to a MasterCard stock sale gain - Net interest margin increased to 3.34% in Q1 2019 from 3.21% in Q1 2018, as the 35 basis point increase in average yields on interest-earning assets outpaced the 31 basis point increase in rates on interest-bearing liabilities[203][208] - Other operating income increased by $2.7 million (30.4%) year-over-year, primarily due to a $2.6 million gain on the sale of MasterCard stock and a $0.6 million increase in income from bank-owned life insurance[212] - The efficiency ratio improved to 60.49% in Q1 2019 from 65.15% in Q1 2018, positively impacted by higher revenue, including the gain on the sale of MasterCard stock[217] Financial Condition Total assets grew to $5.84 billion by March 31, 2019, with net loans and leases at $4.10 billion, stable deposits at $4.95 billion, and nonperforming assets remaining low at 0.08% Loan Portfolio Composition (in thousands) | Loan Category | March 31, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :--- | :--- | :--- | | Commercial, financial & agricultural | $566,795 | $581,660 | | Residential mortgage | $1,451,794 | $1,428,205 | | Commercial mortgage | $1,058,006 | $1,040,278 | | Consumer | $487,813 | $492,206 | | Total loans and leases | $4,101,571 | $4,078,366 | - Nonperforming assets increased to $3.3 million at March 31, 2019, from $2.7 million at year-end 2018. The ratio of nonperforming assets to total loans and OREO remained low at 0.08%[231][233] - The allowance for loan and lease losses as a percentage of total loans decreased to 1.15% at March 31, 2019, from 1.17% at December 31, 2018, reflecting the credit quality of the portfolio and economic conditions[237][238] Capital Resources and Liquidity The company maintained strong capital, exceeding 'well capitalized' minimums, with a 8.60% tangible common equity ratio, repurchasing 277,000 shares for $7.7 million, and redeeming $20.0 million in trust preferred securities Regulatory Capital Ratios (Company) | Ratio | March 31, 2019 | Minimum for Adequacy | | :--- | :--- | :--- | | CET1 risk-based capital | 11.8% | 4.5% | | Tier 1 risk-based capital | 13.0% | 6.0% | | Total risk-based capital | 14.1% | 8.0% | | Leverage capital | 9.5% | 4.0% | - In Q1 2019, the company repurchased 277,000 shares of common stock for $7.7 million. As of March 31, 2019, $13.0 million remained under the stock repurchase plan[253] - The company redeemed $20.0 million in floating rate trust preferred securities of CPB Capital Trust II on January 7, 2019[257] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk, its primary market risk, with ALCO projecting a 1.77% NII increase for a +100 bp rate shift and a 4.24% NII decrease for a -100 bp shift Net Interest Income Sensitivity Analysis (as of March 31, 2019) | Rate Change | Estimated NII Sensitivity (1-Year Horizon) | | :--- | :--- | | +100 bp | +1.77% | | -100 bp | -4.24% | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of the reporting period, with no material changes to internal control over financial reporting during Q1 2019 - Based on an evaluation as of the end of the reporting period, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[281] - No material changes to the company's internal control over financial reporting occurred during the first quarter of 2019[282] Part II. Other Information Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the company's 2018 Annual Report on Form 10-K were reported - No material changes from the Risk Factors disclosed in the 2018 Form 10-K were reported[285] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In Q1 2019, the company repurchased 277,000 common shares for $7.7 million, with $13.0 million remaining available under the stock repurchase plan Issuer Purchases of Equity Securities (Q1 2019) | Period | Total Shares Purchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | January 2019 | 110,500 | $25.98 | | February 2019 | 71,000 | $29.50 | | March 2019 | 95,500 | $28.73 | | Total | 277,000 | $27.83 | - As of March 31, 2019, approximately $13.0 million remained available for repurchase under the company's stock repurchase plan[287] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files