Central Pacific Financial (CPF) - 2021 Q1 - Quarterly Report

Part I Item 1. Financial Statements (Unaudited) This section presents Central Pacific Financial Corp.'s unaudited consolidated financial statements, including balance sheets, income, comprehensive income, equity, and cash flow statements, with detailed notes for Q1 2021 and comparative periods Consolidated Balance Sheets Total assets increased to $6.98 billion by March 31, 2021, driven by growth in loans and deposits, while total equity slightly decreased Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $6,979,265 | $6,594,583 | | Total Loans, net | $5,056,296 | $4,880,844 | | Total Investment Securities | $1,217,776 | $1,183,960 | | Total Liabilities | $6,436,352 | $6,047,850 | | Total Deposits | $6,208,950 | $5,796,118 | | Total Equity | $542,913 | $546,733 | Consolidated Statements of Income Net income for Q1 2021 significantly increased to $18.0 million from $8.3 million year-over-year, primarily due to a credit to the provision for credit losses and growth in net interest income Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Net Interest Income | $49,804 | $47,830 | | Provision for Credit Losses | ($821) | $11,127 | | Net Income | $18,038 | $8,326 | | Diluted Earnings Per Share | $0.64 | $0.29 | | Cash Dividends Declared | $0.23 | $0.23 | Consolidated Statements of Cash Flows Net cash provided by operating activities was $19.7 million, while investing activities used $249.1 million, and financing activities provided $385.2 million, resulting in a $155.8 million net increase in cash Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $19,679 | $31,245 | | Net Cash Used in Investing Activities | ($249,067) | ($118,025) | | Net Cash Provided by Financing Activities | $385,212 | $76,801 | | Net Increase (Decrease) in Cash | $155,824 | ($9,979) | Notes to Consolidated Financial Statements (Unaudited) This section provides detailed explanations of the company's accounting policies and financial data, covering topics such as the impact of COVID-19, investment securities, loans, ACL, and fair value measurements - The company adopted ASU 2016-13 (CECL) on January 1, 2020, materially changing the methodology for estimating the allowance for credit losses[222] - The company applies Section 4013 of the CARES Act, suspending requirements to classify certain COVID-19 related loan modifications as Troubled Debt Restructurings (TDRs)[60] - The company's Allowance for Credit Losses (ACL) methodology incorporates a one-year reasonable and supportable forecast period, reverting to historical loss information over a one-year period[65] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q1 2021 financial performance, highlighting increased net income driven by a credit to the provision for credit losses, the impact of the COVID-19 pandemic, and details on operations, financial condition, capital, and liquidity management Financial Summary Net income for Q1 2021 reached $18.0 million or $0.64 per diluted share, primarily driven by a $0.8 million credit to the provision for credit losses Key Performance Metrics | Metric | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Net Income | $18.0 million | $8.3 million | | Diluted EPS | $0.64 | $0.29 | | Return on average assets | 1.07% | 0.55% | | Return on average shareholders' equity | 13.07% | 6.21% | - The company recorded a $0.8 million credit to the provision for credit losses in Q1 2021, contrasting with an $11.1 million provision in Q1 2020[227] COVID-19 Pandemic The COVID-19 pandemic continues to impact Hawaii's economy, but conditions are improving with declining unemployment and a significant reduction in loan deferrals, while the company actively participates in PPP and manages operations - Loans on active payment forbearance or deferral significantly declined to $39.5 million (0.8% of total loans) as of March 31, 2021, from $120.2 million (2.4% of total loans) as of December 31, 2020[245][329] - The company actively participated in the SBA's Paycheck Protection Program (PPP), funding over 7,200 loans for $558 million in the first two rounds and over 3,600 loans for $292 million in Q1 2021[262][263] - Hawaii's unemployment rate was 9.0% in March 2021, a significant decrease from its 21.9% peak in April/May 2020[241][286] Results of Operations Net interest income increased to $49.9 million despite net interest margin compression, driven by PPP fees and lower deposit costs, while other operating income rose due to mortgage banking, and operating expenses increased, impacting the efficiency ratio - Net interest margin decreased to 3.19% in Q1 2021 from 3.43% in Q1 2020, primarily due to lower yields on earning assets in the low-rate environment[298][299] - Net interest income for Q1 2021 included $5.2 million in PPP net interest income and net loan fees, with $2.4 million in fees recognized from loan forgiveness during the quarter[294] - Other operating income increased by $1.8 million year-over-year, primarily due to a $2.6 million increase in mortgage banking income from strong residential mortgage demand[305] - Other operating expense increased by $3.4 million year-over-year, mainly due to higher directors' deferred compensation plan expense, computer software expense, and advertising expense[308] Financial Condition Total assets reached $6.98 billion as of March 31, 2021, driven by increases in loans and deposits, while nonperforming assets remained low and the Allowance for Credit Losses slightly decreased Loan Portfolio Composition (in thousands) | Loan Category | March 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | SBA PPP | $597,819 | $416,375 | | Residential mortgage | $1,687,513 | $1,690,212 | | Commercial mortgage | $1,164,338 | $1,156,328 | | Other Commercial | $514,189 | $545,091 | | Total Loans | $5,137,849 | $4,964,113 | Deposit Composition (in thousands) | Deposit Category | March 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Noninterest-bearing demand | $2,070,428 | $1,790,269 | | Core Deposits | $5,546,681 | $5,136,412 | | Total Deposits | $6,208,950 | $5,796,118 | - Nonperforming assets (NPAs) increased to $7.2 million from $6.2 million at year-end, but the ratio of NPAs to total assets remained low at 0.14%[325][327] - The Allowance for Credit Losses (ACL) was 1.59% of total loans, or 1.80% excluding government-guaranteed PPP loans[332][337] Capital Resources Shareholders' equity was $542.9 million at March 31, 2021, with all regulatory capital ratios remaining well above 'well capitalized' levels, and the company increased its quarterly cash dividend and authorized a new share repurchase program Regulatory Capital Ratios (Company) | Ratio | March 31, 2021 | Minimum for Adequacy | | :--- | :--- | :--- | | CET1 risk-based capital | 12.0% | 4.5% | | Tier 1 risk-based capital | 13.1% | 6.0% | | Total risk-based capital | 15.4% | 8.0% | | Leverage capital | 8.9% | 4.0% | - On April 27, 2021, the Board of Directors declared a cash dividend of $0.24 per share, an increase of 4.3% from the prior year[349] - In January 2021, the Board approved a new share repurchase authorization of up to $25 million, with no shares repurchased during Q1 2021[353] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk, managed by the Asset/Liability Management Committee (ALCO) using simulation models, with potential net interest income fluctuations within established policy limits for various rate shifts Net Interest Income Sensitivity Analysis (as of March 31, 2021) | Rate Change Scenario | Estimated Net Interest Income Sensitivity | | :--- | :--- | | +100 bp | 4.28% | | -100 bp | (5.11)% | - The company's primary market risk is interest rate risk, monitored by the ALCO through simulation models to measure the impact of rate changes on net interest income and market value of portfolio equity[366][379] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2021, with no material changes to internal control over financial reporting during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[381] - No material changes to the company's internal control over financial reporting occurred during the first quarter of 2021[382] Part II Item 1. Legal Proceedings The company is involved in legal claims and lawsuits arising in the ordinary course of business, which management believes will not materially adversely affect its financial position or results of operations - Management opines that pending legal actions, if disposed of unfavorably, would not have a material adverse effect on the company's financial statements[385] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2020 - No material changes from the Risk Factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020 have occurred[386] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Board of Directors approved a new $25 million share repurchase authorization in January 2021, with no shares repurchased during Q1 2021, leaving the full amount available - On January 26, 2021, the Board of Directors approved a new share repurchase authorization of up to $25 million[389] - The company did not repurchase any shares during the first quarter of 2021[389][391] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications pursuant to the Sarbanes-Oxley Act and XBRL data files - The report includes CEO and CFO certifications under Sarbanes-Oxley Act Sections 302 and 906[393] - XBRL Instance Document and related taxonomy files are included as exhibits[393]