Central Pacific Financial (CPF) - 2021 Q2 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (Unaudited) Unaudited statements show significant net income growth driven by a credit provision reversal amid an improving economy Consolidated Balance Sheets Total assets and deposits grew significantly, driven by loan growth and strong deposit inflows Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $7,178,481 | $6,594,583 | | Total Loans | $5,077,318 | $4,964,113 | | Allowance for credit losses | ($77,781) | ($83,269) | | Total Investment Securities | $1,408,918 | $1,183,960 | | Total Liabilities | $6,625,640 | $6,047,850 | | Total Deposits | $6,397,159 | $5,796,118 | | Total Equity | $552,841 | $546,733 | Consolidated Statements of Income Net income more than doubled year-over-year due to a large credit provision reversal Key Income Statement Data (in thousands, except per share data) | Metric | Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $52,061 | $49,259 | $101,865 | $97,089 | | (Credit) Provision for Credit Losses | ($3,443) | $11,213 | ($4,264) | $22,340 | | Net Income | $18,714 | $9,917 | $36,752 | $18,243 | | Diluted EPS | $0.66 | $0.35 | $1.29 | $0.65 | Consolidated Statements of Cash Flows A net increase in cash was driven by strong financing activities from deposit growth Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $59,140 | $57,058 | | Net Cash used in Investing Activities | ($385,179) | ($589,583) | | Net Cash from Financing Activities | $562,450 | $572,886 | | Net Increase in Cash | $236,411 | $40,361 | Notes to Consolidated Financial Statements (Unaudited) Notes detail the CECL methodology, loan portfolio composition, and the impact of COVID-19 relief programs - The company adopted ASU 2016-13 (CECL) and made an accounting policy election to not measure credit losses on accrued interest receivable, as it writes off uncollectible amounts in a timely manner[52] - Under the CARES Act, the company applied guidance allowing it to suspend the requirement to classify certain COVID-19 related loan modifications as Troubled Debt Restructurings (TDRs)[57] - The company's methodology for the Allowance for Credit Losses (ACL) incorporates a one-year reasonable and supportable forecast period, after which it reverts to historical loss information over a one-year period[61] Management's Discussion and Analysis of Financial Condition and Results of Operations Performance was driven by Hawaii's economic recovery, PPP loan activity, and strategic digital investments - Net income for Q2 2021 was $18.7 million ($0.66 per diluted share), up from $9.9 million ($0.35 per diluted share) in Q2 2020[203] - The company recorded a credit to the provision for credit losses of $3.4 million in Q2 2021, compared to a provision expense of $11.2 million in Q2 2020, reflecting improved economic forecasts[204] - The RISE2020 initiative was completed in January 2021 with the renovation of the headquarters, launch of a new brand design, and rollout of new digital banking platforms and upgraded ATMs[253] COVID-19 Pandemic Impact and Response The company actively managed pandemic impacts through PPP participation and loan deferrals, which have now significantly decreased - Loans on active payment forbearance or deferral due to COVID-19 declined significantly from $120.2 million (2.4% of total loans) at year-end 2020 to $3.5 million (0.1% of total loans) as of June 30, 2021[216][243] - Through three rounds of the Paycheck Protection Program (PPP), the company funded over 11,800 loans totaling more than $878 million[232][233][234] - Hawaii's economy is showing signs of recovery, with visitor arrivals in July 2021 reaching approximately 90% of pre-pandemic levels and the unemployment rate falling to 7.7% in June 2021[215][250] Results of Operations Analysis Net interest income grew due to PPP fees, though the net interest margin compressed in the low-rate environment - Net interest income for H1 2021 included $13.1 million from PPP loans, which had an average balance of $540.0 million and an effective yield of 4.90%[265] - The efficiency ratio increased to 64.40% for the first six months of 2021 from 60.25% in the prior year, reflecting strategic investments and higher operating expenses[289] Net Interest Margin Comparison | Period | Net Interest Margin | | :--- | :--- | | Six Months Ended June 30, 2021 | 3.18% | | Six Months Ended June 30, 2020 | 3.34% | Financial Condition Analysis Asset growth was fueled by a surge in deposits, while credit quality improved with low nonperforming assets - Total deposits increased by $601.0 million (10.4%) since year-end 2020, driven by PPP fund inflows and government stimulus[317][318] - Excluding PPP loans, the loan portfolio grew by $95.0 million (2.1%) since December 31, 2020[297] Credit Quality Metrics | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Nonperforming Assets (NPAs) | $6.7 million | $6.2 million | | NPAs to Total Loans and OREO | 0.13% | 0.12% | | ACL to Total Loans (ex-PPP) | 1.68% | 1.83% | Capital and Liquidity The company maintains strong capital ratios well above regulatory minimums and possesses robust liquidity - In Q2 2021, the company repurchased 156,600 shares for $4.3 million under its $25 million share repurchase authorization[328] - As of June 30, 2021, the company had $1.58 billion in undrawn borrowing capacity from the Federal Home Loan Bank (FHLB)[346] Regulatory Capital Ratios (Company) | Ratio | June 30, 2021 | Minimum for Adequacy | | :--- | :--- | :--- | | CET1 risk-based capital | 11.6% | 4.5% | | Tier 1 risk-based capital | 12.7% | 6.0% | | Total risk-based capital | 14.9% | 8.0% | | Leverage capital | 8.6% | 4.0% | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with net interest income moderately asset-sensitive Net Interest Income Sensitivity Analysis (as of June 30, 2021) | Rate Change Scenario | Estimated NII Sensitivity | | :--- | :--- | | +100 bp | +4.10% | | -100 bp | -3.86% | Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes to internal controls - 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[353] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[354] Part II. Other Information Risk Factors No material changes were reported from the risk factors disclosed in the previous Annual Report on Form 10-K - There have been no material changes from the Risk Factors as previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020[358] Unregistered Sales of Equity Securities and Use of Proceeds The company continued its share repurchase program, buying back $4.3 million in stock during the second quarter - As of June 30, 2021, $20.7 million remained available for repurchase under the company's $25 million share repurchase program authorized in January 2021[359] Issuer Purchases of Equity Securities (Q2 2021) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2021 | 0 | $— | | May 2021 | 59,500 | $28.03 | | June 2021 | 97,100 | $27.38 | | Total | 156,600 | $27.63 | Exhibits This section lists all exhibits filed with the report, including required certifications and XBRL data