Central Pacific Financial (CPF) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Forward-Looking Statements and Factors that Could Affect Future Results This section provides a cautionary statement regarding forward-looking statements, highlighting that actual results may differ materially due to various risks and uncertainties - Forward-looking statements are subject to risks and uncertainties, and actual results could differ materially[6] - Key risk factors include the adverse effects of the COVID-19 pandemic on local and national economies, the impact of the Paycheck Protection Program (PPP), real estate market conditions, changes in financial performance of borrowers, regulatory reforms, interest rate fluctuations, and cybersecurity breaches[6] Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets The balance sheets present the company's financial position, showing a slight decrease in total assets and shareholders' equity Consolidated Balance Sheets | (dollars in thousands) | March 31, 2022 | December 31, 2021 | |:-----------------------|:---------------|:------------------| | Total Assets | $7,298,819 | $7,419,089 | | Total Liabilities | $6,812,441 | $6,860,822 | | Total Equity | $486,378 | $558,267 | - Total assets decreased by $120.27 million (1.62%) from December 31, 2021, to March 31, 2022[11] - Total shareholders' equity decreased by $71.89 million (12.88%) from December 31, 2021, to March 31, 2022, primarily due to accumulated other comprehensive loss[11] Consolidated Statements of Income The income statements indicate an increase in net income and diluted earnings per share year-over-year Consolidated Statements of Income | (dollars in thousands, except per share data) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |:----------------------------------------------|:----------------------------------|:----------------------------------| | Total Interest Income | $52,886 | $51,781 | | Total Interest Expense | $1,951 | $1,977 | | Net Interest Income | $50,935 | $49,804 | | (Credit) Provision for Credit Losses | $(3,195) | $(821) | | Total Other Operating Income | $9,551 | $10,711 | | Total Other Operating Expense | $38,205 | $37,846 | | Income Before Income Taxes | $25,476 | $23,490 | | Income Tax Expense | $6,038 | $5,452 | | Net Income | $19,438 | $18,038 | | Basic Earnings Per Common Share | $0.70 | $0.64 | | Diluted Earnings Per Common Share | $0.70 | $0.64 | | Cash Dividends Declared | $0.26 | $0.23 | - Net income increased by $1.4 million (7.76%) year-over-year[12] - Diluted EPS increased by $0.06 (9.38%) year-over-year[12] Consolidated Statements of Comprehensive Income The statements show a significant comprehensive loss for Q1 2022, driven by a substantial net change in unrealized loss on investment securities Consolidated Statements of Comprehensive Income | (dollars in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |:---------------------------------------|:----------------------------------|:----------------------------------| | Net Income | $19,438 | $18,038 | | Net Change in Unrealized Loss on Investment Securities | $(79,450) | $(17,301) | | Total Other Comprehensive Loss, Net of Tax | $(79,387) | $(17,117) | | Comprehensive (Loss) Income | $(59,949) | $921 | - Total other comprehensive loss significantly increased to $(79.4) million in Q1 2022 from $(17.1) million in Q1 2021, mainly due to unrealized losses on investment securities[13] Consolidated Statements of Changes in Equity This statement details changes in shareholders' equity, reflecting the impact of net income, other comprehensive loss, dividends, and stock repurchases Consolidated Statements of Changes in Equity | (dollars in thousands) | Balance at Dec 31, 2021 | Net Income | Other Comprehensive Loss | Cash Dividends Declared | Common Stock Repurchased | Share-based Compensation | Balance at Mar 31, 2022 | |:---------------------------------------|:------------------------|:-----------|:-------------------------|:------------------------|:-------------------------|:-------------------------|:------------------------| | Total Shareholders' Equity | $558,219 | $19,438 | $(79,387) | $(7,201) | $(6,731) | $876 | $486,328 | - Shareholders' equity decreased by $71.89 million from December 31, 2021, to March 31, 2022, primarily due to the other comprehensive loss[16] - The company repurchased $6.73 million of common stock during the period[16] Consolidated Statements of Cash Flows The cash flow statements show a net decrease in cash, driven by significant cash used in investing and financing activities Consolidated Statements of Cash Flows | (dollars in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |:---------------------------------------|:----------------------------------|:----------------------------------| | Net Cash Provided by Operating Activities | $9,410 | $19,679 | | Net Cash Used in Investing Activities | $(82,807) | $(249,067) | | Net Cash (Used in) Provided by Financing Activities | $(53,380) | $385,212 | | Net (Decrease) Increase in Cash and Cash Equivalents | $(126,777) | $155,824 | | Cash and Cash Equivalents at End of Period | $202,130 | $259,891 | - Net cash provided by operating activities decreased by $10.27 million (52.2%) year-over-year[20] - Net cash used in investing activities significantly decreased from $(249.1) million in Q1 2021 to $(82.8) million in Q1 2022, primarily due to lower purchases of investment securities and net loan originations[20] Notes to Consolidated Financial Statements (Unaudited) 1. Summary of Significant Accounting Policies This section outlines significant accounting policies, including basis of presentation, consolidation, and methodologies for investment securities, loans, and the allowance for credit losses - The company consolidates majority-owned subsidiaries and accounts for 50% ownership interests in mortgage loan origination companies using the equity method[25][27] - Investment securities are classified as available-for-sale (AFS) or held-to-maturity (HTM), with AFS reported at fair value and HTM at amortized cost[35] - The ACL for loans is estimated using a current expected credit loss methodology, incorporating historical information, current conditions, and reasonable and supportable forecasts[65][66] Loan Segment Historical Lifetime Loss Methods | Loan Segment | Historical Lifetime Loss Method | Historical Lookback Period | |:-----------------------------------------|:-------------------------------------|:---------------------------| | Construction | Probability of Default/Loss Given Default ("PD/LGD") | 2008-Present | | Commercial real estate | PD/LGD | 2008-Present | | Multi-family mortgage | PD/LGD | 2008-Present | | Commercial, financial and agricultural | PD/LGD | 2008-Present | | Home equity lines of credit | Loss-Rate Migration | 2008-Present | | Residential mortgage | Loss-Rate Migration | 2008-Present | | Consumer - other revolving | Loss-Rate Migration | 2008-Present | | Consumer - non-revolving | Loss-Rate Migration | 2008-Present | | Purchased Mainland portfolios (Dealer, Other consumer) | Weighted-Average Remaining Maturity ("WARM") | 2008-Present | 2. Recent Accounting Pronouncements This section details the adoption of new accounting standards and discusses the potential future impact of others currently under evaluation - ASU 2021-04 and ASU 2021-05 were adopted effective January 1, 2022, with no material impact on financial statements[96][97] - The company will elect optional expedients for applicable contract modifications and hedge accounting related to ASU 2020-04 (Reference Rate Reform) concerning LIBOR discontinuation[99] - ASU 2022-02, effective after December 15, 2022, will eliminate TDR accounting guidance and enhance disclosure requirements for certain loan refinancings and restructurings[101] 3. Investment Securities This section details the investment securities portfolio, highlighting a significant transfer of AFS securities to HTM to mitigate capital impact from rising interest rates Investment Securities Summary (March 31, 2022) | (dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |:-----------------------|:---------------|:-----------------------|:------------------------|:------------| | Held-to-maturity | $329,507 | $— | $(4) | $329,503 | | Available-for-sale | $1,290,456 | $1,224 | $(92,198) | $1,199,482 | | Total | $1,619,963 | $1,224 | $(92,202) | $1,528,985 | - During Q1 2022, the company transferred 41 AFS investment securities with a fair value of $329.5 million to HTM, resulting in a net unrealized loss of $32.3 million at the transfer date, with no impact on net income[106] - As of March 31, 2022, there were 273 debt securities in an unrealized loss position (totaling $92.2 million in unrealized losses) for AFS securities, primarily due to changes in interest rates[111][112] - The company carries Visa Class B common stock at a zero cost basis due to transfer restrictions and litigation uncertainty[113][115] 4. Loans and Credit Quality This section details the loan portfolio's composition, past due loans, troubled debt restructurings, and credit quality indicators Gross Loans by Category (March 31, 2022 vs. December 31, 2021) | (dollars in thousands) | March 31, 2022 | December 31, 2021 | $ Change | % Change | |:---------------------------------------|:---------------|:------------------|:---------|:---------| | SBA Paycheck Protection Program | $45,938 | $94,850 | $(48,912)| (51.6)% | | Other Commercial, financial and agricultural | $544,732 | $530,383 | $14,349 | 2.7% | | Construction | $123,767 | $123,351 | $416 | 0.3% | | Residential mortgage | $1,873,405 | $1,875,200 | $(1,795) | (0.1)% | | Home equity | $674,625 | $635,721 | $38,904 | 6.1% | | Commercial mortgage | $1,245,423 | $1,222,138 | $23,285 | 1.9% | | Consumer | $669,194 | $624,115 | $45,079 | 7.2% | | Gross Loans | $5,177,084 | $5,105,758 | $71,326| 1.4% | - Outstanding PPP loan balance decreased by $48.9 million to $45.9 million as of March 31, 2022, with $1.7 million in net deferred fees remaining[119] Past Due and Nonaccrual Loans (March 31, 2022) | (dollars in thousands) | Accruing Loans 30-59 Days Past Due | Accruing Loans 60-89 Days Past Due | Accruing Loans >90 Days Past Due | Nonaccrual Loans | Total Past Due and Nonaccrual | |:---------------------------------------|:-----------------------------------|:-----------------------------------|:---------------------------------|:-----------------|:------------------------------| | Commercial, financial and agricultural - Other | $710 | $323 | $592 | $293 | $1,918 | | Residential mortgage | $7,512 | $4,538 | $111 | $3,804 | $15,965 | | Home equity | $135 | $138 | $— | $820 | $1,093 | | Consumer | $3,113 | $555 | $621 | $419 | $4,708 | | Total | $11,470 | $5,554 | $1,324 | $5,336 | $23,684 | - Troubled Debt Restructurings (TDRs) included in nonperforming assets at March 31, 2022, consisted of five Hawaii residential mortgage loans totaling $1.1 million[139] 5. Allowance for Credit Losses and Reserve for Off-Balance Sheet Credit Exposures This section details activity in the Allowance for Credit Losses, showing a net credit to the provision reflecting improved credit quality and economic forecasts Allowance for Credit Losses Activity (Three Months Ended March 31, 2022) | (dollars in thousands) | Amount | |:---------------------------------------|:------------| | Beginning balance | $68,097 | | (Credit) provision for credit losses on loans | $(2,931) | | Charge-offs | $(1,470) | | Recoveries | $1,058 | | Ending balance | $64,754 | - The provision for credit losses was a credit of $3.2 million in Q1 2022, comprising a $2.9 million credit for loans and a $0.3 million credit for off-balance sheet exposures[160] - Net charge-offs for Q1 2022 were $412 thousand, a decrease from $742 thousand in Q1 2021[159] 6. Investments in Unconsolidated Entities This section breaks down investments in unconsolidated entities, primarily focusing on low-income housing tax credit partnerships and strategic fintech investments Investments in Unconsolidated Entities (March 31, 2022 vs. December 31, 2021) | (dollars in thousands) | March 31, 2022 | December 31, 2021 | |:-------------------------------------------------------------|:---------------|:------------------| | Investments in low income housing tax credit partnerships, net of amortization | $25,309 | $25,916 | | Investments in common securities of statutory trusts | $1,547 | $1,547 | | Investments in affiliates | $187 | $162 | | Other | $4,049 | $2,054 | | Total | $31,092 | $29,679 | - The company invested $2.0 million in Swell Financial, Inc. in Q1 2022, accounted for under the cost method[164] - Unfunded commitments for LIHTC partnerships and other partnerships totaled $15.9 million as of March 31, 2022[166] 7. Mortgage Servicing Rights This section details changes in mortgage servicing rights, showing a decrease in amortization expense year-over-year Mortgage Servicing Rights Activity (Three Months Ended March 31, 2022) | (dollars in thousands) | Amount | |:-----------------------|:-------| | Balance, January 1, 2022 | $9,738 | | Additions | $276 | | Amortization | $(534) | | Balance, March 31, 2022 | $9,480 | - Amortization of mortgage servicing rights decreased from $1.2 million in Q1 2021 to $0.5 million in Q1 2022[169] - The fair market value of MSRs increased from $10.5 million at the beginning of Q1 2022 to $11.2 million at the end of the period[170] 8. Derivatives This section describes the use of derivative financial instruments to manage interest rate risk, including a new forward starting interest rate swap - The company uses undesignated derivatives like interest rate lock and forward sale commitments to manage interest rate risk on mortgage loans intended for sale[173] - Back-to-back swap agreements are used to originate variable rate loans while providing fixed interest payments for customers[175] - During Q1 2022, the company entered into a forward starting interest rate swap with a notional amount of $115.5 million, designated as a fair value hedge of municipal debt securities[176] Derivative Financial Instruments Not Designated as Hedging Instruments (March 31, 2022) | (dollars in thousands) | Fair Value (Asset) | Fair Value (Liability) | |:---------------------------------------|:-------------------|:-----------------------| | Interest rate lock and forward sale commitments | $5 | $5 | | Risk participation agreements | $— | $— | | Back-to-back swap agreements | $1,624 | $1,624 | 9. Short-Term Borrowings and Long-Term Debt This section details the company's short-term and long-term borrowing arrangements, including FHLB lines of credit and subordinated notes - The bank maintained a $1.92 billion line of credit with the FHLB as of March 31, 2022, with $1.89 billion undrawn[181] - The company had $51.5 million in junior subordinated debentures outstanding as of March 31, 2022[186] - The company has $55.0 million in ten-year fixed-to-floating rate subordinated notes outstanding, which are included in Tier 2 capital[190][191][192] 10. Revenue from Contracts with Customers This section categorizes other operating income into amounts in-scope and out-of-scope of ASC 606 Other Operating Income (Three Months Ended March 31) | (dollars in thousands) | 2022 | 2021 | |:---------------------------------------|:-------|:-------| | In-scope of ASC 606 | $7,113 | $6,725 | | Out-of-scope other operating income | $2,438 | $3,986 | | Total other operating income | $9,551 | $10,711 | - Total other operating income decreased by $1.16 million (10.8%) year-over-year, primarily due to a decrease in out-of-scope income[193] 11. Share-Based Compensation This section details the activity of restricted stock units under the company's 2013 Stock Compensation Plan Restricted Stock Units Activity (Three Months Ended March 31, 2022) | Activity | Shares | Weighted Average Grant Date Fair Value | |:---------------------------------------|:---------|:---------------------------------------| | Non-vested restricted stock units, beginning of period | 485,339 | $21.95 | | Granted | 95,155 | $29.38 | | Vested | (89,304) | $24.61 | | Forfeited | (39,749) | $28.00 | | Non-vested restricted stock units, end of period | 451,441 | $22.46 | - The fair value of restricted stock awards and units that vested during the period was $2.65 million[196] 12. Operating Leases This section describes operating lease arrangements for bank branches and ATMs, detailing costs, cash flows, and lease liability Lease Cost and Other Information (Three Months Ended March 31) | (dollars in thousands) | 2022 | 2021 | |:---------------------------------------|:-------|:-------| | Total Lease Cost | $2,208 | $2,291 | | Operating Cash Flows from Operating Leases | $(1,506)| $(1,599)| | Weighted-average remaining lease term - operating leases | 11.49 years | 11.78 years | | Weighted-average discount rate - operating leases | 3.92% | 3.89% | Undiscounted Cash Flows and Lease Liability (Year Ending December 31) | (dollars in thousands) | Undiscounted Cash Flows | Lease Liability Reduction | |:-----------------------|:------------------------|:--------------------------| | 2022 (remainder) | $4,420 | $3,307 | | 2023 | $5,183 | $3,840 | | Thereafter | $23,253 | $19,617 | | Total | $49,815 | $39,610 | 13. Accumulated Other Comprehensive Income (Loss) This section presents the components of AOCI, highlighting a significant increase in net unrealized losses on investment securities Components of Other Comprehensive Loss (Three Months Ended March 31, 2022) | (dollars in thousands) | Before Tax | Tax Effect | Net of Tax | |:---------------------------------------|:-----------|:-----------|:-----------| | Net unrealized losses on investment securities | $(108,448) | $(28,998) | $(79,450) | | Net unrealized losses on derivatives | $(50) | $(13) | $(37) | | Defined benefit plans, net | $137 | $37 | $100 | | Other comprehensive loss | $(108,361) | $(28,974) | $(79,387) | Changes in AOCI (Three Months Ended March 31, 2022) | (dollars in thousands) | Investment Securities | Derivatives | Defined Benefit Plans | AOCI | |:---------------------------------------|:----------------------|:------------|:----------------------|:----------| | Balance at beginning of period | $(3,666) | $— | $(4,294) | $(7,960) | | Other comprehensive loss before reclassifications | $(79,450) | $(37) | $— | $(79,487) | | Reclassification adjustments from AOCI | $— | $— | $100 | $100 | | Balance at end of period | $(83,116) | $(37) | $(4,194) | $(87,347) | - The AOCI balance shifted from a loss of $(7.96) million at December 31, 2021, to a loss of $(87.35) million at March 31, 2022, primarily due to significant unrealized losses on investment securities[202] 14. Earnings Per Share This section presents the calculation of basic and diluted earnings per common share, showing an increase in both metrics year-over-year Earnings Per Share Data (Three Months Ended March 31) | (dollars in thousands, except per share data) | 2022 | 2021 | |:----------------------------------------------|:-------------|:-------------| | Net income | $19,438 | $18,038 | | Weighted average common shares outstanding - basic | 27,591,390 | 28,108,648 | | Weighted average common shares outstanding - diluted | 27,874,924 | 28,313,014 | | Basic earnings per common share | $0.70 | $0.64 | | Diluted earnings per common share | $0.70 | $0.64 | - Diluted EPS increased by $0.06 (9.38%) from $0.64 in Q1 2021 to $0.70 in Q1 2022[205] 15. Fair Value of Financial Assets and Liabilities This section provides disclosures about the fair value of financial instruments, outlining estimation methods and categorizing assets and liabilities into a three-level hierarchy - Fair values of financial instruments are estimated using market price quotations, discounted cash flows, and pricing models, with a hierarchy of Level 1, Level 2, and Level 3 inputs[209][210][212][213][214][223][224] Fair Value of Financial Assets (March 31, 2022) | (dollars in thousands) | Carrying Amount | Estimated Fair Value | Level 1 | Level 2 | Level 3 | |:-----------------------|:----------------|:---------------------|:--------|:------------|:------------| | Investment securities | $1,528,989 | $1,528,985 | $— | $1,520,904 | $8,081 | | Loans, net of ACL | $5,110,083 | $4,688,605 | $— | $— | $4,688,605 | - The weighted average discount rate used for valuing loans was 6.44% and for time deposits was 1.24% as of March 31, 2022[210][212] - Level 3 assets, primarily available-for-sale debt securities, decreased from $8.6 million at December 31, 2021, to $8.1 million at March 31, 2022[231][233] 16. Legal Proceedings The company does not anticipate that legal actions arising from the ordinary course of business will have a material adverse impact on its financial position - Legal actions are not expected to have a material adverse impact on the company's financial results or position[237] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Central Pacific Financial Corp operates as a bank holding company for Central Pacific Bank, a full-service community bank in Hawaii - Central Pacific Financial Corp is a bank holding company for Central Pacific Bank, a full-service community bank in Hawaii[239] - The bank operates 30 branches and 65 ATMs across Hawaii, offering a wide range of deposit and loan products[240] Basis of Presentation This section clarifies that the MD&A should be read in conjunction with the unaudited financial statements and the company's 2021 Annual Report on Form 10-K - The MD&A should be read in conjunction with the unaudited consolidated financial statements and the 2021 Form 10-K, including its 'Risk Factors'[241] Critical Accounting Policies and Use of Estimates The determination of the allowance for credit losses on loans is identified as the most critical accounting policy due to its complexity and potential material impact - The determination of the allowance for credit losses (ACL) on loans is considered the most critical accounting policy due to the high degree of judgment and complexity involved[244][245] - The ACL reflects management's estimate of expected loan losses over the life of the loan portfolio[245] Financial Summary The company reported increased net income and diluted EPS for Q1 2022 compared to the prior year, alongside a credit to the provision for credit losses Financial Summary (Three Months Ended March 31) | Metric | 2022 | 2021 | |:---------------------------------------|:------------|:------------| | Net Income | $19.4 million | $18.0 million | | Diluted Earnings Per Share | $0.70 | $0.64 | | (Credit) Provision for Credit Losses | $(3.2) million| $(0.8) million| | Pre-tax, Pre-provision Income | $22.3 million | $22.7 million | | Return on Average Assets (Annualized) | 1.06% | 1.07% | | Return on Average Shareholders' Equity (Annualized) | 14.44% | 13.07% | - Net income increased by $1.4 million (7.8%) and diluted EPS by $0.06 (9.4%) year-over-year[248] COVID-19 Pandemic This section discusses the ongoing impact of the COVID-19 pandemic, noting Hawaii's economic recovery and the significant decline in loan payment deferrals - Hawaii's economy is on track for recovery, with all government-imposed COVID-19 restrictions ending on March 26, 2022[253][278] - The company funded over 7,200 PPP loans totaling $558.9 million in the first two rounds and over 4,600 loans totaling $320.9 million in the third round[267][268] - As of March 31, 2022, $846.8 million in PPP loans have been forgiven or repaid, with an outstanding balance of $45.9 million[269] - Loan payment forbearance or deferrals for COVID-19 impacted borrowers significantly declined, with only $0.1 million remaining on deferral as of March 31, 2022[254][270] Material Trends This section analyzes key economic indicators in Hawaii, including the recovery of the visitor industry, declining unemployment, and a strong real estate market - Hawaii's visitor industry is recovering, with 1.2 million visitors in the two months ended February 28, 2022, and total spending up 240.6% year-over-year[279][280] - The seasonally adjusted annual unemployment rate in Hawaii declined to 4.1% in March 2022, down from a high of 21.9% in April-May 2020[283] - The Oahu real estate market set new record median sales prices in Q1 2022: single-family homes at $1,100,000 (up 20.2% YoY) and condominiums at $510,000 (up 12.1% YoY)[285] Banking-as-a-Service ("BaaS") Initiative The company launched a BaaS initiative to expand its reach by investing in and collaborating with fintech companies, including Swell Financial, Inc - The company launched a BaaS initiative in January 2022 to expand through investments and collaborations with fintech companies[286] - An equity investment was made in Swell Financial, Inc, with Central Pacific Bank serving as the bank sponsor for Swell's integrated banking app, expected to launch in mid-2022[287] - The company's Shaka digital checking account has opened approximately 3,900 accounts since its November 2021 launch[286] Results of Operations Net Interest Income Net interest income increased by 2.3% to $51.1 million in Q1 2022, driven by higher average investment and loan balances Net Interest Income and Margin (Three Months Ended March 31) | Metric | 2022 | 2021 | |:--------------------|:------------|:------------| | Net Interest Income | $51,108 | $49,941 | | Net Interest Margin | 2.97% | 3.19% | - Net interest income increased by $1.17 million (2.3%) year-over-year[293] - Net interest income for Q1 2022 included $1.9 million in PPP net interest income and loan fees, down from $5.2 million in Q1 2021[296] Interest Income Taxable-equivalent interest income rose by 2.2% to $53.1 million in Q1 2022, primarily due to higher average balances in investment securities and loans Taxable-Equivalent Interest Income (Three Months Ended March 31) | Metric | 2022 | 2021 | |:-------------------------------------|:------------|:------------| | Taxable-Equivalent Interest Income | $53.1 million | $51.9 million | - The increase was driven by higher average investment securities balances (+$477.6 million) and loan balances (+$34.4 million)[298] Interest Expense Interest expense remained relatively flat at $2.0 million in Q1 2022, with average rates paid on interest-bearing deposits unchanged year-over-year Interest Expense (Three Months Ended March 31) | Metric | 2022 | 2021 | |:-----------------|:------------|:------------| | Interest Expense | $2.0 million | $2.0 million | - Average rates paid on interest-bearing deposits remained at 9 basis points, and on total interest-bearing liabilities declined by 1 basis point to 18 basis points[299] Net Interest Margin The net interest margin decreased by 22 basis points to 2.97% in Q1 2022, primarily due to lower recognition of net loan fees from PPP loans Net Interest Margin (Three Months Ended March 31) | Metric | 2022 | 2021 | |:------------------|:------|:------| | Net Interest Margin | 2.97% | 3.19% | - The decrease was mainly attributable to lower PPP-related net loan fees and lower yields on loans and investment securities[300] Rate-Volume Analysis This analysis shows that an increase in volume contributed positively to net interest income, while a decrease in rates had a negative impact Net Interest Income Change Due to Volume and Rate (Three Months Ended March 31, 2022 vs. 2021) | (dollars in thousands) | Change Due to Volume | Change Due to Rate | Net Change | |:-----------------------|:---------------------|:-------------------|:-----------| | Total Interest Earning Assets | $2,713 | $(1,572) | $1,141 | | Total Interest-Bearing Liabilities | $(41) | $15 | $(26) | | Net Interest Income| $2,754 | $(1,587) | $1,167 | - The increase in net interest income was primarily driven by volume growth in interest-earning assets, partially offset by declining rates[303] Provision for Credit Losses The company recorded a credit to the provision for credit losses of $3.2 million in Q1 2022, reflecting improved economic forecasts and loan portfolio quality Provision for Credit Losses (Three Months Ended March 31) | Metric | 2022 | 2021 | |:-------------------------------------|:------------|:------------| | (Credit) Provision for Credit Losses | $(3.2) million| $(0.8) million| | Net Charge-offs | $0.4 million | $0.7 million | - The credit to the provision was primarily due to improved economic forecasts and loan portfolio improvement as Hawaii recovers from the pandemic[306] Other Operating Income Total other operating income decreased by 10.8% to $9.6 million in Q1 2022, mainly due to lower mortgage banking income Other Operating Income (Three Months Ended March 31) | (dollars in thousands) | 2022 | 2021 | $ Change | % Change | |:---------------------------------------|:-------|:-------|:---------|:---------| | Mortgage banking income | $1,172 | $2,970 | $(1,798) | (60.5)% | | Service charges on deposit accounts | $1,861 | $1,478 | $383 | 25.9% | | Other service charges and fees | $4,488 | $3,790 | $698 | 18.4% | | Income from bank-owned life insurance | $539 | $797 | $(258) | (32.4)% | | Total other operating income | $9,551 | $10,711 | $(1,160) | (10.8)% | - Lower mortgage banking income was primarily attributable to seasonality and rising interest rates[309] Other Operating Expense Total other operating expense increased slightly by 0.9% to $38.2 million in Q1 2022, with a one-time settlement expense expected in Q2 2022 Other Operating Expense (Three Months Ended March 31) | (dollars in thousands) | 2022 | 2021 | $ Change | % Change | |:---------------------------------------|:-------|:-------|:---------|:---------| | Salaries and employee benefits | $20,942| $19,827| $1,115 | 5.6% | | Legal and professional services | $2,626 | $2,377 | $249 | 10.5% | | Computer software | $3,082 | $3,783 | $(701) | (18.5)% | | Advertising | $1,150 | $1,658 | $(508) | (30.6)% | | Directors' deferred compensation plan (credit) expense | $(80) | $902 | $(982) | (108.9)% | | Total other operating expense | $38,205 | $37,846 | $359 | 0.9% | - The company expects to recognize a one-time settlement expense of approximately $4.5 million to $6.5 million in Q2 2022 upon termination of its defined benefit retirement plan[312] Efficiency Ratio The efficiency ratio increased to 63.16% in Q1 2022, reflecting strategic investments for future profitability Efficiency Ratio (Three Months Ended March 31) | Metric | 2022 | 2021 | |:---------------------------------------|:--------|:--------| | Total other operating expense | $38,205 | $37,846 | | Total revenue before provision for credit losses | $60,486 | $60,515 | | Efficiency Ratio | 63.16% | 62.54% | - The increase in the efficiency ratio is attributed to strategic investments aimed at improving future profitability and shareholder returns[316] Income Taxes Income tax expense for Q1 2022 was $6.0 million, with an effective tax rate of 23.70% Income Tax Data (Three Months Ended March 31) | Metric | 2022 | 2021 | |:-------------------|:------------|:------------| | Income Tax Expense | $6.0 million | $5.5 million | | Effective Tax Rate | 23.70% | 23.21% | - The net deferred tax asset (DTA) increased to $52.1 million at March 31, 2022, from $25.8 million at December 31, 2021, primarily due to significant unrealized losses on AFS investment securities[318] Financial Condition Total Assets Total assets decreased by $120.3 million to $7.30 billion at March 31, 2022 Total Assets | (dollars in thousands) | March 31, 2022 | December 31, 2021 | |:-----------------------|:---------------|:------------------| | Total Assets | $7,298,819 | $7,419,089 | - Total assets decreased by $120.3 million (1.62%) from December 31, 2021, to March 31, 2022[319] Investment Securities Investment securities decreased by $102.7 million to $1.53 billion, primarily due to a decline in the market valuation of the AFS portfolio Investment Securities | (dollars in thousands) | March 31, 2022 | December 31, 2021 | |:-----------------------|:---------------|:------------------| | Investment Securities | $1,528,989 | $1,631,699 | - The decrease was driven by a $108.4 million decline in the market valuation of the AFS portfolio[320] - 41 AFS investment securities with a fair value of $329.5 million were transferred to HTM to mitigate future capital impact from rising interest rates[321] - A forward starting interest rate swap with a notional amount of $115.5 million was entered into on municipal debt securities, effective March 31, 2024[322] Loans Total loans increased by 1.4% to $5.17 billion, with growth in consumer, home equity, and commercial loans offsetting a significant decrease in PPP loans Total Loans by Category (March 31, 2022 vs. December 31, 2021) | (dollars in thousands) | March 31, 2022 | December 31, 2021 | $ Change | % Change | |:---------------------------------------|:---------------|:------------------|:---------|:---------| | SBA Paycheck Protection Program | $44,231 | $91,327 | $(47,096)| (51.6)% | | Other Commercial, financial and agricultural | $544,416 | $530,121 | $14,295 | 2.7% | | Home equity | $676,326 | $637,249 | $39,077 | 6.1% | | Commercial mortgage | $1,243,499 | $1,220,204 | $23,295 | 1.9% | | Consumer | $669,000 | $623,901 | $45,099 | 7.2% | | Total Loans | $5,174,837 | $5,101,649 | $73,188| 1.4% | - Core loans (excluding PPP loans) increased by $120.3 million (2.4%) to $5.13 billion[324] - The U.S. Mainland loan portfolio increased by $87.0 million (12.4%), primarily due to growth in consumer and commercial loans[327] Nonperforming Assets, Accruing Loans Delinquent for 90 Days or More, Restructured Loans Still Accruing Interest Nonperforming assets decreased by 9.3% to $5.3 million at March 31, 2022 Nonperforming Assets (NPAs) (March 31, 2022 vs. December 31, 2021) | (dollars in thousands) | March 31, 2022 | December 31, 2021 | $ Change | % Change | |:---------------------------------------|:---------------|:------------------|:---------|:---------| | Total Nonaccrual Loans | $5,336 | $5,881 | $(545) | (9.3)% | | Total OREO | $— | $— | $— | — | | Total Nonperforming Assets | $5,336 | $5,881 | $(545) | (9.3)% | Total NPAs, Accruing Loans Delinquent for 90 Days or More, and Restructured Loans Still Accruing Interest | (dollars in thousands) | March 31, 2022 | December 31, 2021 | $ Change | % Change | |:---------------------------------------|:---------------|:------------------|:---------|:---------| | Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest | $10,498 | $12,147 | $(1,649) | (13.6)% | - The decrease in NPAs was primarily due to $1.6 million in repayments of nonaccrual loans and $0.6 million in net charge-offs[331] - The ratio of classified assets and OREO to Tier 1 capital and ACL increased from 6.42% to 6.84%[333] Allowance for Credit Losses The Allowance for Credit Losses decreased to $64.8 million, driven by a credit to the provision reflecting improved economic forecasts Allowance for Credit Losses (ACL) (March 31) | (dollars in thousands) | 2022 | 2021 | |:---------------------------------------|:------------|:------------| | Balance at end of period | $64,754 | $81,553 | | (Credit) provision for credit losses on loans | $(2,931) | $(974) | | Net charge-offs | $412 | $742 | | Ratio of ACL to total loans | 1.25% | 1.59% | | Ratio of ACL to total loans, excluding PPP loans | 1.26% | 1.80% | | Ratio of ACL to nonaccrual loans | 1213.53% | 1133.63% | - The credit to the provision for credit losses on loans was $2.9 million in Q1 2022, driven by improvements in economic forecasts and the loan portfolio[336] Federal Home Loan Bank Stock Federal Home Loan Bank stock increased by $1.0 million to $8.9 million, reflecting activity-based stock requirements Federal Home Loan Bank Stock | (dollars in thousands) | March 31, 2022 | December 31, 2021 | |:-----------------------|:---------------|:------------------| | FHLB Stock | $8,943 | $7,964 | - FHLB stock increased by $1.0 million (12.3%) due to activity-based stock requirements[340] Deposits Total deposits decreased by 0.6% to $6.60 billion, with a slight runoff in core deposits after significant prior increases Total Deposits by Category (March 31, 2022 vs. December 31, 2021) | (dollars in thousands) | March 31, 2022 | December 31, 2021 | $ Change | % Change | |:---------------------------------------|:---------------|:------------------|:---------|:---------| | Noninterest-bearing demand deposits | $2,269,562 | $2,291,246 | $(21,684)| (0.9)% | | Interest-bearing demand deposits | $1,433,284 | $1,415,277 | $18,007 | 1.3% | | Savings and money market deposits | $2,197,647 | $2,225,903 | $(28,256)| (1.3)% | | Time deposits less than $100,000 | $132,712 | $136,584 | $(3,872) | (2.8)% | | Time deposits $100,000 to $250,000 | $87,838 | $88,873 | $(1,035) | (1.2)% | | Government time deposits | $188,000 | $214,950 | $(26,950)| (12.5)% | | Other time deposits greater than $250,000 | $289,988 | $266,325 | $23,663 | 8.9% | | Total Deposits | $6,599,031 | $6,639,158 | $(40,127) | (0.6)% | - Core deposits decreased by $36.8 million (0.6%) to $6.12 billion, representing 92.8% of total deposits[342] - The average cost of total deposits was 6 basis points during Q1 2022[342] Capital Resources Shareholders' equity decreased to $486.3 million, primarily due to a significant other comprehensive loss and share repurchases Shareholders' Equity and Related Metrics | Metric | March 31, 2022 | December 31, 2021 | |:---------------------------------------|:---------------|:------------------| | Shareholders' Equity | $486.3 million | $558.2 million | | Total Shareholders' Equity to Total Assets Ratio | 6.66% | 7.52% | | Book Value Per Share | $17.63 | $20.14 | - The decrease in equity was primarily due to a $79.4 million other comprehensive loss and $6.7 million in common stock repurchases, partially offset by $19.4 million in net income[344] - The Board declared a cash dividend of $0.26 per share, an 8.3% increase from the prior year[349] - A new $30 million share repurchase program was approved, with $24.3 million remaining available[353][354] Trust Preferred Securities The company has $50.0 million in floating rate trust preferred securities outstanding through two unconsolidated statutory trusts - The company has $50.0 million in floating rate trust preferred securities outstanding through CPB Capital Trust IV and CPB Statutory Trust V[355] - The trusts are not consolidated in the company's financial statements, and the company provides a full and unconditional guarantee of the trusts' obligations[357] Subordinated Notes The company has $55.0 million in ten-year fixed-to-floating rate subordinated notes outstanding, which qualify as Tier 2 capital - The company has $55.0 million in ten-year fixed-to-floating rate subordinated notes outstanding, issued in October 2020[358] - The notes bear a fixed interest rate of 4.75% for the first five years, then reset quarterly to three-month SOFR plus 456 basis points[358] - These subordinated notes may be included in Tier 2 capital under regulatory guidelines[359] Regulatory Capital Ratios Both the company and Central Pacific Bank maintained capital ratios above the 'well capitalized' regulatory designation Regulatory Capital Ratios (Company, March 31, 2022) | Capital Ratio | Actual Ratio | Minimum Required for Capital Adequacy | Minimum Required to be Well Capitalized | |:------------------------|:-------------|:--------------------------------------|:----------------------------------------| | Leverage Capital | 8.5% | 4.0% | N/A | | Tier 1 Risk-Based Capital | 11.9% | 6.0% | N/A | | Total Risk-Based Capital | 14.2% | 8.0% | N/A | | CET1 Risk-Based Capital | 10.9% | 4.5% | N/A | Regulatory Capital Ratios (Central Pacific Bank, March 31, 2022) | Capital Ratio | Actual Ratio | Minimum Required for Capital Adequacy | Minimum Required to be Well Capitalized | |:------------------------|:-------------|:--------------------------------------|:----------------------------------------| | Leverage Capital | 9.0% | 4.0% | 5.0% | | Tier 1 Risk-Based Capital | 12.6% | 6.0% | 8.0% | | Total Risk-Based Capital | 13.8% | 8.0% | 10.0% | | CET1 Risk-Based Capital | 12.6% | 4.5% | 6.5% | - The company elected to delay for two years the CECL methodology's effect on regulatory capital[364] Asset/Liability Management and Interest Rate Risk The company manages interest rate risk through its ALCO, utilizing NII and EVE simulations which indicate fluctuations remain within policy limits - Interest rate risk is managed by the ALCO through NII and EVE simulation, using hypothetical interest rate scenarios[371][372] Estimated Net Interest Income Sensitivity (March 31, 2022) | Rate Change (Gradual) | Estimated NII Sensitivity | |:----------------------|:--------------------------| | +100 bp | 2.48% | | -100 bp | (1.86)% | | Rate Change (Instantaneous) | Estimated NII Sensitivity | |:----------------------------|:--------------------------| | +100 bp | 4.67% | | -100 bp | (4.33)% | Liquidity and Borrowing Arrangements The company maintains strong liquidity by balancing fund sources and uses, relying on core deposits and secondary funding sources - The company's liquidity objective is to meet cash requirements and capitalize on lending/investment opportunities[376] - Core deposits are a primary, stable funding source, supplemented by FHLB lines of credit, secured repurchase agreements, and the Federal Reserve discount window[377] - At March 31, 2022, the bank had a $1.92 billion FHLB line of credit ($1.89 billion undrawn) and $84.3 million in unused Federal Reserve discount window borrowings[378][379] Contractual Obligations There have been no material changes to the company's contractual obligations since December 31, 2021 - No material changes in contractual obligations since December 31, 2021[381] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is interest rate risk, which is managed by the ALCO using a simulation model to project changes in NII - The primary market risk exposure is interest rate risk, arising from differing maturities or repricing of rate-sensitive assets and liabilities[383] - ALCO monitors interest rate risk using a simulation model that projects NII changes under various interest rate scenarios, ensuring fluctuations remain within policy limits[383][384] Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2022 - The company's disclosure controls and procedures were effective as of March 31, 2022[385] Changes in Internal Control Over Financial Reporting There were no material changes in the company's internal control over financial reporting during the period - No material changes in internal control over financial reporting occurred during the period[386] PART II. OTHER INFORMATION Item 1. Legal Proceedings Management believes routine legal actions will not have a material adverse effect on the company's consolidated financial position - Legal actions are not expected to have a material adverse effect on the company's financial results or position[389] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2021 Annual Report on Form 10-K - No material changes to risk factors since the 2021 Form 10-K[390] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company approved a new $30 million share repurchase program and repurchased $6.7 million of common stock in Q1 2022 - A new $30 million share repurchase program (2022 Repurchase Plan) was approved on January 25, 2022, replacing the prior plan[392] Issuer Purchases of Equity Securities (Three Months Ended March 31, 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | |:------------------|:---------------------------------|:-----------------------------| | January 1-31, 2022| 38,100 | $29.61 | | February 1-28, 2022| 84,025 | $29.22 | | March 1-31, 2022 | 112,856 | $27.90 | | Total | 234,981 | $28.65 | - $24.3 million remained available for repurchase under the 2022 Repurchase Plan as of March 31, 2022[394] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and various XBRL documents - Exhibits include CEO and CFO certifications (Rule 13a-14(a) and Section 1350) and XBRL instance, schema, calculation, label, presentation, and definition documents[397] Signatures The report is duly signed on April 28, 2022, by the Chairman and CEO and the Senior Executive Vice President and CFO - The report was signed by Paul K. Yonamine (Chairman and CEO) and David S. Morimoto (Senior Executive Vice President and CFO) on April 28, 2022[399][400]