SECOND QUARTER EARNINGS
HONOLULU, HI, July 24, 2015 – Central Pacific Financial Corp. (NYSE: CPF), parent company of Central Pacific Bank (the “Bank”), today reported net income for the second quarter of 2015 of $12.3 million, or $0.39 per diluted share, compared to net income in the second quarter of 2014 of $9.2 million, or $0.25 per diluted share, and net income in the first quarter of 2015 of $10.4 million, or $0.29 per diluted share.
“During the second quarter, our positive performance trends continued with growth in loans, increase in net interest income, and a decline in nonperforming assets,” said Catherine Ngo, President and Chief Executive Officer. “We are especially pleased with the strong increase in core deposits, which is reflective of our focus on strengthening customer relationships.”
On July 23, 2015, the Company’s Board of Directors declared a quarterly cash dividend of $0.12 per share on the Company’s outstanding common shares. The dividend will be payable on September 15, 2015 to shareholders of record at the close of business on August 31, 2015.
In March 2015, the Company’s Board of Directors authorized the addition of $75 million to its common stock repurchase program and promptly deployed this enhanced repurchase authority on April 1, 2015 with the repurchase of an additional 3,259,452 shares of its common stock at a purchase price per share of $23.01 (and an aggregate repurchase cost of approximately $75 million, excluding fees and expenses) in connection with the underwritten public offering of the Company’s common stock by the Company’s two largest shareholders, ACMO-CPF, L.L.C. and Carlyle Financial Services Harbor, L.P.
During the second quarter of 2015, the Company repurchased a total of 3,476,952 shares of common stock, including the shares repurchased in connection with the underwritten public offering noted above, at a total cost of $80.0 million, excluding fees and expenses, under its share repurchase program. The average cost was $23.01 per share repurchased. During the six months ended June 30, 2015, we have repurchased approximately 11.2% of our common stock outstanding as of December 31, 2014. The Company’s remaining repurchase authority under its common stock repurchase program at June 30, 2015 is approximately $24.2 million.
Since reinstating our quarterly cash dividends in 2013, we have returned a total of $28.1 million in cash dividends to our shareholders and have repurchased 10,996,401 shares of our common stock at a total cost of $230.8 million, excluding fees and expenses.
Significant Highlights and Second Quarter Results
| § | Reported net income of $12.3 million, compared to net income in the first quarter of 2015 of $10.4 million. |
| § | Increased the loans and leases portfolio by $38.3 million, or 1.3%, to $3.01 billion at June 30, 2015, compared to $2.97 billion at March 31, 2015. |
| § | Increased core deposits by $46.5 million to $3.38 billion at June 30, 2015, compared to $3.33 billion at March 31, 2015. |
| § | Reported a net interest margin of 3.32%, compared to 3.28% in the first quarter of 2015. |
| § | Recorded a credit to the provision for loan and lease losses of $7.3 million in the second quarter of 2015, compared to a credit to the provision for loan and lease losses of $2.7 million in the first quarter of 2015. |
| § | Nonperforming assets decreased by $8.7 million to $32.1 million at June 30, 2015 from $40.8 million at March 31, 2015. |
| § | Maintained a strong capital position with leverage capital, tier 1 risk-based capital, total risk-based capital, and common equity tier 1 ratios of 10.44%, 14.47%, 15.73%, and 11.91%, respectively, as of June 30, 2015. The Company’s capital ratios continue to be well in excess of the minimum levels required for a “well-capitalized” regulatory designation under Basel III. |
Earnings Highlights
Net interest income for the second quarter of 2015 was $37.3 million, compared to $35.9 million in the year-ago quarter and $36.2 million in the first quarter of 2015. Net interest margin was 3.32%, compared to 3.35% in the year-ago quarter and 3.28% in the first quarter of 2015. The sequential quarter increase in net interest margin was primarily due to higher loan fees and prepayment income totaling $0.6 million, primarily attributable to the early repayment of loans, and higher interest received on nonaccrual loans of $0.1 million. The increase in net interest income was also the result, in part, of our average investment securities and loan portfolio balances increasing by $47.7 million and $25.7 million, respectively. The taxable equivalent yield on the loans and leases portfolio increased to 3.97% in the current quarter from 3.90% last quarter. The taxable equivalent yield on the investment securities portfolio decreased to 2.56% in the current quarter, compared to 2.61% last quarter. Rates paid on total deposits decreased to 0.08% in the current quarter, compared to 0.09% last quarter.
In the second quarter of 2015, $119.4 million in available-for-sale securities were sold as part of an investment portfolio repositioning designed to improve profitability. Investment securities sold in the second quarter had a weighted average life of 4.4 years, average yield of 1.35% and resulted in a loss of $1.9 million, recorded in other operating income. Proceeds from the sale were immediately reinvested back into the investment portfolio, purchasing $120.6 million in mortgage-backed securities with a weighted average life of 7.6 years and an average yield of 2.71%.
In the second quarter of 2015, we recorded a credit to the provision for loan and lease losses of $7.3 million, compared to a provision of $2.0 million in the year-ago quarter and a credit of $2.7 million in the first quarter of 2015. The credit to the provision for loan and lease losses was primarily attributable to improving trends in credit quality.
Other operating income for the second quarter of 2015 totaled $8.1 million, compared to $12.0 million in the year-ago quarter and $11.2 million in the first quarter of 2015. The decrease from the year-ago quarter was primarily due to investment securities losses of $1.9 million and unrealized losses on loans held for sale and interest rate locks of $0.2 million (included in other) in the second quarter of 2015, compared to investment securities gains of $0.2 million and unrealized gains on loans held for sale and interest rate locks of $0.4 million (included in other) in the year-ago quarter. In addition, we recorded lower net gains on sales of foreclosed assets of $0.5 million, lower income from bank-owned life insurance of $0.3 million, and lower other service charges of fees of $0.3 million. These decreases were offset by higher net gains on sales of residential mortgage loans of $0.4 million. The sequential quarter decrease was primarily due to the aforementioned investment securities losses of $1.9 million, unrealized losses on loans held for sale and interest rate locks of $0.2 million (included in other) in the second quarter of 2015, compared to unrealized gains on loans held for sale and interest rate locks of $0.5 million (included in other) in the first quarter of 2015, lower other service charges and fees of $0.3 million, and lower income from bank-owned life insurance of $0.2 million.
Other operating expense for the second quarter of 2015 totaled $32.5 million, compared to $32.9 million in the year-ago quarter and $34.0 million in the first quarter of 2015. The decrease from the year-ago quarter was primarily attributable to lower salaries and employee benefits of $1.4 million, lower legal and professional services of $0.6 million, lower net occupancy expense of $0.3 million, and a credit to the reserve for unfunded commitments of $0.3 million (included in other) in the second quarter of 2015, compared to an increase to the reserve for unfunded commitments of $0.1 million in the year-ago quarter. These decreases were partially offset by higher charitable contributions of $2.0 million (included in other) and higher computer software expense of $0.8 million. The higher charitable contributions were primarily attributable to a $2.0 million contribution to the Central Pacific Bank Foundation (“CPB Foundation), which was the first contribution to CPB Foundation since December 2013. The sequential quarter decrease is primarily attributable to lower salaries and employee benefits of $2.0 million, lower legal and professional services of $0.6 million, and lower amortization of mortgage servicing rights of $0.5 million. These decreases were offset by higher charitable contributions of $2.0 million (included in other). The current quarter decrease in salaries and employee benefits was due primarily to a one-time reversal of an accrual for a former executive officer’s retirement benefits which will not be paid.
The efficiency ratio for the second quarter of 2015 was 71.47%, compared to 68.65% in the year-ago quarter and 71.73% in the first quarter of 2015. The efficiency ratio in the second quarter of 2015 was primarily impacted by the investment securities losses and the CPB Foundation charitable contribution, offset by the salaries and employee benefits accrual reversal noted above.
In the second quarter of 2015, the Company recorded income tax expense of $7.9 million, compared to income tax expense of $3.9 million in the year-ago quarter and $5.8 million in the first quarter of 2015. The effective tax rate for the second quarter of 2015 was 39.2%, compared to 35.7% in the first quarter of 2015. Our income tax expense and effective tax rate in the second quarter of 2015 was impacted by $0.6 million in additional income tax expense resulting from the reduction in deferred tax liabilities related to the redemption of Federal Home Loan Bank of Des Moines (“FHLB Des Moines”) membership stock during the quarter, as discussed below. Our income tax expense and effective tax rate in the first quarter of 2015 was impacted by $0.5 million in costs related to the underwriting agreement and share repurchase completed on April 1, 2015, which are not tax-deductible. As of June 30, 2015, the Company’s net deferred tax assets totaled $94.2 million.
Balance Sheet Highlights
Total assets at June 30, 2015 of $4.97 billion increased by $240.1 million from June 30, 2014, and increased by $1.9 million from March 31, 2015.
Total loans and leases at June 30, 2015 of $3.01 billion increased by $211.9 million and $38.3 million from June 30, 2014 and March 31, 2015, respectively. The increase in total loans and leases from the first quarter of 2015 was primarily due to an increase in the residential mortgage and consumer loan portfolios of $51.7 million and $23.2 million, respectively, partially offset by a decrease in the construction and commercial mortgage loan portfolios of $29.2 million and $6.1 million, respectively.
During the second quarter of 2015, following their merger with Federal Home Loan Bank of Seattle on June 1, 2015, we redeemed $31.3 million in excess FHLB Des Moines membership stock at par value of $100 per share.
Total deposits at June 30, 2015 of $4.18 billion increased by $179.7 million from June 30, 2014, and decreased by $6.3 million from March 31, 2015. Core deposits, which include demand deposits, savings and money market deposits, and time deposits less than $100,000, totaled $3.38 billion at June 30, 2015. This represents an increase of $182.5 million and $46.5 million from a year ago and from March 31, 2015, respectively. Changes in total deposits during the quarter included net decreases in time deposits of $59.1 million, offset by net increases in noninterest-bearing demand deposits, savings and money market deposits, and interest-bearing demand deposits of $37.6 million, $13.9 million, and $1.3 million, respectively.
Total shareholders’ equity was $488.8 million at June 30, 2015, compared to $564.6 million and $572.9 million at June 30, 2014 and March 31, 2015, respectively. The sequential quarter decrease is due primarily to repurchases of $80.0 million in common stock, excluding fees and expenses, under the Company’s stock repurchase program, a $11.4 million change in unrealized losses on investment securities, and common stock dividends paid of $3.8 million, partially offset by net income of $12.3 million in the current quarter.
Asset Quality
Nonperforming assets at June 30, 2015 totaled $32.1 million, or 0.65% of total assets, compared to $40.8 million, or 0.82% of total assets at March 31, 2015. The sequential-quarter change in nonperforming assets reflects net decreases in U.S. Mainland commercial and industrial assets of $10.1 million, Hawaii residential mortgage assets of $2.3 million, and U.S. Mainland commercial mortgage assets of $1.6 million. These net decreases were offset by net increases in Hawaii commercial and industrial assets of $2.8 million and Hawaii commercial mortgage assets of $2.6 million.
Loans delinquent for 90 days or more still accruing interest totaled $45,000 at June 30, 2015, compared to $5,000 at March 31, 2015. In addition, loans delinquent for 30 days or more still accruing interest totaled $2.8 million at June 30, 2015, compared to $3.6 million at March 31, 2015.
Net recoveries in the second quarter of 2015 totaled $2.8 million, compared to net charge-offs of $1.6 million in the second quarter of 2014, and net recoveries of $0.1 million in the first quarter of 2015. Net recoveries during the second quarter of 2015 included recoveries of two Hawaii commercial and industrial loans to a single borrower totaling $2.8 million, a $2.5 million recovery of a Hawaii commercial mortgage loan, and a $1.0 million recovery of a Hawaii commercial mortgage loan, partially offset by charge-offs of two U.S. Mainland commercial and industrial loans to a single borrower totaling $3.5 million.
The ALLL, as a percentage of total loans and leases, was 2.23% at June 30, 2015, compared to 2.41% at March 31, 2015. The ALLL, as a percentage of nonperforming assets, was 208.43% at June 30, 2015, compared to 175.21% at March 31, 2015. The ALLL, as a percentage of nonaccrual loans, was 249.44% at June 30, 2015, compared to 190.89% at March 31, 2015.
Capital Levels
At June 30, 2015, the Company’s leverage capital, tier 1 risk-based capital, total risk-based capital, and common equity tier 1 ratios were 10.44%, 14.47%, 15.73%, and 11.91%, respectively. At March 31, 2015, the Company’s leverage capital, tier 1 risk-based capital, total risk-based capital, and common equity tier 1 ratios were 12.79%, 17.43%, 18.69%, and 14.89%, respectively. The Company’s capital ratios continue to exceed the levels required to be considered a “well-capitalized” institution for regulatory purposes under Basel III.
Non-GAAP Financial Measures
This press release contains certain references to financial measures that have been adjusted to exclude certain expenses and other specified items. These financial measures differ from comparable measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) in that they exclude unusual or non-recurring charges, losses, credits or gains. This press release identifies the specific items excluded from the comparable GAAP financial measure in the calculation of each non-GAAP financial measure. Management believes that financial presentations excluding the impact of these items provide useful supplemental information that is important to a proper understanding of the Company’s core business results by investors. These presentations should not be viewed as a substitute for results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures presented by other companies.
Conference Call
The Company’s management will host a conference call today at 1:00 p.m. Eastern Time (7:00 a.m. Hawaii Time) to discuss the quarterly results. Individuals are encouraged to listen to the live webcast of the presentation by visiting the investor relations page of the Company's website at http://ir.centralpacificbank.com. Alternatively, investors may participate in the live call by dialing 1-877-505-7644. A playback of the call will be available through August 24, 2015 by dialing 1-877-344-7529 (passcode: 10069135) and on the Company's website.
About Central Pacific Financial Corp.
Central Pacific Financial Corp. is a Hawaii-based bank holding company with approximately $5.0 billion in assets. Central Pacific Bank, its primary subsidiary, operates 36 branches and 110 ATMs in the state of Hawaii, as of June 30, 2015. For additional information, please visit the Company’s website at http://www.centralpacificbank.com.
