CENTRAL PACIFIC FINANCIAL CORP. Overview
Central Pacific Financial Corp. ("CPF") is aHawaii corporation and a bank holding company. Our principal business is to serve as a holding company for our bank subsidiary,Central Pacific Bank . We refer toCentral Pacific Bank herein as "our bank" or "the bank," and when we say "the Company," "we," "us" or "our," we mean the holding company on a consolidated basis with the bank and our other consolidated subsidiaries.
The bank offers a broad range of products and services including accepting demand, money market, savings and time deposits and originating loans, including commercial loans, construction loans, commercial real estate loans, residential mortgage loans, and consumer loans.
Basis of Presentation
Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements under "Part I, Item 1. Financial Statements (Unaudited)." The following discussion should also be read in conjunction with the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 filed with theU.S. Securities and Exchange Commission (the "SEC") onFebruary 24, 2023 , including the "Risk Factors" set forth therein.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted inthe United States of America ("GAAP") requires that management make certain judgments and use certain estimates and assumptions that affect amounts reported and disclosures made. Actual results may differ from those estimates and such differences could be material to the financial statements. Accounting estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimate are reasonably likely to occur from period-to-period and would materially impact our consolidated financial statements as of or for the periods presented. Management has discussed the development and selection of the critical accounting estimates noted below with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed the accompanying disclosures. The Company identified a significant accounting policy, which involves a higher degree of judgment and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial statements. AtMarch 31, 2023 andDecember 31, 2022 , the significant accounting policy that we believed to be the most critical in preparing our consolidated financial statements is the determination of the allowance for credit losses on loans. This is further described in Note 1 - Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements in our 2022 Form 10-K.
Allowance for Credit Losses on Loans
Management considers the policies related to the allowance for credit losses
("ACL") on loans as the most critical to the financial statement presentation.
The total ACL on loans includes activity related to allowances calculated in
accordance with Accounting Standards Codification ("ASC") 326, "Financial
Instruments - Credit Losses". The ACL is established through the provision for
credit losses on loans charged to current earnings. The amount maintained in the
ACL reflects management's continuing evaluation of the estimated loan losses
expected to be recognized over the life of the loans in our loan portfolio at
the balance sheet date. The ACL is comprised of specific reserves assigned to
certain loans that do not share general risk characteristics and general
reserves on pools of loans that do share general risk characteristics. Factors
contributing to the determination of specific reserves include the
creditworthiness of the borrower, and more specifically, changes in the expected
future receipt of principal and interest payments and/or in the value of pledged
collateral. A reserve is recorded when the carrying amount of the loan exceeds
the discounted estimated cash flows using the loan's initial effective interest
rate or the fair value of the collateral for certain collateral dependent loans.
For purposes of establishing the general reserve, we stratify the loan portfolio
into homogeneous groups of loans that possess similar loss potential
characteristics and calculate the net amount expected to be collected over the
life of the loans to estimate the expected credit losses in the loan portfolio.
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The Company's ACL methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an ACL that management believes is appropriate at each reporting date. Quantitative factors include our historical loss experiences on loan pools based on common risk characteristics and loan profile, considers risk rating, delinquency and charge-off trends, changes in nonperforming loans, and other factors. Qualitative factors are used to adjust the ACL calculation for risks not considered by the quantitative calculations. Qualitative factors considered in our methodologies include the general economic forecast in our markets, concentrations of credit, changes in lending management and staff, quality of the loan review system, changes in loan profile, problem loan trends and changes in collateral value. Refer to Note 1 - Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements in this report for further discussion of the risk factors considered by management in establishing the ACL.
Financial Summary
Net income for the three months endedMarch 31, 2023 was$16.2 million , or$0.60 per diluted share, compared to net income of$19.4 million , or$0.70 per diluted share for the three months endedMarch 31, 2022 . Net income for the three months endedMarch 31, 2023 included PPP net interest income and net loan fees of$41 thousand , compared to$1.9 million for the three months endedMarch 31, 2022 . During the three months endedMarch 31, 2023 , the Company recorded a debit to the provision for credit losses of$1.9 million , compared to a credit to the provision of$3.2 million during the three months endedMarch 31, 2022 . Excluding the provision for credit losses and income tax expense, the Company's pre-tax, pre-provision net revenue for the three months endedMarch 31, 2023 was$23.1 million , compared to$22.3 million for the three months endedMarch 31, 2022 . Excluding net interest income and fees from SBA Paycheck Protection Program ("PPP") loans, the Company's pre-tax, pre-provision net revenue, excluding PPP, for the three months endedMarch 31, 2023 was$23.1 million , compared to$20.3 million for the three months endedMarch 31, 2022 . The following table presents annualized returns on average assets and average shareholders' equity, and basic and diluted earnings per share for the periods indicated. Return on average assets and average shareholders' equity are annualized based on a 30/360 day convention. Three Months Ended March 31, 2023 2022 Return on average assets 0.87 % 1.06 % Return on average shareholders' equity 13.97
14.44
Basic earnings per common share$ 0.60 $ 0.70 Diluted earnings per common share 0.60 0.70 Non-GAAP Financial Measures To supplement our consolidated financial statements presented in accordance with GAAP, the Company also uses non-GAAP financial measures in addition to our GAAP results. The Company believes non-GAAP financial measures may provide useful information for evaluating our cash operating performance, ability to service debt, compliance with debt covenants and measurement against competitors. This information should be considered as supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be comparable to similarly entitled measures reported by other companies. 51 -------------------------------------------------------------------------------- Table of Contents The following table presents the Company's pre-provision net revenue and pre-provision net revenue, excluding net interest income and net loan fees from PPP loans for the periods indicated: Three Months Ended March 31, (dollars in thousands) 2023 2022 Net income$ 16,187 $ 19,438 Add: Provision (credit) for credit losses 1,852
(3,195)
Income tax expense 5,059
6,038
Pre-provision net revenue 23,098
22,281
Less: Net interest income - PPP (41)
(1,941)
Pre-provision net revenue, excluding PPP$ 23,057
The following table presents the Company's net interest income and net interest
margin, excluding net interest income and net loan fees from PPP loans for the
periods indicated:
Three Months Ended March 31,
(dollars in thousands) 2023 2022
Net interest income - PPP $ 41 $ 1,941
Net interest income - all others 54,155 48,994
Net interest income - total$ 54,196
Net interest margin - Reported 3.08 % 2.97 % Less: Impact of PPP on net interest margin -
(0.08)
Net interest margin, excluding PPP 3.08 % 2.89 % Recent Industry Developments InMarch 2023 , the banking industry experienced significant volatility due to recent high-profile bank failures, which resulted in industry-wide concerns related to liquidity, deposit outflows, unrealized or unrecognized losses on investment securities and eroding consumer confidence in the banking industry. Despite these negative developments, we believe the Company's balance sheet, asset quality and liquidity position remained solid. The Company has a long-tenured and diversified deposit portfolio, which was 66%FDIC insured or collateralized as ofMarch 31, 2023 . Additionally, the Company took a number of preemptive actions during the first and beginning of the second quarters of 2023, which included pro-active outreach to clients and other liquidity contingency planning actions, such as maximizing funding sources and increasing liquidity monitoring in response to these recent developments. The Company's total deposits of$6.75 billion increased by$10.7 million during the first quarter of 2023. The Company had$198.8 million in cash on its balance sheet and$2.83 billion in total other liquidity sources, including available borrowing capacity plus unpledged investment securities as ofMarch 31, 2023 . Finally, the Company's capital remained strong with the Company's leverage capital, tier 1 risk-based capital, total risk-based capital, and common equity tier 1 ratios of 8.6%, 11.5%, 13.6%, and 10.6%, respectively, as ofMarch 31, 2023 , all exceeding "well capitalized" regulatory standards.
Material Trends
The majority of our operations are concentrated in the state ofHawaii . As a result, our performance is significantly influenced by the strength of the real estate markets, economic environment and environmental conditions inHawaii . Macroeconomic conditions also influence our performance. A favorable business environment is generally characterized by expanding gross state product, low unemployment and rising personal income; while an unfavorable business environment is characterized by the reverse. Following the solid performances of our leading economic indicators in 2019,Hawaii's economy was greatly impacted by the COVID-19 pandemic in 2020 andHawaii's visitor industry continued to be impacted by the COVID-19 pandemic in 2021. OnMarch 26, 2022 , the state ofHawaii's mask mandate, Safe Travels Program, and Emergency Proclamation on COVID-19 ended, effectively ending all government-imposed restrictions related to COVID-19. 52
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With restrictions lifted,Hawaii's visitor industry improved significantly in 2022 and continued to improve during the first two months of 2023 with visitor arrivals at pre-pandemic levels. According to the latest available statistics from theHawaii Tourism Authority ("HTA"), a total of 1.5 million visitors arrived to the Hawaiian Islands in the two months endedFebruary 28, 2023 , mainly from theU.S. West andU.S. East. This was a 28.3% increase from the 1.2 million visitors from the same period last year, and represents a recovery of approximately 97% from the same period in the pre-pandemic and record year in 2019. Japanese visitor arrivals continue to increase modestly, however are only at around a quarter of pre-pandemic levels. Total spending for visitors arriving in the two months endedFebruary 28, 2023 was$3.53 billion , up 30.5% from$2.71 billion in the same period last year, and up by 17.6% from$3.01 billion in the two months endedFebruary 28, 2019 . According to aMarch 2023 report by theUniversity of Hawaii Economic Research Organization ("UHERO"), total visitor arrivals are expected to increase to approximately 9.9 million in 2023. Visitor spending is expected to increase to approximately$19.65 billion in 2023 which would exceed last year's record year for visitor spending of$19.29 billion .
Real estate lending is a primary focus for us, including residential mortgage and commercial mortgage loans. As a result, we are dependent on the strength ofHawaii's real estate market. While theHawaii housing market continues to experience some moderation in sales activity and prices, it remains healthy and resilient, with continued strong demand and low inventory. According to theHonolulu Board of Realtors , sales ofOahu single-family homes and condominiums in the three months endedMarch 31, 2023 were down 38.7% and 28.7%, respectively, from the same prior year period. TheOahu single-family home median price in the three months endedMarch 31, 2023 fell 6.8% to$1,025,000 from$1,100,000 in the same prior year period. TheOahu condominium median price in the three months endedMarch 31, 2023 fell 2.0% to$500,000 from$510,000 in the same prior year period.
Banking-as-a-Service ("BaaS") Initiative
InJanuary 2022 , the Company announced the launch of a new BaaS initiative with the goal of expanding the Company both in and beyondHawaii by investing in or collaborating with leading fintech companies. The BaaS initiative is being developed based on the successful product development and launch strategies used in the Company's new Shaka digital product. Shaka,Hawaii's first all-digital checking account, was launched inNovember 2021 with a VIP waitlist campaign and a large social media influencer campaign. The Company is also in the process of developing additional complementary Shaka product and service offerings. In the first quarter of 2022, the Company continued its BaaS initiatives with a minority equity investment inSwell Financial, Inc. ("Swell"), a new fintech company. During the fourth quarter of 2022, Swell launched a consumer banking application that combines checking, credit and more into one integrated account, andCentral Pacific Bank serving as the bank sponsor. In addition, the Company is also collaborating withSwell and Elevate Credit, Inc. (NYSE:ELVT), a provider of digital solutions. In the first quarter of 2023, Elevate was acquired byPark Cities Asset Management, LLC , who is also the largest investor in Swell. Swell did not have a material impact to the Company's financial statements during the three months endedMarch 31, 2023 .
Results of Operations
Net Interest Income
Net interest income, when annualized and expressed as a percentage of average interest earning assets, is referred to as "net interest margin." Interest income, which includes loan fees and resultant yield information, is expressed on a taxable equivalent basis using a federal statutory tax rate of 21% for the three months endedMarch 31, 2023 and 2022. A comparison of net interest income on a taxable-equivalent basis for the three months endedMarch 31, 2023 and 2022 is set forth below. 53
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Three Months Ended March 31,
2023 2022 Variance
Average Interest Average Interest Average Interest
Average Yield/ Income/ Average Yield/ Income/ Average Yield/ Income/
(dollars in thousands) Balance Rate Expense Balance Rate Expense Balance Rate Expense
Assets
Interest earning assets: Interest-bearing deposits in other banks$ 24,957 4.51 %$ 277 $ 157,861 0.18 %$ 72 $ (132,904) 4.33 %$ 205 Investment securities, excluding ACL: Taxable (1) 1,395,985 2.10 7,336 1,489,538 1.88 6,990 (93,553) 0.22 346 Tax-exempt (1) 153,067 2.61 1,000 163,352 2.53 1,033 (10,285) 0.08 (33) Total investment securities 1,549,052 2.15 8,336 1,652,890 1.94 8,023 (103,838) 0.21 313 Loans, including loans held for sale (2) 5,525,988 4.26 58,269 5,114,260 3.54 44,949 411,728 0.72 13,320Federal Home Loan Bank stock 12,380 4.40 136 7,996 2.98 59 4,384 1.42 77 Total interest earning assets 7,112,377 3.80 67,018 6,933,007 3.09 53,103 179,370 0.71 13,915 Noninterest-earning assets 331,390 408,843 (77,453) Total assets$ 7,443,767 $ 7,341,850 $ 101,917 Liabilities and Equity Interest-bearing liabilities: Interest-bearing demand deposits$ 1,415,155 0.10 %$ 363 $ 1,425,303 0.03 %$ 112 $ (10,148) 0.07 %$ 251 Savings and money market deposits 2,182,942 0.63 3,386 2,212,426 0.06 329 (29,484) 0.57 3,057 Time deposits up to$250,000 341,396 2.22 1,870 223,661 0.28 156 117,735 1.94 1,714 Time deposits over$250,000 689,432 2.58 4,394 462,087 0.28 313 227,345 2.30 4,081 Total interest-bearing deposits 4,628,925 0.88 10,013 4,323,477 0.09 910 305,448 0.79 9,103Federal Home Loan Bank advances and other short-term borrowings 64,462 4.79 761 - - - 64,462 4.79 761 Long-term debt 127,273 5.86 1,838 105,637 4.00 1,041 21,636 1.86 797 Total interest-bearing liabilities 4,820,660 1.06 12,612 4,429,114 0.18 1,951 391,546 0.88 10,661 Noninterest-bearing deposits 2,026,735 2,258,116 (231,381) Other liabilities 132,816 115,971 16,845 Total liabilities 6,980,211 6,803,201 177,010 Shareholders' equity 463,556 538,601 (75,045) Non-controlling interest - 48 (48) Total equity 463,556 538,649 (75,093) Total liabilities and equity$ 7,443,767 $ 7,341,850 $ 101,917 Net interest income$ 54,406 $ 51,152 $ 3,254 Interest rate spread 2.74 % 2.91 % (0.17) % Net interest margin 3.08 % 2.97 % 0.11 % (1) At amortized cost. (2) Includes nonaccrual loans. Net interest income (expressed on a taxable-equivalent basis) was$54.4 million for the first quarter of 2023, representing an increase of$3.3 million , or 6.4% from$51.2 million in the year-ago quarter. The increase from the year-ago quarter was primarily due to higher average loans and higher yields earned on loans resulting in an increase in interest income and fees on loans of$13.3 million . This increase outpaced the increase in interest expense of$10.7 million which was attributable to higher average balances and rates paid on interest-bearing deposits and borrowings. Net interest income for the first quarter of 2023 included$41 thousand in PPP net interest income and net loan fees, which are accreted into income over the term of the loans and accelerated when the loans are forgiven or paid-off, compared to$1.9 million in the year-ago quarter. During the first quarter of 2023, the Company received$0.8 million in PPP loan forgiveness and repayments, compared to$48.9 million in the year-ago quarter. During the first quarters of 2023 and 2022, the 54 -------------------------------------------------------------------------------- Table of Contents Company had average PPP loan balances of$2.2 million and$68.7 million , respectively, which earned annualized yields of approximately 7.43% and 11.47%, respectively. As ofMarch 31, 2023 , the Company has net deferred PPP fees of$0.1 million remaining. Interest Income Taxable-equivalent interest income was$67.0 million for the first quarter of 2023, representing an increase of$13.9 million , or 26.2%, from$53.1 million in the year-ago quarter. The increase during the first quarter of 2023, compared to the year-ago quarter was primarily attributable to the increase in average yield earned on core loans, excluding PPP, of 82 bp, which increased interest income by approximately$11.2 million , combined with the increase in average core loan balances, excluding PPP, of$478.1 million , which increased interest income by approximately$4.1 million . In addition, the average yield earned on investment securities increased by 21 bp, which increased interest income by approximately$0.8 million . These increases were partially offset by lower average investment securities balances of$103.8 million which decreased interest income by approximately$0.5 million , and the aforementioned lower PPP net interest income and loan fees of$1.9 million compared to the year-ago quarter.
Interest Expense
Interest expense was$12.6 million for the first quarter of 2023, representing an increase of$10.7 million , or 546.4%, from$2.0 million in the year-ago quarter. Due to the rising interest rate environment, average rates paid on interest-bearing deposits of 0.88% increased by 79 bp from the year-ago quarter, which increased interest expense by approximately$8.9 million . Average FHLB advances and other short-term borrowings totaled$64.5 million for the first quarter of 2023, compared to none in the year-ago quarter, which increased interest expense by approximately$0.8 million . Average rates paid on long-term debt of 5.86% increased by 186 bp from the year-ago quarter, which increased interest expense by approximately$0.6 million .
Net Interest Margin
Our net interest margin of 3.08% for the first quarter of 2023 increased by 11 bp from 2.97% in the year-ago quarter. As previously discussed, the increase in net interest margin for the first quarter of 2023 compared to the year-ago quarter was primarily attributable to higher yields earned on core loans and investment securities, which outpaced the higher rates paid on interest-bearing deposits and borrowings. As previously discussed, during the first quarter of 2023, the Company recognized lower net loan fees related to loans originated and forgiven under the PPP compared to the year-ago quarter. Excluding the PPP net interest income and net loan fees of$41 thousand and$1.9 million in the first quarter of 2023 and year-ago quarter, respectively, our net interest margin was 3.08% and 2.89% in the first quarter of 2023 and year-ago quarter, respectively. In an effort to rein in inflation, the FRB aggressively increased interest rates during 2022. During the first quarter of 2022, theFederal Reserve increased the Federal Funds target range by 25 bp for the first time since 2018 to 0.25-0.50%. During the second quarter of 2022, theFederal Reserve increased the Federal Funds target range by 50 bp (the largest rate hike since 2000) in May and another 75 bp (the largest rate hike since 1994) in June to end the quarter at a target range of 1.50-1.75%. In July, September, andNovember 2022 , theFederal Reserve hiked rates for the fourth, fifth and sixth time in 2022 by an additional 75 bp each. InDecember 2022 , the FRB increased rates for the seventh consecutive time in 2022. The 50 bp increase brought the target range to 4.25-4.50% at the end of 2022, which was the highest it has been in 15 years. InFebruary 2023 , the FRB increased rates by 25 bp to a target range of 4.50-4.75%. Despite stress hitting the banking industry following the collapse of two regional banks, the FRB increased rates for the ninth time in a row by another 25 bp inMarch 2023 to a target range of 4.75-5.00%.Federal Reserve officials have indicated that they intend to keep interest rates high in 2023. The Company anticipates its average loan yield will continue to increase in the rising interest rate environment. Deposit and borrowing costs will also increase. The extent will depend on the competitive market environment and the Company's ability to retain and grow lower cost deposits. Such factors will influence the future direction of the net interest margin. In addition to the impacts from changes in monetary policy, other economic conditions may impact financial results in future periods. Inflationary concerns, labor shortages, changes to the political and regulatory environment, including geopolitical conflicts, supply chain disruptions and the possibility of future bank failures, could adversely impact the economy, which could negatively impact our financial results as well as our customers' creditworthiness. In light of these potential issues, we continue to monitor our liquidity. 55 -------------------------------------------------------------------------------- Table of Contents Rate-Volume Analysis For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in average balances (volume) and (ii) changes in weighted average interest rates (rate). The change in volume is calculated as change in average balance, multiplied by prior period average yield/rate. The change in rate is calculated as change in average yield/rate, multiplied by current period volume. The change in interest income not solely due to change in volume or change in rate has been allocated proportionately to change in volume and change in average yield/rate. Three Months Ended March 31, 2023 Compared To March 31, 2022 Increase (Decrease) Due to: (dollars in thousands) Volume Rate Net Change Interest earning assets: Interest-bearing deposits in other banks$ (61) $ 266 $ 205 Investment securities, excluding ACL: Taxable investment securities (1) (433) 779 346 Tax-exempt investment securities (1) (64) 31 (33) Total investment securities (497) 810 313 Loans, including loans held for sale (2) 3,571 9,749 13,320 Federal Home Loan Bank stock 33 44 77 Total interest earning assets 3,046 10,869 13,915 Interest-bearing liabilities: Interest-bearing demand deposits (1) 252 251 Savings and money market deposits (4) 3,061 3,057 Time deposits up to$250,000 81 1,633 1,714 Time deposits over$250,000 157 3,924 4,081 Total interest-bearing deposits 233 8,870 9,103
- 761 761
Long-term debt 213 584 797
Total interest-bearing liabilities 446 10,215 10,661
Net interest income $ 2,600 $ 654 $ 3,254
(1) At amortized cost.
(2) Includes nonaccrual loans.
Provision for Credit Losses
During the first quarter of 2023, we recorded a provision for credit losses of$1.9 million , which consisted of a provision for credit losses on loans of$1.6 million and a provision for credit losses on off-balance sheet credit exposures of$0.3 million . During the first quarter of 2022, we recorded a credit to the provision for credit losses of$3.2 million , which consisted of a credit to the provision for credit losses on loans of$2.9 million and a credit to the provision for credit losses on off-balance sheet credit exposures of$0.3 million .
We did not record a provision for credit losses on investment securities during
the three months ended
We recorded net charge-offs of
Other Operating Income
The following tables set forth components of other operating income for the periods indicated:
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Three Months Ended March 31,
(dollars in thousands) 2023 2022 $ Change % Change
Other operating income:
Mortgage banking income $ 526 $ 1,172 $ (646) -55.1 %
Service charges on deposit accounts 2,111 1,861 250 13.4
Other service charges and fees 4,985 4,488 497 11.1
Income from fiduciary activities 1,321 1,154 167 14.5
Income from bank-owned life insurance 1,291 539 752 139.5
Other:
Equity in earnings of unconsolidated entities 28 93 (65) -69.9 Income recovered on nonaccrual loans previously charged-off 288 38 250 657.9 Other recoveries 98 25 73 292.0 Unrealized losses on loans-held-for-sale 3 (63) 66 -104.8 Commissions on sale of checks 80 77 3 3.9 Other 278 167 111 66.5 Total other operating income$ 11,009 $ 9,551 $ 1,458 15.3
Not meaningful ("N.M.")
For the first quarter of 2023, total other operating income was$11.0 million , which increased by$1.5 million , or 15.3%, from$9.6 million in the year-ago quarter. The increase from the year-ago quarter was primarily due to higher income from bank-owned life insurance ("BOLI") of$0.8 million , higher other service charges and fees of$0.5 million , higher service charges on deposit accounts of$0.3 million , and higher income recovered on nonaccrual loans previously charged-off of$0.3 million , partially offset by lower mortgage banking income of$0.6 million .
Other Operating Expense
The following tables set forth components of other operating expense for the periods indicated:
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Three Months Ended March 31,
(dollars in thousands) 2023 2022 $ Change % Change
Other operating expense:
Salaries and employee benefits $ 22,023 $ 20,942 $ 1,081 5.2 %
Net occupancy 4,474 3,774 700 18.5
Equipment 946 1,082 (136) -12.6
Communication 778 806 (28) -3.5
Legal and professional services 2,886 2,626 260 9.9
Computer software 4,606 3,082 1,524 49.4
Advertising 933 1,150 (217) -18.9
Other:
Pension plan and SERP expense 95 200 (105) -52.5
Charitable contributions 198 95 103 108.4
FDIC insurance assessment 1,086 631 455 72.1
Miscellaneous loan expenses 282 389 (107) -27.5
ATM and debit card expenses 787 663 124 18.7
Armored car expenses 348 251 97 38.6
Entertainment and promotions 542 327 215 65.7
Stationery and supplies 293 350 (57) -16.3
Directors' fees and expenses 355 263 92 35.0
Directors' deferred compensation plan
(credit) expense (220) (80) (140) 175.0
Loss on disposal of fixed assets 2 1 1 100.0
Other 1,693 1,653 40 2.4
Total other operating expense $ 42,107 $ 38,205 $ 3,902 10.2
Not meaningful ("N.M.")
For the first quarter of 2023, total other operating expense was $42.1 million ,
which increased by $3.9 million , or 10.2%, from $38.2 million in the year-ago
quarter. The increase was primarily due to higher computer software expense of
$1.5 million , higher salaries and employee benefits of $1.1 million , higher net
occupancy expense of $0.7 million , and higher FDIC insurance assessment of
$0.5 million .
Efficiency Ratio
A key measure of operating efficiency tracked by management is the efficiency
ratio, which is calculated by dividing total other operating expense by total
pre-provision revenue (net interest income and total other operating income).
Management believes that the efficiency ratio provides useful supplemental
information that is important to a proper understanding of the company's core
business results by investors. Our efficiency ratio should not be viewed as a
substitute for results determined in accordance with GAAP, nor is it necessarily
comparable to the efficiency ratio presented by other companies.
The following table sets forth a calculation of our efficiency ratio for each of
the periods indicated:
Three Months Ended March 31,
(dollars in thousands) 2023 2022
Total other operating expense $ 42,107 $ 38,205
Net interest income $ 54,196 $ 50,935
Total other operating income 11,009 9,551
Total revenue before provision for credit losses $ 65,205 $ 60,486
Efficiency ratio 64.58 % 63.16 %
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Our efficiency ratio increased to 64.58% in the first quarter of 2023, compared to 63.16% in the year-ago quarter. The higher efficiency ratio in the first quarter of 2023 was primarily due to the aforementioned higher other operating expense, partially offset by higher net interest income and other operating income. The Company continues its strategic investments in digital banking, technology and personnel and it expects these investments, along with continued business development and relationship-focused banking, will improve profitability and shareholder returns. Income Taxes The Company recorded income tax expense of$5.1 million for the first quarter of 2023, compared to$6.0 million in the same year-ago period. The effective tax rate for the first quarter of 2023 was 23.81%, compared to 23.70% in the same year-ago period. The valuation allowance on our net DTA atMarch 31, 2023 andDecember 31, 2022 totaled$3.4 million , which related entirely to our DTA from net apportioned net operating loss ("NOL") carryforwards forCalifornia state income tax purposes, as the Company does not expect to generate sufficient income inCalifornia to utilize the DTA. Net of the valuation allowance, the Company's net DTA totaled$40.1 million atMarch 31, 2023 , compared to a net DTA of$48.5 million as ofDecember 31, 2022 , and is included in other assets on our consolidated balance sheets. The decrease in the net DTA was primarily due to utilization of net operating loss carryforwards.
Financial Condition
Total assets were
Investment securities totaled$1.35 billion atMarch 31, 2023 , which increased by$9.1 million , or 0.7%, from$1.34 billion atDecember 31, 2022 . The increase in the investment securities portfolio reflects a market valuation improvement on the AFS portfolio of$16.9 million and purchases of investment securities of$14.9 million , partially offset by principal runoff of$22.7 million . In 2022, the market valuation on the AFS portfolio declined significantly. The decline in the market valuation was primarily driven by the rising interest rate environment. The market valuation slightly recovered during the first quarter of 2023. To mitigate the potential future impact to capital through AOCI, inMarch 2022 , the Company transferred 41 investment securities that were classified as AFS to HTM. The investment securities had an amortized cost basis of$361.8 million and a fair market value of$329.5 million . On the date of transfer, these securities had a total net unrealized loss of$32.3 million . InMay 2022 , the Company transferred an additional 40 investment securities that were classified as AFS to HTM. The investment securities had an amortized cost basis of$400.9 million and a fair market value of$343.7 million . On the date of transfer, these securities had a total net unrealized loss of$57.2 million . There was no impact to net income as a result of the reclassifications. In addition, during the first quarter of 2022, the Company entered into a forward starting interest rate swap on certain municipal debt securities with a notional amount of$115.5 million . The Company will pay the counterparty a fixed rate of 2.095% and will receive a floating rate based on the Federal Funds effective rate. This transaction has an effective date ofMarch 31, 2024 and a maturity date ofMarch 31, 2029 . 59 -------------------------------------------------------------------------------- Table of Contents Loans
The following table sets forth information regarding our outstanding loans by category and geographic location as of the dates indicated:
March 31, December 31,
(dollars in thousands) 2023 2022 $ Change % Change
Hawaii :Commercial, financial and agricultural:
SBA Paycheck Protection Program$ 1,821 $ 2,555 $ (734) (28.7) % Other 375,158 383,665 (8,507) (2.2) Real estate: Construction 154,303 150,208 4,095 2.7 Residential mortgage 1,941,230 1,940,999 231 - Home equity 743,908 739,380 4,528 0.6 Commercial mortgage 1,030,086 1,029,708 378 - Consumer 342,922 346,789 (3,867) (1.1) Total loans 4,589,428 4,593,304 (3,876) (0.1) Allowance for credit losses ("ACL") (44,062)
(45,169) 1,107 (2.5)
Loans, net of ACL$ 4,545,366 $ 4,548,135
Commercial, financial and agricultural:
SBA Paycheck Protection Program $ - $ - $ - - % Other 179,906 160,282 19,624 12.2 Real estate: Construction 27,171 16,515 10,656 64.5 Commercial mortgage 331,546 333,367 (1,821) (0.5) Consumer 429,346 451,998 (22,652) (5.0) Total loans 967,969 962,162 5,807 0.6 ACL (19,037) (18,569) (468) 2.5 Loans, net of ACL$ 948,932 $ 943,593 $ 5,339 0.6 Total:
Commercial, financial and agricultural:
SBA Paycheck Protection Program$ 1,821 $ 2,555 $ (734) (28.7) % Other 555,064 543,947 11,117 2.0 Real estate: Construction 181,474 166,723 14,751 8.8 Residential mortgage 1,941,230 1,940,999 231 - Home equity 743,908 739,380
4,528 0.6
Commercial mortgage 1,361,632 1,363,075 (1,443) (0.1) Consumer 772,268 798,787 (26,519) (3.3) Total loans 5,557,397 5,555,466 1,931 - ACL (63,099) (63,738) 639 (1.0)
Loans, net of ACL$ 5,494,298 $ 5,491,728 $ 2,570 - Loans, net of deferred costs, totaled$5.56 billion atMarch 31, 2023 , which increased by$1.9 million , or 0.03%, from$5.56 billion atDecember 31, 2022 . The increase reflects net increases in the following loan portfolios: construction of$14.8 million , other commercial loans of$11.1 million , home equity of$4.5 million and residential mortgage loans of$0.2 million . These increases were offset by net decreases in consumer of$26.5 million , commercial mortgage of$1.4 million and SBA Paycheck Protection Program loans of$0.7 million . During the three months endedMarch 31, 2023 , the Company received$0.8 million in PPP loan forgiveness and paydowns. Core loans, or total loans, net of deferred costs, excluding PPP loans, totaled$5.56 billion atMarch 31, 2023 and increased by$2.7 million , or 0.05%, from$5.55 billion atDecember 31, 2022 . 60 -------------------------------------------------------------------------------- Table of Contents TheHawaii loan portfolio decreased by$3.9 million , or 0.1%, fromDecember 31, 2022 . The decrease reflects net decreases in the following loan portfolios: other commercial, financial and agricultural loans of$8.5 million , consumer of$3.9 million and SBA Paycheck Protection Program loans of$0.7 million . These decreases were partially offset by net increases in the following portfolios: home equity of$4.5 million , construction of$4.1 million , commercial mortgage of$0.4 million and residential mortgage of$0.2 million . TheU.S. Mainland loan portfolio increased by$5.8 million , or 0.6% fromDecember 31, 2022 . The increase was primarily attributable to net increases in other commercial, financial and agricultural loans of$19.6 million and construction loans of$10.7 million , partially offset by a net decrease in consumer loans of$22.7 million , and commercial mortgage loans of$1.8 million . As a prudent measure, we continued to let theU.S. Mainland unsecured consumer loan portfolio run off until the national economic outlook improves. Refer to Note 4 - Loans and Credit Quality in the accompanying notes to the consolidated financial statements in this report for information onU.S. Mainland loan portfolio purchases. 61
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Table of Contents Nonperforming Assets, Accruing Loans Delinquent for 90 Days or More, Restructured Loans Still Accruing Interest
The following table sets forth nonperforming assets, accruing loans delinquent
for 90 days or more and restructured loans still accruing interest as of the
dates indicated:
March 31, December 31,
(dollars in thousands) 2023 2022 $ Change % Change
Nonperforming Assets ("NPAs")
Nonaccrual loans:
Commercial, financial and agricultural -
Other $ 264 $ 297 $ (33) (11.1) %
Real estate:
Residential mortgage 3,445 3,808 (363) (9.5)
Home equity 712 570 142 24.9
Commercial mortgage 77 - 77 -
Consumer 815 576 239 41.5
Total nonaccrual loans 5,313 5,251 62 1.2
Other real estate owned ("OREO"):
Real estate: Residential mortgage - - - - Total OREO - - - - Total nonperforming assets 5,313 5,251 62 1.2 Accruing Loans Delinquent for 90 Days or More Commercial, financial and agricultural: SBA PPP - 13 (13) (100.0) Other - 26 (26) (100.0) Real estate: Residential mortgage - 559 (559) (100.0) Consumer 1,908 1,240 668 53.9 Total accruing loans delinquent for 90 days or more 1,908 1,838 70 3.8
Restructured Loans Still Accruing Interest
Real estate: Residential mortgage 1,376 1,845 (469) (25.4) Commercial mortgage 846 886 (40) (4.5) Consumer 54 62 (8) (12.9) Total restructured loans still accruing interest 2,276 2,793 (517) (18.5) Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest$ 9,497 $ 9,882 $ (385) (3.9) Ratio of nonaccrual loans to total loans 0.10 % 0.09 % 0.01 % Ratio of NPAs to total loans and OREO 0.10 % 0.09 % 0.01 % Ratio of NPAs and accruing loans delinquent for 90 days or more to total loans and OREO 0.13 % 0.13 % - % Ratio of NPAs, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO 0.17 % 0.18 % (0.01) % Ratio of classified assets and OREO to tier 1 capital and ACL 6.25 % 6.25 % - % 62
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The following table sets forth year-to-date activity in nonperforming assets as
of the date indicated:
(dollars in thousands)
Balance at December 31, 2022 $ 5,251
Additions 1,626
Reductions:
Payments (857)
Return to accrual status (15)
Net charge-offs, valuation and other adjustments (692)
Total reductions (1,564)
Net increase 62
Balance at March 31, 2023 $ 5,313
Nonperforming assets, which includes nonaccrual loans and other real estate
owned, totaled $5.3 million at March 31, 2023 , compared to $5.3 million at
December 31, 2022 . There were no nonperforming loans classified as held for sale
at March 31, 2023 and December 31, 2022 . The increase in nonperforming assets
from December 31, 2022 was primarily attributable to additions to nonaccrual
loans totaling $1.6 million , partially offset by $0.9 million in repayments of
nonaccrual loans and $0.7 million in net charge-offs, valuation and other
adjustments.
Prior to our adoption of ASU 2022-02, we accounted for a modification to the
contractual terms of a loan that resulted in granting a concession to a borrower
experiencing financial difficulties as a troubled debt restructuring ("TDR").
Loans identified as TDRs prior to our adoption of ASU 2022-02 included in
nonperforming assets at March 31, 2023 consisted of five Hawaii loans with a
combined principal balance of $1.1 million . There were $2.3 million of loans
identified as TDRs prior to our adoption of ASU 2022-02 still accruing interest
at March 31, 2023 , none of which were more than 90 days delinquent. At
December 31, 2022 , there were $2.8 million of loans identified as TDRs prior to
our adoption of ASU 2022-02 still accruing interest, none of which were more
than 90 days delinquent.
Criticized loans at March 31, 2023 declined by $5.8 million from December 31,
2022 to $71.3 million , or 1.3% of the total loan portfolio. Special mention
loans declined by $6.2 million to $26.7 million , or 0.5% of the total loan
portfolio. Classified loans increased by $0.5 million to $44.6 million , or 0.8%
of the total loan portfolio.
The Company's ratio of classified assets and other real estate owned to tier 1
capital and the ACL of 6.25% at March 31, 2023 remained unchanged from 6.25% at
December 31, 2022 .
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Allowance for Credit Losses
The following table sets forth certain information with respect to the ACL as of the dates and for the periods indicated:
Three Months Ended March 31,
(dollars in thousands) 2023 2022
Allowance for Credit Losses:
Balance at beginning of period $ 63,738 $ 68,097
Provision (credit) for credit losses on loans 1,615 (2,931)
Charge-offs:
Commercial, financial and agricultural - Other 779 254 Consumer 2,686 1,216 Total charge-offs 3,465 1,470 Recoveries: Commercial, financial and agricultural - Other 250 350 Real estate: Residential mortgage 53 112 Consumer 908 596 Total recoveries 1,211 1,058 Net charge-offs 2,254 412 Balance at end of period$ 63,099 $ 64,754 Average loans, net of deferred fees and costs$ 5,525,988 $ 5,114,260 Annualized ratio of net charge-offs to average loans 0.16 % 0.03 % Ratio of ACL to total loans 1.14 % 1.25 % Ratio of ACL to total loans, excluding PPP loans 1.14 % 1.26 % ACL as a percentage of nonaccrual loans 1188 % 1214 %
Our ACL totaled
During the first quarter of 2023, we recorded a debit to the provision for credit losses on loans of$1.6 million and net charge-offs of$2.3 million . The provision for credit losses on loans during the current quarter was primarily attributable to net loan charge-offs during the quarter. Our ACL as a percentage of total loans decreased to 1.14% atMarch 31, 2023 from 1.15% atDecember 31, 2022 and 1.25% atMarch 31, 2022 . Our ACL as a percentage of nonaccrual loans decreased to 1188% atMarch 31, 2023 from 1214% atDecember 31, 2022 and 1214% atMarch 31, 2022 .
In accordance with GAAP, loans held for sale and other real estate assets are not included in our assessment of the ACL.
Federal Home Loan
The bank is a member of theFederal Home Loan Bank of Des Moines (the "FHLB"). Our FHLB stock balance of$12.0 million atMarch 31, 2023 increased by$2.8 million , or 30.8%, from the FHLB stock balance of$9.1 million atDecember 31, 2022 . FHLB stock has an activity-based stock requirement, such that as borrowings increase, so will our holdings of FHLB stock. As a condition of membership in the FHLB, members are required to purchase and hold a minimum number of FHLB stock based on a percentage of total assets even if we have no borrowings outstanding. 64 -------------------------------------------------------------------------------- Table of Contents Deposits The following table sets forth the composition of our deposits by category for the periods indicated: March 31, December 31, (dollars in thousands) 2023 2022 $ Change % Change Noninterest-bearing demand deposits$ 2,028,087 $ 2,092,823 $ (64,736) (3.1) % Interest-bearing demand deposits 1,386,913 1,453,167 (66,254) (4.6) Savings and money market deposits 2,184,675 2,199,028 (14,353) (0.7) Time deposits less than$100,000 188,289 181,547 6,742 3.7 Time deposits$100,000 to$250,000 183,861 148,601 35,260 23.7 Core deposits 5,971,825 6,075,166 (103,341) (1.7) Government time deposits 360,501 290,057 70,444 24.3 Other time deposits greater than$250,000 414,642 371,000 43,642 11.8 Total time deposits greater than$250,000 775,143 661,057 114,086 17.3 Total deposits$ 6,746,968 $ 6,736,223 $ 10,745 0.2 Our total deposits of$6.75 billion atMarch 31, 2023 increased by$10.7 million , or 0.2%, from total deposits of$6.74 billion atDecember 31, 2022 . Net increases in government time deposits of$70.4 million , other time deposits greater than$250,000 of$43.6 million , time deposits$100,000 to$250,000 of$35.3 million , and time deposits less than$100,000 of$6.7 million , were offset by net decreases in noninterest-bearing demand deposits of$64.7 million , interest-bearing demand deposits of$66.3 million , and savings and money market deposits of$14.4 million . Our core deposits, which we define as demand deposits, savings and money market deposits, and time deposits up to$250,000 , totaled$5.97 billion atMarch 31, 2023 and decreased by$103.3 million , from$6.08 billion atDecember 31, 2022 . Core deposits as a percentage of total deposits was 88.5% atMarch 31, 2023 , compared to 90.2% atDecember 31, 2022 . Our average cost of total deposits was 60 bp during the three months endedMarch 31, 2023 . The Company's business model is based on long-term relationships and most of the Company's customers are long-tenured with a diversified deposit portfolio. AtMarch 31, 2023 andDecember 31, 2022 , approximately 66% and 65%, respectively, of the Company's total deposits wereFDIC -insured or fully collateralized.
Capital Resources
In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources and uses of capital in conjunction with an analysis of the size and quality of our assets, the anticipated performance of our business (including the effects of the COVID-19 pandemic and FRB actions impacting market interest rates and the economy) and the level of risk and regulatory capital requirements. As part of this ongoing assessment, the Board of Directors reviews our capital position on an ongoing basis to ensure it is adequate, including, but not limited to, the need for raising additional capital or the ability to return capital to our shareholders, including the ability to declare cash dividends or repurchase our securities.
Common and Preferred Equity
Our total shareholders' equity was$470.9 million atMarch 31, 2023 , compared to$452.9 million atDecember 31, 2022 . The change in total shareholders' equity was primarily attributable to net income of$16.2 million and other comprehensive income of$11.3 million , partially offset by cash dividends declared of$7.0 million and the repurchase of$2.2 million in shares of our common stock under our stock repurchase programs in the three months endedMarch 31, 2023 .
Our total shareholders' equity to total assets ratio was 6.26% at
Holding Company Capital Resources
CPF is required to act as a source of strength to the bank under the Dodd-Frank
Act. CPF is obligated to pay its expenses and payments on its junior
subordinated debentures which fund payments on the outstanding trust preferred
securities, and payments on its subordinated notes.
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CPF relies on the bank to pay dividends to fund its obligations. On a
stand-alone basis, CPF had an available cash balance of approximately
As aHawaii state-chartered bank, the bank may only pay dividends to the extent it has retained earnings as defined underHawaii banking law ("Statutory Retained Earnings"), which differs from GAAP retained earnings. As ofMarch 31, 2023 , the bank had Statutory Retained Earnings of$150.0 million . Provisions of federal law also impact the ability of the bank to pay dividends to the Company and the ability of the Company to pay dividends to our shareholders and repurchase our common stock. OnApril 25, 2023 , the Company's Board of Directors declared a cash dividend of$0.26 per share on the Company's outstanding common stock, which remained unchanged from$0.26 per share a year-ago. Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. Our ability to pay cash dividends to our shareholders is subject to restrictions under federal andHawaii law, including restrictions imposed by the FRB and covenants set forth in various agreements we are a party to, including covenants set forth in our subordinated debentures and subordinated notes. OnJanuary 25, 2022 , the Company's Board of Directors approved a new share repurchase authorization of up to$30 million of its common stock (the "2022 Repurchase Plan"), which replaced and superseded the previous share repurchase program. During 2022, the Company repurchased 868,613 shares of common stock, at an aggregate cost of$20.7 million under the Company's share repurchase programs. OnJanuary 24, 2023 , the Company's Board of Directors approved a new share repurchase authorization of up to$25 million of its common stock from time to time in the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase program (the "2023 Repurchase Plan"). The 2023 Repurchase Plan replaces and supersedes in its entirety the 2022 Repurchase Plan, which had$10.3 million in remaining repurchase authority as ofDecember 31, 2022 . During the three months endedMarch 31, 2023 , the Company repurchased 101,760 shares of common stock, at an aggregate cost of$2.2 million under the Company's share repurchase programs (48,760 shares at an aggregate cost of$1.0 million under the 2022 Repurchase Plan and 53,000 shares at an aggregate cost of$1.2 million under the 2023 Repurchase Plan). As ofMarch 31, 2023 ,$23.8 million remained available for repurchase under the Company's 2023 Repurchase Plan.
In mid
Trust Preferred Securities
As ofMarch 31, 2023 , we have two remaining statutory trusts,CPB Capital Trust IV ("Trust IV") and CPB Statutory Trust V ("Trust V"), which issued a total of$50.0 million in floating rate trust preferred securities. The trust preferred securities, the underlying floating rate junior subordinated debentures that are the assets of Trusts IV and V, and the common securities issued by Trusts IV and V are redeemable in whole or in part on any interest payment date on or afterDecember 15, 2009 for Trust IV and V, or at any time in whole but not in part within 90 days following the occurrence of certain events. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from time to time to defer subordinated debenture interest payments, which would result in a deferral of dividend payments on the related trust preferred securities, for up to 20 consecutive quarterly periods without default or penalty.
The Company determined that its investments in Trust IV and Trust V did not represent a variable interest and therefore the Company was not the primary beneficiary of each of the trusts. As a result, consolidation of the trusts by the Company were not required.
Subordinated Notes
OnOctober 20, 2020 , the Company completed a$55 million private placement of ten-year fixed-to-floating rate subordinated notes, which will be used to support regulatory capital ratios and for general corporate purposes. The Company exchanged the privately placed notes for registered notes with the same terms and in the same aggregate principal amount at the end of the fourth quarter of 2020. The notes bear a fixed interest rate of 4.75% for the first five years and will reset quarterly thereafter for the remaining five years to the then current three-month Secured Overnight Financing Rate, as published by the Federal 66 -------------------------------------------------------------------------------- Table of ContentsReserve Bank of New York , plus 456 basis points. The subordinated notes had a carrying value of$54.4 million , net of unamortized debt issuance costs of$0.6 million , atMarch 31, 2023 .
The subordinated notes may be included in Tier 2 capital, with certain limitations applicable, under current regulatory guidelines and interpretations.
Regulatory Capital Ratios
The Company and the bank are subject to various regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementingBasel Committee on Banking Supervision's capital guidelines forU.S. banks ("Basel III rules") became effective for the Company onJanuary 1, 2015 , and has now been fully phased in. Under the Basel III rules, the Company must hold a "capital conservation buffer" above the adequately capitalized risk-based capital ratios. The capital conservation buffer is now at its fully phased in level of 2.50%. The final rules allowed community banks to make a one-time election not to include the additional components of accumulated other comprehensive income ("AOCI") in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital. The Company made the election not to include the additional components of AOCI in regulatory capital. InMarch 2020 , theFDIC , FRB and OCC, collectively, issued three interim final rules that impact the reporting of regulatory capital in the Call Report. The revisions include: 1.Revising the definition of eligible retained income in the capital rule; 2.Permitting banking organizations to neutralize the effects of purchasing assets through the Money Market Mutual Fund Liquidity Facility ("MMLF") on their risk-based and leverage capital ratios; 3.Providing banking organizations that implement the Accounting Standards Update No. 2016-13, "Financial Instruments - Credit Losses, Topic 326, Measurement of Credit Losses on Financial Instruments", before the end of 2020 the option to delay for two years an estimate of the CECL methodology's effect on regulatory capital, relative to the incurred loss methodology's effect on capital, followed by a three-year transition period; 4.Allowing banking organizations to implement the final rule titled Standardized Approach for Calculating the Exposure Amount of Derivative Contracts (the "SA-CCR rule") for the first quarter of 2020, on a best efforts basis.
The Company elected to exercise the option to delay for two years the CECL methodology's effect on regulatory capital.
General capital adequacy regulations adopted by the FRB andFDIC require an institution to maintain minimum leverage capital, Tier 1 risk-based capital, total risk-based capital, and common equity Tier 1 ("CET1") capital ratios. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. For a further discussion of the effect of forthcoming changes in required regulatory capital ratios, see the discussion in the "Business - Supervision and Regulation" sections of our 2022 Form 10-K. The following table sets forth the Company's and the bank's capital ratios, as well as the minimum capital adequacy requirements applicable to all financial institutions as of the dates indicated. The Company's and the bank's leverage capital, tier 1 risk-based capital, total risk-based capital, and CET1 risk-based capital ratios as ofMarch 31, 2023 were above the levels required for a "well capitalized" regulatory designation. 67
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Minimum Required Minimum Required
for Capital Adequacy to be
Actual Purposes Well Capitalized
(dollars in thousands) Amount Ratio Amount Ratio [1] Amount Ratio
Company
At March 31, 2023:
Leverage capital $ 650,231 8.6 % $ 303,339 4.0 % N/A N/A
Tier 1 risk-based capital 650,231 11.5 340,197 6.0 N/A N/A
Total risk-based capital 771,810 13.6 453,596 8.0 N/A N/A
CET1 risk-based capital 600,231 10.6 255,148 4.5 N/A N/A
At December 31, 2022 :
Leverage capital $ 642,302 8.5 % $ 301,053 4.0 % N/A N/A
Tier 1 risk-based capital 642,302 11.3 340,151 6.0 N/A N/A
Total risk-based capital 764,283 13.5 453,535 8.0 N/A N/A
CET1 risk-based capital 592,302 10.5 255,113 4.5 N/A N/A
Central Pacific Bank
At March 31, 2023:
Leverage capital $ 680,607 9.0 % $ 301,976 4.0 % $ 377,470 5.0 %
Tier 1 risk-based capital 680,607 12.0 339,388 6.0 452,517 8.0
Total risk-based capital 747,186 13.2 452,517 8.0 565,647 10.0
CET1 risk-based capital 680,607 12.0 254,541 4.5 367,670 6.5
At December 31, 2022 :
Leverage capital $ 675,331 9.0 % $ 300,584 4.0 % $ 375,730 5.0 %
Tier 1 risk-based capital 675,331 11.9 339,422 6.0 452,563 8.0
Total risk-based capital 742,312 13.1 452,563 8.0 565,704 10.0
CET1 risk-based capital 675,331 11.9 254,567 4.5 367,708 6.5
[1] Under the Basel III Capital Rules, the Company and the bank must also
maintain the required Capital Conservation Buffer ("CCB") to avoid becoming
subject to restrictions on capital distributions and certain discretionary bonus
payments to management. The CCB is calculated as a ratio of CET1 capital to
risk-weighted assets, and effectively increases the required minimum risk-based
capital ratios. The CCB requirement was phased in over a three-year period that
began on January 1, 2016 . The phase-in period ended on January 1, 2019 , and the
CCB is now at its fully phased-in level of 2.5%.
Asset/Liability Management and Interest Rate Risk
Our earnings and capital are sensitive to risk of interest rate fluctuations.
Interest rate risk arises when rate-sensitive assets and rate-sensitive
liabilities mature or reprice during different periods or in differing amounts.
In the normal course of business, we are subjected to interest rate risk through
the activities of making loans and taking deposits, as well as from our
investment securities portfolio and other interest-bearing funding sources.
Asset/liability management monitors our rate-sensitive assets and rate-sensitive
liabilities to meet our financial objectives.
Our Asset/Liability Management Policy seeks to maximize the risk-adjusted return
to shareholders while maintaining consistently acceptable levels of liquidity,
interest rate risk and capitalization. Our Asset/Liability Management Committee,
or ALCO, monitors interest rate risk through the use of net interest income
("NII") and economic value of equity ("EVE") simulation and various hypothetical
interest rate scenarios that may include gradual, immediate or non-parallel rate
changes. This process is designed to measure the impact of future changes in
interest rates on NII and EVE. Potentially adverse interest rate risk exposures
are managed through the shortening or lengthening of the duration of assets and
liabilities.
ALCO utilizes a detailed and dynamic simulation model to measure and manage
interest rate risk exposures. The simulation incorporates various assumptions
which may impact results. Key modeling assumptions are made around the timing of
interest rate changes, the prepayment of mortgage-related assets, pricing
spreads of assets and liabilities and the timing and magnitude of deposit rate
changes in relation to changes in the overall level of interest rates.
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The following reflects our net interest income sensitivity analysis as ofMarch 31, 2023 . Net interest income is estimated assuming no balance sheet growth under a flat interest rate scenario. The net interest income sensitivity is measured as the change in net interest income in alternate interest rate scenarios as a percentage of the flat rate scenario. The alternate rate scenarios typically assume rates move up or down 100 bp in either a gradual or an instantaneous, parallel fashion. Estimated Net Interest Income Sensitivity Rate Change Gradual Instantaneous +100 bp 1.33 % 2.27 % -100 bp (1.83) % (3.48) %
Liquidity and Borrowing Arrangements
Our objective in managing liquidity is to maintain a balance between sources and uses of funds in order to economically meet the cash requirements of customers for loans and deposit withdrawals and participate in lending and investment opportunities as they arise. We monitor our liquidity position in relation to changes in loan and deposit balances on a daily basis to ensure maximum utilization, maintenance of an adequate level of readily marketable assets and access to short-term funding sources. Core deposits have historically provided us with a sizable source of relatively stable and low cost funds, but are subject to competitive pressure in our market. In addition to core deposit funding, we also have access to a variety of other short-term and long-term funding sources, which include proceeds from maturities of our loans and investment securities, as well as secondary funding sources such as the FHLB, secured repurchase agreements and theFederal Reserve discount window, available to meet our liquidity needs. While we historically have had access to these other funding sources, access to these sources may not be guaranteed and can be restricted in the future as a result of market conditions or the Company's and bank's financial position. The bank maintained a$2.05 billion line of credit with the FHLB as ofMarch 31, 2023 , compared to$2.23 billion atDecember 31, 2022 . There were$25.0 million in short-term borrowings under this arrangement atMarch 31, 2023 , compared to$5.0 million atDecember 31, 2022 . Letters of credit under this arrangement that are used to collateralize certain government deposits totaled$36.0 million atMarch 31, 2023 , and remained unchanged from$36.0 million atDecember 31, 2022 . There were$50.0 million in long-term borrowings under this arrangement atMarch 31, 2023 , compared to no borrowings atDecember 31, 2022 . FHLB advances and standby letters of credit available atMarch 31, 2023 were secured by certain real estate loans with a carrying value of$3.19 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB. AtMarch 31, 2023 ,$1.94 billion was undrawn under this arrangement, compared to$2.19 billion atDecember 31, 2022 . AtMarch 31, 2023 andDecember 31, 2022 , our bank had additional unused borrowings available at theFederal Reserve discount window of$76.6 million and$75.9 million , respectively. As ofMarch 31, 2023 andDecember 31, 2022 , certain commercial and commercial real estate loans with a carrying value totaling$123.2 million and$125.0 million , respectively, were pledged as collateral on our line of credit with theFederal Reserve discount window. TheFederal Reserve does not have the right to sell or repledge these loans.
As of
Our ability to maintain adequate levels of liquidity is dependent on our ability to continue to maintain our strong risk profile and capital base. Our liquidity may also be negatively impacted by unexpected deposit withdrawals from weakness in the financial markets and industry-wide reductions in liquidity. Information regarding our material contractual obligations is provided in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2022 . There have been no material changes in our cash requirements from known contractual and other obligations sinceDecember 31, 2022 . We believe we will be able to meet our contractual obligations as they come due through the maintenance of adequate liquidity levels. We expect to maintain adequate liquidity levels through profitability, loan payoffs, securities repayments and maturities and continued deposit gathering activities. We also have various borrowing mechanisms in place for both short-term and long-term liquidity needs. 69
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