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, 2020 filed with theU.S. Securities and Exchange Commission (the "SEC") onFebruary 23, 2021 , 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. AtDecember 31, 2019 , the significant accounting policy which we believed to be the most critical in preparing our consolidated financial statements is the determination of the allowance for loan and lease losses. This is further described in Note 1 - Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements in our 2019 Form 10-K. OnJanuary 1, 2020 , the Company adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which created material changes to the Company's existing critical accounting policy that existed atDecember 31, 2019 . The significant accounting policy which we believe to be the most critical in preparing our consolidated financial statements is the determination of the allowance for credit losses on loans.
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
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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. The Company's methodologies for estimating
the ACL consider available relevant information about the collectability of cash
flows, including information about past events, current conditions, and
reasonable and supportable forecasts. 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 endedSeptember 30, 2021 was$20.8 million , or$0.74 per diluted share, compared to net income of$6.9 million , or$0.24 per diluted share for the three months endedSeptember 30, 2020 . Net income for the nine months endedSeptember 30, 2021 was$57.6 million , or$2.03 per diluted share, compared to net income of$25.1 million , or$0.89 per diluted share for the nine months endedSeptember 30, 2020 . During the three and nine months endedSeptember 30, 2021 , the Company recorded credits to the provision for credit losses of$2.6 million and$6.9 million , respectively, compared to debits to the provision of$14.9 million and$37.2 million during the three and nine months endedSeptember 30, 2020 , respectively. Excluding the provision for credit losses and income tax expense, the Company's pre-tax, pre-provision income for the three and nine months endedSeptember 30, 2021 was$25.0 million and$68.8 million , respectively, compared to$23.9 million and$70.3 million for the three and nine months endedSeptember 30, 2020 , respectively. The following table presents annualized returns on average assets and average shareholders' equity, and basic and diluted earnings per share for the periods indicated. Returns on average assets and average shareholders' equity are annualized based on a 30/360 day convention. Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Return on average assets 1.15 % 0.42 %
1.10 % 0.53 % Return on average shareholders' equity 14.83 4.99 13.82 6.17
Basic earnings per common share
0.74 0.24 2.03 0.89
COVID-19 Pandemic
The ongoing novel coronavirus pandemic ("COVID-19") and its related variants
continue to cause significant disruption in the local, national and global
economies and financial markets. The COVID-19 pandemic and its related variants
have resulted in temporary and permanent closures of many businesses and the
institution of social distancing, mask mandates and gathering and travel
restrictions in many states and communities. While many of these restrictions
have since loosened, continuation and further spread of COVID-19, including its
related variants, could cause additional quarantines, shutdowns, reductions in
business activity and financial transactions, and financial market instability.
In response to the anticipated economic effects of COVID-19, the Board of
Governors of the Federal Reserve System (the "FRB") has taken a number of
actions that have significantly affected the financial markets in the United
States , including actions intended to result in substantial decreases in market
interest rates. On March 3, 2020 , the 10-year Treasury yield fell below 1.00%
for the first time, and the FRB reduced the target federal funds range by 50
basis points to 1.00% to 1.25%. On March 15, 2020 , the FRB further reduced the
target federal funds range by 100 basis points to 0% to 0.25% and announced a
$700 billion quantitative easing program in response to the expected economic
downturn caused by COVID-19. On March 22, 2020 , the FRB announced that it would
continue its quantitative easing program in amounts necessary to support the
smooth functioning of markets for Treasury securities and agency MBS. We expect
that these reductions in interest rates, among other actions of the FRB and the
Federal government generally, especially if prolonged, could adversely affect
our net interest income, margins and profitability. In the September 2021
meeting, the FRB elected to hold the target federal funds rate at 0% to 0.25%
and officials expect it will be appropriate to maintain this target range until
labor market conditions have reached levels consistent with their assessments of
maximum employment and inflation has risen to 2.00% and is on track to
moderately
exceed 2.00% for some time.
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In late March 2020 , the Coronavirus Aid, Relief and Economic Security ("CARES")
Act was signed into law as an over $2 trillion economic stimulus package. The
CARES Act is intended to prevent a severe economic downturn through various
measures, including direct financial aid to American families and economic
stimulus to significantly impacted industry sectors.
In
InMarch 2021 ,Congress passed another$1.9 trillion aid package, or the American Rescue Plan Act of 2021, which builds upon many of the measures in the CARES Act fromMarch 2020 and in the Consolidated Appropriations Act, 2021, fromDecember 2020 .Hawaii's economy continues to be impacted by COVID-19 and its variants, but has generally been improving. OnMarch 4, 2020 ,Hawaii GovernorDavid Ige issued a Proclamation declaring a state of emergency to support ongoing State and county responses to COVID-19. Since then,Governor Ige issued twenty-one supplemental emergency proclamations and an emergency proclamation to the COVID-19 response, which includes travel restrictions and other measures. Although most of the imposed restrictions have been loosened, some new restrictions were put into place recently due to the rise in cases related to the Delta variant, and to prevent large scale shutdowns like those that occurred in 2020. As a result of these restrictions and vaccinations administered, the spread of COVID-19 has been relatively contained. As ofOctober 25, 2021 theCenters for Disease Control and Prevention reported there were 83,448 cases (7-day moving average of 121 new infections) and 888 COVID-19-related deaths inHawaii . As ofOctober 25, 2021 , 70.9% ofHawaii's population has been fully vaccinated. Our operations, like those of other financial institutions that operate in our market, are significantly influenced by economic conditions inHawaii , including the strength of the real estate market and the tourism industry. The COVID-19 pandemic and the mandatory 10-day self quarantine resulted in a significant decline in tourism to the state ofHawaii in 2020. As a result, many customers and businesses across the state have been significantly impacted by the COVID-19 pandemic. However the state is making progress towards economic recovery. BeginningOctober 15, 2020 , passengers arriving from out-of-state and traveling inter-county could bypass the mandatory 14-day self-quarantine with a valid negative COVID-19 Nucleic Acid Amplification Test ("NAAT") test result from a Trusted Testing and Travel Partner through the state's Safe Travels program. OnDecember 10, 2020 , the mandatory quarantine was reduced from 14 to 10 days in accordance with theU.S. Centers for Disease Control and Prevention's ("CDC") guidelines. Starting onJuly 8, 2021 , travelers who were fully vaccinated inthe United States or its territories may enterHawaii on domestic flights without pre-travel testing/quarantine starting the 15th day after the completion of their vaccination, essentially reopening domestic tourism toHawaii . Visitor arrivals greatly increased in the summer of 2021 with the daily average exceeding 30,000 per day inJuly 2021 , or approximately 90% of pre-pandemic levels. However, inAugust 2021 , similar to many other states,Hawaii experienced a spike in COVID-19 cases due to the Delta variant. To mitigate further spread and due to concerns over hospital capacity,Governor Ige asked that only essential travel toHawaii occur which resulted in a decline to approximately 20,000 per day inSeptember 2021 . Further,Governor Ige implemented a new requirement starting onSeptember 13, 2021 , which requires individuals to show proof of vaccination or a negative COVID test to enter most indoor non-retail establishments. According to aSeptember 2021 report byUniversity of Hawaii Economic Research Organization , theNovember 2021 Thanksgiving holiday is likely to be the time when tourism starts to make a significant recovery after a decline tied to the Delta variant. While still elevated,Hawaii's unemployment rate of 6.6% during the month ofSeptember 2021 is significantly down from its peak of 21.9% in April and May of last year.
Financial position and results of operations
Through guidance from regulatory agencies, the Company has prudently worked with its borrowers impacted by COVID-19 to defer principal payments, interest, and fees. The Company has successfully worked on returning borrowers to payment as the economy recovers. Loans on active payment forbearance or deferrals granted to borrowers impacted by the COVID-19 pandemic declined significantly from$120.2 million or, 2.4% of the total loan portfolio as ofDecember 31, 2020 , to$1.3 million , or 0.03% of the total loan portfolio as ofSeptember 30, 2021 , as most borrowers resumed payments. During the third quarter of 2020, the Company recorded a reserve on the accrued interest receivable for loans on active forbearance or deferral totaling$0.2 million . This reserve balance was reversed during the second quarter of 2021 due to the significant decline in loans on active forbearance or deferral. As ofSeptember 30, 2021 , the Company does not have a reserve on accrued interest receivable. 51 --------------------------------------------------------------------------------
Liquidity and capital
Through our past experience during the Great Recession in the late 2000s, we believe we have developed robust liquidity and capital stress tests and comprehensive liquidity and capital contingency plans. We further believe our liquidity and capital positions are strong. To further strengthen its capital position, the Company issued$55.0 million in subordinated debt inOctober 2020 , which is classified as tier 2 capital for regulatory purposes, and down-streamed$46.8 million to the bank. The Company relies on cash on hand as well as dividends from its subsidiary bank to service its debt. If the Company's capital deteriorates such that its subsidiary bank is unable to pay dividends to it for an extended period of time or the bank is otherwise restricted in its ability to pay dividends to the Company, the Company may not be able to service its debt or pay dividends to its shareholders. The Company's liquidity risk related to loan principal and interest payment deferrals that were granted for certain customers due to COVID-19 and its variants, is currently low as essentially all loan payment deferrals have returned to payment status as ofSeptember 30, 2021 , and no further payment deferrals are being granted. Additionally, during 2020 and in the nine months endedSeptember 30, 2021 , we experienced a significant inflow of deposits due to government stimulus and general market uncertainty; however, this may not continue. The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile. The Company had access to the Paycheck Protection Program Liquidity Facility ("PPPLF"), which was an extension of credit to eligible financial institutions that originate Paycheck Protection Program ("PPP") loans that takes the PPP loans as collateral at face value. However, the PPPLF expired onJuly 30, 2021 . InMarch 2020 , we decided to suspend our share repurchase program as a result of the uncertainty posed by the pandemic. InJanuary 2021 , our Board of Directors approved a new authorization to repurchase up to$25 million in common stock and we resumed repurchases inMay 2021 . We can provide no assurance on how many shares in the aggregate we may repurchase under this repurchase program.
Asset valuation
COVID-19 has not affected the Company's ability to account timely for the assets on its balance sheet. The Company also has not made significant changes in the methodology used to determine the fair value of assets measured in accordance with GAAP, except for updating certain valuation assumptions to account for pandemic-related circumstances such as widening credit spreads. The Company has a significant real estate loan portfolio. Thus far, theHawaii real estate market continues to be extremely strong and real estate collateral values have remained relatively stable, but we cannot provide any assurance as to future levels of stability.
Processes, controls and business continuity plan
The Company's Business Continuity Plan includes a Pandemic Preparedness Plan which it successfully activated in earlyMarch 2020 . The Company's remote workforce plan has been rolled out with an overall smooth transition. The Company already had Virtual Private Network ("VPN") technology capability, and during the first quarter of 2020, expanded VPN access to over 70% of its employees. In addition to VPN, the Company believes it is well-setup with the latest technologies that enable our operations to continue efficiently. The Company is using collaboration tools and several other cloud-based software programs. For its customers, during the third quarter of 2020 the Company launched its premier digital banking platform which is one of the key initiatives and milestones in its RISE2020 initiative. The Company is developing a gradual, phased-in return-to-office plan that includes a portion of the workforce continuing with flexible, remote work schedules. The Company deployed a remote workforce plan at the onset of the pandemic in 2020 and has been able to continue operations without disruption as well as maintain its systems and internal controls in light of the measures the Company has taken to prevent the spread of COVID-19. As an essential service provider, the COVID-19 vaccine became available to our employees inMarch 2021 . Over 90% of the Company's employees are fully vaccinated as ofSeptember 30, 2021 . InSeptember 2021 , the Company implemented required weekly COVID testing for the small portion of its workforce that remained unvaccinated. 52 --------------------------------------------------------------------------------
Lending operations and accommodations to borrowers
To support its customers during the onset of the pandemic in 2020, the Company moved quickly to put in place a number of COVID-19 relief programs for its consumer and business customers affected by the pandemic. For its customers, the Company offered an employment disruption loan as well as consumer, commercial, commercial mortgage, and residential mortgage payment deferral programs. In addition, we waived non-CPB ATM fees and early withdrawal fees on our time deposits throughout the second quarter of 2020 and increased spending cap limits on debit cards and mobile deposit limits to$10,000 daily. BeginningJuly 1, 2020 , the previously waived fees have been reinstated but the increased spending cap limits will remain in place temporarily. The bank is aSmall Business Administration ("SBA") approved lender and actively participated in assisting customers with loan applications for the SBA's Paycheck Protection Program, or PPP, which was part of the CARES Act. PPP loans have a two or five-year term and earn interest at 1%. The SBA pays the originating bank a processing fee ranging from 1% to 5% based on the size of the loan, which the Company is recognizing over the life of the loan. The Company saw tremendous interest in the PPP. With the significant increase in volume of PPP loan requests, the Company redeployed staff to handle and assist with loan processing. Additionally, the Company brought on some outside resources to assist with the PPP. The SBA began accepting submissions for the initial round of PPP loans onApril 3, 2020 . InApril 2020 , the Paycheck Protection Program and Health Care Enhancement Act added an additional round of funding for the PPP. InJune 2020 , the Paycheck Protection Program Flexibility Act of 2020 was enacted, which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Through the end of the second round inAugust 2020 , the Company funded over 7,200 PPP loans totaling$558.9 million and received gross processing fees of$21.2 million . InDecember 2020 , the Consolidated Appropriations Act, 2021 was passed which among other things, included a third round of funding and a new simplified forgiveness procedure for PPP loans of$150,000 or less. During 2021, the Company funded over 4,600 loans totaling$320.9 million in the third round, which ended onMay 31, 2021 , and received additional gross processing fees of$18.4 million . The Company developed a PPP forgiveness portal and with assistance from a third party vendor has assisted its customers with applying for forgiveness from the SBA. We have received forgiveness payments and repayments from borrowers totaling over$653.2 million as ofSeptember 30, 2021 . A total outstanding balance of$226.6 million and net deferred fees of$7.9 million remain as ofSeptember 30, 2021 . Although the Company believes that the majority of the remaining loans will ultimately be forgiven by the SBA or repaid by the borrower in accordance with the terms of the program, there could be risks and liabilities by the Company that cannot be determined at this time. The Company had previously become aware of two PPP loans that it originated for$10.0 million and$3.0 million , in which they were under investigation for borrower fraud and/or misrepresentations. The$10.0 million PPP loan was fully repaid for all principal and interest outstanding by the SBA in the third quarter of 2021 under their 100% guarantee. The$3.0 million loan was partially forgiven by the SBA, and the borrower has started making payments on the remaining balance in accordance with loan terms. The Company provided initial three-month principal and interest payment forbearance for our residential mortgage customers, and three-month principal and interest payment deferrals for our consumer customers. Both residential mortgage and consumer customers were granted extensions to their forbearance or deferral, if needed. The Company deferred either the full loan payment or the principal component of the loan payment for generally three to six months for its commercial real estate and commercial and industrial loan customers on a case-by-case basis depending on need. The majority of loans that were granted forbearance or deferral have returned to payment. As ofSeptember 30, 2021 , the Company had loan payment forbearance or deferrals on outstanding balances of$1.3 million , or 0.03% of total loans. In accordance with the revised interagency guidance issued inApril 2020 and Section 4013 of the CARES Act, banks are provided an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as ofFebruary 29, 2020 (time of modification program implementation) andDecember 31, 2019 , respectively. As ofSeptember 30, 2021 , there were no loans that were modified that did not meet the criteria under Section 4013 of the CARES Act or the interagency guidance. During the third quarter of 2020, the Company recorded a reserve on the accrued interest receivable of loans on active forbearance or deferral totaling$0.2 million , with the offset recorded to provision for credit losses. This reserve balance was reversed during the second quarter of 2021 due to the significant decline in loans on active forbearance or deferral and the Company no longer has a reserve on accrued interest receivable. 53 -------------------------------------------------------------------------------- As part of the CARES Act, the Section 1112 debt relief program authorized the SBA to pay, for a 6-month period, the principal, interest, and associated fees that borrowers owed on covered 7(a) loans, 504 loans, and Microloans reported in regular servicing status (excluding PPP loans). Under Section 325 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the "Economic Aid Act") enactedDecember 29, 2020 , Section 1112 was amended and authorized a second round of payments covering the principal, interest, and associated fees that borrowers owed on covered loans for a 3-month period beginning with payments dueFebruary 1, 2021 , followed by an additional payment for a 2-month period for borrowers with an assigned North American Industry Classification System code beginning with 61, 71, 72, 213, 315, 448, 451, 481, 485, 487, 511, 512, 515, 532, or 812. As ofSeptember 30, 2021 , the Company had$0.1 million in SBA loans under the SBA Debt Relief Program. During the nine months endedSeptember 30, 2021 , the Company received$0.9 million in loan payments from the SBA.
Credit
Following the recovery from the Great Recession, the Company believes it has implemented a disciplined approach to credit that includes tighter underwriting standards with a focus on making quality loans and maintaining a diversified loan portfolio. The Company's loan portfolio today is diversified by product and by industry. InMarch 2020 , the Company reviewed its entire commercial loan portfolio and actively reached out to its customers to determine the initial impact, if any, of COVID-19 on their businesses. The review continued through 2020 and into 2021. The Company proactively worked with many of its customers in providing loan payment deferrals, as well as assisted in the application and approval of PPP loans, and the processing of loan payments from the SBA under Section 1112 debt relief program. The volume of loan payment deferrals granted peaked inMay 2020 at approximately$605 million in total loan balances, and has since declined to$1.3 million , or 0.03% of total loans atSeptember 30, 2021 . Most borrowers have resumed payments with the total count on active deferral dropping from a peak of 467 atMay 31, 2020 to 35 atSeptember 30, 2021 . The Company is providing alternative payment plans on a limited basis following the end of the payment deferral periods. Our consumer loan payment deferrals totaled$0.4 million atSeptember 30, 2021 , compared to$2.3 million atDecember 31, 2020 . Our residential mortgage loans on active payment forbearance totaled$0.9 million atSeptember 30, 2021 , compared to$70.4 million atDecember 31, 2020 . There were no commercial, commercial real estate and construction loans on payment deferral atSeptember 30, 2021 , compared to$47.5 million atDecember 31, 2020 . Criticized loans declined by$100.6 million fromDecember 31, 2020 to$91.6 million , or 1.9% of the total loan portfolio excluding PPP loans. Special mention loans declined by$97.3 million to$45.2 million , or 0.9% of the total loan portfolio excluding PPP loans. Classified loans declined by$3.3 million to$46.5 million , or 1.0% of the total loan portfolio excluding PPP loans. The loan improvements were the result of our continued assessment of borrower risk based on the borrower's performance and near-term strategy and outlook. Approximately 7% of special mention balances and 7% of classified balances also received PPP loans. Material Trends The majority of our operations are concentrated in the state ofHawaii . As a result, our performance is significantly influenced by 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, robust tourism 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.Hawaii's visitor industry continues to be impacted by the COVID-19 pandemic, however the state is making progress towards economic recovery as travel restrictions have started to loosen. According to preliminary statistics from theHawaii Tourism Authority ("HTA"), a total of 722,393 visitors arrived by air service to the Hawaiian Islands inAugust 2021 , mainly from theU.S. West andU.S. East. In comparison, only 23,256 visitors arrived by air inAugust 2020 due to the global COVID-19 pandemic andHawaii's quarantine requirement for travelers. Total spending for visitors arriving inAugust 2021 was$1.37 billion . There is no comparative visitor spending data available forAugust 2020 . Prior to the pandemic,Hawaii experienced record-level visitor expenditures and arrivals in 2019 and in the first two months of 2020. When compared to 2019, visitor arrivals inAugust 2021 were down 22.0% from theAugust 2019 count of 926,417 visitors, and visitor spending was down 8.9% from the$1.50 billion spent inAugust 2019 , both attributable to minimal international travelers as a result of the pandemic. 54 -------------------------------------------------------------------------------- StartingJuly 2021 , passengers arriving from out-of-state could bypass the State's mandatory 10-day self-quarantine if they were fully vaccinated inthe United States or with a valid negative COVID-19 NAAT test result from a Trusted Testing Partner prior to their departure through the Safe Travels program. OnAugust 23, 2021 ,Governor Ige urged travelers to curtail non-essential travel until the end ofOctober 2021 due to a surge in Delta variant cases that has overburdened the state's health care facilities and resources. According to projections provided by theHawaii Department of Business Economic Development and Tourism ("DBEDT") in lateAugust 2021 , total visitor arrivals are expected to increase to approximately 6.8 million visitors in 2021, an increase of 150.0% from the 2020 level. Visitor arrivals are projected to increase to 8.8 million in 2022, 9.6 million in 2023, and 10.2 million in 2024. Visitor spending is expected to increase to approximately$12.22 billion in 2021.The Department of Labor and Industrial Relations reported thatHawaii's seasonally adjusted annual unemployment rate was 6.6% in the month ofSeptember 2021 . The unemployment rate of 6.6% inSeptember 2021 continues to decline from the high of 21.9% in the months of April andMay 2020 , but remains above the national seasonally adjusted unemployment rate of 4.8%. DBEDT projectsHawaii's seasonally adjusted annual unemployment rate to be around 6.4% in 2022. According to the latest data available from theHonolulu Board of Realtors , sales ofOahu single-family homes and condominiums saw significant double-digit growth compared to a year-ago. In the nine months endedSeptember 30, 2021 , sales of single family homes and condominiums are up 24.2% and 63.3%, respectively. For single-family homes, the median days on market declined to nine in the nine months endedSeptember 30, 2021 from 17 in the same year ago period. For condominiums, the median days on market declined to 12 in the nine months endedSeptember 30, 2021 from 28 in the same year ago period. The median price for a single-family home inSeptember 2021 remained unchanged fromAugust 2021 which set a new record high of$1,050,000 , representing a 19.3% year-over-year increase. The median price for a condominium increased by 7.4% to$478,000 , compared to$445,000 inSeptember 2020 .
RISE2020
Commencing in the second quarter of 2019, the Company launched RISE2020, a multifaceted initiative intended to enhance customer experience, drive stronger long-term growth and profitability, improve shareholder returns and lower our efficiency ratio. RISE2020 includes initiatives in the following key areas of opportunity: Digital Banking, Revenue Enhancements, Branch Transformation and Operational Excellence. RISE2020 is intended to provideCentral Pacific Bank with premier products and services in several strategic areas. During 2019, the outsourcing of the Company's residential mortgage loan servicing, the launch of its new website under the cpb.bank domain name and the implementation of its end-to-end commercial loan origination system were completed. During the first quarter of 2020, the Company opened its concept branch, providing its customers a glimpse into the future ofCentral Pacific Bank . After significant development, the Company's new online and mobile banking platforms for its retail customers launched inAugust 2020 . The rollout of newly upgraded ATMs was completed in the fourth quarter of 2020. Despite several challenges resulting from the impact of the COVID-19 pandemic, the Company completed its RISE2020 initiative culminating with the grand opening of the fully renovatedCentral Pacific Plaza headquarters building and flagship main branch, and the launch of a new brand design in earlyJanuary 2021 .
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 and nine months endedSeptember 30, 2021 and 2020. A comparison of net interest income on a taxable-equivalent basis ("net interest income") for the three and nine months endedSeptember 30, 2021 and 2020 is set forth below. 55 --------------------------------------------------------------------------------
Three Months Ended September 30,
2021 2020 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$ 273,039 0.15 % 105$ 12,262 0.09 % 3$ 260,777 0.06 % 102 Investment securities, excluding ACL: Taxable (1) 1,351,272 1.84 6,228 1,029,987 2.04 5,250 321,285 (0.20) 978 Tax-exempt (1) 106,333 2.24 595 88,749 3.54 786 17,584 (1.30) (191) Total investment securities 1,457,605 1.87 6,823 1,118,736 2.16 6,036 338,869 (0.29) 787 Loans, including loans held for sale (2) 5,022,909 4.05 51,104 5,016,955 3.64 45,751 5,954 0.41 5,353Federal Home Loan Bank stock 8,090 3.09 62 12,428 4.12 128 (4,338) (1.03) (66) Total interest earning assets 6,761,643 3.42 58,094 6,160,381 3.36 51,918 601,262 0.06 6,176 Noninterest-earning assets 448,567 414,111 34,456 Total assets$ 7,210,210 $ 6,574,492 $ 635,718 Liabilities and Equity Interest-bearing liabilities: Interest-bearing demand deposits$ 1,356,967 0.03 % 101$ 1,092,976 0.04 % 115$ 263,991 (0.01) % (14) Savings and money market deposits 2,168,055 0.06 332 1,910,971 0.09 417 257,084 (0.03) (85) Time deposits up to$250,000 228,762 0.31 181 257,518 0.70 453 (28,756) (0.39) (272) Time deposits over$250,000 467,289 0.21 247 672,146 0.49 831 (204,857) (0.28) (584) Total interest-bearing deposits 4,221,073 0.08 861 3,933,611 0.18 1,816 287,462 (0.10) (955)Federal Home Loan Bank advances and other short-term borrowings - - - 79,984 0.35 71 (79,984) (0.35) (71) Long-term debt 105,516 3.84 1,022 105,131 2.82 746 385 1.02 276 Total interest-bearing liabilities 4,326,589 0.17 1,883 4,118,726 0.25 2,633 207,863 (0.08) (750) Noninterest-bearing deposits 2,203,695 1,794,536 409,159 Other liabilities 118,272 111,851 6,421 Total liabilities 6,648,556 6,025,113 623,443 Shareholders' equity 561,606 549,378 12,228 Non-controlling interest 48 1 47 Total equity 561,654 549,379 12,275 Total liabilities and equity$ 7,210,210 $ 6,574,492 $ 635,718 Net interest income$ 56,211 $ 49,285 $ 6,926 Interest rate spread 3.25 % 3.11 % 0.14 % Net interest margin 3.31 % 3.19 % 0.12 % (1) At amortized cost. (2) Includes nonaccrual loans. Net interest income (expressed on a taxable-equivalent basis) was$56.2 million for the third quarter of 2021, representing an increase of 14.1% from$49.3 million in the year-ago quarter. The increase from the year-ago quarter was primarily due to the recognition of net loan fees related to loans originated and forgiven under the SBA Paycheck Protection Program ("PPP"), and higher average investment securities balances, combined with lower average rates paid on interest-bearing liabilities. These increases were partially offset by decreases in average yields earned on core (or non-PPP) loans and investment securities. Net interest income for the third quarter of 2021 included$8.6 million 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$3.4 million in the year-ago quarter. During the third quarter of 2021, the Company received$223.9 million in PPP loan forgiveness and repayments, compared to$0.3 million in the year-ago quarter. During the third quarters of 2021 and 2020, the 56 -------------------------------------------------------------------------------- Company had average PPP loan balances of$330.4 million and$544.7 million , respectively, which earned yields of approximately 10.27% and 2.48%, respectively. The increase in yield was due to the accelerated PPP net loan fee recognition attributable to PPP loan forgiveness and repayments received during the third quarter of 2021. The decreases in average yields earned on core loans and investment securities and average rates paid on interest-bearing liabilities were primarily attributable to the historically low interest rate environment we are operating in since the beginning of the COVID-19 pandemic.
Interest Income
Taxable-equivalent interest income was$58.1 million for the third quarter of 2021, representing an increase of$6.2 million , or 11.9%, from$51.9 million in the year-ago quarter. The significant increase was primarily attributable to higher net interest income of$5.0 million related to loans originated and forgiven under the PPP. In addition, average investment securities balances increased by$338.9 million during the third quarter of 2021, compared to the year-ago quarter, which increased interest income by approximately$1.8 million . These increases were partially offset by a 29 bp decrease in the average yields earned on investment securities during the third quarter of 2021, compared to the year-ago quarter, which decreased interest income by approximately$1.0 million .
Interest Expense
Interest expense for the third quarter of 2021 was$1.9 million , representing a decrease of$0.8 million , or 28.5%, from$2.6 million in the year-ago quarter. The decrease was primarily attributable to declines in rates paid on deposits, combined with improved deposit composition as noninterest-bearing deposits and lower-cost interest-bearing demand and savings and money market deposits increased significantly from the year-ago quarter. Average rates paid on savings and money market deposits and time deposits up to and over$250,000 declined by 3 bp, 39 bp and 28 bp, respectively, which decreased interest expense by approximately$0.1 million ,$0.2 million , and$0.3 million , respectively. In addition, average time deposits over$250,000 balances decreased by$204.9 million during the third quarter of 2021, compared to the year-ago quarter, which decreased interest expense by approximately$0.3 million . Time deposits over$250,000 primarily consists of public funds which may be opportunistic sources of funding, but fluctuate more directly with the Company's overall balance sheet liquidity. These decreases were partially offset by a 102 bp increase in average rates paid on long-term debt which interest expense by approximately$0.3 million . Net Interest Margin Our net interest margin of 3.31% for the third quarter of 2021 increased by 12 bp from 3.19% in the year-ago quarter. As previously discussed, the increase in net interest margin for the third quarter of 2021 compared to the year-ago quarter was primarily attributable to the recognition of net loan fees related to loans originated and forgiven under the PPP, combined with lower rates paid on interest-bearing liabilities. These variances were partially offset by lower average yields earned on interest-earning assets. The lower average yields earned on interest-earning assets and lower average rates paid on interest-bearing liabilities are primarily attributable to the historically low interest rate environment we have been operating in since the beginning of the COVID-19 pandemic. 57 --------------------------------------------------------------------------------
Nine Months Ended September 30,
2021 2020 Variance
Average Interest Average Interest Average Interest
Average Yield/ Income/ Average Yield/ Income/ Average Yield/ Income/
(dollars in thousands) Balance Rate Expense Balance Rate Expense Balance Rate Expense
Assets
Interest earning assets: Interest-bearing deposits in other banks$ 180,646 0.13 % 176$ 13,038 0.43 % 42$ 167,608 (0.30) % 134 Investment securities, excluding ACL: Taxable investment securities (1) 1,202,564 1.75 15,817 1,033,362 2.37 18,351 169,202 (0.62) (2,534) Tax-exempt investment securities (1) 97,613 2.30 1,684 98,153 3.25 2,390 (540) (0.95) (706) Total investment securities 1,300,177 1.79 17,501 1,131,515 2.44 20,741 168,662 (0.65) (3,240) Loans, including loans held for sale (2) 5,070,993 3.85 146,202 4,794,883 3.84 137,870 276,110 0.01 8,332Federal Home Loan Bank stock 7,924 3.11 184 12,921 3.78 366 (4,997) (0.67) (182) Total interest earning assets 6,559,740 3.34 164,063 5,952,357 3.57 159,019 607,383 (0.23) 5,044 Noninterest-earning assets 438,294 398,339 39,955 Total assets$ 6,998,034 $ 6,350,696 $ 647,338 Liabilities and Equity Interest-bearing liabilities: Interest-bearing demand deposits$ 1,271,825 0.03 % 280$ 1,054,692 0.05 % 405$ 217,133 (0.02) % (125) Savings and money market deposits 2,057,194 0.06 888 1,806,829 0.16 2,102 250,365 (0.10) (1,214) Time deposits up to$250,000 232,474 0.36 619 162,255 0.64 777 70,219 (0.28) (158) Time deposits over$250,000 579,984 0.21 895 807,346 0.98 5,899 (227,362) (0.77) (5,004) Total interest-bearing deposits 4,141,477 0.09 2,682 3,831,122 0.32 9,183 310,355 (0.23) (6,501)Federal Home Loan Bank advances and other short-term borrowings 810 0.30 2 94,248 0.93 653 (93,438) (0.63) (651) Long-term debt 105,458 3.90 3,074 114,504 2.88 2,472 (9,046) 1.02 602 Total interest-bearing liabilities 4,247,745 0.18 5,758 4,039,874 0.41 12,308 207,871 (0.23) (6,550) Noninterest-bearing deposits 2,077,895 1,657,825 420,070 Other liabilities 117,113 110,669 6,444 Total liabilities 6,442,753 5,808,368 634,385 Shareholders' equity 555,264 542,326 12,938 Non-controlling interest 17 2 15 Total equity 555,281 542,328 12,953 Total liabilities and equity$ 6,998,034 $ 6,350,696 $ 647,338 Net interest income$ 158,305 $ 146,711 $ 11,594 Interest rate spread 3.16 % 3.16 % - % Net interest margin 3.22 % 3.29 % (0.07) % (1) At amortized cost. (2) Includes nonaccrual loans. Net interest income (expressed on a taxable-equivalent basis) was$158.3 million for the nine months endedSeptember 30, 2021 , representing an increase of$11.6 million , or 7.9%, from$146.7 million in the same year-ago period. The increase in the nine months endedSeptember 30, 2021 was primarily due to the recognition of net loan fees related to loans originated and forgiven under PPP, combined with lower average rates paid on interest-bearing liabilities. These increases were partially offset by decreases in average yields earned on core loans and investment securities. Net interest income for the nine months endedSeptember 30, 2021 included$21.7 million in PPP net interest income and net loan fees, compared to$5.9 million in the same year-ago period. During the nine months endedSeptember 30, 2021 , the Company originated$320.9 million in PPP loans and received$520.3 million in PPP loan forgiveness and repayments. During the nine months endedSeptember 30, 2020 , the Company originated$558.9 million in PPP loans and received$13.6 million in 58 -------------------------------------------------------------------------------- PPP loan repayments. During the nine months endedSeptember 30, 2021 and 2020, the Company had average PPP loan balances of$469.3 million and$309.1 million , respectively, which earned approximately 6.17% and 2.53%, respectively, in net interest income and net loan fees. The decreases in average yields earned on core loans and investment securities and average rates paid on interest-bearing liabilities were primarily attributable to the historically low interest rate environment we are operating in since the beginning of the COVID-19 pandemic.
Interest Income
Taxable-equivalent interest income was$164.1 million for the nine months endedSeptember 30, 2021 , representing an increase of$5.0 million , or 3.2% from$159.0 million in the same year-ago period. The increase was primarily attributable to higher net interest income of$16.1 million related to loans originated and forgiven under the PPP. In addition, average investment securities balances increased by$168.7 million during the nine months endedSeptember 30, 2021 , compared to the same year-ago period, which increased interest income by approximately$3.0 million . These increases were partially offset by lower net interest income of$7.8 million related to core loans, which was primarily attributable to a 32 bp decline in average yields earned on core loans. In addition, average yields earned on investment securities decreased by 65 bp during the nine months endedSeptember 30, 2021 , compared to the same year-ago period, which decreased interest income by$6.3 million .
Interest Expense
Interest expense for the nine months endedSeptember 30, 2021 was$5.8 million , representing a decrease of$6.6 million , or 53.2% from$12.3 million in the same year-ago period. The decrease was primarily attributable to declines in rates paid on deposits, combined with improved deposit composition as noninterest-bearing deposits and lower-cost interest-bearing demand and savings and money market deposits increased significantly from the same year-ago period. Rates paid on savings and money market deposits and time deposits up to and over$250,000 declined by 10 bp, 28 bp and 77 bp, respectively, which decreased interest expense by approximately$1.5 million ,$0.5 million , and$3.3 million , respectively. In addition, average time deposits over$250,000 andFederal Home Loan Bank advances and other short-term borrowings decreased by$227.4 million and$93.4 million , respectively, which reduced interest expense by approximately$1.7 million and$0.6 million , respectively. These decreases were partially offset by a 102 bp increase in average rates paid on long-term debt which interest expense by approximately$0.8 million .
Net Interest Margin
Our net interest margin of 3.22% for the nine months endedSeptember 30, 2021 decreased by 7 bp from 3.29% in the same year-ago period. As previously discussed, the decline in net interest margin for the nine months endedSeptember 30, 2021 compared to the same year-ago period was primarily due to lower yields earned on core loans and investment securities, partially offset by lower average rates paid on interest-bearing liabilities, primarily attributable to the historically low interest rate environment we have been operating in since the beginning of the COVID-19 pandemic.
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.
59
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Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021 Compared To
Compared To September 30, 2020 September 30, 2020
Increase (Decrease) Due to: Increase (Decrease) Due to:
(dollars in thousands) Volume Rate Net Change Volume Rate Net Change
Interest earning assets:
Interest-bearing deposits in
other banks $ 60 $ 42 $ 102 $ 540 $ (406) $ 134
Investment securities, excluding
ACL:
Taxable investment securities (1) 1,650 (672) 978 3,025 (5,559) (2,534)
Tax-exempt investment securities (1) 156 (347) (191) (13) (693) (706) Total investment securities 1,806 (1,019) 787 3,012 (6,252) (3,240) Loans, including loans held for sale (2) 56 5,297 5,353 7,952 380
8,332
Federal Home Loan Bank stock (45) (21) (66) (142) (40)
(182)
Total interest earning assets 1,877 4,299 6,176 11,362 (6,318)
5,044
Interest-bearing liabilities: Interest-bearing demand deposits 23 (37) (14) 77 (202)
(125)
Savings and money market deposits 63 (148) (85) 305 (1,519) (1,214) Time deposits up to$250,000 (50) (222) (272) 334 (492) (158) Time deposits over$250,000 (254) (330)
(584) (1,666) (3,338) (5,004)
Total interest-bearing deposits (218) (737) (955) (950) (5,551)
(6,501)
Federal Home Loan Bank advances and other short-term borrowings (71) - (71) (647) (4) (651) Long-term debt 3 273 276 (197) 799 602 Total interest-bearing liabilities (286) (464) (750) (1,794) (4,756) (6,550) Net interest income$ 2,163 $ 4,763 $ 6,926 $ 13,156 $ (1,562) $ 11,594 (1) At amortized cost. (2) Includes nonaccrual loans.
Provision for Credit Losses
Three months ended
In the third quarter of 2021, our provision for credit losses was a credit of$2.6 million , which consisted of a credit to the provision for credit losses on loans of$3.0 million and a debit to the provision for credit losses on off-balance sheet credit exposures of$0.4 million . In the third quarter of 2020, our provision for credit loss was a debit of$14.9 million , which consisted of a debit to the provision for credit losses on loans of$14.5 million , a debit to the provision for credit losses on accrued interest receivable of$0.2 million , and a debit to the provision for credit losses on off-balance sheet credit exposures of$0.2 million .
Our net charge-offs were
The provision for credit losses in the year-ago periods were primarily due to adverse economic conditions brought on by the COVID-19 pandemic, while the credits to the provision for credit losses in the current year were primarily due to improved economic forecasts, lower net charge-offs and loan portfolio improvement as theState of Hawaii begins to recover from the pandemic.
We did not record a provision for credit losses on investment securities during
the three and nine months ended
60
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Nine months ended
In the nine months endedSeptember 30, 2021 , our provision for credit losses was a credit of$6.9 million , which consisted of a credit to the provision for credit losses on loans of$6.9 million and a credit to the provision for credit losses on accrued interest receivable of$0.2 million , offset by a debit to the provision for credit losses on off-balance sheet credit exposures of$0.2 million . In the nine months endedSeptember 30, 2020 , our provision for credit loss was a debit of$37.2 million , which consisted of a debit to the provision for credit losses on loans of$34.4 million , a debit to the provision for credit losses on accrued interest receivable of$0.2 million , and a debit to the provision for credit losses on off-balance sheet credit exposures of$2.6 million .
Our net charge-offs were
Other Operating Income
The following tables set forth components of other operating income for the
periods indicated:
Three Months Ended
September 30, September 30,
(dollars in thousands) 2021 2020 $ Change % Change
Other operating income:
Mortgage banking income $ 1,327 $ 4,345 $ (3,018) -69.5 %
Service charges on deposit accounts 1,637 1,475 162 11.0 %
Other service charges and fees 4,942 3,345 1,597 47.7 %
Income from fiduciary activities 1,292 1,149 143 12.4 %
Investment securities gains (losses) 100 (352) 452 -128.4
Income from bank-owned life insurance 540 1,179 (639) -54.2 %
Other:
Equity in earnings of unconsolidated subsidiaries 112 104 8 7.7 % Net gain (loss) on sales of foreclosed assets - - - N.M. Income recovered on nonaccrual loans previously charged-off 39 47 (8) -17.0 % Other recoveries 20 22 (2) -9.1 % Commissions on sale of checks 78 73 5 6.8 % Other 166 176 (10) -5.7 % Total other operating income$ 10,253 $ 11,563 $ (1,310) -11.3 %
Not meaningful ("N.M.") Note: Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period.
For the third quarter of 2021, total other operating income of$10.3 million decreased by$1.3 million , or 11.3%, from$11.6 million in the year-ago quarter. The decrease from the year-ago quarter was primarily due to lower mortgage banking income of$3.0 million and lower income from bank-owned life insurance of$0.6 million in the third quarter of 2021. The lower mortgage banking income was primarily attributable to lower gains on sales of residential mortgage loans of$3.9 million , partially offset by lower amortization of mortgage servicing rights of$0.6 million . These decreases were partially offset by higher other service charges and fees of$1.6 million , resulting from higher transactional activity in the third quarter of 2021 as theState of Hawaii begins to recover from the pandemic, combined with higher investment securities gains of$0.5 million . 61 --------------------------------------------------------------------------------
Nine Months Ended
September 30, September 30,
(dollars in thousands) 2021 2020 $ Change % Change
Other operating income:
Mortgage banking income $ 5,830 $ 8,248 $ (2,418) -29.3 %
Service charges on deposit accounts 4,558 4,674 (116) -2.5 %
Other service charges and fees 13,351 11,158 2,193 19.7 %
Income from fiduciary activities 3,792 3,716 76 2.0 %
Investment securities gains (losses) 150 (352) 502 -142.6
Income from bank-owned life insurance 2,547 2,584 (37) -1.4 %
Other:
Equity in earnings of unconsolidated subsidiaries 298 234 64 27.4 % Net gain (loss) on sales of foreclosed assets - (6) 6 -100.0 % Income recovered on nonaccrual loans previously charged-off 111 107 4 3.7 % Other recoveries 64 88 (24) -27.3 % Commissions on sale of checks 235 210 25 11.9 % Other 558 480 78 16.3 % Total other operating income$ 31,494 $ 31,141 $ 353 1.1 %
* Not meaningful ("N.M.") Note: Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period.
For the nine months endedSeptember 30, 2021 , total other operating income of$31.5 million increased by$0.4 million , or 1.1%, from$31.1 million in the year-ago quarter. The increase from the year-ago quarter was primarily due to higher other service charges and fees of$2.2 million , attributable to higher transactional activity, combined with higher investment securities gains of$0.5 million . These increases were partially offset by lower mortgage banking income of$2.4 million . The lower mortgage banking income was primarily attributable to lower gains on sales of residential mortgage loans of$5.5 million , partially offset by lower amortization of mortgage servicing rights of$1.8 million , combined with higher loan placement fees of$1.0 million . 62 --------------------------------------------------------------------------------
Other Operating Expense
The following tables set forth components of other operating expense for the
periods indicated:
Three Months Ended
September 30, September 30,
(dollars in thousands) 2021 2020 $ Change % Change
Other operating expense:
Salaries and employee benefits $ 23,566 $ 20,375 $ 3,191 15.7 %
Net occupancy 4,185 3,834 351 9.2 %
Equipment 1,089 1,234 (145) -11.8 %
Communication expense 824 856 (32) -3.7 %
Legal and professional services 2,575 2,262 313 13.8 %
Computer software expense 2,998 3,114 (116) -3.7 %
Advertising expense 1,329 1,020 309 30.3 %
Other:
Pension and SERP expense 313 354 (41) -11.6 %
Foreclosed asset expense - 6 (6) -100.0 %
Charitable contributions 35 12 23 191.7 %
FDIC insurance assessment 555 649 (94) -14.5 %
Miscellaneous loan expenses 471 497 (26) -5.2 %
ATM and debit card expenses 691 573 118 20.6 %
Armored car expenses 225 192 33 17.2 %
Entertainment and promotions 226 132 94 71.2 %
Stationery and supplies 340 226 114 50.4 %
Directors' fees and expenses 241 213 28 13.1 %
Directors' deferred compensation plan expense (60) (237) 177 -74.7 %
Branch consolidation costs - 321 (321) -100.0
Loss on disposal of fixed assets 1 - 1 N.M.
Other 1,741 1,118 623 55.7 %
Total other operating expense $ 41,345 $ 36,751 $ 4,594 12.5 %
Note: Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period.
For the third quarter of 2021, total other operating expense was$41.3 million and increased by$4.6 million , or 12.5%, from$36.8 million in the year-ago quarter. The increase was primarily due to higher salaries and employee benefits of$3.2 million and higher net occupancy expense of$0.4 million . The higher salaries and employee benefits are primarily due to annual merit increases, higher base salaries due to strategic hires and higher commissions and incentives. 63 --------------------------------------------------------------------------------
Nine Months Ended
September 30, September 30,
(dollars in thousands) 2021 2020 $ Change % Change
Other operating expense:
Salaries and employee benefits $ 67,183 $ 60,758 $ 6,425 10.6 %
Net occupancy 12,004 11,151 853 7.6 %
Equipment 3,137 3,374 (237) -7.0 %
Communication expense 2,349 2,467 (118) -4.8 %
Legal and professional services 7,524 6,528 996 15.3 %
Computer software expense 10,179 9,092 1,087 12.0 %
Advertising expense 4,316 3,035 1,281 42.2 %
Other:
Pension and SERP expense 940 940 - - %
Foreclosed asset expense 3 73 (70) -95.9 %
Charitable contributions 107 209 (102) -48.8 %
FDIC insurance assessment 1,497 1,124 373 33.2 %
Miscellaneous loan expenses 1,220 1,196 24 2.0 %
ATM and debit card expenses 2,459 1,791 668 37.3 %
Armored car expenses 674 715 (41) -5.7 %
Entertainment and promotions 632 577 55 9.5 %
Stationery and supplies 767 694 73 10.5 %
Directors' fees and expenses 590 650 (60) -9.2 %
Directors' deferred compensation plan expense 942 (1,617) 2,559 -158.3 %
Branch consolidation and relocation costs - 321 (321) -100.0
Loss on disposal of fixed assets 37 - 37 N.M.
Other 4,064 3,969 95 2.4 %
Total other operating expense $ 120,624 $ 107,047 $ 13,577 12.7 %
Note: Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period.
For the nine months endedSeptember 30, 2021 , total other operating expense was$120.6 million and increased by$13.6 million , or 12.7%, from$107.0 million in the year-ago quarter. The increase was primarily due to higher salaries and employee benefits of$6.4 million , higher net occupancy expense of$0.9 million , higher computer software expense of$1.1 million , higher advertising expense of$1.3 million , higher legal and professional services of$1.0 million , and higher ATM and debit card expenses of$0.7 million . The current year increases are reflective of the Company's strategic investments for the future. In addition, the Company recorded directors' deferred compensation plan expenses of$0.9 million during the nine months endedSeptember 30, 2021 , compared to a credit of$1.6 million in the same year-ago period. These expenses are related to changes in the directors' deferred compensation plan liability and are impacted by fluctuations in the Company's stock price and the equity markets.
Efficiency Ratio
A key measure of operating efficiency tracked by management is the efficiency
ratio, which is calculated by dividing total other operating expense by total
pre-provision revenue (net interest income and total other operating income).
Management believes that the efficiency ratio provides useful supplemental
information that is important to a proper understanding of the company's core
business results by investors. Our efficiency ratio should not be viewed as a
substitute for results determined in accordance with GAAP, nor is it necessarily
comparable to the efficiency ratio presented by other companies.
64
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The following table sets forth a calculation of our efficiency ratio for each of
the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in thousands) 2021 2020 2021 2020
Total other operating expense
Net interest income$ 56,086 $ 49,120 $ 157,951 $ 146,209 Total other operating income 10,253 11,563 31,494 31,141 Total revenue before provision for credit losses$ 66,339 $ 60,683 $ 189,445 $ 177,350 Efficiency ratio 62.32 % 60.56 % 63.67 % 60.36 % Our efficiency ratio increased to 62.32% in the third quarter of 2021, compared to 60.56% in the year-ago quarter. The efficiency ratio in the third quarter of 2021 was negatively impacted by the aforementioned higher other operating expenses and lower other operating income, offset by an increase in net interest income. Our efficiency ratio increased to 63.67% in the nine months endedSeptember 30, 2021 , compared to 60.36% in the same year-ago period. The efficiency ratio in the nine months endedSeptember 30, 2021 was also negatively impacted by the aforementioned higher other operating expenses, offset by the increase in net interest income.
The current year increases in our efficiency ratio are reflective of the Company's strategic investments for the future. Longer term, the Company believes these investments will improve profitability and shareholder returns.
Income Taxes
Three months ended
The Company recorded income tax expense of$6.8 million for the third quarter of 2021, compared to$2.2 million in the same year-ago period. The effective tax rate for the third quarter of 2021 was 24.66%, compared to 24.29% in the same year-ago period. The valuation allowance on our net deferred tax assets ("DTA") totaled$3.5 million atSeptember 30, 2021 and$3.4 million atDecember 31, 2020 , of which$3.2 million and$3.2 million , respectively, related to our DTA from net apportioned net operating loss ("NOL") carryforwards forCalifornia state income tax purposes as we do not expect to generate sufficient income inCalifornia to utilize the DTA. The remaining valuation allowance of$0.3 million and$0.2 million as ofSeptember 30, 2021 andDecember 31, 2020 relates to aHawaii capital loss carryforward balance that we do not expect to be able to utilize. Net of the valuation allowance, the Company's net DTA totaled$29.4 million atSeptember 30, 2021 , compared to a net DTA of$26.4 million as ofDecember 31, 2020 , and is included in other assets on our consolidated balance sheets.
Nine months ended
The Company recorded income tax expense of$18.2 million for the nine months endedSeptember 30, 2021 , compared to$8.0 million in the same year-ago period. The effective tax rate for the nine months endedSeptember 30, 2021 was 23.97%, compared to 24.14% in the same year-ago period.
Financial Condition
Total assets at
Investment securities of$1.54 billion atSeptember 30, 2021 increased by$353.1 million , or 29.8%, from$1.18 billion atDecember 31, 2020 . The increase reflects$620.9 million in net purchases, partially offset by principal runoff of$229.9 million , a decline in the market valuation on the available-for-sale portfolio of$30.6 million , and net amortization and accretion of premiums and discounts totaling$7.6 million . 65 --------------------------------------------------------------------------------
Loans
The following table sets forth information regarding our outstanding loans by category and geographic location as of the dates indicated.
September 30, December 31,
(dollars in thousands) 2021 2020 $ Change % Change
Hawaii :
Commercial, financial and
agricultural:
SBA Paycheck Protection Program $ 198,315 $ 375,879 $ (177,564) (47.2) %
Other 404,751 426,670 (21,919) (5.1)
Real estate:
Construction 128,908 125,407 3,501 2.8
Residential mortgage 1,748,729 1,690,212 58,517 3.5
Home equity 618,951 551,266 67,685 12.3
Commercial mortgage 915,746 898,055 17,691 2.0
Consumer 331,987 332,430 (443) (0.1)
Total loans 4,347,387 4,399,919 (52,532) (1.2)
Allowance for credit losses ("ACL") (62,126) (73,152) 11,026 (15.1)
Loans, net of ACL $ 4,285,261 $ 4,326,767 $ (41,506) (1.0)
U.S. Mainland:
Commercial, financial and
agricultural:
SBA Paycheck Protection Program $ 20,356 $ 40,496 $ (20,140) (49.7) %
Other 114,122 118,421 (4,299) (3.6)
Real estate:
Construction - - - -
Residential mortgage - - - -
Home equity - - - -
Commercial mortgage 292,671 258,273 34,398 13.3
Consumer 271,261 147,004 124,257 84.5
Total loans 698,410 564,194 134,216 23.8
ACL (12,461) (10,117) (2,344) 23.2
Loans, net of ACL $ 685,949 $ 554,077 $ 131,872 23.8
Total:
Commercial, financial and
agricultural:
SBA Paycheck Protection Program $ 218,671 $ 416,375 $ (197,704) (47.5) %
Other 518,873 545,091 (26,218) (4.8)
Real estate:
Construction 128,908 125,407 3,501 2.8
Residential mortgage 1,748,729 1,690,212 58,517 3.5
Home equity 618,951 551,266 67,685 12.3
Commercial mortgage 1,208,417 1,156,328 52,089 4.5
Consumer 603,248 479,434 123,814 25.8
Total loans 5,045,797 4,964,113 81,684 1.6
ACL (74,587) (83,269) 8,682 (10.4)
Loans, net of ACL $ 4,971,210 $ 4,880,844 $ 90,366 1.9
Loans, net of deferred costs, of $5.05 billion at September 30, 2021 increased
by $81.7 million , or 1.6%, from $4.96 billion at December 31, 2020 . The increase
reflects net increases in the following loan portfolios: construction of $3.5
million , residential mortgage of $58.5 million , home equity of $67.7 million ,
commercial mortgage of $52.1 million and consumer of $123.8 million . These
increases were partially offset by a net decrease in SBA Paycheck Protection
Program loans of $197.7 million and other commercial loans of $26.2 million .
During the nine months ended September 30, 2021 , the Company originated
$320.9 million in PPP loans and received $520.3 million in PPP loan forgiveness
and repayments. Core loans, or total loans, net of deferred costs, excluding PPP
loans, totaled $4.83 billion at September 30, 2021 and increased by
$279.4 million , or 6.1%, from $4.55 billion at December 31, 2020 .
66
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The Hawaii loan portfolio decreased by $52.5 million , or 1.2%, from December 31,
2020 . The decrease reflects net decreases in the following loan portfolios: SBA
Paycheck Protection Program of $177.6 million , other commercial of $21.9 million
and consumer $0.4 million . These decreases were partially offset by net
increases in the construction of $3.5 million , residential mortgage of
$58.5 million , home equity of $67.7 million , and commercial mortgage of $17.7
million . The increases in the portfolios were primarily due to increased demand
from both new and existing customers.
The U.S. Mainland loan portfolio increased by $134.2 million , or 23.8% from
December 31, 2020 . The net increase was primarily attributable to net increases
in the consumer loan portfolio of $124.3 million due to loan portfolio
purchases, and commercial mortgage of $34.4 million , partially offset by net
decreases in the SBA Paycheck Protection Program of $20.1 million and other
commercial loan portfolio of $4.3 million . Refer to Note 4 - Loans and Credit
Quality in the accompanying notes to the consolidated financial statements in
this report for information on U.S. Mainland loan portfolio purchases.
67
--------------------------------------------------------------------------------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.
September 30, December 31,
(dollars in thousands) 2021 2020 $ Change % Change
Nonperforming Assets ("NPAs") [1]
Nonaccrual loans:
Commercial, financial and agricultural -
Other $ 689 $ 1,461 $ (772) (52.8) %
Real estate:
Residential mortgage 5,351 4,115 1,236 30.0
Home equity 880 524 356 67.9
Consumer 317 92 225 244.6
Total nonaccrual loans 7,237 6,192 1,045 16.9
Other real estate owned ("OREO"):
Real estate: Residential mortgage - - - - Total OREO - - - - Total nonperforming assets 7,237 6,192 1,045 16.9 Accruing Loans Delinquent for 90 Days or More [1] Real estate: Residential mortgage 444 567 (123) (21.7) Consumer 166 240 (74) (30.8) Total accruing loans delinquent for 90 days or more 610 807 (197) (24.4) Restructured Loans Still Accruing Interest [1] Commercial, financial and agricultural - Other 12 100 (88) (88.0) Real estate: Residential mortgage 4,458 5,718 (1,260) (22.0) Commercial mortgage 1,577 1,761 (184) (10.4) Consumer 99 207 (108) (52.2) Total restructured loans still accruing interest 6,146 7,786 (1,640) (21.1) Total NPAs, accruing loans delinquent for 90 days or more and restructured loans still accruing interest$ 13,993 $ 14,785 $ (792) (5.4) Ratio of nonaccrual loans to total loans 0.14 % 0.12 % 0.02 % Ratio of NPAs to total loans and OREO 0.14 % 0.12 % 0.02 % Ratio of NPAs and accruing loans delinquent for 90 days or more to total loans and OREO 0.16 % 0.14 % 0.02 % Ratio of NPAs, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest to total loans and OREO 0.28 % 0.30 % (0.02) % Ratio of classified assets and OREO to tier 1 capital and ACL 6.76 % 7.49 % (0.73) %
[1] Section 4013 of the CARES Act and the revised Interagency Statement are being applied to loan modifications related to the COVID-19 pandemic as eligible and applicable. These loan modifications are not included in the delinquent or restructured loan balances presented above.
68
--------------------------------------------------------------------------------The following table sets forth year-to-date activity in nonperforming assets as of the date indicated:
(dollars in thousands)
Balance at December 31, 2020 $ 6,192
Additions 6,087
Reductions:
Payments (2,179)
Return to accrual status (324)
Sales of NPAs -
Net charge-offs, valuation and other adjustments (2,539)
Total reductions (5,042)
Net increase 1,045
Balance at September 30, 2021 $ 7,237
Nonperforming assets, which includes nonaccrual loans and other real estate
owned, totaled $7.2 million at September 30, 2021 , compared to $6.2 million at
December 31, 2020 . There were no nonperforming loans classified as held for sale
at September 30, 2021 and December 31, 2020 . The increase in nonperforming
assets from December 31, 2020 was primarily attributable to additions to
nonaccrual loans totaling $6.1 million , offset by $2.5 million in net
charge-offs, valuation and other adjustments, $2.2 million in repayments of
nonaccrual loans, and $0.3 million in loans returned to accrual status.
Troubled debt restructurings ("TDRs") included in nonperforming assets at
September 30, 2021 consisted of four Hawaii residential mortgage loans with a
combined principal balance of $0.5 million . There were $6.1 million of TDRs
still accruing interest at September 30, 2021 , none of which were more than 90
days delinquent. At December 31, 2020 , there were $7.8 million of TDRs still
accruing interest, none of which were more than 90 days delinquent.
Loan payment forbearance or deferrals were made for borrowers impacted by the
COVID-19 pandemic with loan balances totaling $1.3 million , or 0.03% of total
loans as of September 30, 2021 , compared to $120.2 million , or 2.4% of the total
loan portfolio as of December 31, 2020 .
The Company's ratio of classified assets and other real estate owned to tier 1
capital and the ACL decreased from 7.49% at
69
--------------------------------------------------------------------------------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 Nine Months Ended
September 30, September 30,
(dollars in thousands) 2021 2020 2021 2020
Allowance for Credit Losses:
Balance at beginning of period $ 77,781 $ 67,339 $ 83,269 $ 47,971
Adoption of ASU 2016-13 - - - 3,566
Adjusted balance at beginning of period 77,781 67,339 83,269 51,537
(Credit) provision for credit losses on loans (2,969) 14,465 (6,906) 34,434
[1] [2]
Charge-offs:
Commercial, financial and agricultural - 334 810 1,344 2,350
Other
Real estate:
Residential mortgage - 11 - 63
Commercial mortgage - 75 - 75
Consumer 829 1,492 3,450 6,335
Total charge-offs 1,163 2,388 4,794 8,823
Recoveries:
Commercial, financial and agricultural - 281 321 646 968
Other
Real estate:
Construction - - - 131
Residential mortgage 53 13 345 214
Home equity - - 9 31
Commercial mortgage - 12 73 15
Consumer 604 780 1,945 2,035
Total recoveries 938 1,126 3,018 3,394
Net charge-offs 225 1,262 1,776 5,429
Balance at end of period $ 74,587 $ 80,542 ACL as a percentage of total loans 1.48 % 1.60 % 1.48 % 1.60 % ACL as a percentage of total loans, excluding PPP loans 1.55 % 1.79 % 1.55 % 1.79 %
ACL as a percentage of nonaccrual loans 1030.63 % 616.75 %
1030.63 % 616.75 %
Annualized ratio of net charge-offs to 0.02 % 0.10 % 0.05 % 0.15 %
average loans
[1] The Company recorded a reserve on accrued interest receivable for loans on active payment forbearance or deferral, which were granted to borrowers impacted by the COVID-19 pandemic. This reserve was recorded as a contra-asset against accrued interest receivable with the offset to provision for credit losses. In the second quarter of 2021, the entire reserve was reversed as loans on active payment forbearance or deferral have declined significantly. The provision for credit losses on loans presented in this table excludes the adjustments to the provision for credit losses on accrued interest receivable. [2] As ofJanuary 1, 2021 , the provision for credit losses on off-balance sheet credit exposures (previously included in other operating expense) is included in the provision for credit losses line on the consolidated statements of income. The allowance for off-balance sheet credit exposures continues to be included in other liabilities. For roll-forward purposes, in this table we exclude the provision for credit losses on off-balance sheet credit exposures.
Our ACL at
OnJanuary 1, 2020 , the Company adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. The Company recorded increases of$3.6 million to the ACL for loans and$0.7 million to the reserve for off-balance sheet credit exposures, included in other liabilities, offset by a net decrease to retained earnings (or a net increase to accumulated deficit) of$3.2 million and a$1.1 million increase to other assets for the related impact to net deferred tax assets as ofJanuary 1, 2020 for the cumulative effect of adopting ASU 2016-13. 70 -------------------------------------------------------------------------------- During the third quarter of 2021, we recorded a credit to the provision for credit losses on loans of$3.0 million and net charge-offs of$0.2 million . During the nine months endedSeptember 30, 2021 , we recorded a credit to the provision for credit losses on loans of$6.9 million and net charge-offs of$1.8 million . The credits to the provision are driven by improved economic forecasts, lower net charge-offs and loan portfolio improvement as theState of Hawaii continues to recover from the COVID-19 pandemic. Our ACL as a percentage of total loans decreased from 1.68% atDecember 31, 2020 to 1.48% atSeptember 30, 2021 . Excluding the PPP loan portfolio, which is guaranteed by the SBA, our ACL as a percentage of total loans was 1.55% atSeptember 30, 2021 , compared to 1.83% atDecember 31, 2020 . Our ACL as a percentage of nonaccrual loans decreased from 1344.78% atDecember 31, 2020 to 1030.63% atSeptember 30, 2021 .
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"). FHLB stock of$8.0 million atSeptember 30, 2021 decreased by$0.3 million , or 3.5%, from the FHLB stock balance of$8.2 million atDecember 31, 2020 . FHLB stock has an activity-based stock requirement, thus as borrowings decline, 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.
Deposits
The following table sets forth the composition of our deposits by category for
the periods indicated:
September 30, December 31,
(dollars in thousands) 2021 2020 $ Change % Change
Noninterest-bearing demand deposits $ 2,195,404 $ 1,790,269 $ 405,135 22.6 %
Interest-bearing demand deposits 1,372,626 1,174,888 197,738 16.8
Savings and money market deposits 2,296,968 1,932,043 364,925 18.9
Time deposits less than $100,000 139,358 149,063 (9,705) (6.5)
Time deposits $100,000 to $250,000 87,491 90,149 (2,658) (2.9)
Core deposits 6,091,847 5,136,412 955,435 18.6
Government time deposits 238,950 500,344 (261,394) (52.2)
Other time deposits greater than $250,000 185,066 159,362 25,704 16.1
Total time deposits greater than $250,000 424,016 659,706 (235,690) (35.7)
Total deposits $ 6,515,863 $ 5,796,118 $ 719,745 12.4
[1] As of
Total deposits of$6.52 billion atSeptember 30, 2021 increased by$719.7 million , or 12.4%, from total deposits of$5.80 billion atDecember 31, 2020 . Net increases in noninterest-bearing demand deposits of$405.1 million , interest-bearing demand deposits of$197.7 million , savings and money market deposits of$364.9 million , and other time deposits greater than$250,000 of$25.7 million were offset by net decreases in time deposits less than$100,000 of$9.7 million , time deposits$100,000 to$250,000 of$2.7 million , and government time deposits of$261.4 million . Core deposits, which we define as demand deposits, savings and money market deposits, and time deposits up to$250,000 , totaled$6.09 billion atSeptember 30, 2021 and increased by$955.4 million , or 18.6%, from$5.14 billion atDecember 31, 2020 . The deposit of PPP funds and other government stimulus into both new and existing deposit accounts largely contributed to the increase in core deposits. The addition of PPP funds may be temporary as the PPP monies are spent by the businesses in accordance with the program. Going forward, the Company is focused on expanding banking relationships with the new businesses we assisted with PPP. Core deposits as a percentage of total deposits was 93.5% atSeptember 30, 2021 , compared to 88.6% atDecember 31, 2020 . 71 --------------------------------------------------------------------------------
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 its variants) 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
Shareholders' equity totaled$555.4 million atSeptember 30, 2021 , compared to$546.7 million atDecember 31, 2020 . The change in total shareholders' equity was primarily attributable to net income of$57.6 million , partially offset by other comprehensive loss of$21.9 million , cash dividends declared of$20.0 million , and the repurchase of$10.2 million in shares of our common stock under our stock repurchase program in the nine months endedSeptember 30, 2021 . Our total shareholders' equity to total assets ratio was 7.61% atSeptember 30, 2021 , compared to 8.29% atDecember 31, 2020 . The decline in our total shareholders' equity to total assets ratio was primarily due to the significant increase in the total assets denominator attributable to$218.7 million in PPP loans, net of deferred fees and costs. Our book value per share was$19.84 and$19.40 atSeptember 30, 2021 andDecember 31, 2020 , respectively.
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.
CPF relies on the bank to pay dividends to fund its obligations. As of
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 ofSeptember 30, 2021 , the bank had Statutory Retained Earnings of$110.7 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. OnOctober 26, 2021 , the Company's Board of Directors declared a cash dividend of$0.25 per share on the Company's outstanding common stock, which increased by 4.2% from$0.24 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. InJanuary 2020 , the Company's Board of Directors authorized the repurchase of up to$30 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 "Repurchase Plan"). The Company's Repurchase Plan was subject to a one year expiration. In the first quarter of 2020, the Company repurchased 206,802 shares of common stock, at a cost of$4.7 million , under the Company's repurchase plan. InMarch 2020 , the Company temporarily suspended the Repurchase Plan due to uncertainty during the current COVID-19 pandemic. OnJanuary 26, 2021 , the Company's Board of Directors approved a new share repurchase authorization of up to$25 million of its common stock. The Company resumed repurchases during the second quarter of 2021. During the second and third quarters of 2021, the Company repurchased 391,300 shares of common stock at a cost of$10.2 million . We cannot provide any assurance whether or not we will continue to repurchase common stock under our share repurchase program.
Trust Preferred Securities
As ofSeptember 30, 2021 , 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 72 -------------------------------------------------------------------------------- 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 theFederal Reserve Bank of New York , plus 456 basis points. The subordinated notes had a carrying value of$54.0 million , net of unamortized debt issuance costs of$1.0 million , atSeptember 30, 2021 .
The subordinated notes may be included in Tier 2 capital, with certain limitations applicable, under current regulatory guidelines and interpretations.
Regulatory Capital Ratios
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 2020 Form 10-K. 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 has elected to exercise the option to delay for two years the CECL methodology's effect on regulatory capital.
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 ofSeptember 30, 2021 were above the levels required for a "well capitalized" regulatory designation. 73 -------------------------------------------------------------------------------- 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. Minimum Required Minimum Required for Capital Adequacy to be Actual Purposes Well Capitalized (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Company AtSeptember 30, 2021 : Leverage capital$ 613,103 8.5 % $ 288,270 4.0 % N/A Tier 1 risk-based capital 613,103 12.2 300,769 6.0 N/A Total risk-based capital 731,015 14.6 401,025 8.0 N/A CET1 risk-based capital 563,103 11.2 225,577 4.5 N/A AtDecember 31, 2020 : Leverage capital$ 581,358 8.8 % $ 263,979 4.0 % N/A Tier 1 risk-based capital 581,358 12.9 271,027 6.0 N/A Total risk-based capital 686,130 15.2 361,370 8.0 N/A CET1 risk-based capital 531,358 11.8 203,270 4.5 N/A Central Pacific Bank AtSeptember 30, 2021 : Leverage capital$ 649,667 9.0 % $ 287,999 4.0 %$ 359,998 5.0 % Tier 1 risk-based capital 649,667 13.0 300,024 6.0 400,032 8.0 Total risk-based capital 712,426 14.3 400,032 8.0 500,040 10.0 CET1 risk-based capital 649,667 13.0 225,018 4.5 325,026 6.5 AtDecember 31, 2020 : Leverage capital$ 620,372 9.4 % $ 263,735 4.0 %$ 329,668 5.0 % Tier 1 risk-based capital 620,372 13.7 270,820 6.0 361,094 8.0 Total risk-based capital 670,087 14.9 361,094 8.0 451,367 10.0 CET1 risk-based capital 620,372 13.7 203,115 4.5 293,389 6.5
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 attempts to coordinate 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 interest rate sensitivity gap, net interest income and market value of portfolio equity simulation and rate shock analyses. This process is designed to measure the impact of future changes in interest rates on net interest income and market value of portfolio equity. 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 process is designed to measure the impact of future changes in interest rates on net interest income and market value of portfolio equity and to allow ALCO to model alternative balance sheet strategies. The following reflects our net interest income sensitivity analysis as ofSeptember 30, 2021 . 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 74 --------------------------------------------------------------------------------
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 bps in an instantaneous, parallel fashion. However, due to historically low rates stemming from the COVID-19 pandemic, market rate changes in the down 100 bp scenario were limited.
Rate Change Estimated Net Interest Income Sensitivity +100 bp 4.88 % -100 bp (5.24) %
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 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$1.83 billion line of credit with the FHLB as ofSeptember 30, 2021 , compared to$1.81 billion atDecember 31, 2020 . There were no short-term borrowings under this arrangement atSeptember 30, 2021 , compared to$22.0 million atDecember 31, 2020 . Letters of credit under this arrangement that are used to collateralize certain government deposits totaled$20.4 million atSeptember 30, 2021 , compared to$268.0 million atDecember 31, 2020 . There were no long-term borrowings under this arrangement atSeptember 30, 2021 andDecember 31, 2020 . FHLB advances and standby letters of credit available atSeptember 30, 2021 were secured by certain real estate loans with a carrying value of$2.70 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB. AtSeptember 30, 2021 ,$1.81 billion was undrawn under this arrangement, compared to$1.52 billion atDecember 31, 2020 . AtSeptember 30, 2021 andDecember 31, 2020 , our bank had additional unused borrowings available at theFederal Reserve discount window of$66.4 million and$64.5 million , respectively. As ofSeptember 30, 2021 andDecember 31, 2020 , certain commercial and commercial real estate loans with a carrying value totaling$129.1 million and$136.9 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. To bolster the effectiveness of the PPP, theFederal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The Paycheck Protection Program Liquidity Facility ("PPPLF") extended credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. AtSeptember 30, 2021 andDecember 31, 2020 , there were no funds drawn from theFederal Reserve Bank under the PPPLF and no PPP loans pledged to theFederal Reserve Bank . The PPPLF expired onJuly 30, 2021 . 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 weakness in the financial markets and industry-wide reductions in liquidity.
Contractual Obligations
Information regarding our 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, 2020 . During the third quarter of 2021, the Company signed an extension to its existing agreement with a computer software vendor. There have been no other material changes in our contractual obligations sinceDecember 31, 2020 . 75
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