Business Overview

Central Pacific Financial Corp (CPF) is a Hawaii-based bank holding company that operates Central Pacific Bank, a full-service community bank with a strong presence across the Hawaiian islands. With a rich history spanning over a century, Central Pacific Financial has established itself as a trusted financial institution, known for its commitment to serving the diverse needs of its customers and supporting the local economy.

Founded in 1954, Central Pacific Bank has grown to become one of the largest banks in Hawaii, with 27 branches and 56 ATMs strategically located throughout the state. The bank's success is rooted in its deep understanding of the local market and its ability to adapt to the evolving financial landscape, making it a key player in Hawaii's thriving economy. Starting with a single branch on the island of Oahu, Central Pacific Bank has steadily expanded its presence and product offerings over the decades to meet the diverse needs of its consumer and business customers. The bank now offers a wide range of services, including commercial loans, residential mortgages, and wealth management.

History and Development

Throughout its history, Central Pacific Financial has demonstrated its commitment to its employees and executives. In 1995, 2001, 2004, and 2006, the bank established Supplemental Executive Retirement Plans (SERPs) to provide certain current and former officers with supplemental retirement benefits. The company has also shown its ability to adapt to changing circumstances, as evidenced by the curtailment of the 1995 and 2001 SERPs in 2002. In 2004, Central Pacific Financial expanded its reach through the acquisition of CB Bancshares, Inc., assuming its SERP obligation in the process.

The company's resilience was put to the test during the 2008 financial crisis, which posed challenges for many banks. However, Central Pacific Financial was able to maintain its capital position and continue serving its customers throughout this difficult period. More recently, in 2022, the company demonstrated its commitment to financial best practices by updating its methodology for measuring expected credit losses on its loan portfolio in accordance with the Current Expected Credit Losses (CECL) accounting standard.

Market Focus and Strategy

One of the defining characteristics of Central Pacific Financial's business model is its focus on the Hawaii market. As a regional bank, the company has a unique advantage in its intimate knowledge of the local economic trends and the specific needs of its customer base. This expertise has allowed the bank to navigate the various challenges and opportunities that have arisen over the years, including the COVID-19 pandemic, which had a significant impact on Hawaii's tourism-dependent economy.

Financial Performance

Despite the headwinds faced during the pandemic, Central Pacific Financial has demonstrated its resilience and adaptability. The company's net income for the fiscal year 2023 was $58.67 million, with a solid return on assets (ROA) of 0.78% and a return on equity (ROE) of 12.33%. These strong financial results highlight the bank's ability to weather economic storms and continue delivering value to its shareholders.

Central Pacific Financial's loan portfolio, which totaled $5.44 billion as of the end of 2023, is well-diversified across various sectors, including commercial and industrial, real estate, and consumer loans. The bank's non-performing assets ratio of 0.09% as of December 31, 2023, showcases its prudent risk management practices and the overall credit quality of its loan book.

The company's net interest margin (NIM), a key metric that measures the difference between the interest income generated and the interest paid on deposits and other sources of funding, stood at 2.98% for the fiscal year 2023. This figure, combined with the bank's strong liquidity position, has enabled Central Pacific Financial to maintain a solid funding base and support its lending activities.

For the fiscal year 2023, Central Pacific Financial reported revenue of $246.97 million and net income of $58.67 million. The company's operating cash flow (OCF) was $105.11 million, with free cash flow (FCF) of $92.46 million. In the most recent quarter (Q3 2024), the company reported revenue of $65.33 million, net income of $13.30 million, OCF of $21.27 million, and FCF of $15.62 million.

The company's financial position remains strong, with a debt-to-equity ratio of 0.2875 in 2023. As of the end of 2023, Central Pacific Financial had $522.44 million in cash, a current ratio of 1.07, and a quick ratio of 1.07. The company also maintains substantial liquidity through various credit facilities, including a $1.85 billion line of credit with the Federal Home Loan Bank of Des Moines, of which $1.72 billion was undrawn as of September 30, 2024. Additionally, the company has $242.8 million in available borrowing capacity at the Federal Reserve Discount Window and $75 million in additional unused and unsecured credit lines.

Product Segments

Central Pacific Financial's loan portfolio is divided into several key segments:

Commercial and Industrial Loans: As of September 30, 2024, this portfolio totaled $599.45 million, excluding SBA Paycheck Protection Program (PPP) loans. These loans include term loans and lines of credit to small- and middle-market businesses and professionals. The credit risk for this segment is primarily based on the cash flows of the borrower's business, global cash flows including guarantor liquidity, and economic and market conditions.

Real Estate Loans: This segment, totaling $3.32 billion as of September 30, 2024, includes construction loans, residential mortgage loans, home equity loans, and commercial mortgage loans. Residential mortgage loans, primarily secured by single-family owner-occupied primary residences in Hawaii, accounted for $1.90 billion of this portfolio. Home equity loans totaled $697.12 million, while commercial mortgage loans amounted to $1.47 billion.

Consumer Loans: The consumer loan portfolio, which includes other revolving credit, non-revolving term loans, and purchased dealer and unsecured consumer loans, totaled $519.68 million as of September 30, 2024. Credit risk for this segment is primarily based on current and projected economic conditions, as well as employment and income levels of the borrower.

For the three months ended September 30, 2024, Central Pacific Financial reported net interest income of $53.85 million and a provision for credit losses of $2.83 million. For the nine months ended September 30, 2024, net interest income was $155.96 million, and the provision for credit losses was $9.01 million. The company's total assets were $7.42 billion as of September 30, 2024, with a loan portfolio (net of deferred fees and costs) of $5.34 billion.

Geographic Diversification

In terms of geographic diversification, Central Pacific Financial's loan portfolio is primarily concentrated in Hawaii, reflecting the bank's deep roots and understanding of the local market. However, the company has also strategically expanded its presence on the U.S. mainland, with a portion of its loan book dedicated to serving customers outside of the Hawaiian islands.

Economic Outlook

Looking ahead, Central Pacific Financial remains optimistic about the prospects for Hawaii's economy. The state's construction industry, a key driver of economic growth, generated $11.8 billion in 2023, a 10% increase from the prior year. Additionally, the value of private building permits increased 19% in the first seven months of 2024, and the number of residential units authorized were up over 50% compared to the prior year, indicating a robust pipeline of real estate development activity.

While the visitor industry in Hawaii has experienced some softness in recent years, the company remains cautiously optimistic about the sector's recovery. Year-to-date through August 2024, total statewide visitor arrivals were down 2.2% from the prior year, but were about 92% of pre-pandemic levels in 2019. Furthermore, visitors from Japan, a key market for Hawaii, were up 38% from a year ago, although they remained about 45% of the first eight months in 2019.

Forward Guidance

Central Pacific Financial has provided guidance on several key financial metrics for the near future. The company expects its net interest margin (NIM) to be in the range of 3.10% to 3.20% for the next quarter or two. The effective tax rate is projected to be between 22% and 24% going forward. Additionally, the normalized run rate for total other operating income is approximately $12 million quarterly, while the normalized run rate for total other operating expense is expected to be around $42 million quarterly.

Conclusion

Central Pacific Financial's strong financial position, diversified loan portfolio, and deep understanding of the local market have positioned the company well to capitalize on the resurgence of Hawaii's economy. The bank's commitment to supporting its customers and the community, combined with its prudent risk management practices, have been instrumental in its long-term success.

As Central Pacific Financial continues to navigate the evolving financial landscape, investors can take comfort in the company's demonstrated ability to adapt and thrive in the face of various challenges. With its robust balance sheet, experienced management team, and unwavering focus on the Hawaii market, Central Pacific Financial is poised to maintain its position as a leading financial institution in the state, delivering sustained growth and value to its shareholders.

Throughout its history, Central Pacific Financial has remained committed to supporting the local community in Hawaii through charitable giving, community development initiatives, and employee volunteerism. The company has also been recognized for its strong corporate governance practices and ethical business conduct, further solidifying its reputation as a responsible and trustworthy financial institution in the Hawaiian market.