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Section 1: 10K (10K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal year ended December 31, 2015
or
Commission file number: 00131567
Central Pacific Financial Corp.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
Hawaii
220 South King Street, Honolulu, Hawaii
(Address of principal executive offices)
990212597
(I.R.S. Employer Identification No.)
96813
(Zip Code)
Registrant’s telephone number, including area code:
(808) 5440500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, No Par Value
Preferred Share Purchase Rights
Name of each exchange on
which registered
New York Stock Exchange
New York Stock Exchange
Indicate by check mark if the registrant is a wellknown seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation ST during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation SK is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10K or any amendment to this Form 10K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, or a smaller reporting company. See definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b2 of the Exchange Act.
Large Accelerated Filer
NonAccelerated Filer
Accelerated Filer
Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Exchange Act).Yes No
As of June 30, 2015, the aggregate market value of the common stock held by nonaffiliates of the registrant was approximately $722,991,000. As of February 11, 2016, the
number of shares of common stock of the registrant outstanding was 31,325,752 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement for the 2016 annual meeting of shareholders are incorporated by reference into Part III of this annual report on Form 10K to the extent
stated herein. The proxy statement will be filed within 120 days after the end of the fiscal year covered by this annual report on Form 10K.
ForwardLooking Statements and Factors that Could Affect Future Results
PART I
Certain statements contained in this annual report on Form 10K that are not statements of historical fact constitute forwardlooking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified. In addition, certain statements may be contained in our
future filings with the U.S. Securities and Exchange Commission (“SEC”), in press releases and in oral and written statements made by us or with our approval that are not
statements of historical fact and constitute forwardlooking statements within the meaning of the Act. Examples of forwardlooking statements include but are not limited to:
(i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital position and other financial items; (ii) statements
of plans, objectives and expectations of Central Pacific Financial Corp. or its management or Board of Directors, including those relating to business plans, use of capital
resources, products or services and regulatory developments and regulatory actions; (iii) statements of future economic performance; and (iv) statements of assumptions
underlying such statements. Words such as “believes,” “plans,” “anticipates,” “expects,” “intends,” “forecasts,” “hopes,” “targeted,” “continue,” “remain,” “will,” “should,”
“may” and other similar expressions are intended to identify forwardlooking statements but are not the exclusive means of identifying such statements.
Forwardlooking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results
to differ from those discussed in the forwardlooking statements include but are not limited to:
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increase in inventory or adverse conditions in the real estate market and deterioration in the construction industry;
adverse changes in the financial performance and/or condition of our borrowers and, as a result, increased loan delinquency rates, deterioration in asset quality and losses
in our loan portfolio;
the impact of local, national, and international economies and events (including natural disasters such as wildfires, tsunamis, storms and earthquakes) on the Company’s
business and operations and on tourism, the military and other major industries operating within the Hawaii market and any other markets in which the Company does
business;
deterioration or malaise in domestic economic conditions, including any destabilization in the financial industry and deterioration of the real estate market, as well as the
impact of declining levels of consumer and business confidence in the state of the economy in general and in financial institutions in particular;
changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;
the impact of the DoddFrank Wall Street Reform and Consumer Protection Act (the “DoddFrank Act”), changes in capital standards, other regulatory reform, including
but not limited to regulations promulgated by the Consumer Financial Protection Bureau (the “CFPB”), governmentsponsored enterprise reform, and any related
rules and regulations which affect our business operations and competitiveness;
the costs and effects of legal and regulatory developments, including legal proceedings or regulatory or other governmental inquiries and proceedings and the resolution
thereof, and the results of regulatory examinations or reviews;
the effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System (the
“FRB” of the “Federal Reserve”);
inflation, interest rate, securities market and monetary fluctuations;
negative trends in our market capitalization and adverse changes in the price of the Company’s common shares;
political instability;
acts of war or terrorism;
changes in consumer spending, borrowings and savings habits;
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failure to maintain effective internal control over financial reporting or disclosure controls and procedures;
technological changes and developments;
changes in the competitive environment among financial holding companies and other financial service providers;
the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the
Financial Accounting Standards Board (“FASB”) and other accounting standard setters;
our ability to attract and retain skilled employees;
changes in our organization, compensation and benefit plans; and
our success at managing any of the risks involved in the foregoing items.
For information with respect to factors that could cause actual results to differ from the expectations stated in the forwardlooking statements, see also “Risk Factors” under
Part I, Item 1A of this report. We urge investors to consider all of these factors carefully in evaluating the forwardlooking statements contained in this Form 10K. Forward
looking statements speak only as of the date on which such statements are made. We undertake no obligation to update any forwardlooking statement to reflect events or
circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events except as required by law.
ITEM 1. BUSINESS
General
Central Pacific Financial Corp., a Hawaii corporation and bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), was
organized on February 1, 1982. Our principal business is to serve as a holding company for our bank subsidiary, Central Pacific Bank, which was incorporated in its present form
in the state of Hawaii on March 16, 1982 in connection with the holding company reorganization. Its predecessor entity was incorporated in the state of Hawaii on January 15,
1954. As of December 31, 2015, we had total assets of $5.13 billion, total loans of $3.21 billion, total deposits of $4.43 billion and shareholders’ equity of $494.6 million.
When we refer to “the Company,” “we,” “us” or “our,” we mean Central Pacific Financial Corp. and its subsidiaries on a consolidated basis. When we refer to “Central Pacific
Financial Corp.,” “CPF” or to the holding company, we are referring to the parent company on a standalone basis. We refer to Central Pacific Bank herein as “our bank” or “the
bank.”
Through our bank and its subsidiaries, we offer fullservice commercial banking with 36 bank branches and 103 ATMs located throughout the state of Hawaii. Our administrative
and main offices are located in Honolulu and we have 28 branches on the island of Oahu. We operate four branches on the island of Maui, two branches on the island of Hawaii
and two branches on the island of Kauai. Our bank’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to applicable limits. The bank is not a
member of the Federal Reserve System.
Central Pacific Bank is a fullservice commercial bank offering a broad range of banking products and services, including accepting time and demand deposits and originating
loans. Our loans include commercial loans, construction loans, commercial and residential mortgage loans and consumer loans.
We derive our income primarily from interest and fees on loans, interest on investment securities and fees received in connection with deposit and other services. Our major
operating expenses are the interest paid by our bank on deposits and borrowings, salaries and employee benefits and general operating expenses. Our bank relies substantially on
a foundation of locally generated deposits. For financial reporting purposes, we have the following three reportable segments: (1) Banking Operations, (2) Treasury and (3) All
Others. For further information about our reporting segments, including information about the assets and operating results of each, see “Note 24 — Segment Information” in the
accompanying consolidated financial statements.
Our operations, like those of other financial institutions that operate in our market, are significantly influenced by economic conditions in Hawaii, including the strength of the
real estate market, as well as the fiscal and regulatory policies of the federal
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and state government and the regulatory authorities that govern financial institutions. See “—Supervision and Regulation” below for other information about the regulation of
our holding company and bank.
Our Services
We offer a full range of banking services and products to businesses, professionals and individuals. We provide our customers with an array of loan products, including residential
mortgage loans, commercial and consumer loans and lines of credit, commercial real estate loans and construction loans.
Through our bank, we concentrate our lending activities in five principal areas:
(1) Residential Mortgage Lending. Residential mortgage loans include fixed and adjustablerate loans primarily secured by singlefamily, owneroccupied residences in
Hawaii and home equity lines of credit and loans. We typically require loantovalue ratios of not more than 80%, although higher levels are permitted with
accompanying mortgage insurance. First mortgage loans secured by residential properties have an average loan size of approximately $0.4 million and marketable
collateral. Changes in interest rates, the economic recession and other market factors have impacted, and future changes will likely continue to impact, the marketability
and value of collateral and the financial condition of our borrowers and thus the level of credit risk inherent in the portfolio. The majority of our first residential mortgage
loan originations are sold in the secondary market.
(2) Commercial Lending and Leasing. Loans in this category consist primarily of term loans, lines of credit and equipment leases to small and middlemarket businesses and
professionals in the state of Hawaii. The borrower’s business is typically regarded as the principal source of repayment, although our underwriting policies and practices
generally require additional sources of collateral, including real estate and other business assets, as well as personal guarantees where possible to mitigate risk and help to
reduce credit losses.
(3) Commercial Mortgage Lending. Loans in this category consist of loans secured by commercial real estate, including but not limited to, structures and facilities to
support activities designated as multifamily residential properties, industrial, warehouse, general office, retail, health care and religious dwellings. Our underwriting
policies and practices generally requires net cash flow from the property to cover the debt service while maintaining an appropriate amount of reserves and permits
consideration of liquidation of the collateral as a secondary source of repayment.
(4) Construction Lending. Construction lending encompasses the financing of residential and commercial construction projects.
(5) Consumer Lending. Loans in this category are generally either unsecured or secured by personal assets, such as automobiles, and the average loan size is generally small.
Beyond the lending function described above, we also offer a full range of deposit products and services including checking, savings and time deposits, cash management and
electronic banking services, trust services and retail brokerage services.
Our Market Area and Competition
Based on deposit market share among FDICinsured financial institutions in Hawaii, Central Pacific Bank was the fourthlargest depository institution in the state at
December 31, 2015.
The banking and financial services industry in the state of Hawaii generally, and particularly in our target market areas, is highly competitive. We compete for loans, deposits and
customers with other commercial banks, savings banks, securities and brokerage companies, mortgage companies, insurance companies, finance companies, credit unions and
other nonbank financial service providers, including mortgage providers and brokers, operating via the internet and other technology platforms. Some of these competitors are
much larger by total assets and capitalization, have greater access to capital markets and have achieved better results than we have during the last economic downturn.
In order to compete with the other financial services providers in the state of Hawaii, we principally rely upon local promotional activities, personal relationships between
customers and our officers, directors and employees, and specialized services tailored to meet the needs of our customers and the communities we serve. We remain competitive by
offering flexibility and superior service levels, coupled with competitive interest rates and pricing.
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For further discussion of factors affecting our operations see, “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Business Concentrations
No individual or single group of related accounts is considered material in relation to the assets or deposits of our bank, or in relation to the overall business of the Company.
However, approximately 71% of our loan portfolio at December 31, 2015 consisted of real estaterelated loans, including construction loans, residential mortgage loans and
commercial mortgage loans. See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Loan
Portfolio.”
Our business activities are focused primarily in Hawaii. Consequently, our results of operations and financial condition are impacted by the general economic trends in Hawaii,
particularly in the commercial and residential real estate markets. During periods of economic strength, the real estate market and the real estate industry typically perform well;
during periods of economic weakness, they typically are adversely affected.
Our Subsidiaries
Central Pacific Bank is the whollyowned principal subsidiary of Central Pacific Financial Corp. Other whollyowned subsidiaries include: CPB Capital Trust II; CPB Statutory
Trust III; CPB Capital Trust IV; and CPB Statutory Trust V.
As of December 31, 2015, Central Pacific Bank does not have any whollyowned subsidiaries. Central Pacific Bank owns 50% of Pacific Access Mortgage, LLC, Gentry
HomeLoans, LLC, Haseko HomeLoans, LLC, Island Pacific HomeLoans, LLC, and One Hawaii HomeLoans, LLC.
Supervision and Regulation
General
The Company and the bank are subject to significant regulation and restrictions by federal and state laws and regulatory agencies for the protection of depositors and the FDIC
deposit insurance fund, borrowers, and the stability of the U.S. banking system. The following discussion of statutes and regulations is a summary and does not purport to be
complete nor does it address all applicable statutes and regulations. This discussion is also qualified in its entirety by reference to the statutes and regulations referred to in this
discussion. We cannot predict whether or when new legislative initiatives may be proposed or enacted or new regulations or guidance may be promulgated nor the effect new
laws, regulations and supervisory policies and practices may have on community banks generally or on our financial condition and results of operations. Such developments
could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and
other financial institutions.
Regulatory Agencies
Central Pacific Financial Corp. is a legal entity separate and distinct from its subsidiaries. As a bank holding company for Central Pacific Bank, Central Pacific Financial Corp. is
regulated under the BHC Act and is subject to inspection, examination and supervision by the FRB. It is also subject to Hawaii’s Code of Financial Institutions and is subject to
inspection, examination and supervision by the Hawaii Division of Financial Institutions ("DFI".)
The Company is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), as administered by the SEC. Our common stock is listed on the New York Stock Exchange (“NYSE”) under the trading symbol “CPF,” and we are subject to the
rules of the NYSE for companies listed there. In addition to the powers of the bank regulatory agencies we are subject to, the SEC and the NYSE have the ability to take
enforcement actions against us.
The Company is also subject to the accounting oversight and corporate governance requirements of the SarbanesOxley Act of 2002, including, among other things, required
executive certification of financial presentations, requirements for board audit committees and their members, and disclosure of controls and procedures and internal control over
financial reporting.
Central Pacific Bank, as a Hawaii statechartered bank, is subject to primary supervision, periodic examination and regulation by the DFI and FDIC and is also subject to certain
regulations promulgated by the Consumer Financial Protection Bureau ("CFPB"), Federal Trade Commission ("FTC"), and FRB. In periodic examinations, the DFI, FDIC, and FRB
assesses our
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financial condition, capital resources, asset quality, earnings prospects, management, liquidity, market sensitivity and other aspects of our operations. These bodies also determine
whether our management is effectively managing the bank and the holding company and whether we are in compliance with all applicable laws or regulations.
Legislative and Regulatory Developments
The federal banking agencies continue to implement the remaining requirements in the DoddFrank Act, as well as promulgating other regulations and guidelines intended to
assure the financial strength and safety and soundness of banks and the stability of the U.S. banking system. Following on the implementation in 2014 and effectiveness in 2015
of new capital rules ("New Capital Rules") and the so called Volcker Rule restrictions on certain proprietary trading and investment activities, developments in 2015 included:
(i) the extension of the Volcker Rule conformance period until July 21, 2016 and a possible additional extension until 2017 for banking institutions to conform existing
investments and relationships, with certain exceptions, with “covered funds”, including hedge funds, private equity funds and certain other private funds. The Company and the
bank held no investment positions at December 31, 2015 which were subject to the final rule. See “Volcker Rule”.
(ii) the shift in the stress testing cycle and reporting dates required by the banking agencies for institutions with total consolidated assets of $10 billion to $50 billion to
assess the potential impact of different scenarios on earnings, losses, liquidity and capital. Although the bank conducts stress testing, we are not subject to these requirements.
(iii) the implementation of an additional “capital conservation buffer” of 0.625% in 2016 for minimum riskweighted asset ratios under the New Capital Rules. See
“Capital Adequacy” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations Capital Resources.
(iv) the effectiveness in October, 2015 of the final TILARESPA Integrated Disclosure ("TRID") rules issued by the CFPB as required by the DoddFrank Act, which
require new mortgage disclosures and training of staff for most mortgage loan applications. The bank has fully implemented the TRID requirements. See CFPB.
(v) the release by the Interagency Federal Financial Institutions Examinations Council ("FFIEC") of a cybersecurity assessment tool for voluntary use by banks which
provides guidelines to measure a bank’s individual risk profile” and “Cybersecurity maturity”.
(vi) the adoption of the Fixing America’s Surface Transportation Act (the “FAST Act”), highway legislation which contains financial services provisions, including (a)
expanding the extended 18 months examination cycle for banks with up to $1 billion in assets; (b) deleting the annual privacy notice for banks which have not changed their
policy or practices of sharing of information with third parties and (c) limiting the percentage payment of dividends on reserve bank stock held by banks with more than $10
billion in assets. As a nonmember statebank, the bank holds no reserve bank stock.
In the exercise of their supervisory and examination authority, the regulatory agencies have emphasized corporate governance, capital planning and stress testing, enterprise risk
management and other board responsibilities; antimoney laundering compliance; information technology adequacy; cybersecurity preparedness; vendor management; and fair
lending and other consumer compliance obligations.
Capital Adequacy Requirements
Bank holding companies and banks are subject to various regulatory capital requirements administered by state and federal banking agencies. The New Capital Rules became
fully effective on January 1, 2015, but many elements are being phased in over multiple future years. The riskbased capital guidelines for bank holding companies and banks
require capital ratios that vary based on the perceived degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as
assets, such as loans, and those recorded as offbalance sheet items, such as commitments, letters of credit and recourse arrangements. The riskbased capital ratio is determined by
classifying assets and certain offbalance sheet financial instruments into weighted categories, with higher levels of capital being required for those categories perceived as
representing greater risks and dividing its qualifying capital by its total riskadjusted assets and offbalance sheet items. Bank holding companies and banks engaged in
significant trading activity may also be subject to the market risk capital guidelines and be required to incorporate additional market and interest rate risk components into their
riskbased capital standards. To the extent that the new rules are not fully phased in, the prior capital rules continue to apply.
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The New Capital Rules revised the previous riskbased and leverage capital requirements for banking organizations to meet requirements of the Dodd—Frank Act and to
implement the Basel III international agreements reached by the Basel Committee. Although many of the rules contained in these final regulations are applicable only to large,
internationally active banks, some of them apply on a phasedin basis to all banking organizations, including the Company and the bank. Management believes that, as of
December 31, 2015, the Company and the bank would meet all applicable capital requirements under the New Capital Rules on a fully phasedin basis if such requirements were
currently in effect.
Under the riskbased capital guidelines in place prior to the effectiveness of the new capital Rules, there were three fundamental capital ratios: a total riskbased capital ratio, a
Tier 1 riskbased capital ratio and a Tier 1 leverage ratio. To be deemed “well capitalized,” a bank must have a total riskbased capital ratio, a Tier 1 riskbased capital ratio and a
Tier 1 leverage ratio of at least ten percent, six percent and five percent, respectively.
The following are among the new capital rules that were phasedin beginning January 1, 2015:
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an increase in the minimum Tier 1 capital ratio from 4.00% to 6.00% of riskweighted assets;
a new category and a required 4.50% of riskweighted assets ratio is established for common equity Tier 1 ("CET1”) as a subset of Tier 1 capital limited to common
equity;
a minimum nonriskbased leverage ratio is set at 4.00%;
changes in the permitted composition of Tier 1 capital to exclude trust preferred securities subject to certain grandfathering exceptions for organizations like the
Company which were under $15 billion in assets as of December 31, 2009, mortgage servicing rights and certain deferred tax assets and include unrealized gains and
losses on available for sale debt and equity securities unless the organization opts out of including such unrealized gains and losses, which the Company elected to do in
2015;
the riskweights of certain assets for purposes of calculating the riskbased capital ratios are changed for high volatility commercial real estate acquisition, development
and construction loans, certain past due nonresidential mortgage loans and certain mortgagebacked and other securities exposures; and
an additional “countercyclical capital buffer” is required for larger and more complex institutions.
an additional capital conservation buffer of 2.5% of risk weighted assets above the regulatory minimum capital ratios established under the new final capital rule which
will be phased in until 2019 beginning at 0.625% of riskweighted assets for 2016 and must be met to avoid limitations on the ability of the bank to pay dividends,
repurchase shares or pay discretionary bonuses.
Including the capital conservation buffer of 2.5%, the new final capital rule would result in the following minimum ratios to be considered well capitalized: (i) a Tier 1 capital
ratio of 8.5%, (ii) a common equity Tier 1 capital ratio of 7.0%, and (iii) a total capital ratio of 10.5%. At December 31, 2015, the respective capital ratios of the Company and the
bank exceeded the minimum percentage requirements to be deemed “wellcapitalized” for regulatory purposes. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations Capital Resources.”
While the New Capital Rules set higher regulatory capital standards for the Company and the bank, bank regulators may also continue their past policies of expecting banks to
maintain additional capital beyond the new minimum requirements. The final Liquidity Coverage Ratio rule issued in October 2014 by the federal banking agencies, which
requires the largest banking organizations with more than $250 billion in assets to maintain sufficient highquality liquid assets does not apply to community banks with less
than $10 billion in assets. However, the implementation of the New Capital Rules or more stringent requirements to maintain higher levels of capital or to maintain higher levels
of liquid assets could adversely impact the Company’s net income and return on equity, restrict the ability to pay dividends or executive bonuses and require the raising of
additional capital.
Prompt Corrective Action Provisions
The Federal Deposit Insurance Act requires the federal bank regulatory agencies to take “prompt corrective action” with respect to a depository institution if that institution does
not meet certain capital adequacy standards, including requiring the prompt submission of an acceptable capital restoration plan. Depending on the bank’s capital ratios, the
agencies’ regulations define five categories in which an insured depository institution will be placed: wellcapitalized, adequately capitalized,
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undercapitalized, significantly undercapitalized, and critically undercapitalized. At each successive lower capital category, an insured bank is subject to more restrictions,
including restrictions on the bank’s activities, operational practices or the ability to pay dividends or executive bonuses. Based upon its capital levels, a bank that is classified as
wellcapitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after
notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.
The prompt corrective action standards were also changed as the New Capital Rules ratios became effective. Under the new standards, in order to be considered wellcapitalized,
the bank will be required to meet the new common equity Tier 1 ratio of 6.5%, an increased Tier 1 ratio of 8% (increased from 6%), a total capital ratio of 10% (unchanged) and a
leverage ratio of 5% (unchanged).
The federal banking agencies also may require banks and bank holding companies subject to enforcement actions to maintain capital ratios in excess of the minimum ratios
otherwise required to be deemed well capitalized, in which case institutions may no longer be deemed to be well capitalized and may therefore be subject to certain restrictions
such as taking brokered deposits.
Volcker Rule
In December 2013, the federal bank regulatory agencies adopted final rules that implement a part of the DoddFrank Act commonly referred to as the “Volcker Rule.” Under these
rules and subject to certain exceptions, banking entities are restricted from engaging in activities that are considered proprietary trading and from sponsoring or investing in
certain entities, including hedge or private equity funds that are considered “covered funds.” These rules became effective on April 1, 2014, although certain provisions are
subject to delayed effectiveness under rules promulgated by the FRB. The Company and the bank held no investment positions at December 31, 2015 which were subject to the
final rule. Therefore, while these new rules may require us to conduct certain internal analysis and reporting, they did not require any material changes in our operations or
business.
Bank Holding Company Regulation
As contained in both federal and state banking laws and regulations, a wide range of requirements and restrictions apply to bank holding companies and their subsidiaries which:
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require regular periodic reports and such additional reports of information as the Federal Reserve may require;
require bank holding companies to meet or exceed minimum capital requirements See “Capital Adequacy” above and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations Capital Resources.);
require that bank holding companies serve as a source of financial and managerial strength to subsidiary banks and commit resources as necessary to support each
subsidiary bank. The sourceofstrength doctrine most directly affects bank holding companies where a bank holding company’s subsidiary bank fails to maintain
adequate capital levels. In such a situation, the subsidiary bank will be required by the bank’s federal regulator to take “prompt corrective action” (see “Prompt
Corrective Action Provisions”);
limit dividends payable to shareholders and restrict the ability of bank holding companies to obtain dividends or other distributions from their subsidiary banks;
require a bank holding company to terminate an activity or terminate control of or liquidate or divest certain subsidiaries, affiliates or investments if the Federal Reserve
believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any bank subsidiary;
require the prior approval for changes in senior executive officers or directors and prohibit golden parachute payments, including change in control agreements, or new
employment agreements with such payment terms, which are contingent upon termination when a bank holding company is deemed to be in troubled condition;
regulate provisions of certain bank holding company debt, including the authority to impose interest ceilings and reserve requirements on such debt and require prior
approval to purchase or redeem securities in certain situations;
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require prior approval for the acquisition of 5% or more of the voting stock of a bank or bank holding company by bank holding companies or other acquisitions and
mergers with other banks or bank holding companies and consider certain competitive, management, financial, and antimoney laundering compliance impact on the
U.S.; and
require prior notice and/or prior approval of the acquisition of control of a bank or a bank holding company by a shareholder or individuals acting in concert with
ownership or control of 10% of the voting stock being a presumption of control.
Other Restrictions on the Company’s Activities
Subject to prior notice or Federal Reserve approval, bank holding companies may generally engage in, or acquire shares of companies engaged in, activities determined by the
Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Bank holding companies that elect and retain “financial
holding company” status pursuant to the GrammLeachBliley Act of 1999 (“GLBA”) may engage in these nonbanking activities and broader securities, insurance, merchant
banking and other activities that are determined to be “financial in nature” or are incidental or complementary to activities that are financial in nature without prior Federal
Reserve approval. Pursuant to the GLBA and the DoddFrank Act, in order to elect and retain financial holding company status, a bank holding company and all depository
institution subsidiaries of that bank holding company must be well capitalized and well managed, and, except in limited circumstances, depository subsidiaries must be in
satisfactory compliance with the Community Reinvestment Act (“CRA”), which requires banks to help meet the credit needs of the communities in which they operate. Failure to
sustain compliance with these requirements or correct any noncompliance within a fixed time period could lead to the required divestiture of subsidiary banks or the termination
of all activities that do not conform to those permissible for a bank holding company. The Company has not elected financial holding company status and neither Company nor
the bank has engaged in any activities determined by the Federal Reserve to be financial in nature or incidental or complementary to activities that are financial in nature.
Dividends
It is the Federal Reserve’s policy that bank holding companies should generally pay dividends on common stock only out of income available over the past year, and only if
prospective earnings retention is consistent with the organization’s expected future needs and financial condition. It is also the Federal Reserve’s policy that bank holding
companies should not maintain dividend levels that undermine their ability to be a source of strength to their banking subsidiaries. The Federal Reserve has also discouraged
payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.
The bank is a legal entity that is separate and distinct from its holding company. CPF is dependent on the performance of the bank for funds which may be received as dividends
from the bank for use in the operation of CPF and the ability of CPF to pay dividends to shareholders. Subject to regulatory and statutory restrictions, future cash dividends by the
bank will depend upon management’s assessment of future capital requirements, contractual restrictions and other factors.
Regulation of the Bank
As a Hawaii statechartered bank whose deposits are insured by the FDIC, the bank is subject to regulation, supervision, and regular examination by the DFI and by the FDIC as a
state nonmember bank, as the bank’s primary Federal regulator. Specific federal and state laws and regulations which are applicable to banks regulate, among other things, the
scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds, their activities relating to dividends, investments, loans,
the nature and amount of and collateral for certain loans, servicing and foreclosing on loans, transactions with affiliates, officers, directors and other insiders, borrowings, capital
requirements, certain checkclearing activities, branching, and mergers and acquisitions.
FDIC and DFI Enforcement Authority
The federal and Hawaii regulatory structure gives the bank regulatory agencies extensive discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. The regulatory
agencies have adopted guidelines to assist in identifying and addressing potential safety and soundness concerns before an institution’s capital becomes impaired. The guidelines
establish operational and managerial standards generally relating to: (1) internal controls, information systems, and internal audit systems; (2) loan documentation; (3) credit
underwriting; (4) interestrate exposure; (5) asset growth and asset quality; and (6) compensation, fees, and benefits. Further, the regulatory agencies have adopted safety and
soundness guidelines for asset quality and for evaluating and monitoring earnings to ensure that earnings are sufficient for the
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maintenance of adequate capital and reserves. If, as a result of an examination, the DFI or the FDIC should determine that the financial condition, capital resources, asset quality,
earnings prospects, management, liquidity, market sensitivity, or other aspects of the bank’s operations are unsatisfactory or that the bank or its management is violating or has
violated any law or regulation, the DFI and the FDIC, and separately the FDIC as insurer of the bank’s deposits, have residual authority to:
•
•
•
•
•
•
require affirmative action to correct any conditions resulting from any violation or practice;
direct an increase in capital and the maintenance of higher specific minimum capital ratios, which may preclude the bank from being deemed well capitalized and restrict
its ability to accept certain brokered deposits;
restrict the bank’s growth geographically, by products and services, or by mergers and acquisitions, including bidding in FDIC receiverships for failed banks;
enter into or issue informal or formal enforcement actions, including required Board resolutions, memoranda of understanding, written agreements and consent or cease
and desist orders or prompt corrective action orders to take corrective action and cease unsafe and unsound practices;
require prior approval of senior executive officer or director changes; remove officers and directors and assess civil monetary penalties; and
terminate FDIC insurance, revoke the charter and/or take possession of and close and liquidate the bank or appoint the FDIC as receiver, which for a Hawaii state
chartered bank would result in a revocation of its charter.
CPF and the bank are not subject to any regulatory agreements with our regulators. Nevertheless, we could in the future become subject to other agreements with our regulators or
enforcement action which restrict our activities or may also impose increased capital ratios or other requirements on our business.
Deposit Insurance
The FDIC is an independent federal agency that insures deposits through the Deposit Insurance Fund (the “DIF”) up to prescribed statutory limits of federally insured banks and
savings institutions and safeguards the safety and soundness of the banking and savings industries. The DoddFrank Act revised the FDIC's DIF management authority by setting
requirements for the Designated Reserve Ratio (the "DRR", calculated as the DIF balance divided by estimated insured deposits) and redefining the assessment base which is used
to calculate banks' quarterly assessments. The amount of FDIC assessments paid by each DIF member institution is based on its asset size and its relative risk of default as
measured by regulatory capital ratios and other supervisory factors. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance and
the FDIC has proposed a rule to impose an additional surcharge on the quarterly assessments of depository institutions with total consolidated assets of $10 billion or more. If
there are additional bank or financial institution failures or if the FDIC otherwise determines, we may be required to pay higher FDIC premiums. Any future increases in FDIC
insurance premiums may have a material and adverse effect on our earnings and could have a material adverse effect on the value of, or market for, our common stock.
Operations and Consumer Compliance Laws
The bank must comply with numerous federal and state antimoney laundering and consumer protection and privacy statutes and implementing regulations, including the USA
Patriot Act of 2001, GLBA, the Bank Secrecy Act, the Foreign Account Tax Compliance Act, the CRA, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, as
amended by the Fair and Accurate Credit Transactions Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Housing Act, the Home Mortgage Disclosure
Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act, and various federal and state privacy protection laws, including the Telephone Consumer
Protection Act and the CANSPAM Act. Noncompliance with these laws could subject the bank to lawsuits and could also result in administrative penalties, including, fines and
reimbursements. CPF and the bank are also subject to federal and state laws prohibiting unfair or fraudulent business practices, untrue or misleading advertising and unfair
competition.
These laws and regulations mandate certain disclosure and reporting requirements and regulate the manner in which financial institutions must deal with customers when taking
deposits, making loans, servicing, collecting, and foreclosure of loans, and providing other services. Failure to comply with these laws and regulations can subject the bank to
various penalties, including but not limited to enforcement actions, injunctions, fines or criminal penalties, punitive damages to consumers, and the loss of certain contractual
rights.
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The bank received an “Outstanding” rating in the FDIC’s 2014 Community Reinvestment Act performance evaluation that measures how financial institutions support their
communities in the areas of lending, investment and service.
CFPB
The DoddFrank Act provided for the creation of the CFPB as an independent Federal agency with broad rulemaking, supervisory and enforcement authority over consumer
financial products and services, including deposit products, residential mortgages, homeequity loans, credit cards, and other consumer loans. The CFPB’s functions include
investigating consumer complaints, conducting market research, rulemaking, supervising and examining bank consumer transactions, and enforcing rules related to consumer
financial products and services. CFPB regulations and guidance apply to all financial institutions, including the bank. Financial institutions with $10 billion or more in assets and
are subject to examination by the CFPB. Financial institutions with less than $10 billion in assets, including the bank, will continue to be examined for compliance by their
primary federal banking agency. If we were to grow beyond $10 billion in assets, we would be subject to enhanced CFPB examination as well as be required to perform more
comprehensive stresstesting on our business and operations.
In 2013, the CFPB adopted revisions to Regulation Z, which implements the Truth in Lending Act (“TILA”), and Regulation X, which implements the Real Estate Settlement
Procedures Act (“RESPA”), pursuant to the DoddFrank Act (TRID Rule). The TRID Rule applies to most closedend consumer mortgage loans. The TRID Rule does not apply to
home equity lines of credit, reverse mortgages, or mortgages secured by a mobile home or dwelling that is not attached to real property. Effective October 3, 2015, the TRID Rule
combined certain disclosures that consumers previously received in connection with applying for and closing on a mortgage loan under TILA and RESPA. The bank has fully
implemented the TRID requirements.
Employees
At December 31, 2015, we employed 876 persons, 789 on a fulltime basis and 87 on a parttime basis. We are not a party to any collective bargaining agreement.
Protection of Net Operating Losses
We have generated considerable tax benefits, including net operating loss carryforwards and federal and state tax credits. Our use of the tax benefits would have been limited if
we had experienced an “ownership change” for U.S. federal income tax purposes. In general, an “ownership change” would have occurred if there was a cumulative increase in the
Company’s ownership by “5percent shareholders” (as defined under U.S. income tax laws) that exceeded 50 percentage points over a rolling threeyear period.
In order to protect these benefits, on November 23, 2010, our board declared a dividend of preferred share purchase rights (“Rights”) in respect of our common stock which were
issued pursuant to a Tax Benefits Preservation Plan, dated as of November 23, 2010 (the “Tax Benefits Preservation Plan”), between the Company and Wells Fargo Bank,
National Association, as rights agent. Each Right represented the right to purchase, upon the terms and subject to the conditions in the Tax Benefits Preservation Plan, 1/10,000th
of a share of our Junior Participating Preferred Stock, Series C, no par value, for $6.00, subject to adjustment. The Tax Benefits Preservation Plan is designed to reduce the
likelihood that the Company will experience an ownership change by discouraging any person from becoming a beneficial owner of 4.99% or more of our common stock (a
“Threshold Holder”). Adoption of the Tax Benefits Preservation Plan was required by our agreements with the two lead investors in our 2011 capital raise. On January 29, 2014,
our Board of Directors approved an amendment to the Tax Benefits Preservation Plan to extend it for up to an additional two years (until February 18, 2016). Our Board of
Directors determined in January 2016 that it was no longer necessary to continue the Tax Benefits Preservation Plan because we have utilized a significant portion of our tax
benefits and we expect to be able to utilize the remaining benefits even if an ownership change occurs. As a result, our Tax Benefits Preservation Plan expired in accordance with
its terms on February 18, 2016.
To further protect our tax benefits, on January 26, 2011, our board approved a proposed amendment to our restated articles of incorporation to restrict transfers of our stock if the
effect of an attempted transfer would cause the transferee to become a Threshold Holder or to cause the beneficial ownership of a Threshold Holder to increase (the “Protective
Charter Amendment”). At our annual meeting of shareholders on April 27, 2011, our shareholders approved the Protective Charter Amendment. In 2014, our Board of Directors
and shareholders approved an amendment to the Protective Charter Amendment to extend it for up to an additional two years (until May 2, 2016). Our Board of Directors has
determined not to seek an amendment to further extend the Protective Charter Amendment because we have utilized a significant portion of our tax benefits and we expect to be
able to utilize the remaining benefits even if an ownership change occurs. Accordingly, the Board intends to allow the Protective Charter Amendment to also naturally expire in
accordance with its terms on May 2, 2016.
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Available Information
Our internet website can be found at www.centralpacificbank.com. Our annual reports on Form 10K, quarterly reports on Form 10Q, current reports on Form 8K and all
amendments to those reports can be found on our internet website as soon as reasonably practicable after such materials are electronically filed with or furnished to the SEC.
Copies of the Company’s filings with the SEC may also be obtained directly from the SEC’s website at www.sec.gov. These documents may also be obtained in print upon
request by our shareholders to our Investor Relations Department.
Also posted on our website and available in print upon request of any shareholder to our Investor Relations Department, are the charters for our Audit Committee, Compensation
Committee and Corporate Governance Committee, as well as our Corporate Governance Guidelines and Code of Business Conduct and Ethics. Within the time period required by
the SEC and NYSE, we will post on our website any amendment to the Code of Business Conduct and Ethics and any waiver applicable to our senior financial officers, as defined
by the SEC, and our executive officers or directors. In addition, our website includes information concerning purchases and sales of our equity securities by our executive officers
and directors, as well as disclosure relating to certain nonGAAP financial measures (as defined in the SEC’s Regulation G) that we may make public orally, telephonically, by
webcast, by broadcast or by similar means from time to time.
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ITEM 1A. RISK FACTORS
Our business faces significant risks, including credit, market/liquidity, operational, legal/regulatory and strategic/reputation risks. The factors described below may not be the
only risks we face and are not intended to serve as a comprehensive listing or be applicable only to the category of risk under which they are disclosed. The risks described
below are generally applicable to more than one of the following categories of risks. Additional risks that we do not yet know of or that we currently think are immaterial may
also impair our business operations. If any of the events or circumstances described in the following factors actually occurs, our business, financial condition and/or results of
operations could be materially and adversely affected.
Risk Factors Related to our Business
Negative developments in the global and U.S. economies could have an adverse effect on us.
Although general economic trends and market conditions have stabilized within the U.S., concerns about the ability to maintain a sustained economic recovery still remain.
Geopolitical risks, sustained low oil prices, weakness in the energy sector, international economic concerns, particularly in China, deflationary or inflationary pressures, a rise in
unemployment and low wage growth are all factors that may derail the economic recovery. In general, adverse economic conditions could have one or more of the following
negative impacts on us, any one of which could have a material adverse effect on our financial condition or results of operations: (i) loan delinquencies may increase; (ii) problem
assets and foreclosures may increase leading to higher loan chargeoffs; (iii) demand for our products and services may decline; (iv) low cost or noninterestbearing deposits may
decrease; and (v) collateral for loans made by us, especially involving real estate, may decline in value, in turn reducing customers’ borrowing power and reducing the value of
assets and collateral associated with our existing loans.
Difficult economic and market conditions have adversely affected our industry and renewed economic slowdown in Hawaii would result in additional adverse effects on us.
Unlike larger national or other regional banks that are more geographically diversified, our business and operations are closely tied to the Hawaii market. The Hawaii economy
relies on tourism, real estate, government and other servicebased industries. Declines in tourism, increases in energy costs, the availability of affordable air transportation, adverse
weather and natural disasters, and local budget issues impact consumer and corporate spending. As a result, such events may contribute to the deterioration in Hawaii’s general
economic condition, which could adversely impact us and our borrowers.
The high concentration of real estate loans in our portfolio, combined with the deterioration in these sectors caused by the economic downturn, previously had and could have in
the future a significantly more adverse impact on our operating results than many other banks across the nation. If our borrowers experience financial difficulty, or if property
values securing our real estate loans decline, we will incur elevated credit costs due to the composition of our loan portfolio even if market conditions improve.
Our real estate loan operations have a considerable effect on our results of operations.
The performance of our real estate loans depends on a number of factors, including the continued improvement of the real estate markets in which we operate. As we have seen in
the Hawaii and California construction and real estate markets, the strength of the real estate market and the results of our operations could be negatively affected by an economic
downturn.
In addition, declines in the market for commercial property could cause some of our borrowers to suffer losses on their projects, which would negatively affect our financial
condition, results of operations and prospects. Declines in housing prices and the supply of existing houses for sale could cause residential developers who are our borrowers to
suffer losses on their projects and encounter difficulty in repaying their loans. We cannot assure you that we will have an adequate allowance for loan and lease losses to cover
future losses. If we suffer greater losses than we are projecting, our financial condition and results of operations would be adversely affected.
Our allowance for loan and lease loss methodology has resulted in credits to our provision for loan and lease losses but the credit provisions may not continue.
For five consecutive years from 2011 through 2015, we recorded a credit to the provision for loan and lease losses. Although other factors of our overall risk profile have improved
in recent years and general economic trends and market conditions have stabilized, concerns over the global and U.S. economies still remain. Accordingly, it is possible that the
real estate markets we participate in could deteriorate as it did from the latter part of 2007 through 2010. If this occurs, it may result in an increase in loan delinquencies, loan
chargeoffs, and our allowance for loan and lease losses. Even if economic conditions improve or stay
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the same, it is possible that we may experience material credit losses and in turn, increases to our allowance for loan and lease losses, due to any number of factors, including but
not limited to, the elevated risk still inherent in our existing loan portfolio resulting from our high concentration of loans collateralized by real estate. If that were to occur, or if we
continue to have strong growth in our loan portfolio, we may have to record a provision for loan and lease losses which would have an adverse impact on our net income.
A large percentage of our loans are collateralized by real estate and any deterioration in the real estate market may result in additional losses and adversely affect our
financial results.
Our results of operations have been, and in future periods, will continue to be significantly impacted by the economy in Hawaii, and to a lesser extent, other markets we are
exposed to including California. Approximately 71% of our loan portfolio as of December 31, 2015 was comprised of loans primarily collateralized by real estate, with the
significant majority of these loans concentrated in Hawaii.
Deterioration of the economic environment in Hawaii, California or other markets we are exposed to, including a decline in the real estate market and singlefamily home resales
or a material external shock, may significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. In the event of a default with respect to any
of these loans, amounts received upon sale of the collateral may be insufficient to recover outstanding principal and interest on the loan. As we have seen in the past, material
declines in the value of the real estate assets securing many of our commercial real estate loans may lead to significant credit losses in this portfolio. As a result of our particularly
high concentration of real estate loans, our portfolio had been and remains particularly susceptible to significant credit losses during economic downturns and adverse changes in
the real estate market.
Our allowance for loan and lease losses may not be sufficient to cover actual loan losses, which could adversely affect our results of operations. Additional loan losses may
occur in the future and may occur at a rate greater than we have experienced to date.
As a lender, we are exposed to the risk that our loan customers may not repay their loans according to their terms and that the collateral or guarantees securing these loans may be
insufficient to assure repayment. Our current allowance for loan and lease losses may not be sufficient to cover future loan losses. We may experience significant loan losses that
could have a material adverse effect on our operating results. Management makes various assumptions and judgments about the collectibility of our loan portfolio, which are
regularly reevaluated and are based in part on:
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current economic conditions and their estimated effects on specific borrowers;
an evaluation of the existing relationships among loans, potential loan losses and the present level of the allowance for loan and lease losses;
results of examinations of our loan portfolios by regulatory agencies; and
• management’s internal review of the loan portfolio.
In determining the size of the allowance for loan and lease losses, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions.
If our assumptions prove to be incorrect, our current allowance for loan and lease losses may not be sufficient to cover the losses. Because of the uncertainty in the economy,
volatility in the credit and real estate markets, including specifically, the deterioration in the Hawaii and California real estate markets and our high concentration of commercial
real estate loans, we made significant enhancements to our allowance for loan and lease losses over the past several years and may need to make additional enhancements in the
future. In addition, third parties, including our federal and state regulators, periodically evaluate the adequacy of our allowance for loan and lease losses and may communicate
with us concerning the methodology or judgments that we have raised in determining the allowance for loan and lease losses. As a result of this input, we may be required to
assign different grades to specific credits, increase our provision for loan and lease losses, and/or recognize further loan charge offs.
Our commercial loan and commercial real estate loan portfolios expose us to risks that may be greater than the risks related
to our other loans.
Our loan portfolio includes commercial loans and commercial real estate loans, which are secured by commercial real estate, including but not limited to, structures and facilities
to support activities designated as multifamily residential properties, industrial, warehouse, general office, retail, health care and religious dwellings. Commercial and commercial
real estate loans
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carry more risk as compared to other types of lending, because they typically involve larger loan balances often concentrated with a single borrower or groups of related
borrowers.
Accordingly, chargeoffs on commercial and commercial real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios. In
addition, these loans expose a lender to greater credit risk than loans secured by residential real estate. The payment experience on commercial real estate loans that are secured by
income producing properties are typically dependent on the successful operation of the related real estate project and thus, may subject us to adverse conditions in the real estate
market or to the general economy. The collateral securing these loans typically cannot be liquidated as easily as residential real estate. If we foreclose on these loans, our holding
period for the collateral typically is longer than residential properties because there are fewer potential purchasers of the collateral.
Unexpected deterioration in the credit quality of our commercial or commercial real estate loan portfolios would require us to increase our provision for loan losses, which would
reduce our profitability and could materially adversely affect our business, financial condition, results of operations and prospects.
In addition, with respect to commercial real estate loans, federal and state banking regulators are examining commercial real estate lending activity with heightened scrutiny and
may require banks with higher levels of commercial real estate loans to implement more stringent underwriting, internal controls, risk management policies and portfolio stress
testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures. Because a significant
portion of our loan portfolio is comprised of commercial real estate loans, the banking regulators may require us to maintain higher levels of capital than we would otherwise be
expected to maintain, which could limit our ability to leverage our capital and have a material adverse effect on our business, financial condition, results of operations and
prospects.
Our ability to maintain adequate sources of funding and liquidity and required capital levels may be negatively impacted by uncertainty in the economic environment which
may, among other things, impact our ability to satisfy our obligations.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of investments or loans, and other sources would have a substantial
negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that
affect us specifically, the financial services industry, or the economy in general. Factors that could detrimentally impact our access to liquidity sources include concerns regarding
deterioration in our financial condition, increased regulatory actions against us and a decrease in the level of our business activity as a result of a downturn in the markets in
which our loans or deposits are concentrated. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or
negative views and expectations about the prospects for the financial industry in light of the past turmoil faced by banking organizations and the credit markets.
The management of liquidity risk is critical to the management of our business and our ability to service our customer base. In managing our balance sheet, our primary source of
funding is customer deposits. Our ability to continue to attract these deposits and other funding sources is subject to variability based upon a number of factors including volume
and volatility in the securities’ markets, our financial condition, our credit rating and the relative interest rates that we are prepared to pay for these liabilities. The availability and
level of deposits and other funding sources is highly dependent upon the perception of the liquidity and creditworthiness of the financial institution, and perception can change
quickly in response to market conditions or circumstances unique to a particular company. Concerns about our past and future financial condition or concerns about our credit
exposure to other parties could adversely impact our sources of liquidity, financial position, including regulatory capital ratios, results of operations and our business prospects.
If our level of deposits were to materially decrease, we would need to raise additional funds by increasing the interest that we pay on certificates of deposits or other depository
accounts, seek other debt or equity financing or draw upon our available lines of credit. We rely on commercial and retail deposits, and to a lesser extent, advances from the
Federal Home Loan Bank of Des Moines (“FHLB”) and the Federal Reserve discount window, to fund our operations. Although we have historically been able to replace
maturing deposits and advances as necessary, we might not be able to replace such funds in the future if, among other things, our results of operations or financial condition or the
results of operations or financial condition of the FHLB or market conditions were to change.
Our line of credit with the FHLB serves as our primary outside source of liquidity. The Federal Reserve discount window also serves as an additional outside source of liquidity.
Borrowings under this arrangement are through the Federal Reserve’s primary facility under the borrowerincustody program. The duration of borrowings from the Federal
Reserve discount window are generally for a very short period, usually overnight. In the event that these outside sources of liquidity become
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unavailable to us, we will need to seek additional sources of liquidity, including selling assets. We cannot assure you that we will be able to sell assets at a level to allow us to
repay borrowings or meet our liquidity needs.
We constantly monitor our activities with respect to liquidity and evaluate closely our utilization of our cash assets; however, there can be no assurance that our liquidity or the
cost of funds to us may not be materially and adversely impacted as a result of economic, market, or operational considerations that we may not be able to control.
Our business is subject to interest rate risk and fluctuations in interest rates may adversely affect our earnings.
The majority of our assets and liabilities are monetary in nature and subject to risk from changes in interest rates. Like most financial institutions, our earnings and profitability
depend significantly on our net interest income, which is the difference between interest income on interestearning assets, such as loans and investment securities, and interest
expense on interestbearing liabilities, such as deposits and borrowings. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and
liabilities, meaning that either our interestbearing liabilities will be more sensitive to changes in market interest rates than our interestearning assets, or vice versa. If market
interest rates should move contrary to our position, this “gap” will work against us and our earnings may be negatively affected. In light of our current volume and mix of interest
earning assets and interestbearing liabilities, our net interest margin could be expected to remain relatively constant during periods of rising interest rates, and to decline slightly
during periods of falling interest rates. We are unable to predict or control fluctuations of market interest rates, which are affected by many factors, including the following:
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inflation;
recession;
changes in unemployment;
the money supply;
international disorder and instability in domestic and foreign financial markets; and
governmental actions.
Our asset/liability management strategy may not be able to control our risk from changes in market interest rates and it may not be able to prevent changes in interest rates from
having a material adverse effect on our results of operations and financial condition. From time to time, we may reposition our assets and liabilities to reduce our net interest
income volatility. Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which,
in turn, could have a material adverse effect on our financial condition and results of operations.
Governmental regulation and regulatory actions against us may impair our operations or restrict our growth.
As a regulated financial institution, we are subject to significant governmental supervision and regulation. These regulations affect our lending practices, capital structure,
investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for
possible changes. Statutes and regulations affecting our business may be changed at any time and the interpretation of these statutes and regulations by examining authorities may
also change. In addition, regulations may be adopted which increase our deposit insurance premiums and enact special assessments which could increase expenses associated with
running our business and adversely affect our earnings.
There can be no assurance that such statutes and regulations, any changes thereto or to their interpretation will not adversely affect our business. In particular, these statutes and
regulations, and any changes thereto, could subject us to additional costs (including legal and compliance costs), limit the types of financial services and products we may offer
and/or increase the ability of nonbanks to offer competing financial services and products, among other things. In addition to governmental supervision and regulation, we are
subject to changes in other federal and state laws, including changes in tax laws, which could materially affect us and the banking industry generally. We are subject to the
rules and regulations of the FRBSF, the FDIC and the DFI, and may become subject to the rules and regulations promulgated by the CFPB. In addition, we are subject to the
rules and regulation of the NYSE and the SEC and are subject to enforcement actions and other punitive actions by these agencies. If we fail to comply with federal and state
regulations, the regulators may limit our activities or growth, impose fines on us or in the case of our bank regulators, ultimately require our bank to cease its operations. Bank
regulations can hinder our
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ability to compete with financial services companies that are not regulated in the same manner or are less regulated. Federal and state bank regulatory agencies regulate many
aspects of our operations. These areas include:
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the capital that must be maintained;
the kinds of activities that can be engaged in;
the kinds and amounts of investments that can be made;
the locations of offices;
insurance of deposits and the premiums that we must pay for this insurance;
procedures and policies we must adopt;
conditions and restrictions on our executive compensation; and
how much cash we must set aside as reserves for deposits.
In addition, bank regulatory authorities have the authority to bring enforcement actions against banks and bank holding companies, including CPF and the bank, for unsafe or
unsound practices in the conduct of their businesses or for violations of any law, rule or regulation, any condition imposed in writing by the appropriate bank regulatory agency
or any written agreement with the authority. Enforcement actions against us could include a federal conservatorship or receivership for the bank, the issuance of additional orders
that could be judicially enforced, the imposition of civil monetary penalties, the issuance of directives to enter into a strategic transaction, whether by merger or otherwise, with a
third party, the termination of insurance of deposits, the issuance of removal and prohibition orders against institutionaffiliated parties, and the enforcement of such actions
through injunctions or restraining orders. In addition, if we were able to grow beyond $10 billion in assets, we would be subject to enhanced CFPB examination as well as be
required to perform more comprehensive stresstesting on our business and operations.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other antimoney laundering statutes and regulations.
The Bank Secrecy Act, the USA PATRIOT Act of 2001, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective
antimoney laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network is authorized to
impose significant civil money penalties for violations of those requirements and has engaged in coordinated enforcement efforts with the individual federal banking regulators,
as well as the U.S. Department of Justice, Drug Enforcement Administration, and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the
rules enforced by the Office of Foreign Assets Control and compliance with the Foreign Corrupt Practices Act. If our policies, procedures and systems are deemed deficient, we
would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory
approvals to proceed with certain aspects of our business plan. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could
also have serious reputational consequences for us. Any of these results could materially and adversely affect our business, financial condition and results of operations.
Regulatory capital standards impose enhanced capital adequacy requirements on us.
Increased regulatory capital requirements (and the associated compliance costs), which have been adopted by federal banking regulators, impose additional capital requirements
on our business. The administration of existing capital adequacy laws as well as adoption of new laws and regulations relating to capital adequacy, or more expansive or
aggressive interpretations of existing laws and regulations, could have a material adverse effect on our business, liquidity, financial condition and results of operations and could
substantially restrict our ability to pay dividends, repurchase any of our capital stock, or pay executive bonuses. In addition, increased regulatory capital requirements could
require us to raise additional capital which would dilute our existing shareholders at the time of such capital issuance.
If we are unable to effectively manage the composition of our investment securities portfolio, which we expect will continue to comprise a significant portion of our earning
assets, our net interest income and net interest margin could be adversely affected.
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Our primary sources of interest income include interest on loans and leases, as well as interest earned on investment securities. Interest earned on investment securities represented
23.7% of our interest income in the year ended December 31, 2015, as compared to 25.1% of our interest income in the year ended December 31, 2014. Accordingly, effectively
managing our investment securities portfolio to generate interest income while managing the composition and risks associated with that portfolio, including the mix of
government agency and nonagency securities, has become increasingly important. If we are unable to effectively manage our investment securities portfolio or if the interest
income generated by our investment securities portfolio declines, our net interest income and net interest margin could be adversely affected.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Defaults by, or even
rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to marketwide liquidity problems and could lead to
losses or defaults by us or by other institutions. There is no assurance that any such losses would not materially and adversely affect our results of operations.
Our deposit customers may pursue alternatives to deposits at our bank or seek higher yielding deposits causing us to incur increased funding costs.
Checking and savings account balances and other forms of deposits can decrease when our deposit customers perceive alternative investments, such as the stock market or other
nondepository investments, as providing superior expected returns or seek to spread their deposits over several banks to maximize FDIC insurance coverage. Furthermore,
technology and other changes have made it more convenient for the bank’s customers to transfer funds into alternative investments including products offered by other financial
institutions or nonbank service providers. Additional increases in shortterm interest rates could increase transfers of deposits to higher yielding deposits. Efforts and initiatives
we undertake to retain and increase deposits, including deposit pricing, can increase our costs. When the bank’s customers move money out of bank deposits in favor of
alternative investments or into higher yielding deposits, or spread their accounts over several banks, we can lose a relatively inexpensive source of funds, thus increasing our
funding costs.
The fiscal, monetary and regulatory policies of the federal government and its agencies could have a material adverse effect on our results of operations.
The FRB regulates the supply of money and credit in the U.S. Its policies determine in large part the cost of funds for lending and investing and the return earned on those loans
and investments, both of which affect the net interest margin. It also can materially decrease the value of financial assets we hold, such as debt securities.
In an effort to stimulate the economy, the federal government and its agencies have taken various steps to keep interest rates at extremely low levels. Our net interest income and
net interest margin may be negatively impacted by a prolonged low interest rate environment like we are currently experiencing as it may result in us holding lower yielding
loans and securities on our balance sheet, particularly if we are unable to replace the maturing higher yielding assets with similar higher yielding assets. Changes in the slope of
the yield curve, which represents the spread between shortterm and longterm interest rates, could also reduce our net interest income and net interest margin. Historically, the
yield curve is upward sloping, meaning shortterm rates are lower than longterm rates. When the yield curve flattens, as is the case in the current interest rate environment, our net
interest income and net interest margin could decrease as our cost of funds increases relative to the yield we can earn on our assets.
If we continue to see an improvement in national economic conditions or other changes occur, there is a potential that the FRB will continue to increase interest rates. Should the
FRB continue to raise interest rates significantly and rapidly, there is potential for decreased demand for our loan products, an increase in our cost of funds, and curtailment of the
current economic recovery.
Changes in FRB policies and our regulatory environment generally are beyond our control, and we are unable to predict what changes may occur or the manner in which any
future changes may affect our business, financial condition and results of operation.
We rely on dividends from our subsidiary for most of our revenue.
Because we are a holding company with no significant operations other than our bank, we depend upon dividends from our bank for a substantial portion of our revenues.
18
Hawaii law only permits the bank to pay dividends out of retained earnings as defined under Hawaii banking law (“Statutory Retained Earnings”), which differs from GAAP
retained earnings. As of December 31, 2015, the bank had Statutory Retained Earnings of $63.7 million.
Our ability to pay cash dividends to our shareholders is subject to restrictions under federal and Hawaii 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.
The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurityrelated incidents could have a material adverse effect on our
business, financial condition and results of operations.
As a financial institution, we are susceptible to fraudulent activity, information security breaches and cybersecurityrelated incidents that may be committed against us, our
customers or our business partners, which may result in financial losses or increased costs to us or, our customers or our business partners, disclosure or misuse of our information
or our client information, misappropriation of assets, privacy breaches against our clients, litigation, or damage to our reputation. Such fraudulent activity may take many forms,
including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Information security breaches and cybersecurityrelated incidents may
include fraudulent or unauthorized access to systems used by us or our clients, denial or degradation of service attacks, and malware or other cyberattacks. In recent periods, there
continues to be a rise in electronic fraudulent activity, security breaches and cyberattacks within the financial services industry, especially in the commercial banking sector due
to cyber criminals targeting commercial bank accounts. Consistent with industry trends, we have also experienced an increase in attempted electronic fraudulent activity, security
breaches and cybersecurityrelated incidents in recent periods. Moreover, in recent periods, several large corporations, including financial institutions and retail companies, have
suffered major data breaches, in some cases exposing not only confidential and proprietary corporate information, but also sensitive financial and other personal information of
their customers and employees and subjecting them to potential fraudulent activity. Some of our clients may have been affected by these breaches, which increase their risks of
identity theft, credit card fraud and other fraudulent activity that could involve their accounts with us.
Information pertaining to us and our clients is maintained, and transactions are executed, on the networks and systems of us, our clients and certain of our third party partners, such
as our online banking or reporting systems. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are
essential to protect us and our clients against fraud and security breaches and to maintain our clients’ confidence. Breaches of information security also may occur, and in
infrequent cases have occurred, through intentional or unintentional acts by those having access to our systems or our clients’ or counterparties’ confidential information,
including employees. In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in thirdparty
technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to
prevent fraudulent transactions and to protect data about us, our clients and underlying transactions, as well as the technology used by our clients to access our systems. Although
we have developed, and continue to invest in, systems and processes that are designed to detect and prevent security breaches and cyberattacks and periodically test our security,
our inability to anticipate, or failure to adequately mitigate, breaches of security could result in: losses to us or our clients; our loss of business and/or clients; damage to our
reputation; the incurrence of additional expenses; disruption to our business; our inability to grow our online services or other businesses; additional regulatory scrutiny or
penalties; or our exposure to civil litigation and possible financial liability — any of which could have a material adverse effect on our business, financial condition and results of
operations.
More generally, publicized information concerning security and cyberrelated problems could inhibit the use or growth of electronic or webbased applications or solutions as a
means of conducting commercial transactions. Such publicity may also cause damage to our reputation as a financial institution. As a result, our business, financial condition and
results of operations could be adversely affected.
We continually encounter technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technologydriven products and services. The effective
use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to
address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our
operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology
driven products and services or be successful in
19
marketing these products and services to our customers. In addition, there are a limited number of qualified persons in our local marketplace with the knowledge and experience
required to effectively maintain our information technology systems and implement our technology initiatives. Failure to successfully attract and retain qualified personnel, or
keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results
of operations.
We are implementing changes to our operations to improve our efficiency ratio that may adversely impact our results of operations.
We have completed or are in progress with several initiatives to improve our efficiency ratio. Several key initiatives involve changes to our technology and information systems
including outsourcing the data centers and hardware for our core information technology system and items processing function to Fiserv, Inc., which is our existing core software
application provider, and designing, developing, and implementing our data warehouse and customer relationship management programs. Additionally, during the third quarter
of 2013, we began to implement a staff rightsizing plan that was completed in 2014. With the assistance of thirdparty consultants, we have completed comprehensive
assessments and plans and are effectively managing and monitoring the execution of these initiatives. However, as a result of the significance of the changes, we could experience
adverse effects on our operations. These adverse effects may include system transactional or reporting errors and delays, shortterm reduced productivity, undesired personnel
turnover, and loss of key customer relationships. If any of these effects were to occur, it could have a material adverse impact on our results of operations. Additionally, these
changes could require us to change our internal and management control environment.
Financial services companies depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of customers and counterparties, including financial
statements, credit reports and other financial information. We may also rely on representations of those customers, counterparties or other third parties, such as independent
auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could
have a material adverse impact on our business and, in turn, our financial condition and results of operations.
We are subject to various legal claims and litigation.
From time to time, customers, employees and others whom we do business with, or are regulated by, as well as our shareholders, can make claims and take legal action against us.
Regardless of whether these claims and legal actions are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in
significant financial liability and/or adversely affect the market perception of us and our products and services, as well as impact customer demand for our products and services.
Any financial liability or reputational damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition
and results of operations. Even if these claims and legal actions do not result in a financial liability or reputational damage, defending these claims and actions have resulted in,
and will continue to result in, increased legal and professional services costs, which adds to our noninterest expense and negatively impacts our operating results.
We operate in a highly competitive industry and market area.
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more financial resources. Such
competitors primarily include national, regional and community banks within the various markets we operate. Additionally, various out of state banks conduct significant
business in the market areas in which we currently operate. We also face competition from many other types of financial institutions, including, without limitation, savings banks,
credit unions, finance companies, financial service providers, including mortgage providers and brokers, operating via the internet and other technology platforms, brokerage
firms, insurance companies, factoring companies and other financial intermediaries.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks,
securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking,
securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for nonbanks to
offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints
and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of
products and services as well as better pricing for those products and services than we can.
20
Our ability to compete successfully depends on a number of factors, including, among other things:
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the ability to develop, maintain and build upon longterm customer relationships based on top quality service, high ethical standards and safe, sound assets;
the ability to expand our market position;
the scope, relevance and pricing of products and services offered to meet customer needs and demands;
the rate at which we introduce new products and services relative to our competitors;
customer satisfaction with our level of service; and
industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have
a material adverse effect on our financial condition and results of operations.
The soundness of our financial condition may also affect our competitiveness. Customers may decide not to do business with the bank due to its financial condition.
We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.
Competition for qualified employees and personnel in the banking industry is intense and there is a limited number of qualified persons with knowledge of, and experience in, the
regional banking industry, especially in the Hawaii market. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is
often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing, and
technical personnel, and upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly dependent upon the
abilities of key executives, including our President and Chief Executive Officer, our President and Chief Banking Officer, our Chief Financial Officer, our Chief Information
Officer, our Chief Credit Officer, and certain other employees.
Our business could be adversely affected by unfavorable actions from rating agencies.
Ratings assigned by ratings agencies to us, our affiliates or our securities may impact the decision of certain customers, in particular, institutions, to do business with us. A rating
downgrade or a negative rating could adversely affect our deposits and our business relationships.
Failure to maintain effective internal control over financial reporting or disclosure controls and procedures could adversely affect our ability to report our financial condition
and results of operations accurately and on a timely basis.
A failure to maintain effective internal control over financial reporting or disclosure controls and procedures could adversely affect our ability to report our financial results
accurately and on a timely basis, which could result in a loss of investor confidence in our financial reporting or adversely affect our access to sources of liquidity. Furthermore,
because of the inherent limitations of any system of internal control over financial reporting, including the possibility of human error, the circumvention or overriding of controls
and fraud, even effective internal controls may not prevent or detect all misstatements.
Risk Factors Related to Our Securities
The market price of our common stock could decline.
The trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to
fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations could adversely affect the
market price of our common stock. Among the factors that could affect our stock price are:
21
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•
•
•
•
•
•
•
•
•
•
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•
•
•
•
failure to comply with all of the requirements of any governmental orders or agreements we may become subject to and the possibility of resulting action by the
regulators;
deterioration of asset quality;
the incurrence of losses;
actual or anticipated quarterly fluctuations in our operating results and financial condition;
changes in revenue or earnings/losses estimates or publication of research reports and recommendations by financial analysts;
failure to meet analysts’ revenue or earnings/losses estimates;
speculation in the press or investment community;
strategic actions by us or our competitors, such as mergers, acquisitions, restructurings, or public offerings;
additions or departures of key personnel;
actions by institutional shareholders;
fluctuations in the stock price and operating results of our competitors;
future sales of other equity or debt securities, including our common stock;
general market conditions and, in particular, developments related to market conditions for the financial services industry;
proposed or adopted regulatory changes or developments;
breaches in our security systems and loss of customer data;
anticipated or pending investigations, proceedings or litigation that involve or affect us; or
domestic and international economic factors unrelated to our performance.
The stock market and, in particular, the market for financial institution stocks, have experienced significant volatility over the past few years. In addition, the trading volume in
our common stock may fluctuate more than usual and cause significant price variations to occur. Accordingly, the common stock that you purchase may trade at a price lower than
that at which they were purchased. Volatility in the market price of our common stock may prevent individual shareholders from being able to sell their shares when they want or
at prices they find attractive.
A significant decline in our stock price could result in substantial losses for shareholders and could lead to costly and disruptive securities litigation.
The transferability of our common stock is currently limited as a result of the Protective Charter Amendment.
We previously adopted the Protective Charter Amendment to assist in using net operating loss carryforwards to reduce future tax payments. The Protective Charter Amendment
currently restricts transfers of our stock if the effect of an attempted transfer would cause the transferee to become a Threshold Holder or cause the beneficial ownership of a
Threshold Holder to increase.
Until its expiration, the Protective Charter Amendment may have the effect of limiting transferability of our common stock because it prohibits certain acquisitions of our
common stock as described above. These transfer restrictions may discourage, delay or prevent a change in control of the Company and make it more difficult for a potential
acquirer to consummate an acquisition of the Company. In addition, these provisions could limit the price that investors would be willing to pay in the future for our common
shares and may limit a shareholder’s ability to dispose of our common shares by reducing the class of potential acquirers for our common shares.
22
Our Board of Directors has determined to let the Protective Charter Amendment naturally expire in accordance with its terms on May 2, 2016 because we have utilized a
significant portion of our tax benefits and we expect to be able to utilize the remaining benefits even if an ownership change occurs.
Antitakeover provisions in our restated articles of incorporation and bylaws and applicable federal and state law may limit the ability of another party to acquire us, which
could cause our stock price to decline.
Various provisions of our restated articles of incorporation and bylaws and certain other actions we have taken could delay or prevent a thirdparty from acquiring us, even if
doing so might be beneficial to our shareholders. These include, among other things, the Protective Charter Amendment and the authorization to issue “blank check” preferred
stock by action of the Board of Directors acting alone, thus without obtaining shareholder approval. In addition, applicable provisions of federal and state law require regulatory
approval in connection with certain acquisitions of our common stock and supermajority voting provisions in connection with certain transactions. In particular, both federal and
state law limit the acquisition of ownership of, generally, 10% or more of our common stock without providing prior notice to the regulatory agencies and obtaining prior
regulatory approval or nonobjection or being able to rely on an exemption from such acquisition. See "Supervision and Regulation." Collectively, these provisions of our restated
articles of incorporation and bylaws and applicable federal and state law may prevent a merger or acquisition that would be attractive to shareholders and could limit the price
investors would be willing to pay in the future for our common stock.
Our common stock is equity and therefore is subordinate to our subsidiaries’ indebtedness and preferred stock.
Our common stock constitutes equity interests and does not constitute indebtedness. As such, common stock will rank junior to all current and future indebtedness and other non
equity claims on us with respect to assets available to satisfy claims against us, including in the event of our liquidation. We may, and the bank and our other subsidiaries may
also, incur additional indebtedness from time to time and may increase our aggregate level of outstanding indebtedness. As of December 31, 2015, we had $90.0 million in face
amount of trust preferred securities outstanding and accrued and unpaid dividends thereon of $0.3 million. We also had shortterm borrowings of $69.0 million as of December 31,
2015. Additionally, holders of common stock are subject to the prior dividend and liquidation rights of any holders of our preferred stock that may be outstanding from time to
time. The Board of Directors is authorized to cause us to issue additional classes or series of preferred stock without any action on the part of our stockholders. If we issue preferred
shares in the future that have a preference over our common stock with respect to the payment of dividends or upon liquidation, or if we issue preferred shares with voting rights
that dilute the voting power of the common stock, then the rights of holders of our common stock or the market price of our common stock could be adversely affected.
There is a limited trading market for our common stock and as a result, you may not be able to resell your shares at or above the price you pay for them at the time you
otherwise may desire.
Although our common stock is listed for trading on the NYSE, the volume of trading in our common shares is lower than many other companies listed on the NYSE. A public
trading market with depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common shares at any given time. This presence
depends on the individual decisions of investors and general economic and market conditions over which we have no control. As a result, you may not be able to resell your
common stock at or above the price you pay or at the time(s) you otherwise may desire.
Our common stock is not insured and you could lose the value of your entire investment.
An investment in our common stock is not a deposit and is not insured against loss by the government.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Certifications
We have filed the required certifications under Section 302 of the SarbanesOxley Act of 2002 as Exhibits 31.1 and 31.2 to this annual report on Form 10K for the fiscal year
ended December 31, 2015. Last year, we submitted to the NYSE on April 27, 2015 our annual CEO certification regarding the Company’s compliance with the NYSE’s corporate
governance listing standards. This year, we intend to submit to the NYSE our annual CEO certification within 30 days of the Company’s annual meeting of shareholders, which is
scheduled for April 29, 2016.
ITEM 2. PROPERTIES
We hold title to the land and building in which our Main branch office and headquarters, Hilo branch office, KailuaKona branch office, Pearl City branch office and certain
operations offices are located. We also hold title to portions of the land our University branch office and operations center are located. The remaining portions of the land where
our University branch office and operations center are located are leased, as are all remaining branch and support office facilities. We also own four floors of a commercial office
condominium in downtown Honolulu where certain administrative and support operations are located.
We occupy or hold leases for approximately 40 other properties including office space for our remaining branches. These leases expire on various dates through 2045 and
generally contain renewal options for periods ranging from 5 to 15 years. For additional information relating to lease rental expense and commitments as of December 31, 2015,
see Note 17 to the Consolidated Financial Statements under “Part II, Item 8. Financial Statements and Supplementary Data.”
ITEM 3. LEGAL PROCEEDINGS
Certain claims and lawsuits have been filed or are pending against us arising in the ordinary course of business. In the opinion of management, all such matters are of a nature that,
if disposed of unfavorably, would not have a material adverse effect on our consolidated results of operations or financial position.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
24
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NYSE under the ticker symbol “CPF.” Set forth below is a line graph comparing the cumulative total stockholder return on the Company’s
common stock, based on the market price of the common stock and assuming reinvestment of dividends, with the Russell 2000 Index and the S&P SmallCap 600 Commercial
Bank Index for the five year period commencing December 31, 2010 and ending December 31, 2015. The graph assumes the investment of $100 on December 31, 2010.
PART II
Indexed Total Annual Return
(as of December 31, 2015)
Index
Central Pacific Financial Corp.
Russell 2000
S&P 600 Commercial Bank Index
2010
2011
2012
2013
2014
2015
December 31,
$100.00
100.00
100.00
$43.72
95.82
100.53
25
$52.76
111.49
115.57
$68.55
154.78
175.21
$74.81
162.35
181.21
$79.41
155.18
192.77
The following table sets forth information on the range of high and low sales prices of our common stock as reported by the NYSE, for each full quarterly period within 2015 and
2014:
First quarter
Second quarter
Third quarter
Fourth quarter
Year Ended December 31,
2015
2014
High
Low
High
Low
$25.34
24.81
24.31
24.69
$18.89
22.00
19.80
19.84
$20.52
20.75
20.38
21.61
$17.76
17.64
17.12
17.51
As of February 11, 2016, there were 2,626 shareholders of record, excluding individuals and institutions for which shares were held in the names of nominees and brokerage firms.
Dividends
The following table sets forth information on dividends declared per share of common stock for each quarterly period within 2015 and 2014. The dividend in the fourth quarter of
2015 includes a special dividend of $0.32 per share:
First quarter
Second quarter
Third quarter
Fourth quarter
Year Ended December 31,
2015
2014
$0.12
0.12
0.12
0.46
$0.08
0.08
0.10
0.10
The holders of our common stock share proportionately, on a per share basis, in all dividends and other distributions declared by our Board of Directors.
Under the terms of our trust preferred securities, our ability to pay dividends with respect to common stock was restricted until our obligations under our trust preferred securities
were brought current. Our obligations on our outstanding trust preferred securities were brought current in the first quarter of 2013.
Additionally, our ability to pay dividends depends on our ability to obtain dividends from our bank. As a Hawaii statechartered bank, the bank may only pay dividends to the
extent it has retained earnings as defined under Hawaii banking law (“Statutory Retained Earnings”), which differs from GAAP retained earnings. As of December 31, 2015, the
bank had Statutory Retained Earnings of $63.7 million. In 2013, in light of the Company’s improved capital position and financial condition, our Board of Directors in
consultation with our regulators, reinstated and declared quarterly cash dividends on the Company’s outstanding common shares. During the first three quarters of 2015, the
Company declared quarterly cash dividends of $0.12 per share. During the fourth quarter of 2015, the Company increased its quarterly cash dividend to $0.14 per share. In
addition, the Company declared a special cash dividend of $0.32 per share, which was paid on December 15, 2015 to shareholders of record as of November 30, 2015.
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 and Hawaii 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.
See “Part I, Item 1. Business — Supervision and Regulation — Regulatory Actions” for a discussion on regulatory restrictions. For additional information regarding our previous
election to defer payments on our trust preferred securities, see Note 13 to the Consolidated Financial Statements under “Part II, Item 8. Financial Statements and Supplementary
Data.”
26
Issuer Purchases of Equity Securities
On May 20, 2014, our Board of Directors authorized the repurchase and retirement of up to $30.0 million of the Company’s outstanding common stock (the “CPF Repurchase
Plan”). Repurchases under the CPF Repurchase Plan may be made from time to time on the open market or in privately negotiated transactions.
In January 2015, our Board of Directors increased the authorization under the CPF Repurchase Plan by $25.0 million. In March 2015, our Board of Directors increased the
authorization under the CPF Repurchase Plan by an additional $75.0 million.
In 2015, 4,122,881 shares of common stock, at a cost of $93.3 million, excluding fees and expenses, were repurchased under the CPF Repurchase Plan. During the quarter ended
December 31, 2015, there were no repurchases made under the CPF Repurchase Plan. A total of $20.2 million remained available for repurchase under the CPF Repurchase Plan at
December 31, 2015.
In January 2016, our Board of Directors authorized the repurchase of up to $30 million of the Company's common stock from time to time on the open market or in privately
negotiated transactions, pursuant to a newly authorized share repurchase program (the "2016 Repurchase Plan"). The 2016 Repurchase Plan replaces and supersedes in its entirety
the CPF Repurchase Plan.
Information relating to compensation plans under which equity securities of the Registrant are authorized for issuance is set forth under “Part III, Item 12—Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial information for each of the years in the fiveyear period ended December 31, 2015. This information is not necessarily indicative
of results of future operations and should be read in conjunction with “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and the Consolidated Financial Statements and related Notes contained in “Part II, Item 8. Financial Statements and Supplementary Data.”
Selected Financial Data
Statement of Operation Data:
Total interest income
Total interest expense
Net interest income
Provision (credit) for loan and lease losses
Net interest income after provision for loan and lease losses
Other operating income
Other operating expense
Income before income taxes
Income tax expense (benefit)
Net income
Balance Sheet Data (YearEnd):
Interestbearing deposits in other banks
Investment securities (1)
Loans and leases
Allowance for loan and lease losses
Mortgage servicing rights
Other intangible assets
Total assets
Core deposits (2)
Total deposits
Longterm debt
Total shareholders’ equity
Per Share Data (3):
Basic earnings per share
Diluted earnings per share
Cash dividends declared
Book value
Diluted weighted average shares outstanding (in thousands)
Financial Ratios:
Return on average assets
Return on average shareholders’ equity
Net income to average tangible shareholders’ equity
Average shareholders’ equity to average assets
Efficiency ratio (4)
Net interest margin (5)
Net loan chargeoffs (recoveries) to average loans and leases
Nonaccrual loans to total loans and leases (6)
Allowance for loan and lease losses to total loans and leases
Allowance for loan and lease losses to nonaccrual loans (6)
Dividend payout ratio
Year Ended December 31,
2015
2014
2013
2012
2011
(Dollars in thousands, except per share data)
$
156,035
$
149,809
$
140,278
$
128,445
$
6,507
149,528
(15,671)
165,199
38,984
131,227
72,956
27,088
45,868
6,391
143,418
(6,414)
149,832
43,823
132,813
60,842
20,389
40,453
7,169
133,109
(11,310)
144,419
54,945
139,536
59,828
(112,247)
172,075
8,734
119,711
(18,885)
138,596
60,743
151,918
47,421
—
47,421
$
8,397
$
13,691
$
4,256
$
120,902
$
1,520,172
3,211,532
63,314
17,797
7,355
5,131,288
3,582,178
4,433,439
92,785
494,614
1,467,305
2,932,198
74,040
19,668
10,029
4,852,987
3,306,133
4,110,300
92,785
568,041
$
$
1.42
1.40
0.82
16.06
32,651
$
1.08
1.07
0.36
16.12
37,937
1,660,046
2,630,601
83,820
20,079
12,704
4,741,198
3,093,279
3,936,173
92,799
660,113
4.10
4.07
0.16
15.68
42,317
1,698,593
2,203,944
96,413
22,121
15,378
4,370,368
3,006,657
3,680,772
108,281
504,822
$
1.14
$
1.13
—
12.06
42,084
136,450
18,629
117,821
(40,690)
158,511
57,002
178,942
36,571
—
36,571
180,839
1,493,925
2,064,447
122,093
22,933
19,053
4,132,865
2,786,215
3,443,528
158,298
456,440
3.36
3.31
—
10.93
36,342
0.92 %
0.85%
3.73%
1.13%
0.90%
8.91
9.06
10.37
69.61
3.30
(0.16)
0.44
1.97
443.75
58.57
6.80
6.93
12.50
70.93
3.32
0.12
1.33
2.53
189.42
33.64
27.70
28.34
13.47
74.20
3.19
0.05
1.58
3.19
201.55
3.93
9.81
10.17
11.49
84.19
3.10
0.32
3.60
4.37
121.53
N/A
9.83
10.41
9.17
102.36
3.09
1.42
5.89
5.91
100.49
N/A
(1)
(2)
Heldtomaturity securities at amortized cost, availableforsale securities at fair value.
Noninterestbearing demand, interestbearing demand and savings deposits, and time deposits under $100,000.
28
(3)
(4)
(5)
(6)
On February 2, 2011, we effected a 1for20 reverse stock split on our outstanding common stock.
The efficiency ratio is a nonGAAP financial measure which should be read and used in conjunction with the Company’s GAAP financial information. Comparison of our efficiency ratio with those of other
companies may not be possible because other companies may calculate the efficiency ratio differently. Our efficiency ratio is derived by dividing other operating expense by net operating revenue (net interest
income plus other operating income). See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations —Table 5. Reconciliation to Efficiency Ratio.
Computed on a taxable equivalent basis using an assumed income tax rate of 35%.
Nonaccrual loans exclude nonaccrual loans held for sale.
29
Five Year Performance Comparison
Significant items affecting the comparability of the five years’ performance include:
(Dollars in thousands)
2015
2014
2013
2012
2011
Year Ended December 31,
Provision (credit) for loan and lease losses:
$
(15,671)
$
(6,414)
$
(11,310) $
(18,885) $
(40,690)
Other operating income:
Net gain on sales of residential mortgage loans
Net gain on sales of foreclosed assets
Investment securities gains (losses)
Gain on early extinguishment of debt (included in other)
Noncash gain on ineffective portion of derivative (included in other)
Other operating expense:
Sharebased compensation (included in salaries and employee benefits)
Severance, early retirement, and retention benefits (included in salaries and employee
benefits)
Foreclosed asset expense
Charitable contributions (included in other)
FDIC insurance premium (included in other)
Provision (credit) for residential mortgage loan repurchase losses (included in other)
Reserve (credit) for unfunded loan commitments (included in other)
Branch consolidation and relocation costs (included in other)
Premium paid on repurchase of preferred stock of subsidiaries (included in other)
Noncash loss (gain) on ineffective portion of derivative (included in other)
Writedown of assets
Loss on early extinguishment of debt (included in other)
6,107
568
(1,866)
—
—
4,181
—
486
2,559
2,706
(1,352)
(271)
—
—
—
—
—
5,545
971
240
—
—
6,101
979
1,710
565
2,848
467
(373)
1,336
—
—
—
—
9,986
8,584
482
1,000
—
17,095
4,999
789
—
—
6,367
4,432
3,042
1,036
1,142
2,727
(130)
(3,501)
—
1,895
(67)
—
—
—
6,887
780
4,867
(2,022)
(1,680)
—
—
142
2,586
—
Income tax expense (benefit):
27,088
20,389
(112,247)
—
8,050
6,821
1,306
—
1,041
2,409
—
11,378
8,996
6,843
4,944
1,620
—
—
—
4,624
6,234
—
30
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
We are a bank holding company that, through our banking subsidiary, Central Pacific Bank, offers full service commercial banking in the state of Hawaii.
Our products and services consist primarily of the following:
•
•
Loans: Our loans consist of commercial, commercial mortgage, construction loans, and leases to small and mediumsized companies, business professionals, and real
estate developers, as well and residential mortgage and consumer loans to local homeowners and individuals. Our lending activities contribute to a key component of our
revenues—interest income.
Deposits: We strive to provide exceptional customer service and products that meet our customers’ needs, like our Value Checking, as well as our Exceptional
Checking & Savings and Super Savings accounts. We also maintain a broad branch and ATM network in the state of Hawaii. The interest paid on such deposits has a
significant impact on our interest expense, an important factor in determining our earnings. In addition, fees and service charges on deposit accounts contribute to our
revenues.
Additionally, we offer wealth management products and services, such as nondeposit investment products, annuities, insurance, investment management, asset custody and
general consultation and planning services.
Executive Overview
In 2015 we continued to achieve key objectives for the Company.
• We recorded our fifth consecutive profitable year in 2015 with net income of $45.9 million, or $1.40 per diluted common share.
• We saw continued improvement in our asset quality as we reduced our nonperforming assets by $25.8 million to $16.2 million at December 31, 2015 from $42.0 million
at December 31, 2014.
•
As a result of the continued improvement in our credit risk profile, we were able to reduce our allowance for loan and lease losses (the “Allowance”), which resulted in a
positive impact to earnings. Our total credit costs during fiscal 2015, which include the provision for loan and lease losses (the “Provision”), writedowns of loans
classified as held for sale, foreclosed asset expense, gains on sales of foreclosed assets, and the change in the reserve for unfunded loan commitments, totaled a credit of
$16.0 million, compared to a credit of $6.0 million in 2014.
• With the improving market conditions in Hawaii, together with our efforts to expand and strengthen customer relationships, we realized strong loan growth of $279.3
million, or 9.5%, as well as an increase of $276.0 million, or 8.3% in our core deposit base in 2015.
•
•
Our capital position remained strong, supported by five consecutive years of profitability and the improvements in our asset quality. With consistent profitability, we
were able to increase our regular cash dividends paid from $0.36 per share in 2014 to $0.50 per share in 2015 and in addition, paid a special cash dividend of $0.32 per
share in December 2015.
In 2015, our strong capital position and consistent profitability also allowed us to execute on our stock buyback program and repurchase approximately 11.7% of
outstanding shares as of December 31, 2014.
The year also marked changes to our Executive Management Team and CPF and CPB Boards. Effective July 1, 2015, Catherine Ngo was appointed President and Chief Executive
Officer and David Morimoto was appointed Executive Vice President and Chief Financial Officer. Additionally, Lee Moriwaki was appointed Executive Vice President and
Chief Information Officer in 2015.
31
In June 2015, two representatives from the colead investors in our 2011 recapitalization vacated their board seats and were replaced by Catherine Ngo, and President and Chief
Banking Officer, Lance Mizumoto. In addition, we welcomed Saedene Ota and Wayne Kamitaki to our Boards, who we believe both bring a wealth of experience and
understanding of our local market.
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 II, Item 8. Financial Statements and Supplementary Data.”
Business Environment
While there remains continued uncertainty in the global macroeconomic environment, the U.S. economy has continued to stabilize following the economic downturn caused by
disruptions in the financial system beginning in 2007.
The U.S economic recovery continues to be weighed down by underutilization of labor forces, low level of inflation as a result of declining commodity prices, weakness in
business investment and manufacturing, and increased concerns over the pace of the global economic recovery. In addition, the stock market's inability to sustain gains this year
continues to hold back further progress.
The majority of our operations are concentrated in the state of Hawaii. As a result, our performance is significantly influenced by conditions in the banking industry,
macroeconomic conditions, and the real estate markets in Hawaii. A favorable business environment is generally characterized by expanding gross state product, low
unemployment and rising personal income; while an unfavorable business environment is characterized by the reverse.
Hawaii’s general economic conditions continued to improve in 2015. Tourism continues to be Hawaii’s center of strength and its most significant economic driver. For the fourth
straight year, Hawaii’s strong visitor industry broke records for visitor arrivals and visitor spending. According to the Hawaii Tourism Authority (“HTA”), 8.6 million total
visitors arrived in the state in 2015. This was an increase of 4.1% from the previous high of 8.3 million visitor arrivals in 2014. The HTA also reported that total spending by
visitors increased to $15.16 billion in 2015, an increase of 2.3%, from the previous high of $14.82 billion in 2014. According to the Hawaii Department of Business Economic
Development & Tourism (“DBEDT”), total visitor arrivals and visitor spending are expected to gain 1.7% and 3.5% in 2016, respectively.
Hawaii’s labor market conditions also continued to improve in 2015. The Department of Labor and Industrial Relations reported that Hawaii’s seasonally adjusted annual
unemployment rate improved to 3.2% in December 2015, compared to 4.0% in December 2014. The last time the seasonally adjusted annual unemployment rate was at 3.2% was
in January 2008. In addition, Hawaii’s unemployment rate in December 2015 of 3.2%, which is among the lowest in the nation, remained below the national seasonally adjusted
unemployment rate of 5.0%. DBEDT projects Hawaii’s seasonally adjusted annual unemployment rate to be 3.7% in 2016.
Real personal income and real gross state product grew by approximately 3.6% and 3.5%, respectively, in 2015. DBEDT projects real personal income and real gross state product
to grow by 3.0% and 2.3%, respectively, in 2016. Based on the recent developments in the national and global economy, the performance of Hawaii’s tourism industry, the labor
market conditions in the state, and growth of personal income and tax revenues, DBEDT expects Hawaii’s economy will continue to experience positive growth in 2016.
Historically, real estate lending has been a primary focus for us, including residential mortgage, commercial mortgage and construction loans. As a result, we are dependent on the
strength of Hawaii’s real estate market. Home sales in Hawaii were strong in 2015. According to the Honolulu Board of Realtors, Oahu singlefamily home prices soared to record
highs in 2015. The median resale price in 2015 for singlefamily homes on Oahu was $700,000, representing an increase of 3.7% from the median resale price of $675,000 in
2014. The median resale price for condominiums on Oahu was $360,000 in 2015, representing an increase of 2.9% from the median resale price of $350,000 in 2014. Oahu unit
sales volume increased by 5.2% for singlefamily homes and increased by 4.5% for condominiums in 2015 from 2014. We believe the Hawaii real estate market will continue to
show improvements in 2016, however, there can be no assurance that this will occur.
As we have seen in the past, our operating results are significantly impacted by: (i) the economy in Hawaii, and to a significantly lesser extent, California, and (ii) the composition
of our loan portfolio. Loan demand, deposit growth, Provision, asset quality, noninterest income and noninterest expense are all affected by changes in economic conditions. If the
residential and commercial real estate markets we have exposure to deteriorate as they did in the latter part of 2007 through 2010, our results of operations would be negatively
impacted. See “—Overview of Results of Operations—Concentrations of Credit
32
Risk” for a further discussion on how a deteriorating real estate market, combined with the elevated concentration risk within our portfolio, could have a significant negative
impact on our asset quality and credit losses.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires that management make
certain judgments and use certain estimates and assumptions that affect amounts reported and disclosures made. 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.
Allowance for Loan and Lease Losses
The Allowance is management’s estimate of credit losses inherent in our loan and lease portfolio at the balance sheet date. We maintain our Allowance at an amount we expect to
be sufficient to absorb probable losses inherent in our loan and lease portfolio. At December 31, 2015, we had an Allowance of $63.3 million, compared to $74.0 million at
December 31, 2014.
The Company’s approach to developing the Allowance has three basic elements. These elements include specific reserves for individually impaired loans, a general allowance for
loans other than those analyzed as individually impaired, and an unallocated reserve. These three methods are explained below.
Specific Reserve
Individually impaired loans in all loan categories are evaluated using one of three valuation methods as prescribed under Accounting Standards Codification (“ASC”) 31010,
Fair Value of Collateral, Observable Market Price, or Cash Flow. A loan is generally evaluated for impairment on an individual basis if it meets one or more of the following
characteristics: riskrated as substandard, doubtful or loss, loans on nonaccrual status, troubled debt restructures, or any loan deemed prudent by management to so analyze. If the
valuation of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the Allowance or, alternatively, a specific reserve will be
established and included in the overall Allowance balance. As of December 31, 2015, this specific reserve represented $0.1 million of the total Allowance, compared to $1.5
million at December 31, 2014.
General Allowance
In determining the general allowance component of the Allowance, the Company utilizes a comprehensive approach to segment the loan portfolio into homogenous groups. Six
criteria divide the Company’s loan portfolio into 128 homogenous subsectors. First, loans are divided by general geographic region (U.S. Mainland and Hawaii). Second, loans
are subdivided according to FDIC classification (Construction, Commercial Mortgage, Commercial, Financial and Agricultural, Leases, Residential Mortgage, Consumer). Third,
loans within the Construction category are further subdivided by collateral type (Commercial and Residential). Fourth, loans within the Residential Mortgage category are further
subdivided by ownership type (Investorowned and Owneroccupied). Fifth, loans are subdivided by state or for some, by county (All Hawaii, Hawaii Island, Kauai, Maui, Oahu,
Other Hawaii, All U.S. Mainland, Los Angeles/Orange County CA, Riverside/San Bernardino CA, Sacramento/Placer/El Dorado/Yolo CA, San Diego CA, Washington/Oregon,
Other U.S. Mainland). Finally, loans are further subdivided by risk rating (Pass, Special Mention, Substandard, and Doubtful).
For the purpose of determining general allowance loss factors, loss experience is derived from chargeoffs and recoveries. A chargeoff occurs when the Company makes the
determination that an amount of debt is deemed to be uncollectible. Loans are also charged off when it is probable that a loss has been incurred and it is possible to make a
reasonable estimate of the loss. Chargeoffs are classified into subsectors according to the underlying loan’s primary geography, loan category, collateral type (if applicable),
investment type (if applicable), state/county, and the risk rating of the loan one year prior to the chargeoff. A recovery occurs when a loan that is classified as a bad debt was
either partially or fully charged off and has been subsequently recovered. Recoveries are classified according to the subsector of the earliest associated chargeoff of the loan
within a selected lookback period. The cumulative chargeoffs are determined by summing all subsectorspecific chargeoffs that occurred within the selected lookback period
and the cumulative recoveries are determined by summing the subsectorspecific recoveries for each subsector. Subsector losses are measured by subtracting each subsector’s
cumulative recoveries from their respective cumulative chargeoffs. Subsector losses are then divided by the subsector loan balance averaged over the lookback period to
determine each subsector’s historical loss rate.
33
From 2010 through 2013, the calculation of subsector loss factors involved a lookback period of eight quarters (for loans secured by real estate by FDIC classifications) or four
quarters (for all other loans). The Company’s then rapidly evolving loss experience necessitated the use of shorter loss analysis periods in order to ensure that loss rates would be
adequately responsive to changes in loss experience. During that period, the Company considered recent loss data to be more relevant to the current period under analysis and
consistent with commentary provided by our primary banking regulator.
As economic conditions continued to improve and stabilize, the Company experienced improving credit quality trends that contributed to consistent reductions to the
Allowance. Given the diminishing loss rates, in the first quarter of 2014 the Company extended the lookback period for loans secured by real estate from 8 quarters to 17 quarters,
with the intention of extending the lookback period each quarter thereafter to a total of 24 quarters or six years to incorporate broader loss experience through a more complete
economic cycle. The Company believed this would also reduce the Company’s reliance on proxy loss rates by capturing more of the Company’s own historical loss experience in
the extended lookback period. The Company also believes the longer lookback period is appropriate in light of the Company’s limited loss experience throughout the recent
economic recovery and stabilization. Additionally, as economic conditions have stabilized, the Company believes the lower loss rate volatility has diminished the need for
shorter loss analysis periods that are more responsive to shifts in loss experience. The enhanced methodology does not incorporate data before 2010 due to the anomalous loss
activity during that time period that may cause pre2010 internal loss data to be an inappropriate representation of the current inherent risk in the Company’s loan portfolio. In our
revised approach, the losses during the six year lookback period are weighted to place more emphasis on recent loss experience. At December 31, 2015, the lookback period for
loans secured by real estate includes 24 quarters of historical loss experience.
Application of Proxies
The Company applies external proxies for minimum loss rates in those loan categories with no associated loss experience during the prescribed lookback period, including
criticized credits. The Company believes the use of external proxies is a prudent approach versus using a zero loss factor for those loan categories that do not have loss experience
in the lookback period. The external proxies used are based on four select credit loss rates tracked by Moody’s Investor Service.
The following table describes the Moody’s loss rate that is applied as a proxy to each loan category when no associated loss experience is registered in a subsector of the loan
category over the relevant lookback period.
Loan Segment
Proxy Moody’s Loss Rate
Commercial, Financial and Agricultural
Maximum of Last 5 Yrs’ Annual Corporate Bond Loss Rate
Construction
Commercial Mortgage
Residential Mortgage
Consumer
Leases
Cumulative 2Yr U.S. CMBS Loss Rate
Cumulative 2Yr U.S. CMBS Loss Rate
Cumulative 2Yr U.S. RMBS/HEL Loss Rate
1Yr U.S. ABS excl. HEL Loss Rate
Maximum of Last 5 Yrs’ Annual Corporate Bond Loss Rate
In those loan categories described in the table above, specific loss rate proxies are applied based on the equivalence of respective risk ratings between the proxy rate and the loan
subsector. Based on the conformity of risk characterizations, Brated proxy rates are matched to substandard loan segments (risk rating 6), Barated proxy rates are matched to
special mention loan segments (risk rating 5), and Aaa, Aa, A and Baarated proxy rates are matched to risk ratings strong quality, above average quality, average quality, and
acceptable quality, respectively (risk ratings 1, 2, 3 and 4).
For pass rated loan segments with no associated loss experience during the respective prescribed lookback periods, the proxy loss rate is determined by weighting each proxy loss
rate (ratings Aaa, Aa, A and Baa) by the loan balance in each equivalent risk rating (strong, above average, average and acceptable quality, respectively).
In assessing the appropriateness of Moody’s proxy rates, the Company conducted a comprehensive review of other potential sources of proxy loss data, evaluated the qualitative
and quantitative factors influencing the relevance and reliability of proxy data, and performed a correlation analysis to determine the codependency of historical loss ratios with
Moody’s loss rates. The analysis compared historical loss ratios in each loan category to the associated Moody’s loss rates over ten years.
34
An analysis of the correlation between historical loss ratios and Moody’s loss rates revealed that the two metrics demonstrated a directionally consistent loss relationship in nearly
every rating group and exhibited average to strong correlation across all rating groups in almost every segment. Given the results of the correlation analysis, the Company deemed
application of these proxy loss rates to be reasonable and supportable.
Qualitative Adjustments
Our Allowance methodology uses qualitative adjustments for economic/market conditions and Companyspecific conditions. The economic/market conditions factor is applied
on a regional/geographic basis. The Companyspecific condition factor is applied on a category basis. Two key indicators, personal income and unemployment, comprise the
economic/market adjustment factor.
Personal income is analyzed by comparing average quartertoquarter percentage change trends reported by the U.S. Bureau of Economic Analysis. Specifically, the rolling four
quarter average percentage change in personal income is calculated and compared to a baseline historical factor, calculated as the average quartertoquarter percentage change
over the prior ten years. The difference between the current average change and the historical average change is utilized as the personal income component of the
economic/market adjustment factor.
The second component of the economic/market factor, unemployment, is derived by comparing the current quarter unemployment rate, reported by the U.S. Bureau of Labor
Statistics, to its ten year historical average. A constant scaling factor is applied to the difference between the current rate and the historical average in order to smooth significant
periodtoperiod fluctuations. The result is utilized as the unemployment component of the economic factor. The personal income factor and unemployment factor are added
together to determine each region’s total economic/market adjustment factor. Management reviews the results of the qualitative adjustment factors to ensure it is consistent with
the trends in the overall economy, and from time to time may make adjustments, if necessary, to ensure directional consistency.
The general allowance also incorporates qualitative adjustment factors that capture Companyspecific conditions for which national/regional statistics are not available, or for
which significant localized market specific events have not yet been captured within regional statistics or the Company’s historical loss experience. Since we cannot predict with
certainty the amount of loan and lease chargeoffs that will be incurred and because the eventual level of loan and lease chargeoffs are impacted by numerous conditions beyond
our control, we use our historical loss experience adjusted for current conditions to determine both our Allowance and Provision.
In recognizing that current and relevant environmental (economic, market or other) conditions that can affect repayment may not yet be fully reflected in historical loss
experience, qualitative assessments are conducted to factor in current loan portfolio and market intelligence. These adjustments, which are added to (or subtracted from) the loss
ratio, consider the nature of the bank’s primary markets and are reasonable, consistently determined and appropriately documented. Management reviews the results of the
qualitative adjustment factors to ensure it is consistent with the trends in the overall economy, and from time to time may make adjustments, if necessary, to ensure directional
consistency. These qualitative adjustments for 2012 through 2015 include the following:
2012
•
•
2013
•
In the second quarter 2012, adjustment factors were added to the Pass and Special Mention rated Commercial Mortgage segments in consideration of the refinance risk
associated with loans maturing over the next two years. Adjustment factors were not added to Substandard rated loans due to the enhanced level of monitoring devoted
to these credits, with impairment analysis performed as indicated.
In the second quarter 2012, an adjustment factor was added in recognition of the delegation of increased credit authority to Line Division Management and changes in
the underwriting and approval process for small business lending. This change involved moving from a judgmental underwriting process for all loans to a scorebased
approval process below a certain loan size threshold, and a streamlined judgmental process augmented by relationship officer involvement above a certain loan size
threshold.
In the first quarter of 2013, an adjustment factor was added to the Pass rated residential mortgage segments in consideration of emerging concentration risk. In addition,
“benchmark” loss rates were applied to loans generated via recent preapproved and invitation to apply promotions in the Direct Consumer segment until historical loss
data had
35
been accumulated. Also, weighted adjustment factors were applied to the syndicated loan portfolio based on Moody’s proxy default rates to account for increased risk
associated with recent entrance into this sector and risk exposure attributed to the size of individual credits.
In the second quarter of 2013, an adjustment factor was subtracted from the Pass rated residential mortgage segments in consideration of the continued disparity between
actual calculated historical loss rates and those provided by our primary regulator in 2010.
In the third quarter of 2013, we purchased the first student loan pool. The expected loss rates were applied to the student loans in the Direct Consumer segment until
historical loss data has been accumulated for this loan segment.
In the first quarter of 2014, the refinance risk qualitative adjustment factors for commercial mortgages were discontinued as the extension of the historical loss lookback
period is deemed to capture a majority of the segment’s refinance risk through the incorporation of more comprehensive economic data.
In the first quarter of 2014, the previous methodology for Pass rated residential mortgage subsectors based on guidance from our primary regulator in 2010 was
discontinued in order to better reflect the bank’s current exposure and actual loss experience. The Company deems the bank’s actual loss experience to be more reflective
of current portfolio conditions.
In the first quarter of 2014, in consideration of portfolio concentration risk, benchmark adjustment factors were added to the Pass and Special Mention rated subsectors of
segments with loan balances comprising greater than 20% of the total loan portfolio. The benchmark adjustment factors consider segmentspecific annual loss rates over
the economic cycle in order to determine a loss rate that adequately captures concentration risk. In the first quarter of 2014, the benchmark adjustment factors affected the
Pass rated residential mortgage and commercial mortgage segments.
In the fourth quarter of 2014, the Company determined that it was appropriate to separate U.S. mainland commercial mortgages from Hawaii commercial mortgages for
purposes of calculating concentration risk. In making this assessment, the Company considered the regulatory guidance and concluded that the U.S. mainland
commercial mortgages were no longer not sufficiently similar in credit performance to the credit performance of the Hawaii commercial mortgages such that they would
necessarily “perform like a single large exposure.” This is supported by a correlation analysis conducted by the Company. In light of the statistical evidence
demonstrating the reduced dependency between the credit performance of the two segments, the Company concluded that the U.S. mainland commercial mortgage
segment should not be included with the Hawaii commercial mortgage segment for the determination of portfolio concentration.
In the fourth quarter of 2014, the Company adopted a time based graduated scale to reduce reliance on benchmark data by substituting our emerging actual experience in
the Preapproved Consumer Loans and Student Loans portfolios of the Consumer Loan Segment.
In the fourth quarter of 2014, the Company replaced a Moody’s proxy loss rate designed to compensate for the large size of the individual loans and lack of experience
with a qualitative factor based on the Company’s emerging experience in the syndicated loan portfolio. The portfolio has begun to season and within the one year look
back period, we experienced a loss. The Company considers it prudent to augment the emerging experience of this portfolio with qualitative factors that are intended to
compensate for lack of sufficient historical experience.
•
•
2014
•
•
•
•
•
•
2015
•
In the first and second quarters of 2015, we increased a qualitative factor applied to our national syndicated loan portfolio in consideration of updated proxy information
which became available in the first quarter of 2015 and better defined portfolio attributes during the second quarter of 2015.
We continually monitor for updated and refined information sources which will enable us to enhance the quality of our Allowance methodology from time to time.
In addition, various regulatory agencies, as an integral part of their examination processes, periodically review our Allowance. The determination of the Allowance requires us to
make estimates of losses that are highly uncertain and involves a high degree
36
of judgment. Accordingly, actual results could differ from those estimates. Changes in the estimate of the Allowance and related Provision could materially affect our operating
results.
The sum of each subsector’s historical loss rate plus a regionspecific economic/market qualitative adjustment and categoryspecific other qualitative adjustment, as discussed in
the above “Application of Proxies” section, is then multiplied by the subsector’s periodending loan balance to determine each subsector’s general allowance provision. The sum
of the 128 subsector general allowance provisions represents the general allowance provision of the entire portfolio. As of December 31, 2015, this general allowance represented
$61.1 million of the total Allowance, compared to $68.5 million at December 31, 2014.
Unallocated Reserve
The Company maintains an unallocated Allowance amount to provide for other credit losses inherent in our loan and lease portfolio that may not have been contemplated in the
credit loss factors. The unallocated reserve is a measure to address judgmental estimates that are inevitably imprecise and it reflects an adjustment to the Allowance that is not
attributable to specific categories of the loan portfolio. The unallocated reserve is distinct from and not captured in the Company’s qualitative adjustments in the general
component of the Allowance. These qualitative adjustments only capture direct and specific risks to our portfolio, whereas the unallocated reserve is intended to capture broader
national and global economic risks that could potentially have a ripple effect on our loan portfolio.
As of December 31, 2015 and December 31, 2014, an unallocated estimate of $2.1 million and $4.0 million, respectively, was based on the Company’s recognition of domestic
(U.S. mainland) and international events that pose heightened volatility in the isolated Hawaii market. Examples of such stressors are acts of terrorism, pandemic events, energy
price volatility and Federal budget changes. Any of these in isolation or combination could have significant effects on the two key drivers of the Hawaii economy: tourism and
Federal spending.
Although the Company does not have direct exposure to the economic and political crises occurring internationally, the ripple effect of continuous uncertainty surrounding
ultimate resolution, along with quantifiable measures once achieved, may result in increased risk to the Company from the standpoint of consequences to its customer base and
impacts on the Hawaii tourism market.
Loans Held for Sale
Loans held for sale consists of the following two types: (1) Hawaii residential mortgage loans that are originated with the intent to sell them in the secondary market and (2) non
residential mortgage loans in both Hawaii and the U.S. Mainland that were originated with the intent to be held in our portfolio but were subsequently transferred to the held for
sale category. Hawaii residential mortgage loans classified as held for sale are carried at the lower of cost or fair value on an aggregate basis while the nonresidential Hawaii and
U.S. Mainland loans are recorded at the lower of cost or fair value on an individual basis.
When a nonresidential mortgage loan is transferred to the held for sale category, the loan is recorded at the lower of cost or fair value. Any reduction in the loan’s value is
reflected as a writedown of the recorded investment resulting in a new cost basis, with a corresponding reduction in the Allowance. In subsequent periods, if the fair value of a
loan classified as held for sale is less than its cost basis, a valuation adjustment is recognized in our consolidated statement of income in other operating expense and the carrying
value of the loan is adjusted accordingly. The valuation adjustment may be recovered in the event that the fair value increases, which is also recognized in our consolidated
statement of income in other operating expense.
The fair value of loans classified as held for sale are generally based upon quoted prices for similar assets in active markets, acceptance of firm offer letters with agreed upon
purchase prices, discounted cash flow models that take into account market observable assumptions, or independent appraisals of the underlying collateral securing the loans. We
report the fair values of the nonresidential mortgage loans classified as held for sale net of applicable selling costs on our consolidated balance sheets. As of December 31, 2015
and 2014, all of our loans held for sale were Hawaii residential mortgage loans.
Mortgage Servicing Rights
We utilize the amortization method to measure our mortgage servicing rights. Under the amortization method, we amortize our mortgage servicing rights in proportion to and over
the period of net servicing income. Income generated as a result of new mortgage servicing rights is reported as gains on sales of loans. Amortization of the servicing rights is
reported as amortization of other intangible assets in our consolidated statements of income. Ancillary income is recorded in other income. Mortgage
37
servicing rights are recorded when loans are sold to thirdparties with servicing of those loans retained and we classify our entire mortgage servicing rights into one pool.
Initial fair value of the servicing right is calculated by a discounted cash flow model prepared by a third party service provider based on market value assumptions at the time of
origination. We assess the servicing right for impairment using current market value assumptions at each reporting period. Critical assumptions used in the discounted cash flow
model include mortgage prepayment speeds, discount rates, costs to service, and ancillary income. Variations in our assumptions could materially affect the estimated fair values.
Changes to our assumptions are made when current trends and market data indicate that new trends have developed. Current market value assumptions based on loan product
types (fixed rate, adjustable rate and balloon loans) include average discount rates and national prepayment speeds. Many of these assumptions are subjective and require a high
level of management judgment. Our mortgage servicing rights portfolio and valuation assumptions are periodically reviewed by management.
The fair value of our mortgage servicing rights is validated by first ensuring the completeness and accuracy of the loan data used in the valuation analysis. Reconciliation is
performed by comparing the loan data from our loan system to a valuation report prepared by a third party. Additionally, the critical assumptions which come from the third party
are reviewed by management. This review may include comparing actual assumptions to forecast or evaluating the reasonableness of market assumptions by reviewing them in
relation to the values and trends of assumptions used by peer banks. The validation process also includes reviewing key metrics such as the fair value as a percentage of the total
unpaid principal balance of the mortgages serviced, and the resulting percentage as a multiple of the net servicing fee. These key metrics are tracked to ensure the trends are
reasonable, and are periodically compared to peer banks.
Prepayment speeds may be affected by economic factors such as home price appreciation, market interest rates, the availability of other credit products to our borrowers and
customer payment patterns. Prepayment speeds include the impact of all borrower prepayments, including full payoffs, additional principal payments and the impact of loans paid
off due to foreclosure liquidations. As market interest rates decline, prepayment speeds will generally increase as customers refinance existing mortgages under more favorable
interest rate terms. As prepayment speeds increase, anticipated cash flows will generally decline resulting in a potential reduction, or impairment, to the fair value of the
capitalized mortgage servicing rights. Alternatively, an increase in market interest rates may cause a decrease in prepayment speeds and therefore an increase in fair value of
mortgage servicing rights.
We perform an impairment assessment of our mortgage servicing rights whenever events or changes in circumstance indicate that the carrying value of those assets may not be
recoverable. Our impairment assessments involve, among other valuation methods, the estimation of future cash flows and other methods of determining fair value. Estimating
future cash flows and determining fair values is subject to judgments and often involves the use of significant estimates and assumptions. The variability of the factors we use to
perform our impairment tests depend on a number of conditions, including uncertainty about future events and cash flows. All such factors are interdependent and, therefore, do
not change in isolation. Accordingly, our accounting estimates may materially change from period to period due to changing market factors.
Deferred Tax Assets and Tax Contingencies
Deferred tax assets and liabilities are recognized for the estimated future tax effects attributable to temporary differences and carryforwards. A valuation allowance may be
required if, based on the weight of available evidence, it is more likely than not that some portion or all of the DTAs will not be realized. In determining whether a valuation
allowance is necessary, we consider the level of taxable income in prior years, to the extent that carrybacks are permitted under current tax laws, as well as estimates of future
taxable income and tax planning strategies that could be implemented to accelerate taxable income, if necessary. If our estimates of future taxable income were materially
overstated or if our assumptions regarding the tax consequences of tax planning strategies were inaccurate, some or all of our DTAs may not be realized, which would result in a
charge to earnings. In 2009, we established a full valuation allowance against our net DTAs. See “— Overview of Results of Operations — Income Taxes” below. The quarter
ended March 31, 2013 marked our ninth consecutive quarter of profitability. Based on this earnings performance trend, improvements in our financial condition, asset quality and
capital ratios and the expectation of continued profitability, the Company determined that it was more likely than not that our net DTA would be realized. As a result, in the first
quarter of 2013, the Company reversed a significant portion of the valuation allowance.
We have established income tax contingency reserves for potential tax liabilities related to uncertain tax positions. Tax benefits are recognized when we determine that it is more
likely than not that such benefits will be realized. Where uncertainty exists due to the complexity of income tax statutes and where the potential tax amounts are significant, we
generally seek independent tax opinions to support our positions. If our evaluation of the likelihood of the realization of benefits is inaccurate, we could
38
incur additional income tax and interest expense that would adversely impact earnings, or we could receive tax benefits greater than anticipated which would positively impact
earnings.
Defined Benefit Retirement Plan
Defined benefit plan obligations and related assets of our defined benefit retirement plan are presented in Note 15 to the Consolidated Financial Statements under “Part II, Item 8.
Financial Statements and Supplementary Data.” In 2002, the defined benefit retirement plan was curtailed and all plan benefits were fixed as of that date. Plan assets, which
consist primarily of marketable equity and debt securities, are typically valued using market quotations. Plan obligations and the annual pension expense are determined by
independent actuaries through the use of a number of assumptions. Key assumptions in measuring the plan obligations include the discount rate and the expected longterm rate
of return on plan assets. In determining the discount rate, we utilize a yield that reflects the top 50% of the universe of bonds with an AA average rating, ranked in the order of the
highest yield. Asset returns are based upon the anticipated average rate of earnings expected on the invested funds of the plans.
At December 31, 2015, we used a weightedaverage discount rate of 4.3% and an expected longterm rate of return on plan assets of 7.0%, which affected the amount of pension
liability recorded as of yearend 2015 and the amount of pension expense to be recorded in 2016. At December 31, 2014, we used a weightedaverage discount rate of 4.0% and
an expected longterm rate of return on plan assets of 7.0% in determining the pension liability recorded as of yearend 2014 and the amount of pension expense recorded in 2015.
For both the discount rate and the asset return rate, a range of estimates could reasonably have been used which would affect the amount of pension expense and pension liability
recorded.
An increase in the discount rate or asset return rate would reduce pension expense in 2015, while a decrease in the discount rate or asset return rate would have had the opposite
effect. A 0.25% change in the discount rate assumption would impact 2016 pension expense by less than $0.1 million and yearend 2015 pension liability by $0.8 million, while
a 0.25% change in the asset return rate would impact 2016 pension expense by less than $0.1 million.
Overview of Results of Operations
2015 vs. 2014 Comparison
In 2015, we recognized net income of $45.9 million, or $1.40 per diluted common share, compared to net income of $40.5 million, or $1.07 per diluted common share, in 2014.
The increase in net income from 2014 was primarily due to a higher credit to the Provision, as well as an increase in net interest income, and a decrease in other operating expense.
We recorded a credit to the Provision of $15.7 million in 2015, compared to $6.4 million in 2014. Total credit costs, which include the Provision, writedowns of loans classified
as held for sale, foreclosed asset expense, gains on sales of foreclosed assets, and the change in the reserve for unfunded loan commitments, amounted to a credit of $16.0 million
in 2015, compared to a credit of $6.0 million in 2014.
Net interest income increased by $6.1 million from 2014 to 2015, primarily due to an increase in average loans and leases.
Other operating expense decreased by $1.6 million, primarily due to a credit to the reserve for residential mortgage loan repurchase losses of $1.4 million recorded in 2015,
compared to an increase to the reserve of $0.5 million recorded in 2014, lower salaries and employee benefits of $1.5 million, branch consolidation and relocation costs of $1.3
million recorded in 2014, and lower foreclosed asset expense of $1.2 million. These decreases in other operating expense were partially offset by higher computer software
expense of $2.5 million and higher amortization of intangible assets of $1.5 million.
These improvements were partially offset by a decrease in other operating income of $4.8 million from 2014 to 2015. The decrease in other operating income was due primarily to
investment securities losses of $1.9 million recorded in 2015, compared to investment securities gains of $0.2 million in 2014. In addition, we recorded lower income recovered
on loans previously charged off of $0.6 million and recorded net unrealized losses on loans held for sale and interest rate locks of $0.3 million in 2015, compared to net unrealized
gains on loans held for sale and interest rate locks of $0.3 million in 2014.
In addition, income tax expense increased by $6.7 million from 2014 primarily due to higher pretax income in 2015.
Our net income on average assets and average shareholders’ equity for 2015 was 0.92% and 8.91%, respectively, compared to 0.85% and 6.80%, respectively, in 2014.
39
2014 vs. 2013 Comparison
In 2014, we recognized net income of $40.5 million, or $1.07 per diluted common share, compared to net income of $172.1 million, or $4.07 per diluted common share, in 2013.
Net income in 2013 included a noncash income tax benefit of $119.8 million recorded in the first quarter of 2013 related to the reversal of a significant portion of a valuation
allowance that was established against the Company’s net DTA during the third quarter of 2009. Excluding this income tax benefit, net income for 2013 was $52.3 million, or
$1.24 per diluted common share.
We recorded a credit to the Provision of $6.4 million in 2014, compared to a credit to the Provision of $11.3 million in 2013. Total credit costs, which include the Provision,
writedowns of loans classified as held for sale, foreclosed asset expense, gains on sales of foreclosed assets, and the change in the reserve for unfunded loan commitments,
amounted to a credit of $6.0 million in 2014, compared to a credit of $22.4 million in 2013.
Other operating income decreased by $11.1 million from 2013 to 2014, primarily due to lower net gains on sales of foreclosed assets of $7.6 million and lower net gains on sales
of residential mortgage loans of $4.4 million.
In 2014, we recorded income tax expense of $20.4 million, compared to an income tax benefit of $112.2 million recorded in 2013. The income tax benefit recorded in 2013
included the aforementioned reversal of a significant portion of a valuation allowance on our net DTA of $119.8 million.
Offsetting these negative variances was an increase in net interest income of $10.3 million and a decrease in other operating expense of $6.7 million. The increase in net interest
income was due primarily to an increase in interestearnings assets from 2013 to 2014, combined with an increase in yields earned on the assets. The decrease in other operating
expense was due primarily to lower salaries and employee benefits of $8.4 million and lower amortization of intangible assets of $2.1 million, partially offset by higher computer
software expense of $1.7 million.
Our net income on average assets and average shareholders’ equity for 2014 was 0.85% and 6.80%, respectively, compared to 3.73% and 27.70%, respectively, in 2013.
40
Net Interest Income
The following table sets forth information concerning average interestearning assets and interestbearing liabilities and the yields and rates thereon. Net interest income, when
expressed as a percentage of average interestearning 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 an assumed income tax rate of 35%. Table 2 presents an analysis of changes in components of net interest income between years. For
each category of interestearning assets and interestbearing liabilities, information is provided on changes attributable to: (i) changes in volume (change in volume of the asset
multiplied by the prior year’s rate) and (ii) changes in rates (change in rate multiplied by the current year’s volume).
Table 1. Average Balances, Interest Income and Expense, Yields and Rates (Taxable Equivalent)
Average
Balance
2015
Average
Yield/
Rate
Amount
of Interest
Average
Balance
2014
Average
Yield/
Rate
(Dollars in thousands)
Amount
of Interest
Average
Balance
2013
Average
Yield/
Rate
Amount
of Interest
Assets
Interestearning assets:
Interestbearing deposits in other banks
$
13,966
0.25% $
35
$
13,207
0.25% $
33
$
81,249
0.25% $
1,339,070
175,919
3,038,100
23,631
4,590,686
375,003
$
4,965,689
$
802,121
1,276,830
227,288
844,376
92,045
92,785
3,335,445
1,072,998
42,203
4,450,646
515,043
—
515,043
$
4,965,689
Taxable investment securities (1)
Taxexempt investment securities (1)
Loans and leases, including loans held for sale (2)
Federal Home Loan Bank stock
Total interestearning assets
Nonearning assets
Total assets
Liabilities and Equity
Interestbearing liabilities:
Interestbearing demand deposits
Savings and money market deposits
Time deposits under $100,000
Time deposits $100,000 and over
Shortterm borrowings
Longterm debt
Total interestbearing liabilities
Noninterestbearing deposits
Other liabilities
Total liabilities
Shareholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
Net interest income
Net interest margin
(1) At amortized cost.
(2)
Includes nonaccrual loans.
2.46
3.52
3.91
0.36
3.45
33,005
6,188
1,344,821
178,275
118,887
2,798,826
86
45,185
158,201
4,380,314
379,502
$
4,759,816
2.50
3.45
4.01
0.10
3.47
33,597
6,148
1,534,136
177,510
112,137
2,394,955
46
47,202
151,961
4,235,052
375,770
$
4,610,822
2.05
3.51
4.36
0.05
3.36
0.05% $
0.07
0.37
0.17
0.28
2.83
0.20
399
916
838
1,474
254
2,626
6,507
$
764,504
0.05% $
0.07
0.42
0.17
0.29
2.77
0.20
1,227,049
254,572
804,863
31,732
92,790
3,175,510
938,078
51,003
4,164,591
595,210
15
595,225
373
901
1,069
1,384
92
2,572
6,391
$
708,658
0.05% $
0.07
0.46
0.19
0.32
2.99
0.23
1,191,919
285,042
769,672
1,988
104,373
3,061,652
849,371
73,040
3,984,063
621,282
5,477
626,759
$
4,759,816
$
4,610,822
203
31,521
6,232
104,479
24
142,459
349
894
1,301
1,500
6
3,119
7,169
$
151,694
$
145,570
$
135,290
3.30%
3.32%
3.19%
41
Table 2. Analysis of Changes in Net Interest Income (Taxable Equivalent)
2015 Compared to 2014
2014 Compared to 2013
Increase (Decrease)
Due to Change In:
Volume
Rate
Increase (Decrease)
Due to Change In:
Volume
Rate
Net
Change
(Dollars in thousands)
Net
Change
Interestearning assets
Interestbearing deposits in other banks
$
2 $
— $
2 $
(170) $
— $
Taxable investment securities
Taxexempt investment securities
Loans and leases, including loans held for sale
Federal Home Loan Bank stock
Total interestearning assets
Interestbearing liabilities
Interestbearing demand deposits
Savings and money market deposits
Time deposits under $100,000
Time deposits $100,000 and over
Shortterm borrowings
Longterm debt
Total interestbearing liabilities
(144)
(81)
9,587
(22)
9,342
19
35
(115)
67
175
—
181
(448)
121
(2,837)
62
(3,102)
7
(20)
(116)
23
(13)
54
(65)
(592)
40
6,750
40
6,240
26
15
(231)
90
162
54
116
(3,881)
27
17,609
(1)
13,584
28
25
(140)
67
95
(346)
(271)
5,957
(111)
(9,951)
23
(4,082)
(4)
(18)
(92)
(183)
(9)
(201)
(507)
(170)
2,076
(84)
7,658
22
9,502
24
7
(232)
(116)
86
(547)
(778)
Net interest income
$
9,161 $
(3,037) $
6,124 $
13,855 $
(3,575) $
10,280
Net interest income is our primary source of earnings and is derived primarily from the difference between the interest we earn on loans and investments versus the interest we pay
on deposits and borrowings. Net interest income (expressed on a taxableequivalent basis) totaled $151.7 million in 2015, increasing by $6.1 million, or 4.2%, from $145.6
million in 2014, which increased by $10.3 million, or 7.6%, from net interest income of $135.3 million recognized in 2013. The increase in net interest income for 2015 was
primarily the result of a significant increase in average loans and leases as we continued to redeploy our excess liquidity into higher yielding assets. Partially offsetting the
increase was the 4 basis points (“bp”) decrease in average yields earned on our taxable investment securities and a 10 bp decline in average yields earned on our loans and leases
portfolio.
Average rates earned on our interestearning assets decreased by 2 bp in the year ended December 31, 2015, from the year ended December 31, 2014. Average rates paid on our
interestbearing liabilities in the year ended December 31, 2015 remained unchanged from the year ended December 31, 2014. The decline in average yields earned on our
interestearning assets in 2015 was primarily attributable to the 10 bp and 4 bp decreases in average yields earned on our loans and leases and taxable investment securities
portfolios, respectively.
In the second quarter of 2015, $119.4 million in availableforsale mortgagebacked securities were sold as part of an investment portfolio repositioning strategy designed to
reduce net interest income volatility and enhance the potential prospective earnings and an improved net interest margin. Investment securities sold had a weighted average life of
4.4 years, average yield of 1.35%, and resulted in a loss of $1.9 million. Proceeds from the sale were reinvested in $120.6 million in investment securities with a weighted average
life of 7.6 years and an average yield of 2.71%. The new securities were classified in the availableforsale portfolio.
In the second quarter of 2014, $162.3 million in availableforsale securities were sold as part of a balance sheet optimization strategy designed to improve our interest rate risk
profile. Investment securities sold had a weighted average life of 5.7 years, average yield of 2.68%, and resulted in a gain of $0.2 million.
42
In the fourth quarter of 2013, we executed a bond swap where we sold $271.5 million in loweryielding availableforsale agency debentures and agency mortgagebacked
securities with an average net yield of 1.87% and a weighted average life of 2.9 years and reinvested the majority of the proceeds in $242.5 million of higheryielding agency
mortgagebacked securities, nonagency commercial mortgagebacked securities, and corporate bond securities with an average yield of 3.21% and a weighted average life of 7.4
years. The new securities were classified in the availableforsale portfolio and a net gain of $0.5 million was realized on the transaction. This transaction contributed to the
significant increase in average yields earned on our taxable investment securities.
Interest Income
Our primary sources of interest income include interest on loans and leases, which represented 75.1%, 73.8%, and 73.3% of interest income in 2015, 2014 and 2013, respectively,
as well as interest earned on investment securities, which represented 24.8%, 26.2%, and 26.5% of interest income (on a taxableequivalent basis), respectively. Interest income
expressed on a taxableequivalent basis of $158.2 million in 2015 increased by $6.2 million, or 4.1%, from the $152.0 million earned in 2014, which increased by $9.5 million, or
6.7%, from the $142.5 million earned in 2013.
As depicted in Table 2, the increase in interest income in 2015 from the prior year was primarily due to a significant increase in average loans and leases balances, partially offset
by a decrease in average loan and taxable investment securities yields. The $239.3 million increase in average loans and leases contributed to an increase of $9.6 million in
current year interest income. This increase was partially offset by the 10 bp decrease in average loan yields in 2015 which contributed to $2.8 million in lower interest income for
2015. The 4 bp decrease in average taxable investment securities yields contributed to a decrease of $0.4 million in current year interest income.
The increase in interest income in 2014 from 2013 was primarily due to a significant increase in average loans and leases balances and the increase in average taxable investment
securities yields, partially offset by a decrease in average loan yields and the decrease in average taxable investment securities balances. The $403.9 million increase in average
loans and leases contributed to an increase of $17.6 million in 2014 interest income. In addition, the 45 bp increase in average taxable investment securities yields in 2014
contributed to $6.0 million in higher interest income for 2014. These increases were partially offset by the 35 bp decrease in average loan yields in 2014 which contributed to
$10.0 million in lower interest income for 2014. The $189.3 million decrease in average taxable investment securities contributed to a decrease of $3.9 million in 2014 interest
income.
Interest Expense
In 2015, interest expense was $6.5 million which represented an increase of $0.1 million, or 1.8%, compared to interest expense of $6.4 million in 2014, which was a decrease of
$0.8 million, or 10.9%, compared to $7.2 million in 2013.
In 2015, increases in the average balances of interestbearing demand deposits of $37.6 million, savings and money market deposits of $49.8 million, time deposits $100,000 and
over of $39.5 million, and shortterm borrowings of $60.3 million contributed to the increase in interest expense in 2015. The average rate paid on interestbearing liabilities
remained unchanged from 0.20% in 2014. Decreases in the average rates paid on time deposits under $100,000 of 5 bp and shortterm borrowings of 1 bp were offset by an
increase in rates paid on longterm debt of 6 bp.
In 2014, the average rate paid on interestbearing liabilities decreased by 3 bp to 0.20%, compared to 0.23% in 2013. Decreases in the average rates paid on longterm debt of 22
bp, time deposits $100,000 and over of 2 bp, and time deposits under $100,000 of 4 bp, were the primary drivers of the overall decrease in interest expense. Decreases in the
average balances of longterm debt of $11.6 million and time deposits under $100,000 of $30.5 million also contributed to the reduction of interest expense in 2014.
Net Interest Margin
Our net interest margin was 3.30%, 3.32% and 3.19% in 2015, 2014 and 2013, respectively. The decrease in our net interest margin in 2015 reflected the 10 bp and 4 bp decreases
in average loan and taxableinvestment securities yields, respectively.
The improvement in our net interest margin in 2014 from the prior year reflected the $403.9 million increase in average loans and leases contributing an increase of $17.6 million
in interest income. In addition, reinvestment in higher yielding taxable investment securities resulted in a 45 bp increase in average taxable yields, contributing $6.0 million in
higher interest income
43
in 2014. These increases were partially offset by the 35 bp decrease in average loan yields, which contributed to the $10.0 million in lower interest income for 2014.
The historically low interest rate environment that we continue to operate in is the result of the target Fed Funds range of 0% to 0.25% initially set by the Federal Reserve in the
fourth quarter of 2008 and other economic policies implemented by the FRB, which continued through the third quarter of 2015. In December 2015, the Federal Reserve increased
the target Fed Funds range to 0.25% to 0.50% based on the improvement in labor market conditions and a positive economic outlook.
We continue to expect the target Fed Funds rate to remain low throughout 2016, as longerterm inflation continues to run below the Federal Open Market Committee's 2% longer
run objective, partly reflecting declines in energy prices and in prices of nonenergy imports. We expect the yield curve to remain relatively unchanged throughout 2016, as
concerns about the ability to maintain a sustained economic recovery still remain. Thus we expect our net interest margin to remain relatively unchanged through 2016 and
expand modestly with the economic recovery.
Other Operating Income
The following table sets forth components of other operating income and the total as a percentage of average assets for the periods indicated.
Table 3. Components of Other Operating Income
Other service charges and fees
Service charges on deposit accounts
Loan servicing fees
Net gain on sales of residential loans
Income from fiduciary activities
Income from bankowned life insurance
Net gain on sales of foreclosed assets
Equity in earnings of unconsolidated subsidiaries
Fees on foreign exchange
Loan placement fees
Investment securities gains (losses)
Other:
Income recovered on loans previously charged off
Other recoveries
Net unrealized gains (losses) on loansheldforsale and interest rate locks
Commissions on sale of checks
Gain on extinguishment of debt
Other
Total other operating income
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
$
11,461
$
11,754
$
12,490
7,829
5,656
6,107
3,343
2,034
568
578
450
720
(1,866)
794
550
(324)
325
—
759
8,113
5,798
5,545
3,552
2,922
971
480
464
437
240
1,436
672
294
336
—
809
$
38,984
$
43,823
$
7,041
6,057
9,986
2,855
2,333
8,584
790
508
570
482
—
67
337
316
1,000
1,529
54,945
Total other operating income as a percentage of average assets
0.92%
1.19%
1.44%
Total other operating income of $39.0 million in 2015 decreased by $4.8 million, or 11.0%, from the $43.8 million earned in 2014, which decreased by $11.1 million, or 20.2%,
from the $54.9 million earned in 2013.
The decrease in other operating income in 2015 from 2014 was primarily due to investment securities losses of $1.9 million recorded in 2015, compared to investment securities
gains of $0.2 million in 2014, and a reversal of unrealized gains on loansheldforsale and interest rate locks of $0.3 million in 2015, compared to an increase in unrealized gains
on loansheldforsale
44
and interest rate locks of $0.3 million in 2014. In addition, we recorded lower income from bankowned life insurance of $0.9 million, lower income recovered on loans
previously charged off of $0.6 million, and lower net gains on sales of foreclosed assets of $0.4 million. These decreases were partially offset by an increase in net gains on sales of
residential mortgage loans of $0.6 million.
The decrease in other operating income in 2014 from 2013 was primarily due to lower net gains on sales of foreclosed assets and net gains on sales of residential mortgage loans of
$7.6 million and $4.4 million, respectively, and a gain on the early extinguishment of trust preferred debt of $1.0 million recorded in 2013. Partially offsetting these decreases in
2014 were higher income recovered on loans previously charged off of $1.4 million and higher service charges on deposit accounts of $1.1 million.
Other Operating Expense
The following table sets forth components of other operating expense and the total as a percentage of average assets for the periods indicated.
Table 4. Components of Other Operating Expense
Salaries and employee benefits
Net occupancy
Legal and professional services
Computer software expense
Amortization and impairment of other intangible assets
Communication expense
Equipment
Advertising expense
Foreclosed asset expense
Other:
Charitable contributions
FDIC insurance assessment
Miscellaneous loan expenses
ATM and debit card expenses
Amortization of investments in lowincome housing tax credit partnerships
Armored car expenses
Entertainment and promotions
Stationery and supplies
Directors' fees and expenses
Provision (credit) for residential mortgage loan repurchase losses
Reserve (credit) for unfunded loan commitments
Branch consolidation and relocation costs
Premium paid on repurchase of preferred stock of subsidiaries
Other
Total other operating expense
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
$
66,429
$
14,432
67,941
$
15,252
76,294
14,323
7,340
8,831
6,859
3,483
3,475
2,550
486
2,559
2,706
1,348
1,538
1,078
896
1,059
1,026
662
(1,352)
(271)
—
—
6,093
7,806
6,327
5,332
3,635
3,582
2,342
1,710
565
2,848
1,083
1,566
1,363
864
968
1,026
795
467
(373)
1,336
—
6,378
8,094
4,579
7,418
3,523
3,676
2,666
1,036
1,142
2,727
1,150
1,724
1,700
885
998
985
712
(130)
(3,501)
—
1,895
7,640
$
131,227
$
132,813
$
139,536
Total other operating expense as a percentage of average assets
2.79%
3.03%
3.61%
Total other operating expense of $131.2 million in 2015 decreased by $1.6 million, or 1.2%, from total operating expense of $132.8 million in 2014, which decreased by $6.7
million, or 4.8%, compared to 2013.
45
The decrease in total other operating expense in 2015, compared to 2014, was primarily due to a credit to the provision for residential mortgage loan repurchase losses of $1.4
million in 2015, compared to a charge of $0.5 million in 2014. In addition, in 2015 we recorded lower salaries and employee benefits of $1.5 million, no branch consolidation and
relocation costs compared $1.3 million in 2014, lower foreclosed asset expense of $1.2 million, and lower net occupancy expense of $0.8 million. These decreases were partially
offset by increases in computer software expense of $2.5 million, charitable contributions of $2.0 million, and amortization of mortgage servicing rights of $1.5 million.
The decrease in total other operating expense in 2014, compared to 2013, was primarily the result of lower salaries and employee benefits and amortization and impairment of
intangible assets of $8.4 million and $2.1 million, respectively, and a premium paid in 2013 on the repurchase of preferred stock of two subsidiaries of $1.9 million. Partially
offsetting these decreases were lower credits to reserves for unfunded loan commitments of $3.1 million, higher computer software expense of $1.7 million, and branch
consolidation and relocation costs incurred in 2014 of $1.3 million.
A key measure of operating efficiency tracked by management is the efficiency ratio, which is calculated by dividing other operating expense by total revenue. 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. Our efficiency ratio decreased to 69.61% in 2015, compared to 70.93% in 2014 and 74.20% in 2013. The decrease in our efficiency ratio was primarily driven by the
aforementioned decrease in other operating expenses and increase in net interest income.
The following table sets forth a reconciliation to our efficiency ratio for each of the dates indicated:
Table 5. Reconciliation to Efficiency Ratio
Total operating expenses
$
131,227
$
132,813
$
139,536
$
151,918
$
178,942
2015
2014
2013
2012
2011
Year Ended December 31,
(Dollars in thousands)
Net interest income
Total other operating income
Total revenue
149,528
38,984
143,418
43,823
133,109
$
119,711
$
54,945
60,743
$
188,512
$
187,241
$
188,054
$
180,454
$
117,821
57,002
174,823
Efficiency ratio
Income Taxes
69.61%
70.93%
74.20%
84.19%
102.36%
In the first quarter of 2013, the Company reversed a significant portion of the valuation allowance that was established against our net DTA during the third quarter of 2009. The
valuation allowance was established during 2009 due to uncertainty at the time regarding our ability to generate sufficient future taxable income to fully realize the benefit of our
net DTA. The quarter ended March 31, 2013 marked our ninth consecutive quarter of profitability. Based on this earnings performance trend, improvements in our financial
condition, asset quality and capital ratios, and the expectation of continued profitability, the Company determined that it was more likely than not that a significant portion of our
net DTA would be realized. The net impact of reversing the valuation allowance and recording the provision for income tax expense was a net income tax benefit of $119.8
million in the first quarter of 2013.
In 2015, the Company recorded net income tax expense of $27.1 million, compared to $20.4 million in 2014, and a net income tax benefit of $112.2 million in 2013.
As of December 31, 2015, the remaining valuation allowance on our net DTA totaled $2.8 million, which related to our California state income taxes as we do not expect to
generate sufficient income in California to utilize the DTA. Net of this valuation allowance, the Company’s net DTA totaled $82.0 million as of December 31, 2015, compared to
a net DTA of $104.4 million as of December 31, 2014, and is included in other assets on our consolidated balance sheets.
46
Our effective tax rate was 37.1% in 2015 compared to 33.5% in 2014 and 187.6% in 2013.
Financial Condition
Total assets of $5.13 billion at December 31, 2015 increased by $278.3 million, or 5.7%, from the $4.85 billion at December 31, 2014, and total liabilities of $4.64 billion at
December 31, 2015 increased by $351.7 million, or 8.2%, from December 31, 2014. The increase in total assets and total liabilities in 2015 was due primarily to our deposit
growth and deployment of these proceeds into higher yielding assets.
Loan Portfolio
Our lending activities are focused on commercial loans, commercial mortgages, construction loans, and leases to small and mediumsized companies, business professionals, and
real estate developers, as well as residential mortgages and consumer loans to local homebuyers and individuals. Our strategy for generating commercial loans has traditionally
relied upon teams of commercial real estate and commercial banking officers organized by geographical and industry lines who are responsible for client prospecting and business
development.
To manage credit risk (i.e., the ability of borrowers to repay their loan obligations), management analyzes the borrower’s financial condition, repayment source, collateral and
other factors that could impact credit quality, such as national and local economic conditions and industry conditions related to respective borrowers. The general underwriting
guidelines require analysis and documentation to include among other things, overall credit worthiness of borrower, guarantor support, use of funds, loan term, minimum equity,
loantovalue standards, repayment terms, sources of repayment, covenants, pricing, collateral, insurance, and documentation standards. All loan requests considered by us
should be for a clearly defined legitimate purpose with a determinable primary source, as well as alternate sources of repayment. All loans should be supported by appropriate
documentation including, current financial statements, credit reports, collateral information, asset verification, tax returns, title reports, and appraisals (where appropriate).
We score consumer and small business loans using underwriting matrices (“Scorecards”) developed based on the results of an analysis from a reputable national credit scoring
company commissioned by our Bank. The Scorecards use the attributes that were determined to most highly correlate with probability of repayment. Those attributes include
(i) credit score, (ii) credit limit amount, and (iii) debttoincome ratio.
Loans and leases totaled $3.21 billion at December 31, 2015, which increased by $279.3 million, or 9.5%, from the $2.93 billion at December 31, 2014, which increased by
$301.6 million, or 11.5%, from the $2.63 billion held at December 31, 2013. The increase in our loan portfolio in 2015 was representative of our continued effort to deploy excess
liquidity into higher yielding assets. The increase in loans and leases was due to net increases in the following loan portfolios: commercial, financial and agricultural of $57.3
million, or 12.4%, residential mortgage of $154.0 million, or 12.0%, commercial mortgage of $57.5 million, or 8.2%, and consumer of $42.3 million, 11.6%. These increases were
offset by net decreases in the construction loan portfolio of $29.7 million, or 25.9%, and lease portfolio of $2.1 million, or 67.3%. In 2015, we transferred the collateral in eight
portfolio loans with a carrying value of $2.2 million to other real estate and recorded chargeoffs of loans and leases of $11.3 million.
The following table sets forth information regarding outstanding loans by category as of the dates indicated.
47
Table 6. Loans by Categories
2015
2014
December 31,
2013
(Dollars in thousands)
2012
2011
Commercial, financial and agricultural
$
521,086 $
463,763 $
398,716 $
246,218 $
180,704
Real estate:
Construction
Mortgage:
residential
commercial
Consumer
Leases
Total loans and leases
Allowance for loan and lease losses
Net loans
84,885
114,554
75,616
96,194
161,063
1,436,305
1,282,324
1,136,573
760,749
407,479
1,028
3,211,532
(63,314)
703,273
365,144
3,140
2,932,198
(74,040)
702,767
310,688
6,241
2,630,601
(83,820)
966,065
741,580
143,383
10,504
2,203,944
(96,413)
$
3,148,218 $
2,858,158 $
2,546,781 $
2,107,531 $
844,737
751,431
108,810
17,702
2,064,447
(122,093)
1,942,354
The following table sets forth the geographic distribution of our loan portfolio and related Allowance as of December 31, 2015.
Table 7. Geographic Distribution
Commercial, financial and agricultural
$
339,738 $
181,348 $
521,086
Hawaii
U.S. Mainland
Total
(Dollars in thousands)
Real estate:
Construction
Mortgage:
residential
commercial
Consumer
Leases
Total loans and leases
Allowance for loan and lease losses
Net loans and leases
Commercial, Financial and Agricultural
81,655
3,230
84,885
1,436,305
642,845
273,248
1,028
2,774,819
(54,141)
—
117,904
134,231
—
436,713
(9,173)
$
2,720,678 $
427,540 $
1,436,305
760,749
407,479
1,028
3,211,532
(63,314)
3,148,218
Loans in this category consist primarily of term loans and lines of credit to small and middlemarket businesses and professionals. The borrower’s business is typically regarded as
the principal source of repayment, although our underwriting policy and practice generally requires additional sources of collateral, including real estate and other business assets,
as well as personal guarantees where possible to mitigate risk. Risks of credit losses could be greater in this loan category relative to secured loans where a greater percentage of
the loan amount is usually covered by collateral. Nonetheless, any collateral or personal guarantees obtained on commercial loans can mitigate the increased risk and help to
reduce credit losses.
Our historical approach to commercial lending involves teams of lending and cash management personnel who focus on relationship development including loans, deposits and
other bank services to new and existing commercial clients.
Real Estate—Construction
Construction loans include both residential and commercial development projects. Each construction project is evaluated for economic viability. Construction loans pose higher
credit risks than typical secured loans. In addition to the financial strength
48
of the borrower, construction loans have the added element of completion risk, which is the risk that the project will not be completed on time and within budget, resulting in
additional costs that could affect the economic viability of the project and market risk at the time construction is complete.
Our construction loan portfolios decreased by $64.9 million in 2012 and $20.6 million in 2013. In 2014, our construction loan portfolio increased by $38.9 million. In 2015, our
construction loan portfolio decreased by $29.7 million. These fluctuations are driven by the start and completion of construction projects and are consistent with a normal
construction cycle.
Interest Reserves
Our policies require interest reserves for construction loans, including loans to build commercial buildings, residential developments (both large tract projects and individual
houses), and multifamily projects.
The outstanding principal balance of loans with interest reserves was $47.5 million at December 31, 2015, compared to $66.5 million in the prior year, while remaining interest
reserves was $2.5 million, or 5.3% of the outstanding principal balance of loans with interest reserves at December 31, 2015, compared to $3.2 million, or 4.9% of the outstanding
principal balance of loans with interest reserves at December 31, 2014.
Interest reserves allow the Company to advance funds to borrowers to make scheduled payments during the construction period. These advances typically are capitalized and
added to the borrower’s outstanding loan balance, although we have the right to demand payment under certain circumstances. Our policy is to determine if interest reserve
amounts are appropriately included in each project’s construction budget and are adequate to cover the expected duration of the construction period.
The amount, terms, and conditions of the interest reserve are established when a loan is originated, although we generally have the option to demand payment if the credit profile
of the borrower changes. We evaluate the viability and appropriateness of the construction project based on the project’s complexity and feasibility, the timeline, as well as the
creditworthiness of the borrowers, sponsors and/or guarantors, and the value of the collateral.
In the event that unfavorable circumstances alter the original project schedule (e.g., cost overruns, project delays, etc.), our policy is to evaluate whether or not it is appropriate to
maintain interest capitalization or demand payment of interest in cash and we will work with the borrower to explore various restructuring options, which may include obtaining
additional equity and/or requiring additional collateral. We may also require borrowers to directly pay scheduled interest payments.
Our process for determining that construction projects are moving as planned are detailed in our lending policies and guidelines. Prior to approving a loan, the Company and
borrower generally agree on a construction budget, a pro forma monthly disbursement schedule, and sales/leaseback assumptions. As each project progresses, the projections are
measured against actual disbursements and sales/lease results to determine if the project is on schedule and performing as planned.
The specific monitoring requirements for each loan vary depending on the size and complexity of the project and the experience and financial strength of the borrower, sponsor
and/or guarantor. At a minimum, to ensure that loan proceeds are properly disbursed and to assess whether it is appropriate to capitalize interest or demand cash payment of
interest, our monitoring process generally includes:
•
•
•
Physical inspection of the project to ensure work has progressed to the stage for which payment is being requested;
Verification that the work completed is in conformance with plans and specifications and items for which disbursement is requested are within budget; and
Determination that there continues to be satisfactory project progress.
In certain rare circumstances, we may decide to extend, renew, and/or restructure the terms of a construction loan. Reasons for the restructure can range from cost overruns to
project delays and the restructuring can result in additional funds being advanced or an extension of the maturity date of the loan. Prior to the loan being restructured, our policy is
to perform a detailed analysis to ensure that the economics of the project remain feasible and that the risks to the Company are within acceptable lending guidelines.
49
Real Estate—Mortgage
The following table sets forth information with respect to the composition of the Real Estate—Mortgage loan portfolio as of the dates indicated.
Table 8. Mortgage Loan Portfolio Composition
2015
2014
December 31,
2013
2012
2011
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in thousands)
$
301,980
13.7% $
1,134,325
1,436,305
51.7
65.4
228,319
1,054,005
1,282,324
11.5% $
53.1
64.6
175,612
960,961
1,136,573
9.6% $
52.2
61.8
154,195
811,870
966,065
9.0% $
47.6
56.6
131,980
712,757
844,737
760,749
$
2,197,054
34.6
100.0% $
703,273
1,985,597
35.4
100.0% $
702,767
1,839,340
38.2
100.0% $
741,580
1,707,645
43.4
100.0% $
751,431
1,596,168
8.3%
44.6
52.9
47.1
100.0%
Residential
HELOC
Closedended loans
Total
Commercial
Total
Residential
Residential mortgage loans include fixed and adjustablerate loans primarily secured by singlefamily owneroccupied residences in Hawaii and home equity lines of credit and
loans. Our home equity lines of credit, which typically carry floating interest rates, accounted for approximately 21.0% of our residential mortgage portfolio. Maximum loanto
value ratios of 80% are typically required for fixed and adjustablerate loans secured by singlefamily owneroccupied residences, although higher levels are permitted with
accompanying mortgage insurance. We emphasize residential mortgage loans for owneroccupied primary residences. First mortgage loans secured by residential properties
generally carry a moderate level of credit risk. With an average loan size of approximately $0.4 million, marketable collateral and a Hawaii residential real estate market that has
been relatively stable, credit losses on residential mortgages had been minimal during the past several years. However, economic conditions including unemployment levels,
future changes in interest rates and other market factors can impact the marketability and value of collateral and thus the level of credit risk inherent in the portfolio.
Residential mortgage loan balances as of December 31, 2015 totaled $1.44 billion, increasing by $154.0 million, or 12.0%, from the $1.28 billion held at yearend 2014, which
increased by $145.8 million, or 12.8%, from the $1.14 billion held at yearend 2013. The increase in residential mortgage loan balances was due primarily to the reinvestment of
cash flow into higher yielding assets.
Residential mortgage loans held for sale at December 31, 2015 totaled $14.1 million, an increase of $4.4 million, or 45.7%, from the December 31, 2014 balance of $9.7 million,
which decreased by $2.7 million, or 21.7%, from the December 31, 2013 balance of $12.4 million. In 2015, 2014 and 2013, we did not securitize any residential mortgage loans.
Home equity lines of credit (“HELOCs”) are underwritten according to a policy and guidelines reviewed and approved by the Board of Directors annually. All HELOCs
originated since early 2011 have a ten year draw period followed by a 20 year repayment period during which the principal balance will be fully amortized. As of December 31,
2015, 70% of the HELOCS in the portfolio are fully amortizing and the remaining 30% have a balloon payment due at maturity. All HELOCs today are underwritten using a
qualifying payment which assumes the line is fully drawn and is amortizing as if was in the repayment period. Underwriting criteria include a minimum FICO score, maximum
debttoincome ratio (DTI), and maximum combined loantovalue ratio (CLTV). During 2015, the weighted average FICO score for newly originated lines exceeded 760 and the
weighted average CLTV was less than 60%. Any underwriting exceptions are recorded and tracked. As of December 31, 2015, more than 30% of all lines in the portfolio were
secured by 1st lien mortgages at origination. All HELOCs are monitored based on default, delinquency, end of draw period, and maturity.
Commercial
Real estate mortgage loans secured by commercial properties continue to represent a sizable portion of our loan portfolio. Our policy with respect to commercial mortgages is that
loans be made for sound purposes, have a definite source and/or plan of repayment established at inception, and be backed up by reliable secondary sources of repayment and
satisfactory collateral with good marketability. Loans secured by commercial property carry a greater risk than loans secured by residential property
50
due to operating income risk. Operating income risk is the risk that the borrower will be unable to generate sufficient cash flow from the operation of the property. The commercial
real estate market and interest rate conditions through economic cycles will impact risk levels.
Consumer Loans
The following table sets forth the major components of our consumer loan portfolio as of the dates indicated.
Table 9. Consumer Loan Portfolio Composition
2015
2014
December 31,
2013
2012
2011
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Automobile
Other revolving credit plans
Student loans
Other
Total
$
190,202
46.7% $
150,559
41.2% $
149,780
48.2% $
(Dollars in thousands)
73,756
38,636
104,885
$
407,479
18.1
9.5
25.7
100.0% $
67,099
57,776
89,710
365,144
18.4
15.8
24.6
100.0% $
61,835
15,971
83,102
310,688
70,219
35,074
—
48.9% $
24.5
—
64,343
34,505
—
19.9
5.1
26.8
100.0% $
38,090
143,383
26.6
100.0% $
9,962
108,810
59.1%
31.7
—
9.2
100.0%
For consumer loans, credit risk is managed on a pooled basis. Considerations include an evaluation of the quality, character and inherent risks in the loan portfolio, current and
projected economic conditions and past loan loss experience. Consumer loans represent a moderate credit risk. Loans in this category are generally either unsecured or secured by
personal assets such as automobiles. The average loan size is generally small and risk is diversified among many borrowers. Our policy is to utilize creditscoring systems for most
of our consumer loans, which offer the ability to modify credit exposure based on our risk tolerance and loss experience.
Consumer loans totaled $407.5 million at December 31, 2015, increasing by $42.3 million, or 11.6%, from 2014’s yearend balance of $365.1 million, which increased by $54.5
million, or 17.5%, compared to the $310.7 million held at yearend 2013. At December 31, 2015, automobile loans, primarily indirect dealer loans, comprised 46.7% of consumer
loans outstanding.
Total automobile loans of $190.2 million at yearend 2015 increased by $39.6 million, or 26.3%, from 2014’s yearend balance of $150.6 million, which increased by $0.8
million, or 0.5%, from $149.8 million at yearend 2013. In 2015, we purchased two auto loan portfolios totaling $52.8 million, which included a $1.7 million premium over the
$51.1 million outstanding balance. In 2014, we purchased a participation interest in auto loans totaling $11.2 million, which included a $0.3 million premium over the $10.9
million outstanding balance. In 2013, we purchased auto loan portfolios totaling $67.7 million, which included a $2.8 million premium over the $64.9 million outstanding
balance.
In 2014 and 2013, we purchased participation interests in student loans totaling $51.5 million and $17.4 million, respectively, which represented the outstanding balance at the
time of purchase.
In 2015, we also purchased fixedrate unsecured consumer loans (included in other) totaling $15.9 million, which represented the outstanding balance at the time of purchase.
We issue solar photovoltaic loans (included in other) which totaled $13.9 million at December 31, 2015, compared to $17.7 million at December 31, 2014 and $17.9 million at
December 31, 2013.
Concentrations of Credit Risk
As of December 31, 2015, approximately $2.28 billion, or 71.1% of loans outstanding were real estate related, including construction loans, residential mortgage loans and
commercial mortgage loans.
The majority of our loans are made to companies and individuals with headquarters in, or residing in, the states of Hawaii and California. Consistent with our focus of being a
Hawaiibased bank, 86.4% of our loan portfolio was concentrated in the Hawaii market while 13.6% was concentrated in the U.S. Mainland as of December 31, 2015.
Our foreign credit exposure as of December 31, 2015 was minimal and did not exceed 1% of total assets.
51
Maturities and Sensitivities of Loans to Changes in Interest Rates
At December 31, 2015, commercial, financial and agricultural loans were 27.5% fixed rate and 72.5% variable rate. Real estate construction loans were 43.3% fixed rate and
56.7% variable rate. Residential mortgage loans, which include home equity lines and loans, were 64.9% fixed rate and 35.1% variable rate. Commercial mortgage loans were
31.8% fixed rate and 68.2% variable rate. Consumer loans were 73.7% fixed rate and 26.3% variable rate.
Commercial loans and commercial mortgage loans with variable interest rates are underwritten at the current market rate of interest. For commercial loans and commercial real
estate loans with a fixed rate period that are not fully amortizing, the loans are underwritten at the current market rate of interest. At the expiration of the fixed rate period and/or
maturity, the projected loan balance at that time is underwritten at an interest rate based on the current interest rate plus two percent per annum (2.0%).
Qualifying payments for our variable rate residential mortgage loans with initial fixed rate periods of five years or less are calculated using the greater of the note rate plus 2% per
annum or the fully indexed rate. Payments for our variable rate loans with a fixedrate period of greater than five years are calculated using the greater of the note rate or the fully
indexed rate. The qualifying payment for our HELOCs is based on the fully indexed rate plus the required principal plus interest payment due during the repayment period
assuming the line was fully drawn. Our consumer lines of credit use a qualifying payment based on a percentage of the credit limit that exceeds the actual required fully indexed
interest rate payment calculation.
52
Table 10 sets forth the maturity distribution and sensitivities of the loan portfolio to changes in interest rates at December 31, 2015. Maturities are based on contractual maturity
dates and do not factor in principal amortization. This differs from the assumptions used in Table 20. Interest Rate Sensitivity.
Table 10. Maturity Distribution and Sensitivities of Loans to Changes in Interest Rates
Commercial, financial and agricultural
With fixed interest rates
With variable interest rates
Real estate:
Construction
With fixed interest rates
With variable interest rates
Mortgage residential
With fixed interest rates
With variable interest rates
Mortgage commercial
With fixed interest rates
With variable interest rates
Consumer
With fixed interest rates
With variable interest rates
Leases
With fixed interest rates
With variable interest rates
Total
All loans
With fixed interest rates
With variable interest rates
Total
One Year
or Less
Maturing
Over One
Through
Five Years
Over Five
Years
Total
(Dollars in thousands)
$
5,548 $
85,692 $
52,187 $
24,047
29,595
2,232
14,349
16,581
6,469
11,410
17,879
10,108
20,633
30,741
4,476
35,726
40,202
46
—
46
191,528
277,220
162,084
214,271
18,908
28,010
46,918
4,957
27,140
32,097
87,426
83,110
170,536
198,674
39,094
237,768
982
—
982
15,589
5,797
21,386
920,865
465,464
1,386,329
144,068
415,404
559,472
97,335
32,174
129,509
—
—
—
143,427
377,659
521,086
36,729
48,156
84,885
932,291
504,014
1,436,305
241,602
519,147
760,749
300,485
106,994
407,479
1,028
—
1,028
$
$
$
135,044 $
765,521 $
2,310,967 $
3,211,532
28,879 $
106,165
135,044 $
396,639 $
368,882
765,521 $
1,230,044 $
1,080,923
2,310,967 $
1,655,562
1,555,970
3,211,532
Provision and Allowance for Loan and Lease Losses
As described above under “—Critical Accounting Policies and Use of Estimates,” the Provision is determined by management’s ongoing evaluation of the loan portfolio and our
assessment of the ability of the Allowance to cover inherent losses. Our methodology for determining the adequacy of the Allowance and Provision takes into account many
factors, including the level and trend of nonperforming and potential problem loans, net chargeoff experience, current repayment by
53
borrowers, fair value of collateral securing specific loans, changes in lending and underwriting standards and general economic factors, nationally and in the markets we serve.
The Company maintains its Allowance at an appropriate level as of a given balance sheet date to absorb management’s best estimate of probable credit losses inherent in its loan
portfolios that will likely be realized over various loss emergence periods. These periods are based upon management’s comprehensive analysis of the risk profiles particular to the
respective loan portfolios. Analysis of Allowance appropriateness is performed quarterly to coincide with financial disclosure to the public and to the regulatory agencies and is
governed by a Boardapproved policy and methodology.
54
The following table sets forth certain information with respect to the Allowance as of the dates or for the periods indicated.
Table 11. Allowance for Loan and Lease Losses
2015
2014
2013
2012
2011
Year Ended December 31,
Average amount of loans outstanding
Allowance for loan and lease losses:
Balance at beginning of year
Chargeoffs:
$
$
3,038,100
$
2,798,826
(Dollars in thousands)
$
2,394,955
$
2,130,758
$
2,121,544
74,040
$
83,820
$
96,413
$
122,093
$
192,854
Commercial, financial and agricultural
5,658
5,046
Real estate:
Construction
Mortgage residential
Mortgage commercial
Consumer
Leases
Total
Recoveries:
Commercial, financial and agricultural
Real estate:
Construction
Mortgage residential
Mortgage commercial
Consumer
Leases
Total
Net loans charged off (recovered)
—
—
110
838
4,650
—
11,256
4,788
880
2,177
6,719
1,610
27
16,201
(4,945)
139
1,041
3,703
8
9,937
2,326
2,040
992
53
1,152
8
6,571
3,366
2,812
358
1,083
6,768
1,595
—
12,616
1,387
3,596
1,107
4,240
657
346
11,333
1,283
3,779
8,435
1,664
2,033
1,490
28
17,429
1,614
6,622
876
488
1,029
5
10,634
6,795
2,401
31,371
4,347
1,298
2,116
10
41,543
1,805
6,518
1,033
1,034
1,082
—
11,472
30,071
Provision (credit) charged to operations
(15,671)
(6,414)
(11,310)
(18,885)
(40,690)
Balance at end of year
$
63,314
$
74,040
$
83,820
$
96,413
$
122,093
Ratios:
Allowance for loan and lease losses to loans and leases
outstanding at end of year
1.97 %
2.53%
3.19%
4.37%
5.91%
Net loans charged off (recovered) during year to average loans
and leases outstanding during year
(0.16)%
0.12%
0.05%
0.32%
1.42%
Our Allowance at December 31, 2015 totaled $63.3 million, which represented a decrease of $10.7 million, or 14.5%, from yearend 2014. When expressed as a percentage of
total loans and leases, our Allowance decreased to 2.0% at December 31, 2015, from 2.5% at yearend 2014. The decrease in our Allowance during 2015 was a result of a credit to
the Provision of $15.7 million recognized during the year and $4.9 million in net recoveries during the year. The decrease in our Allowance as a
55
percentage of total loans and leases from yearend 2014 to yearend 2015 is consistent with our improved credit risk profile as evidenced by a decrease in our nonperforming
assets and is consistent with our belief that stabilization in our loan portfolio, the overall economy and the commercial real estate markets both in Hawaii and on the U.S.
Mainland is continuing.
Our Allowance as a percentage of our nonperforming assets increased from 176.14% at December 31, 2014 to 390.10% at December 31, 2015. Our Allowance as a percentage of
our nonaccrual loans increased from 189.42% at December 31, 2014 to 443.75% at December 31, 2015.
This trend was consistent with the improving credit quality as represented by nonperforming assets of $16.2 million, $42.0 million, and $46.8 million at December 31, 2015,
2014 and 2013, respectively. Net recoveries were $4.9 million for the year ended December 31, 2015, compared to net chargeoffs for the years ended December 31, 2014 and
2013 of $3.4 million and $1.3 million, respectively.
The general component of the Allowance is applicable to performing loans and leases and comprised 96.5%, 92.5% and 92.4% of the total Allowance at December 31, 2015,
2014 and 2013, respectively. The amounts of the general reserves were $61.1 million, $68.5 million and $77.5 million at December 31, 2015, 2014 and 2013, respectively.
The specific component of the Allowance evaluates for impairment and provisions for those loans that meet one or more of the following characteristics: classified as substandard,
doubtful or loss, nonaccrual loans, troubled debt restructures, or any loans deemed prudent by management to analyze. The specific reserves comprised 0.1%, 2.1% and 0.4% of
the total Allowance at December 31, 2015, 2014 and 2013, respectively. The amounts of the specific reserves were $0.1 million, $1.5 million and $0.3 million at December 31,
2015, 2014 and 2013, respectively.
The following table sets forth the allocation of the Allowance by loan category as of the dates indicated. Our practice is to make specific allocations on impaired loans and
general allocations to each loan category based on management’s risk assessment and estimated loss rate.
Table 12. Allocation of Allowance for Loan and Lease Losses
2015
2014
December 31,
2013
2012
2011
Allowance
for Loan
and Lease Losses
Percent of Loans
in Each Category
to Total Loans
Allowance
for Loan
and Lease Losses
Percent of Loans
in Each Category
to Total Loans
Allowance
for Loan
and Lease Losses
Percent of Loans
in Each Category
to Total Loans
Allowance
for Loan
and Lease Losses
Percent of Loans
in Each Category
to Total Loans
Allowance
for Loan
and Lease Losses
Percent of Loans
in Each Category
to Total Loans
(Dollars in thousands)
Commercial, financial and
agricultural
$
16.2% $
8,954
15.8% $
13,196
15.2% $
4,987
11.2% $
6,110
8.7%
Real estate:
Construction
Mortgage:
Residential
Commercial
Consumer
Leases
Unallocated
Total
6,905
8,454
17,738
21,847
6,230
2.7
44.7
23.7
12.7
—
2,140
63,314
$
—
—
100.0% $
14,969
17,927
20,869
7,314
7
4,000
74,040
3.9
43.7
24.0
12.5
0.1
—
100.0% $
2,774
25,272
29,947
6,576
55
6,000
83,820
2.9
43.2
26.7
11.8
0.2
—
100.0% $
4,510
4.3
28,630
27,836
50,574
2,421
85
6,000
96,413
43.8
33.7
6.5
0.5
—
100.0% $
30,732
49,733
2,335
553
4,000
7.8
40.9
36.4
5.3
0.9
—
122,093
100.0%
The Allowance allocated to commercial loans at December 31, 2015 totaled $6.9 million, compared to $9.0 million at December 31, 2014, representing 1.3% and 1.9% of total
commercial loans, respectively. The decreases in the ending Allowance amount and the Allowance as a percentage of commercial loans were primarily due to improvement in the
Moody’s proxy loss rates utilized.
The Allowance allocated to construction loans totaled $8.5 million, or 9.9%, of construction loans at December 31, 2015, compared to $15.0 million, or 13.0%, of construction
loans outstanding at December 31, 2014. The decreases in the ending Allowance amount and the Allowance as a percentage of construction loans were primarily due to the
significant decrease in the construction loan portfolio as of December 31, 2015.
56
The Allowance allocated to our residential mortgage loans decreased to $17.7 million, or 1.2%, of total residential mortgage loans at December 31, 2015, compared to $17.9
million, or 1.4%, of related loans at December 31, 2014. The decrease in the ending Allowance amount was primarily due to the decrease in nonaccrual residential mortgage loans
as of December 31, 2015, which was partially offset by growth in the residential mortgage portfolio.
Commercial mortgage loans were allocated an Allowance of $21.8 million, or 2.9%, of those loans at December 31, 2015, compared to $20.9 million, or 3.0%, of commercial
mortgage loans at yearend 2014. The increase in the ending Allowance amount was primarily due to the increase in the commercial mortgage loan portfolio as of December 31,
2015.
The allocated Allowance for consumer loans at December 31, 2015 decreased to $6.2 million from $7.3 million in the prior year, representing 1.5% of total consumer loans in
2015, compared to 2.0% in 2014. The decrease in the ending Allowance amount was primarily due lower than expected loss experience.
We did not allocate an Allowance for leases as of December 31, 2015, compared to $7 thousand, or 0.2%, of total leases as of December 31, 2014.
The unallocated portion of the Allowance of $2.1 million at December 31, 2015 decreased from $4.0 million at December 31, 2014 as additional loan portfolio performance data
has been captured in our historic loss experience. The unallocated portion of the Allowance has been maintained to provide for additional credit risk which may exist but may not
be adequately accounted for in the specific and unspecified allocations due to the amount of judgment involved in the determination of the Allowance, the absence of perfect
knowledge of all credit risks and the amount of uncertainty in predicting the strength of the economy and the sustainability of that strength.
In accordance with GAAP, loans held for sale and other real estate assets are not included in our assessment of the Allowance.
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 at the dates indicated.
Table 13. Nonperforming Assets, Past Due and Restructured Loans
Nonaccrual loans
Commercial, financial & agricultural
Real estate:
Construction
Mortgage residential
Mortgage commercial
Leases
Total nonaccrual loans
Other real estate
Real estate:
Construction
Mortgage residential
Mortgage commercial
Other real estate
Total nonperforming assets
Accruing loans delinquent for 90 days or more
Real estate:
Mortgage residential
December 31,
2015
2014
2013
2012
2011
(Dollars in thousands)
$
1,044
$
13,007
$
3,533
$
3,510 $
1,367
—
6,130
7,094
310
13,048
12,722
4,015
20,271
13,769
—
—
—
38,742
27,499
9,487
94
69,765
46,960
15,821
—
14,268
39,087
41,588
79,332
133,913
—
1,962
—
1,962
16,230
747
2,201
—
2,948
42,035
3,770
1,184
209
5,163
46,751
8,105
2,372
209
10,686
90,018
56,429
5,252
—
61,681
195,594
—
—
—
387
—
57
Consumer
Leases
Total accruing loans delinquent for 90 days or more
Restructured loans still accruing interest
Commercial, financial & agricultural
Real estate:
Construction
Mortgage residential
Mortgage commercial
Total restructured loans still accruing interest
2015
2014
2013
2012
2011
December 31,
(Dollars in thousands)
273
—
273
77
—
77
—
15
15
116
—
503
—
361
406
447
809
16,224
3,224
20,257
892
17,845
10,405
29,503
3,857
16,508
2,502
23,273
9,522
15,366
6,425
31,760
28
—
28
—
5,170
3,093
—
8,263
Total nonperforming assets, accruing loans delinquent for 90 days or more and restructured loans still
accruing interest
$
36,760
$
71,615
$
70,039
$
122,281
$
203,885
Total nonperforming assets as a percentage of loans and leases and other real estate
0.51%
1.43%
1.77%
4.06%
9.20%
Total nonperforming assets and accruing loans delinquent for 90 days or more as a percentage of loans
and leases and other real estate
Total nonperforming assets, accruing loans delinquent for 90 days or more and restructured loans still
accruing interest as a percentage of loans and leases and other real estate
0.51
1.14
1.43
2.44
1.77
2.66
4.09
5.52
9.20
9.59
302,811
73,248
(106,529)
(9,482)
(36,221)
(28,233)
$
42,035
$
46,751
$
90,018
$
195,594
$
11,863
28,295
27,648
46,641
(9,564)
(11,486)
(13,307)
(3,311)
(37,668)
(9,630)
(15,761)
(3,457)
(4,163)
(33,011)
(41,766)
(17,247)
(9,519)
(2,383)
(70,915)
(63,107)
(26,261)
(53,029)
(9,820)
(152,217)
(180,465)
$
16,230
$
42,035
$
46,751
$
90,018
$
195,594
Yeartodate changes in nonperforming assets:
Balance at beginning of year
Additions
Reductions:
Payments
Return to accrual status
Sales of foreclosed assets
Chargeoffs and/or writedowns
Total reductions
Balance at end of year
Nonperforming assets, which includes nonaccrual loans and leases, nonperforming loans classified as held for sale and other real estate, totaled $16.2 million at December 31,
2015, compared to $42.0 million at December 31, 2014. Nonperforming assets at December 31, 2015 were comprised of $14.3 million in nonaccrual loans, none of which were
loans classified as held for sale, and $2.0 million in other real estate.
The decrease in 2015 was attributable to $9.6 million in repayments, $11.5 million in loans restored to accrual status, the sale of $13.3 million of foreclosed assets, and chargeoffs
and writedowns totaling $3.3 million. All of these decreases were offset by $11.9 million in gross additions.
Net changes to nonperforming assets by category during 2015 included net decreases in U.S. Mainland commercial, financial and agricultural assets totaling $10.1 million,
Hawaii residential mortgage assets totaling $7.2 million, Hawaii commercial mortgage assets totaling $4.0 million, Hawaii commercial, financial and agricultural assets totaling
$1.8 million, U.S. Mainland commercial mortgage assets totaling $1.6 million, and Hawaii construction assets totaling $1.1 million.
58
Loans delinquent for 90 days or more still accruing interest totaled $0.3 million at December 31, 2015, compared to less than $0.1 million at December 31, 2014.
Investment Portfolio
The following table sets forth the amounts and distribution of investment securities held as of the dates indicated.
Table 14. Distribution of Investment Securities
Debt securities:
States and political subdivisions
Corporate securities
Mortgagebacked securities:
Residential U.S. Government sponsored entities
Commercial U.S. Government sponsored entities
Residential Nongovernment sponsored entities
Commercial Nongovernment sponsored entities
Other
Total
2015
December 31,
2014
2013
HeldtoMaturity
(at Amortized
Cost)
AvailableforSale
(at Fair Value)
HeldtoMaturity
(at Amortized
Cost)
Availablefor
Sale (at Fair
Value)
HeldtoMaturity
(at Amortized
Cost)
Availablefor
Sale (at Fair
Value)
(Dollars in thousands)
$
— $
—
190,473
$
108,571
— $
—
191,645 $
100,604
— $
—
152,315
95,602
—
—
771,909
—
64,032
136,354
916
140,741
97,546
—
—
751,558
—
46,693
137,641
877
152,976
99,071
—
—
179,357
158,095
927,626
11,991
130,055
875
$
247,917
$
1,272,255
$
238,287
$
1,229,018 $
252,047 $
1,407,999
Investment securities totaled $1.52 billion at December 31, 2015, increasing by $52.9 million, or 3.6%, from the $1.47 billion held at December 31, 2014, which decreased by
$192.7 million, or 11.61%, from the $1.66 billion at yearend 2013.
In the second quarter of 2015, $119.4 million in availableforsale agency securities were sold as part of an investment portfolio repositioning strategy designed to improve our
interest rate risk profile. We received $117.5 million in gross proceeds and reinvested the proceeds in $120.6 million in mortgagebacked securities yielding an average of 2.71%
at an average weighted life of 7.6 years. Gross realized losses on the sales of the availableforsale investment securities were $1.9 million. The investment securities sold had an
average net yield of 1.35% and a weighted average life of 4.4 years. The specific identification method was used as the basis for determining the cost of all securities sold.
In the second quarter of 2014, $162.3 million in availableforsale agency securities were sold as part of a balance sheet optimization strategy designed to improve our interest rate
risk profile. We received $162.5 million in gross proceeds and gross realized gains and losses on the sales of the availableforsale investment securities were $0.9 million and
$0.7 million, respectively. The investment securities sold had a weighted average life of 5.7 years and average net yield of 2.68%. The specific identification method was used as
the basis for determining the cost of all securities sold.
In the fourth quarter of 2013, we executed a bond swap where we sold $271.5 million in loweryielding availableforsale agency debentures and agency mortgagebacked
securities with an average net yield of 1.87% and a weighted average life of 2.9 years and reinvested the majority of the proceeds in $242.5 million of higheryielding agency
mortgagebacked securities, nonagency commercial mortgagebacked securities, and corporate bond securities with an average yield of 3.21% and a weighted average life of 7.4
years. The specific identification method was used as the basis for determining the cost of all securities sold and the new securities were classified in the availableforsale
portfolio. We received $271.9 million in gross proceeds and gross realized gains and losses on the sales of the availableforsale investment securities were $3.9 million and $3.4
million, respectively.
59
Maturity Distribution of Investment Portfolio
The following table sets forth the maturity distribution of the investment portfolio and weighted average yields by investment type and maturity grouping at December 31, 2015.
Table 15. Maturity Distribution of Investment Portfolio
Portfolio Type and Maturity Grouping
Heldtomaturity portfolio:
Mortgagebacked securities U.S. Government sponsored entities:
Within one year
After one but within five years
After five but within ten years
After ten years
Total mortgagebacked securities U.S. Government sponsored entities:
Carrying
Value
Weighted
Average
Yield (1)
(Dollars in thousands)
$
—
—
95,602
152,315
247,917
Total heldtomaturity portfolio
$
247,917
Availableforsale portfolio:
Debt securities States and political subdivisions:
Within one year
After one but within five years
After five but within ten years
After ten years
Total debt securities States and political subdivisions
Debt securities Corporate:
Within one year
After one but within five years
After five but within ten years
After ten years
Total debt securities Corporate
Mortgagebacked securities U.S. Government sponsored entities:
Within one year
After one but within five years
After five but within ten years
After ten years
Total mortgagebacked securities U.S. Government sponsored entities
Mortgagebacked securities Nongovernment sponsored entities:
Within one year
After one but within five years
After five but within ten years
After ten years
Total mortgagebacked securities Nongovernment sponsored entities
Other:
Within one year
After one but within five years
60
$
2,549
17,457
69,325
101,142
190,473
13,248
89,668
5,655
—
108,571
—
7,136
31,127
733,646
771,909
—
22,841
113,513
64,032
200,386
—
—
—%
—
2.07
2.04
2.05
2.05%
9.20%
2.36
3.31
3.55
3.43
2.85
2.81
3.15
—
2.83
—
3.35
2.82
2.39
2.42
—
2.97
3.27
3.37
3.27
—
—
Portfolio Type and Maturity Grouping
After five but within ten years
After ten years
Total Other
Total availableforsale portfolio
Total investment securities
Carrying
Value
Weighted
Average
Yield (1)
(Dollars in thousands)
—
916
916
$
$
1,272,255
1,520,172
—
—
—
2.74%
2.62%
(1) Weighted average yields are computed on an annual basis, and yields on taxexempt obligations are computed on a taxableequivalent basis using an assumed tax rate of 34%.
As of December 31, 2015, the weighted average yield of the investment portfolio of 2.62% increased by 4 bp from 2.58% in the prior year.
Deposits
The primary source of our funding comes from deposits in the state of Hawaii. In this competitive market, we strive to distinguish ourselves by providing quality customer service
in our branch offices and establishing longterm relationships with businesses and their principals. Our focus has been to develop a large, stable base of core deposits, which are
comprised of noninterest bearing and interestbearing demand deposits, savings and money market deposits, and time deposits less than $100,000. Time deposits in amounts of
$100,000 and greater are generally considered to be more pricesensitive than relationshipbased and are thus given less focus in our marketing and sales efforts.
Total deposits of $4.43 billion at December 31, 2015 reflected an increase of $323.1 million, or 7.9%, from total deposits of $4.11 billion at December 31, 2014. Total deposits at
December 31, 2014 increased by $174.1 million, or 4.4%, over the yearend 2013 balance of $3.94 billion. The increase in deposits in 2015 reflects net increases in savings and
money market deposits of $156.5 million, noninterestbearing demand deposits of $111.1 million, time deposits $100,000 and greater of $47.1 million, and interestbearing
demand deposits of $36.6 million. The net increases were offset by a net decrease in time deposits less than $100,000 of $28.2 million.
Core deposits totaled $3.58 billion at December 31, 2015 and increased by $276.0 million, or 8.3%, from December 31, 2014, which increased by $212.9 million or 6.9% from
December 31, 2013. Core deposits as a percentage of total deposits was 80.8% at December 31, 2015, compared to 80.4% at December 31, 2014 and 78.6% at December 31, 2013.
For additional information regarding the maturity of our time deposits of $100,000 or more, See Note 10 to the Consolidated Financial Statements under "Part II, Item 8. Financial
Statements and Supplementary Data."
The table below sets forth information regarding the average balances and average rates paid for certain deposit categories for each of the years indicated. Average balances are
computed using daily average balances. The average rate on time deposits, which are most sensitive to changes in market rates, decreased by 1 bp in 2015, while savings and
money market deposit rates and interestbearing demand deposit rates remained unchanged. The average rate paid on all deposits remained unchanged in 2015 from 0.09% in
2014, which decreased from 0.11% in 2013.
Table 16. Average Balances and Average Rates on Deposits
2015
2014
2013
Average
Balance
Average
Rate Paid
Average
Balance
Average
Rate Paid
Average
Balance
Average
Rate Paid
Year Ended December 31,
Noninterestbearing demand deposits
$
1,072,998
—% $
Interestbearing demand deposits
Savings and money market deposits
Time deposits
Total
802,121
1,276,830
1,071,664
0.05
0.07
0.22
(Dollars in thousands)
938,078
764,504
1,227,049
1,059,435
—% $
0.05
0.07
0.23
849,371
708,658
1,191,919
1,054,714
$
4,223,613
0.09% $
3,989,066
0.09% $
3,804,662
—%
0.05
0.07
0.27
0.11%
We expect overall deposit rates to remain suppressed in 2016 in response to the FRB’s current monetary policy of keeping interest rates at low levels. In addition to the external
interest rate environment, the overall direction of rate movements in our deposit base will largely depend on the level of deposit growth we need to maintain adequate liquidity
and competitive pricing
61
considerations, which may be impacted by the repeal of federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts as part of the Dodd
Frank Act as further described in “Item 1A. Risk Factors.”
Contractual Obligations
The following table sets forth contractual obligations (excluding deposit liabilities) as of December 31, 2015.
Table 17. Contractual Obligations
Shortterm borrowings
Longterm debt
Pension plan and SERP obligations
Operating leases
Purchase obligations
Total
Less Than
One Year
Payments Due By Period
13 Years
35 Years
(Dollars in thousands)
More Than
5 Years
Total
$
$
69,000 $
—
2,746
7,317
11,905
90,968 $
— $
—
5,626
10,894
7,140
— $
—
5,658
7,735
3,125
— $
92,785
29,689
23,817
642
69,000
92,785
43,719
49,763
22,812
23,660 $
16,518 $
146,933 $
278,079
Components of shortterm borrowings and longterm debt are discussed in Notes 11 and 12, respectively, to the Consolidated Financial Statements under “Part II, Item 8. Financial
Statements and Supplementary Data.” Pension plan obligations include obligations under our defined benefit retirement plan and Supplemental Executive Retirement Plans,
which are discussed in Note 15 to the Consolidated Financial Statements under “Part II, Item 8. Financial Statements and Supplementary Data.” Operating leases represent leases
on bank premises as discussed in Note 17 to the Consolidated Financial Statements under “Part II, Item 8. Financial Statements and Supplementary Data.” Purchase obligations
represent other contractual obligations to purchase goods or services at specified terms including, but not limited to, software licensing agreements, equipment maintenance
contracts and professional service contracts.
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 and the level of risk. 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, need for raising additional capital (whether debt and/or equity) or returning capital to our shareholders, including the ability to declare cash dividends or
repurchase our securities.
Common and Preferred Equity
Shareholders’ equity totaled $494.6 million at December 31, 2015, a decrease of $73.4 million, or 12.9%, from the $568.0 million at December 31, 2014, which decreased by
$92.1 million, or 13.9%, from 2013. When expressed as a percentage of total assets, shareholders’ equity was 9.6% at December 31, 2015, compared to 11.7% at December 31,
2014 and 13.9% at December 31, 2013.
The significant decrease in shareholders’ equity from December 31, 2014 to December 31, 2015 was primarily attributable to : 1) the repurchase of 4,122,881 shares of our
common stock for a total cost of $93.3 million, excluding fees and expenses, under our stock repurchase program, and 2) cash dividends paid of $26.1 million. These decreases
were partially offset by $45.9 million in net income in 2015, respectively. During 2015 we repurchased approximately 11.70% of our common stock outstanding at December 31,
2014.
The significant decrease in shareholders’ equity from 2013 to 2014 was primarily attributable to : 1) the purchase of 3,405,888 shares of our common stock for a total cost of $68.8
million, excluding fees and expenses, related to a tender offer, 2) the purchase of 2,782,178 shares of our common stock for a total cost of $56.2 million, excluding fees and
expenses, related to repurchase agreements with our two largest shareholders, 3) the repurchase of 857,554 shares of our common stock for a total cost of $16.5 million, under our
stock repurchase program, and 4) cash dividends paid of $13.4 million. These decreases were
62
partially offset by $40.5 million and $19.0 million in net income and accumulated other comprehensive income in 2014, respectively. During 2014 we repurchased
approximately 16.73% of our common stock outstanding at December 31, 2013.
In June 2013, the Treasury held a private auction to sell its warrant positions in several financial institutions which included the Company’s warrant to purchase up to 79,288
shares of our common stock at a purchase price of $10 per share. On June 6, 2013, we were notified that we were the winning bidder of the warrant at our bid of $0.8 million. The
warrant was being carried as a derivative liability on our balance sheet at $0.8 million at March 31, 2013. Accordingly, we recorded a credit to other noninterest expense of $0.1
million during the quarter related to the gain on the purchase of the warrant. After the completion of this transaction, the Treasury no longer holds any outstanding shares of our
common stock, or any warrants to purchase our common stock they received in connection with our participation in the Troubled Assets Relief Program.
Our tangible common equity ratio was 9.51% at December 31, 2015, compared to 11.52% at December 31, 2014 and 13.69% at December 31, 2013. Our book value per share was
$16.06, $16.12, and $15.68 at yearend 2015, 2014 and 2013, respectively. The decrease in our tangible common equity ratio from 2014 was primarily attributable to the
reduction in our common equity due to the common stock repurchases completed in 2015 under the aforementioned March 2015 Underwriting Agreement and stock repurchase
program, as well as the quarterly and special dividends paid. The increase in our book value per share from 2014 was primarily attributable to net income recorded in 2015 of
$45.9 million, combined with the reduction in common shares outstanding due to the aforementioned common stock repurchases completed in 2015.
The tangible common equity ratio is a nonGAAP financial measure which should be read and used in conjunction with the Company’s GAAP financial information. Comparison
of our tangible common equity ratio with those of other companies may not be possible because other companies may calculate the tangible common equity ratio differently. Our
tangible common equity ratio is derived by dividing common shareholders’ equity, less intangible assets (excluding mortgage servicing rights), by total assets, less intangible
assets (excluding mortgage servicing rights).
The following table sets forth a reconciliation of our tangible common equity ratio for each of the dates indicated:
Table 18. Reconciliation to Tangible Common Equity Ratio
Total shareholders’ equity
Less:
Other intangible assets (excluding mortgage servicing rights)
Tangible common equity
Total assets
Less: Other intangible assets (excluding mortgage servicing rights)
Tangible assets
2015
December 31,
2014
(Dollars in thousands)
2013
$
494,614
$
568,041
$
660,113
(7,355)
487,259
5,131,288
(7,355)
5,123,933
(10,029)
558,012
4,852,987
(10,029)
4,842,958
(12,704)
647,409
4,741,198
(12,704)
4,728,494
Tangible common equity to tangible assets
9.51%
11.52%
13.69%
Trust Preferred Securities
We have four statutory trusts, CPB Capital Trust II, CPB Statutory Trust III, CPB Capital Trust IV and CPB Statutory Trust V, which issued a total of $90.0 million in trust
preferred securities. We previously had CPB Capital Trust I ("Trust I"), which was canceled in August 2014 as discussed below. Our obligations with respect to the issuance of the
trust preferred securities constitute a full and unconditional guarantee by the Company of the 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.
We began deferring interest and dividend payments on the subordinated debentures and the trust preferred securities in the third quarter of 2009. In March 2013, the Company
elected to pay all deferred interest on its subordinated debentures and related
63
dividend payments on its trust preferred securities and resume quarterly payments for each outstanding trust. As a result, the deferred accrued interest in the amount of $13.0
million was paid in full in March 2013 and the Company resumed quarterly payments on all five statutory trusts.
In June 2013, the Company was notified that $10.0 million of the $15.0 million in trust preferred securities of Trust I would be auctioned off as part of a larger pooled
collateralized debt obligation liquidation. The Company placed a bid of $9.0 million for the securities which was accepted by the trustee and the transaction closed on June 18,
2013. Because our accepted bid of $9.0 million was less than the $10.0 million carrying value, we recognized a gain of $1.0 million related to this transaction on October 7, 2013,
when these securities were called. The Company determined that its investment in Trust I did not represent a variable interest and therefore the Company was not the primary
beneficiary of Trust I. As a result, consolidation of Trust I by the Company was not required. In October 2013, the Company purchased the remaining $5.0 million in trust
preferred securities of Trust I and in April 2014, the remaining $0.5 million in common stock of the Trust I was called. On August 27, 2014, Trust I was cancelled with the state of
Delaware.
Holding Company Capital Resources
CPF is required to act as a source of strength to the bank under the DoddFrank Act. CPF is obligated to pay its expenses and payments on its junior subordinated debentures
which fund payments on the outstanding trust preferred securities. CPF deferred the payment of dividends on our trust preferred securities (along with interest on the related junior
subordinated debentures) beginning in the third quarter of 2009. As mentioned in the previous section, in March 2013, the Company elected to resume quarterly payments for
each outstanding trust and all deferred interest on its subordinated debentures and related dividend payments on its trust preferred securities were paid in full.
In 2013, in light of the Company’s improved capital position and financial condition, our Board of Directors and management, in consultation with our regulators, reinstated and
declared quarterly cash dividends on the Company’s outstanding common shares to shareholders.
On March 21, 2014, CPF received its first dividend from the bank since September 2008 of $125.0 million in order to meet its obligations under the Tender Offer and Private
Repurchases. In the second through fourth quarters of 2014, CPF received additional dividends from the bank totaling $34.3 million to fund the quarterly cash dividends and
share repurchases. In 2015, CPF received dividends totaling $111.8 million to fund the quarterly cash dividends, the special cash dividend, and share repurchases. As of December
31, 2015, on a standalone basis, CPF had an available cash balance of approximately $12.6 million in order to meet its ongoing obligations.
As a Hawaii statechartered bank, the bank may only pay dividends to the extent it has retained earnings as defined under Hawaii banking law (“Statutory Retained Earnings”),
which differs from GAAP retained earnings. As of December 31, 2015, the bank had Statutory Retained Earnings of $63.7 million.
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 and Hawaii 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. For further information, see “Dividends — Market for
Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.”
Share Repurchases
On February 21, 2014, we announced a tender offer to purchase for cash up to $68.8 million in value of shares of our common stock at a price not greater than $21.00 nor less than
$18.50 per share (the “Tender Offer”).
The Tender Offer expired on March 21, 2014 and we accepted for purchase 3,405,888 shares of our common stock at the purchase price of $20.20 per share for a total cost of $68.8
million, excluding fees and expenses related to the Tender Offer. The Tender Offer closed on March 28, 2014.
On February 20, 2014, we also entered into repurchase agreements (the “Repurchase Agreements”) with each of Carlyle Financial Services Harbor, L.P. (“Carlyle”) and ACMO
CPF, L.L.C. (“Anchorage” and together with Carlyle, the “Lead Investors”), each of whom was the owner of 9,463,095 shares (representing 22.5% of the outstanding shares or
44.9% in the aggregate at that time) of our common stock, pursuant to which we agreed to purchase up to $28.1 million of shares of common stock from each of the Lead Investors
at the Purchase Price of the Tender Offer (the “Private Repurchases”) (or an aggregate of
64
$56.2 million of shares). Conditions to the Private Repurchases were satisfied and we purchased 1,391,089 shares from each of Carlyle and Anchorage at the Purchase Price for a
total cost of $56.2 million, excluding fees and expenses related to the Private Repurchases. The Private Repurchases closed on April 7, 2014, the eleventh business day following
the expiration of the Tender Offer.
The completion of the Tender Offer and the Private Repurchases resulted in the aggregate repurchase by us of 6,188,066 shares totaling $125 million, or 14.7% of our issued and
outstanding shares of our common stock prior to the completion of the Tender Offer and the Private Repurchases.
On March 26, 2015, the Company, Carlyle and Anchorage (together the “Selling Shareholders”), and Citigroup Global Markets, Inc. (the “Underwriter”) entered into a secondary
offering underwriting agreement (the “March 2015 Underwriting Agreement”) pursuant to which the Selling Shareholders agreed to each sell 3,802,694 shares for a total of
7,605,388 shares of CPF common stock, no par value per share, to the Underwriter at a price of $23.01 per common share for a total of approximately $175.0 million. In
connection with the March 2015 Underwriting Agreement, the Company repurchased 3,259,452 shares of its common stock from the Underwriter at a price of $23.01 per share for
an aggregate cost of approximately $75.0 million, excluding fees and expenses. On April 1, 2015, the transactions were consummated. The Company did not receive any of the
proceeds from the sale of these shares and no shares were sold by the Company. The Company incurred $0.4 million of costs recorded in other expenses related to the secondary
offering by the Selling Shareholders. In addition, the Company incurred $0.2 million in costs recorded in equity related to the repurchase of its common stock from the
Underwriter.
On June 4, 2015, the Company, the Selling Shareholders, and the Underwriter entered into another secondary offering underwriting agreement (the “June 2015 Underwriting
Agreement”) pursuant to which the Selling Shareholders agreed to each sell 1,500,000 shares for a total of 3,000,000 shares of CPF common stock, no par value per share, to the
Underwriter at a price of $22.15 per common share for a total of approximately $66.5 million. The Company did not receive any of the proceeds from the sale of these shares by
the Selling Shareholders and no shares were sold by the Company. In the second quarter of 2015, the Company accrued $0.3 million of costs recorded in other operating expenses
related to the secondary offering by the Selling Shareholders.
On August 3, 2015, the Company, the Selling Shareholders, and the Underwriter and UBS Investment Bank ("UBS") entered into a final underwriting agreement (the "August
2015 Underwriting Agreement") pursuant to which the Selling Shareholders sold their aggregate remaining interest in the Company of 5,538,624 shares of CPF common stock to
the Underwriter and UBS at a price of $22.11 per common share for a total of approximately $122.5 million. The Company did not receive any of the proceeds from the sale of
these shares by the Selling Shareholders and no shares were sold by the Company.
In January 2008, our Board of Directors authorized the repurchase and retirement of up to 60,000 shares of the Company’s common stock (the “2008 Repurchase Plan”).
Repurchases under the 2008 Repurchase Plan may be made from time to time on the open market or in privately negotiated transactions. There were no repurchases of common
stock during 2012 and 2013. A total of 55,000 shares remained available for repurchase under the 2008 Repurchase Plan at December 31, 2013. In January 2014, the 2008
Repurchase Plan and the remaining 55,000 shares were superseded by the Tender Offer and Repurchase Agreements with our Lead Investors.
On May 20, 2014, our Board of Directors authorized the repurchase and retirement of up to $30.0 million of the Company’s outstanding common stock (the “CPF Repurchase
Plan”). Repurchases under the 2014 Repurchase Plan may be made from time to time on the open market or in privately negotiated transactions. In 2014, 857,554 shares of
common stock, at a cost of $16.5 million, were repurchased under this program.
In January 2015, our Board of Directors increased our repurchase authority under the CPF Repurchase Plan by $25.0 million. In March, 2015, our Board of Directors increased the
authorization under the CPF Repurchase Plan by an additional $75.0 million in connection with the March 2015 Underwriting Agreement. In 2015, an additional 4,122,881
shares of common stock, at a cost of $93.3 million, excluding fees and expenses, were repurchased under this program. A total of $20.2 million authorized remained available for
repurchase under the CPF Repurchase Plan at December 31, 2015.
In January 2016, our Board of Directors authorized the repurchase of up to $30.0 million of the Company's common stock from time to time in the open market or in privately
negotiated transactions, pursuant to a newly authorized share repurchase program (the "2016 Repurchase Plan"). The 2016 Repurchase Plan replaces and supersedes in its entirety
the CPF Repurchase Plan.
65
Asset/Liability Management and Interest Rate Risk
Our earnings and capital are sensitive to risk of interest rate fluctuations. Interest rate risk arises when ratesensitive assets and ratesensitive 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 interestbearing funding sources. Asset/liability management attempts to coordinate our ratesensitive assets and rate
sensitive liabilities to meet our financial objectives.
Our Asset/Liability Management Policy seeks to maximize the riskadjusted 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.
Interest rate risk can be analyzed by monitoring an institution’s interest rate sensitivity gap and changes in the gap over time. An asset or liability is said to be interest rate
sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of
interestearning assets and the amount of interestbearing liabilities maturing or repricing within a specified time period. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount
of interest rate sensitive assets. During a period of rising interest rates, the earnings of an institution with a positive gap theoretically may be positively affected due to its interest
earning assets repricing to a greater extent than its interestbearing liabilities. An adverse impact would be expected for an institution with a negative gap.
66
The following table sets forth information regarding our interest rate sensitivity gap at December 31, 2015. The assumptions used in determining interest rate sensitivity of various
asset and liability products had a significant impact on the resulting table. For purposes of this presentation, assets and liabilities are classified by the earliest repricing date or
maturity. All interestbearing demand and savings balances are included in the threemonthsorless category, even though repricing of these accounts is not contractually
required and may not actually occur during that period. Since all interest rates and yields do not adjust at the same velocity or magnitude, and since volatility is subject to change,
the interest rate sensitivity gap is only a general indicator of interest rate risk.
Table 19. Rate Sensitivity of Assets, Liabilities and Equity
Three
Months
or Less
Over
Three
Through
Six Months
Over Six
Through
Twelve
Months
Over One
Through
Three
Years
Over
Three
Years
NonRate
Sensitive
Total
(Dollars in thousands)
8,397
$
— $
— $
— $
— $
47,564
14,036
806,033
8,606
—
47,757
—
257,573
—
—
98,368
—
374,309
—
—
308,918
—
917,097
—
—
1,011,965
—
855,578
—
—
— $
5,600
73
942
—
368,472
8,397
1,520,172
14,109
3,211,532
8,606
368,472
884,636
$
305,330
$
472,677
$
1,226,015
$
1,867,543 $
375,087 $
5,131,288
1,145,244
$
— $
— $
— $
2,756,141
69,000
92,785
—
—
287,862
145,957
66,552
—
—
—
—
—
—
—
—
—
—
—
—
— $
31,683
—
—
—
—
— $
—
—
—
41,425
494,639
1,145,244
3,288,195
69,000
92,785
41,425
494,639
4,063,170
$
287,862
$
145,957
$
66,552
$
31,683 $
536,064 $
5,131,288
(3,178,534)
$
17,468
$
326,720
$
1,159,463
$
1,835,860 $
(160,977) $
(3,178,534)
$
(3,161,066)
$
(2,834,346)
$
(1,674,883)
$
160,977 $
— $
—
—
Assets
Interestbearing deposits in other
banks
Investment securities
Loans held for sale
Loans and leases
Federal Home Loan Bank stock
Other assets
Total assets
Liabilities and Equity
Noninterestbearing deposits
Interestbearing deposits
Shortterm borrowings
Longterm debt
Other liabilities
Equity
Total liabilities and equity
Interest rate sensitivity gap
Cumulative interest rate sensitivity gap
$
$
$
$
$
$
ALCO also utilizes a detailed and dynamic simulation model to measure and manage interest rate risk exposures. The monthly 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 of December 31, 2015, over a oneyear horizon, assuming no balance sheet growth and given both a 200 bp
upward and 100 bp downward parallel shift in interest rates.
Rate Change
+200bp
100bp
Estimated Net Interest
Income Sensitivity
0.22 %
(4.52)%
67
Table 20. Interest Rate Sensitivity
Expected Maturity Within
One
Year
Two
Years
Three
Years
Four
Years
Five
Years
(Dollars in thousands)
Thereafter
Total
Book
Value
Total
Fair
Value
$
8,397
0.50%
— $
0.00%
— $
0.00%
— $
0.00%
— $
0.00%
— $
0.00%
$
8,397
0.50%
8,397
193,689
$
168,908
$
140,010
$
179,937
$
213,848
$
618,180
$
1,514,572
$
1,515,475
2.47%
2.41%
2.40%
2.29%
2.54%
2.58%
2.49%
— $
0.00%
— $
0.00%
— $
0.00%
— $
0.00%
— $
0.00%
$
848
0.00%
$
848
0.00%
916
488,051
$
336,644
$
237,988
$
163,429
$
113,302
$
421,113
$
1,760,527
$
1,685,005
4.04%
4.06%
3.91%
4.07%
4.12%
4.16%
4.06%
544,127
$
291,898
$
220,271
$
153,381
$
107,146
$
147,276
$
1,464,099
$
1,422,494
3.91%
3.35%
3.39%
3.35%
3.28%
3.32%
3.56%
1,234,264
1,041,022
$
$
797,450
690,540
$
$
598,269
533,778
$
$
496,747
391,358
$
$
434,296
315,913
$
$
1,187,417
1,393,782
$
$
4,748,443
4,366,393
$
$
4,632,287
4,206,142
2,223,988
$
0.07%
— $
0.00%
— $
0.00%
— $
0.00%
— $
0.00%
— $
2,223,988
$
2,223,988
0.00%
0.07%
964,452
$
0.23%
41,513
$
0.60%
26,016
$
0.61%
19,395
$
1.25%
12,275
$
0.91%
69,000
$
0.35%
— $
0.00%
— $
0.00%
— $
0.00%
— $
0.00%
— $
0.00%
— $
0.00%
— $
0.00%
$
556
0.32%
— $
0.00%
— $
0.00%
— $
92,785
$
0.00%
2.97%
1,064,207
$
1,064,255
0.28%
69,000
$
0.35%
92,785
$
2.97%
69,000
67,421
3,257,440
2,984,467
$
$
41,513
71,085
$
$
26,016
28,064
$
$
19,395
9,214
$
$
12,275
21,284
$
$
93,341
92,825
$
$
3,449,980
3,206,939
$
$
3,424,664
3,158,646
Interestsensitive assets
Interestbearing deposits in other banks
Weighted average interest rates
Fixed rate investments
Weighted average interest rates
Equity investments
Weighted average interest rates
Fixed rate loans
Weighted average interest rates
Variable rate loans
Weighted average interest rates
Total December 31, 2015
Total December 31, 2014
Interestsensitive liabilities
Interestbearing demand and savings deposits
Weighted average interest rates
Time deposits
Weighted average interest rates
Shortterm borrowings
Weighted average interest rates
Longterm debt
Weighted average interest rates
Total December 31, 2015
Total December 31, 2014
$
$
$
$
$
$
$
$
$
$
$
$
$
The preceding sensitivity analysis does not represent our forecast and should not be relied upon as being indicative of expected operating results. These estimates are based upon
numerous assumptions including: the magnitude and timing of interest rate changes, prepayments on loans and investment securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment of asset and liability cashflows and others.
The table above presents information on financial instruments held that are sensitive to changes in interest rates. For purposes of this presentation, expected maturities of interest
sensitive assets and liabilities are contractual maturities. Interestbearing demand and savings deposits, which have indeterminate maturities, are included in the earliest maturity
category. The resulting table is based on numerous assumptions including prepayment rates on mortgagerelated assets and forecasted market interest rates. See Note 23 to the
Consolidated Financial Statements under “Part II, Item 8. Financial Statements and Supplementary Data” for a discussion of the calculation of fair values.
Maturities and fair values of interestsensitive assets and liabilities may vary from expectation if actual experience differs from the assumptions used.
68
Liquidity
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 assure maximum utilization, maintenance of an adequate level of readily marketable assets and access to shortterm funding sources. Our loantodeposit ratio at
December 31, 2015 was 72.4% compared to 71.3% at December 31, 2014. Our liquidity may be negatively impacted by unforeseen demands on cash or if our deposit customers
withdraw funds due to uncertainties surrounding our financial condition or prospects.
The consolidated statements of cash flows identify the three major categories of sources and uses of cash as operating, investing and financing activities. As presented in the
consolidated statements of cash flows, cash provided by operating activities has provided a significant source of funds during the past three years. Cash provided by operating
activities totaled $74.5 million in 2015, $71.4 million in 2014, and $84.5 million in 2013. The primary source of cash provided by operating activities continues to be our net
operating income, exclusive of noncash items such as the Provision and asset impairments.
Net cash used in investing activities amounted to $315.1 million, $83.1 million and $442.1 million in 2015, 2014 and 2013, respectively. Investment securities and lending
activities generally comprise the largest components of investing activities, although the level of investment securities activities are impacted by the relationship of loan and
deposit growth during the period. In 2015, 2014 and 2013, net loan originations accounted for $218.2 million, $245.1 million and $357.9 million, respectively, of cash used in
investing activities. Net purchases of investment securities totaled $72.3 million and $24.2 million in 2015 and 2013, respectively, compared to net proceeds received from sales
and maturities of investment securities of $223.0 million in 2014. Investing activities included proceeds from sales of loans originated for investment of $6.7 million and $10.7
million in 2015 and 2013, respectively, and other real estate of $6.7 million, $3.9 million, and $17.9 million in 2015, 2014 and 2013, respectively. We did not sell any loans
originated for investment in 2014.
Cash provided by financing activities totaled $234.8 million, $48.4 million, and $229.5 million in 2015, 2014 and 2013, respectively. Deposit activities, borrowings and capital
transactions represent the major components of financing activities. In 2015, 2014 and 2013, we increased net deposits by $323.1 million, $174.1 million and $255.4 million,
respectively. Net cash inflows from shortterm debt totaled $31.0 million in 2015, $30.0 million in 2014 and $8.0 million in 2013. There were no cash outflows for longterm debt
in 2015. Net cash outflows for longterm debt totaled $14 thousand in 2014 and $15.5 million in 2013. As with investment securities, the level of net borrowings is impacted by
the levels of loan and deposit growth/contraction during the period. Capital transactions, primarily dividends and stock repurchases, totaled $119.3 million, $155.7 million and
$6.7 million of cash used in 2015, 2014 and 2013, respectively, due primarily to share repurchases under the Tender Offer, the Private Repurchases, and the CPF Repurchase Plan.
Core deposits have historically provided us with a sizeable 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 shortterm and longterm 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 the Federal Reserve discount window, available to meet our liquidity needs. While we
historically have had access to these other funding sources, continued 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 is a member of and maintained a $1.22 billion line of credit with the FHLB as of December 31, 2015. Shortterm and longterm borrowings under this arrangement
totaled $69.0 million and nil at December 31, 2015, respectively, compared to $38.0 million and nil at December 31, 2014, respectively. FHLB advances outstanding at
December 31, 2015 were secured by unencumbered investment securities with a fair value of $0.5 million and certain real estate loans with a carrying value of $1.6 billion in
accordance with the collateral provisions of the Advances Pledge and Security Agreement with the FHLB. At December 31, 2015, $1.15 billion remained available under this
arrangement.
The bank also maintained a line of credit with the Federal Reserve discount window of $40.8 million and $33.3 million as of December 31, 2015 and 2014, respectively. There
were no advances outstanding under this arrangement at December 31, 2015 and 2014. Advances under this arrangement would have been secured by certain commercial and
commercial real estate loans with a carrying value totaling $87.3 million. The Federal Reserve does not have the right to sell or repledge these loans. See Note 11 to the
Consolidated Financial Statements under “Part II, Item 8. Financial Statements and Supplementary Data” for additional information regarding our shortterm borrowings.
69
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 industrywide reductions in liquidity.
Holding Company Liquidity
For the holding company on a standalone basis, in 2015, net cash provided by operating activities amounted to $109.1 million. The primary source of funds in operating
activities included dividends received from the bank of $111.8 million. Net cash used in financing activities amounted to $119.3 million. The primary use of funds in financing
activities included the repurchases of common stock totaling $93.5 million and cash dividends of $26.1 million paid to our common shareholders.
In 2014, net cash provided by operating activities amounted to $157.9 million. The primary source of funds in operating activities included dividends received from the bank of
$159.3 million. Net cash provided by investing activities amounted to $1.0 million. Net cash used in financing activities amounted to $155.7 million. The primary use of funds in
financing activities included the repurchases of common stock totaling $142.4 million and cash dividends of $13.4 million paid to our common shareholders.
In 2013, net cash used in operating activities of the holding company amounted to $4.9 million. The primary use of funds in operating activities included the payment of deferred
accrued interest on its subordinated debentures of $13.0 million. Net cash used in financing activities amounted to $22.1 million. The primary use of funds in financing activities
included the repurchase of trust preferred securities of Trust I and subsequent retirement of longterm debt of Trust I totaling $15.5 million, and cash dividends of $6.7 million paid
to our common shareholders.
OffBalance Sheet Arrangements
In the normal course of business, we enter into offbalance sheet arrangements to meet the financing needs of our banking customers. These financial instruments include
commitments to extend credit, standby letters of credit and financial guarantees written, forward foreign exchange contracts, forward interest rate contracts and interest rate swaps
and options. These instruments and the related offbalance sheet exposures are discussed in detail in Note 22 to the Consolidated Financial Statements under “Part II, Item 8.
Financial Statements and Supplementary Data.” In the unlikely event that we must satisfy a significant amount of outstanding commitments to extend credit, liquidity will be
adversely impacted, as will credit risk. The remaining components of offbalance sheet arrangements, primarily interest rate options and forward interest rate contracts related to
our mortgage banking activities, are not expected to have a material impact on our consolidated financial position or results of operations.
Impact of New Accounting Standards
In May 2014, the FASB issued ASU 201409, “Revenue from Contracts with Customers.” ASU 201409 requires an entity to recognize the amount of revenue to which it expects
to be entitled for the transfer of promised goods or services to customers. This ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective.
ASU 201409 is effective for the Company’s reporting period beginning on January 1, 2017. We do not expect the adoption of this guidance to have a material impact on our
consolidated financial statements.
In June 2014, the FASB Issued ASU 201412, “Accounting for ShareBased Payments When the Terms of an Award Provide That a Performance target Could Be Achieved after
the Requisite Service Period.” ASU 201412 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a
performance condition. ASU 201412 is effective for the Company’s reporting period beginning on January 1, 2016. As of December 31, 2015, the Company did not have any
sharebased payment awards that included performance targets that could be achieved after the requisite service period. As such, we do not expect the adoption of this guidance to
have a material impact on our consolidated financial statements.
In February 2015, the FASB issued ASU 201502, “Amendments to the Consolidation Analysis.” ASU 201502 changes the analysis that a reporting entity must perform to
determine whether it should consolidate certain types of legal entities. Specifically, the amendments:1) modify the evaluation of whether limited partnerships and similar legal
entities are variable interest entities (“VIEs”) or voting interest entities; 2) eliminate the presumption that a general partner should consolidate a limited partnership; 3) affect the
consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; 4) provide a scope exception
from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to
those in Rule 2a7 of the Investment Company Act of 1940 for registered money market funds. All legal entities are
70
subject to reevaluation under the revised consolidation model. ASU 201502 is effective for the Company’s annual reporting period beginning on January 1, 2016. We do not
expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In November 2015, the FASB issued ASU 201517, "Presentation of Deferred Taxes as Noncurrent." ASU 201517 requires entities with a classified balance sheet to present all
deferred tax assets and liabilities as noncurrent. ASU 201517 is effective for the Company's reporting period beginning January 1, 2017. We do not expect the adoption of this
guidance to have a material impact on our consolidated financial statements.
In January 2016, the FASB issued ASU 201601, "Accounting for Equity Investments and Financial Liabilities." ASU 201601 changes the income statement impact of equity
investments, and the recognition of changes in fair value of financial liabilities when the fair value option is selected. ASU 201601 is effective for the Company's reporting
period beginning January 1, 2019. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
71
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk is set forth under “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Asset/Liability Management and Interest Rate Risk” and in Note 23 to the Consolidated Financial Statements under “Part II, Item 8. Financial Statements and
Supplementary Data.”
72
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Central Pacific Financial Corp.:
We have audited the accompanying consolidated balance sheets of Central Pacific Financial Corp. and subsidiaries as of December 31, 2015 and 2014, and the related
consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years in the threeyear period ended December 31, 2015. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Central Pacific Financial Corp.
and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three‑year period ended December 31, 2015,
in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Central Pacific Financial Corp.’s internal control
over financial reporting as of December 31, 2015, based on Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated February 25, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.
/s/ KPMG LLP
Honolulu, Hawaii
February 25, 2016
73
The Board of Directors and Shareholders
Central Pacific Financial Corp.:
Report of Independent Registered Public Accounting Firm
We have audited Central Pacific Financial Corp.’s (the Company’s) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal
Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on based on criteria
established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Central Pacific
Financial Corp. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows
for each of the years in the three‑year period ended December 31, 2015, and our report dated February 25, 2016 expressed an unqualified opinion on those consolidated financial
statements.
/s/ KPMG LLP
Honolulu, Hawaii
February 25, 2016
74
CENTRAL PACIFIC FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
Cash and due from banks
Interestbearing deposits in other banks
Investment securities:
Available for sale, at fair value
Held to maturity, at amortized cost (fair value of $244,136 at December 31, 2015 and $235,597 at December 31, 2014)
Total investment securities
Loans held for sale
Loans and leases
Allowance for loan and lease losses
Net loans and leases
Premises and equipment, net
Accrued interest receivable
Investment in unconsolidated subsidiaries
Other real estate
Mortgage servicing rights
Other intangible assets
Bankowned life insurance
Federal Home Loan Bank stock
Other assets
Total assets
Liabilities and Equity
Deposits:
Noninterestbearing demand
Interestbearing demand
Savings and money market
Time
Total deposits
Shortterm borrowings
Longterm debt
Other liabilities
Total liabilities
Equity:
Preferred stock, no par value, authorized 1,100,000 shares, issued and outstanding none at December 31, 2015 and 2014
Common stock, no par value, authorized 185,000,000 shares, issued and outstanding 31,361,452 and 35,233,674 shares at December 31, 2015 and 2014, respectively
Surplus
Accumulated deficit
Accumulated other comprehensive income
Total shareholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
See accompanying notes to consolidated financial statements.
75
December 31,
2015
2014
(Dollars in thousands)
$
71,797
$
8,397
1,272,255
247,917
1,520,172
14,109
3,211,532
(63,314)
3,148,218
49,161
14,898
6,157
1,962
17,797
7,355
153,967
8,606
108,692
72,316
13,691
1,229,018
238,287
1,467,305
9,683
2,932,198
(74,040)
2,858,158
49,214
13,584
7,246
2,948
19,668
10,029
152,283
43,932
132,930
$
$
5,131,288
$
4,852,987
1,145,244
$
824,895
1,399,093
1,064,207
4,433,439
69,000
92,785
41,425
1,034,146
788,272
1,242,598
1,045,284
4,110,300
38,000
92,785
43,861
4,636,649
4,284,946
—
548,878
82,847
(137,314)
203
494,614
25
494,639
$
5,131,288
$
—
642,205
79,716
(157,039)
3,159
568,041
—
568,041
4,852,987
Interest income:
Interest and fees on loans and leases
Interest and dividends on investment securities:
Taxable interest
Taxexempt interest
Dividends
Interest on deposits in other banks
Dividends on Federal Home Loan Bank stock
Total interest income
Interest expense:
Interest on deposits:
Demand
Savings and money market
Time
Interest on shortterm borrowings
Interest on longterm debt
Total interest expense
Net interest income
Provision (credit) for loan and lease losses
Net interest income after provision for loan and lease losses
Other operating income:
Other service charges and fees
Service charges on deposit accounts
Loan servicing fees
Net gain on sales of residential loans
Income from fiduciary activities
Income from bankowned life insurance
Net gain on sales of foreclosed assets
Equity in earnings of unconsolidated subsidiaries
Fees on foreign exchange
Loan placement fees
Investment securities gains (losses)
Other
Total other operating income
Other operating expense:
Salaries and employee benefits
Net occupancy
Legal and professional services
Computer software expense
Amortization and impairment of other intangible assets
Communication expense
Equipment
Advertising expense
Foreclosed asset expense
Other
Total other operating expense
Income before income taxes
Income tax expense (benefit)
Net income
Per common share data:
Basic earnings per share
Diluted earnings per share
Cash dividends declared
CENTRAL PACIFIC FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2015
2014
2013
(Dollars in thousands, except per share data)
$
118,887
$
112,137
$
32,969
4,022
36
35
86
33,574
3,996
23
33
46
156,035
149,809
399
916
2,312
254
2,626
6,507
149,528
(15,671)
165,199
11,461
7,829
5,656
6,107
3,343
2,034
568
578
450
720
(1,866)
2,104
38,984
66,429
14,432
7,340
8,831
6,859
3,483
3,475
2,550
486
17,342
131,227
72,956
27,088
45,868
373
901
2,453
92
2,572
6,391
143,418
(6,414)
149,832
11,754
8,113
5,798
5,545
3,552
2,922
971
480
464
437
240
3,547
43,823
67,941
15,252
7,806
6,327
5,332
3,635
3,582
2,342
1,710
18,886
132,813
60,842
20,389
40,453
$
$
1.42
1.40
0.82
$
1.08
1.07
0.36
See accompanying notes to consolidated financial statements.
76
104,479
31,498
4,051
23
203
24
140,278
349
894
2,801
6
3,119
7,169
133,109
(11,310)
144,419
12,490
7,041
6,057
9,986
2,855
2,333
8,584
790
508
570
482
3,249
54,945
76,294
14,323
8,094
4,579
7,418
3,523
3,676
2,666
1,036
17,927
139,536
59,828
(112,247)
172,075
4.10
4.07
0.16
CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive income (loss), net of tax
Net change in unrealized gain (loss) on investment securities
Net change in unrealized gain on derivatives
Minimum pension liability adjustment
Other comprehensive income (loss), net of tax
Comprehensive income
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
45,868 $
40,453 $
172,075
(4,405)
—
1,449
(2,956)
22,711
—
(3,707)
19,004
42,912 $
59,457 $
(31,865)
10,993
5,857
(15,015)
157,060
$
$
See accompanying notes to consolidated financial statements.
77
CENTRAL PACIFIC FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Balance at December 31, 2012
Net income
Other comprehensive loss
Cash dividends ($0.16 per share)
1,782 net shares of common stock purchased by directors’ deferred
compensation plan
Sharebased compensation
Noncontrolling interests
Balance at December 31, 2013
Net income
Other comprehensive income
Cash dividends ($0.36 per share)
1,118 net shares of common stock sold by directors’ deferred
compensation plan
7,045,620 shares of common stock repurchased and other related
costs
Sharebased compensation
Noncontrolling interests
Balance at December 31, 2014
Net income
Other comprehensive income
Cash dividends ($0.82 per share)
8,159 net shares of common stock sold by directors’ deferred
compensation plan
4,122,881 shares of common stock repurchased and other related
costs
Sharebased compensation
Noncontrolling interests
Balance at December 31, 2015
Common
Shares
Outstanding
41,867,046
$
—
—
—
—
240,587
—
42,107,633
$
—
—
—
—
(7,045,620)
171,661
—
35,233,674
$
—
—
—
—
(4,122,881)
250,659
—
31,361,452
$
Preferred
Stock
Common
Stock
Surplus
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Non
Controlling
Interests
— $
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
— $
(Dollars in thousands, except per share data)
$
$
(349,427)
70,567
784,512
—
—
—
(39)
74
—
—
—
—
—
4,931
—
$
$
172,075
—
(6,735)
—
—
—
(830)
$
—
(15,015)
—
—
—
—
784,547
$
75,498
$
(184,087)
$
(15,845)
$
—
—
—
(11)
(142,405)
—
—
—
—
—
74
—
4,218
—
40,453
—
(13,405)
—
—
—
—
642,205
$
79,716
$
(157,039)
$
—
—
—
(154)
(93,533)
—
—
—
—
—
360
—
3,131
—
45,868
—
(26,143)
—
—
—
—
—
19,004
—
—
—
—
—
3,159
$
—
(2,956)
—
—
—
—
—
548,878
$
82,847
$
(137,314)
$
203
$
9,957
$
—
—
—
—
—
(9,896)
$
61
—
—
—
—
—
—
(61)
— $
—
—
—
—
—
—
Total
514,779
172,075
(15,015)
(6,735)
(39)
5,005
(9,896)
660,174
40,453
19,004
(13,405)
(11)
(142,405)
4,292
(61)
568,041
45,868
(2,956)
(26,143)
(154)
(93,533)
3,491
25
25
25
$
494,639
See accompanying notes to consolidated financial statements.
78
CENTRAL PACIFIC FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for loan and lease losses
Depreciation and amortization
Amortization and impairment of other intangible assets
Write down of other real estate, net of gain on sale
Net amortization of investment securities
Sharebased compensation
Net (gain) loss on sale of investment securities
Net gain on sales of residential loans
Proceeds from sales of loans held for sale
Originations of loans held for sale
Equity in earnings of unconsolidated subsidiaries
Increase in cash surrender value of bankowned life insurance
Deferred income taxes
Premium paid on repurchases of preferred stock of subsidiaries
Net change in other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from maturities of and calls on investment securities available for sale
Proceeds from sales of investment securities available for sale
Purchases of investment securities available for sale
Proceeds from maturities of and calls on investment securities held to maturity
Purchases of investment securities held to maturity
Net loan originations
Purchases of loan portfolios
Proceeds from sales of loans originated for investment
Proceeds from sales of other real estate
Proceeds from bankowned life insurance
Purchases of premises and equipment
Distributions from unconsolidated subsidiaries
Net return of capital from (contributions to) unconsolidated subsidiaries
Proceeds from redemption of FHLB stock
Net cash used in investing activities
Cash flows from financing activities:
Net increase in deposits
Repayments of longterm debt
Net increase in shortterm borrowings
Cash dividends paid on common stock
Repurchases of common stock
Net proceeds from issuance of common stock and stock option exercises
Repurchases of preferred stock of subsidiaries
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents:
At beginning of year
At end of year
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest
Income taxes
Cash received during the year for:
Income taxes
Supplemental disclosure of noncash investing and financing activities:
Net change in common stock held by directors’ deferred compensation plan
Net reclassification of loans to other real estate
Net transfer of loans to loans held for sale
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
$
45,868
$
40,453
$
172,075
(15,671)
5,870
6,859
198
10,246
3,131
1,866
(6,107)
379,318
(377,638)
(578)
(2,407)
26,079
—
(2,529)
74,505
165,492
117,496
(344,766)
26,524
(37,043)
(218,195)
(68,754)
6,658
6,691
723
(5,817)
524
—
35,326
(315,141)
323,139
—
31,000
(26,143)
(93,533)
360
—
234,823
(5,813)
(6,414)
5,842
5,332
1,133
7,807
4,218
(240)
(5,545)
373,061
(364,828)
(480)
(3,161)
20,482
—
(6,228)
71,432
145,592
162,470
(98,408)
15,814
(2,443)
(245,099)
(62,648)
—
3,865
481
(6,017)
531
466
2,261
(83,135)
174,127
(14)
29,985
(13,405)
(142,405)
74
—
48,362
36,659
(11,310)
6,007
7,418
(8,011)
13,283
4,931
(482)
(9,986)
654,005
(618,106)
(790)
(2,729)
(112,138)
1,895
(11,531)
84,531
448,453
271,931
(753,496)
13,500
(4,595)
(357,853)
(85,110)
10,679
17,892
536
(6,287)
9,615
(9,050)
1,735
(442,050)
255,401
(15,482)
8,015
(6,735)
—
74
(11,781)
229,492
(128,027)
$
$
$
86,007
80,194
$
49,348
86,007
$
177,375
49,348
$
6,453
1,642
—
154
$
5,903
6,658
6,413
$
—
185
11
$
2,783
—
19,260
5
—
39
4,358
—
Net transfer of investment securities available for sale to held to maturity
—
—
101,669
See accompanying notes to consolidated financial statements.
79
CENTRAL PACIFIC FINANCIAL CORP. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2015, 2014, and 2013
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Central Pacific Financial Corp. is a bank holding company. Our principal operating subsidiary, Central Pacific Bank, is a fullservice commercial bank with 36 branches and 103
ATMs located throughout the state of Hawaii. The bank engages in a broad range of lending activities including originating commercial loans, commercial and residential
mortgage loans and consumer loans. The bank also offers a variety of deposit products and services. These include personal and business checking and savings accounts, money
market accounts and time certificates of deposit. Other products and services include debit cards, internet banking, cash management services, traveler’s checks, safe deposit
boxes, international banking services, night depository facilities and wire transfers. Wealth management products and services include nondeposit investment products,
annuities, insurance, investment management, asset custody and general consultation and planning services.
When we refer to “the Company,” “we,” “us” or “our,” we mean Central Pacific Financial Corp. & Subsidiaries (consolidated). When we refer to “Central Pacific Financial Corp.”
or to the holding company, we are referring to the parent company on a standalone basis. When we refer to “our bank” or “the bank,” we mean “Central Pacific Bank.”
The banking business depends on rate differentials, the difference between the interest rates paid on deposits and other borrowings and the interest rates received on loans
extended to customers and investment securities held in our portfolio. These rates are highly sensitive to many factors that are beyond our control. Accordingly, the earnings and
growth of the Company are subject to the influence of domestic and foreign economic conditions, including inflation, recession and unemployment.
We have the following three reportable segments: (1) Banking Operations, (2) Treasury and (3) All Others. The Banking Operations segment includes construction and
commercial real estate lending, commercial lending, residential mortgage lending, consumer lending, trust services, retail brokerage services, and our retail branch offices, which
provide a full range of deposit and loan products, as well as various other banking services. The Treasury segment is responsible for managing the Company’s investment
securities portfolio and wholesale funding activities. The All Others segment consists of all activities not captured by the Banking Operations and Treasury segments described
above and includes activities such as electronic banking, data processing and management of bank owned properties. For further information, see Note 24.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majorityowned subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Central Pacific Bank had two whollyowned subsidiaries as of December 31, 2013: CPB Real Estate, Inc. and Citibank Properties, Inc. Both were real estate investment trusts that
were dissolved in 2014. Central Pacific Bank also had two other whollyowned subsidiaries, CB Technology, Inc. and Central Pacific HomeLoans, Inc., which were dissolved in
February 2013 and February 2012, respectively.
In December 2015, we acquired a 50% ownership interest in a mortgage loan origination and brokerage company, One Hawaii HomeLoans, LLC. The bank concluded that the
investment meets the consolidation requirements under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, "Consolidation". The
bank concluded that the entity meets the definition of a variable interest entity and that we are the primary beneficiary of the variable interest entity. Accordingly, the investment
has been consolidated into our financial statements as of December 31, 2015.
We have 50% ownership interests in four other mortgage loan origination and brokerage companies which are accounted for using the equity method and are included in
investment in unconsolidated subsidiaries: Pacific Access Mortgage, LLC, Gentry HomeLoans, LLC, Haseko HomeLoans, LLC and Island Pacific HomeLoans, LLC.
We also have noncontrolling equity investments in affiliates that are accounted for under the cost method and are included in investment in unconsolidated subsidiaries.
Our investments in unconsolidated subsidiaries accounted for under the equity and cost methods were $0.6 million and $5.5 million, respectively, at December 31, 2015 and $0.5
million and $6.7 million, respectively, at December 31, 2014. Our policy
80
for determining impairment of these investments includes an evaluation of whether a loss in value of an investment is other than temporary. Evidence of a loss in value includes
absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity which would justify the carrying amount of
the investment. We perform impairment tests whenever indicators of impairment are present. If the value of an investment declines and it is considered other than temporary, the
investment is written down to its respective fair value in the period in which this determination is made.
The Company sponsors the Central Pacific Bank Foundation, which is not consolidated in the Company’s financial statements.
Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to
make estimates and assumptions that reflect the reported amounts of assets and liabilities and disclosures of contingent assets and contingent liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance and provision for loan and lease losses, reserves for
unfunded loan commitments, residential mortgage repurchase reserves and deferred income tax assets and income tax expense, as well as the valuation of investment securities,
other intangible assets and the related amortization thereon, pension liability and the fair value of certain financial instruments.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, we consider cash and cash equivalents to include cash and due from banks, interestbearing deposits in other banks,
federal funds sold and all highly liquid investments with maturities of three months or less at the time of purchase.
Investment Securities
Investments in debt securities and marketable equity securities are designated as trading, available for sale, or held to maturity. Securities are designated as held to maturity only if
we have the positive intent and ability to hold these securities to maturity. Held to maturity debt securities are reported at amortized cost. Trading securities are reported at fair
value, with changes in fair value included in earnings. Availableforsale securities are reported at fair value with net unrealized gains and losses, net of taxes, included in
accumulated other comprehensive income (loss) (“AOCI”).
We use current quotations, where available, to estimate the fair value of investment securities. Where current quotations are not available, we estimate fair value based on the
present value of expected future cash flows. We consider the facts of each security including the nature of the security, the amount and duration of the loss, credit quality of the
issuer, the expectations for that security’s performance and our intent and ability to hold the security until recovery. Declines in the value of debt securities and marketable equity
securities that are considered other than temporary are recorded in other operating income. Realized gains and losses on the sale of investment securities are recorded in other
operating income using the specific identification method.
We amortize premiums and accrete discounts associated with investment securities using the interest method over the life of the respective security instrument.
We were a member of the Federal Home Loan Bank of Seattle until its merger with the Federal Home Loan Bank of Des Moines on June 1, 2015. We are now a member of the
Federal Home Loan Bank of Des Moines (the "FHLB"). The bank is required to obtain and hold a specific number of shares of capital stock of the FHLB equal to the sum of a
membership investment requirement and an activitybased investment requirement. The securities are reported at cost and are presented separately in the consolidated balance
sheets.
Loans Held for Sale
Loans held for sale consists of the following two types: (1) Hawaii residential mortgage loans that are originated with the intent to sell them in the secondary market and (2) non
residential mortgage loans in both Hawaii and the U.S. Mainland that were originated with the intent to be held in our portfolio but were subsequently transferred to the held for
sale category. Hawaii residential mortgage loans classified as held for sale are carried at the lower of cost or fair value on an aggregate basis, while the nonresidential Hawaii and
U.S. Mainland loans are recorded at the lower of cost or fair value on an individual basis. Net fees and costs associated with originating and acquiring the Hawaii residential
mortgage loans held for sale are deferred and
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included in the basis for determining the gain or loss on sales of loans held for sale. We report the fair values of the nonresidential mortgage loans classified as held for sale net of
applicable selling costs on our consolidated balance sheets.
Loans originated with the intent to be held in our portfolio are subsequently transferred to held for sale when our intent to hold for the foreseeable future has changed. At the time
of a loan’s transfer to the held for sale account, the loan is recorded at the lower of cost or fair value. Any reduction in the loan’s value is reflected as a writedown of the recorded
investment resulting in a new cost basis, with a corresponding reduction in the allowance for loan and lease losses.
In subsequent periods, if the fair value of a loan classified as held for sale is less than its cost basis, a valuation adjustment is recognized in our consolidated statement of income in
other operating expense and the carrying value of the loan is adjusted accordingly. The valuation adjustment may be recovered in the event that the fair value increases, which is
also recognized in our consolidated statement of income in other operating expense.
The fair value of loans classified as held for sale are generally based upon quoted prices for similar assets in active markets, acceptance of firm offer letters with agreed upon
purchase prices, discounted cash flow models that take into account market observable assumptions, or independent appraisals of the underlying collateral securing the loans.
Collateral values are determined based on appraisals received from qualified valuation professionals and are obtained periodically or when indicators that property values may be
impaired are present.
We sell residential mortgage loans under industry standard contractual provisions that include various representations and warranties, which typically cover ownership of the
loan, compliance with loan criteria set forth in the applicable agreement, validity of the lien securing the loan, and other similar matters. We may be required to repurchase certain
loans sold with identified defects, indemnify the investor, or reimburse the investor for any credit losses incurred. Our repurchase risk generally relates to early payment defaults
and borrower fraud. We establish residential mortgage repurchase reserves to reflect this risk based on our estimate of losses after considering a combination of factors, including
our estimate of future repurchase activity and our projection of expected credit losses resulting from repurchased loans. At December 31, 2015 and 2014, this reserve totaled $0.4
million and $2.7 million, respectively, and is included in other liabilities on our consolidated balance sheets.
Loans
Loans are stated at the principal amount outstanding, net of unearned income. Unearned income represents net deferred loan fees that are recognized over the life of the related
loan as an adjustment to yield. Net deferred loan fees are amortized using the interest method over the contractual term of the loan, adjusted for actual prepayments. Unamortized
fees on loans paid in full are recognized as a component of interest income.
Interest income on loans is recognized on an accrual basis. For all loan types, the Company determines delinquency status by considering the number of days full payments
required by the contractual terms of the loan are past due. Loans are placed on nonaccrual status when interest payments are 90 days past due, or earlier should management
determine that the borrowers will be unable to meet contractual principal and/or interest obligations, unless the loans are wellsecured and in the process of collection. When a
loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income should management determine that the
collectibility of such accrued interest is doubtful. All subsequent receipts are applied to principal outstanding and no interest income is recognized unless the financial condition
and payment record of the borrowers warrant such recognition. A nonaccrual loan may be restored to an accrual basis when principal and interest payments are current and full
payment of principal and interest is expected.
Leases
We provide equipment financing to our customers through a variety of lease arrangements. Direct financing leases are carried at the aggregate of lease payments receivable plus
estimated residual value of the leased property, less unearned income. Unearned income on direct financing leases is amortized over the lease terms by methods that approximate
the interest method. Our lease portfolio has declined over the last seven years and had an outstanding balance of $1.0 million and $3.1 million at December 31, 2015 and 2014,
respectively.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses (the “Allowance”) is established through provisions for loan and lease losses (the “Provision”) charged against income. Our policy is to
charge a loan off in the period in which the loan is deemed to be uncollectible and all interest previously accrued but not collected is reversed against current period interest
income. We consider a loan to be uncollectible when it is probable that a loss has been incurred and the Company can make a reasonable
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estimate of the loss. In these instances, the likelihood of and/or timeframe for recovery of the amount due is uncertain, weak, or protracted. Subsequent receipts, if any, are credited
first to the remaining principal, then to the Allowance as recoveries, and finally to unaccrued interest.
The Allowance is management’s estimate of credit losses inherent in our loan and lease portfolio at the balance sheet date. We maintain our Allowance at an amount we expect to
be sufficient to absorb probable losses inherent in our loan and lease portfolio based on a projection of probable net loan chargeoffs.
The Company’s approach to developing the Allowance has three basic elements. These elements include specific reserves for individually impaired loans, a general allowance for
loans other than those analyzed as individually impaired, and an unallocated reserve. These three methods are explained below.
Specific Reserve
Individually impaired loans in all loan categories are evaluated using one of three valuation methods as prescribed under Accounting Standards Codification (“ASC”) 31010,
Fair Value of Collateral, Observable Market Price, or Cash Flow. A loan is generally evaluated for impairment on an individual basis if it meets one or more of the following
characteristics: riskrated as substandard, doubtful or loss, loans on nonaccrual status, troubled debt restructures, or any loan deemed prudent by management to so analyze. If the
valuation of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the Allowance or, alternatively, a specific reserve will be
established and included in the overall Allowance balance.
General Allowance
In determining the general allowance component of the Allowance, the Company utilizes a comprehensive approach to segment the loan portfolio into homogenous groups. Six
criteria divide the Company’s loan portfolio into 128 homogenous subsectors. First, loans are divided by general geographic region (U.S. Mainland and Hawaii). Second, loans
are subdivided according to FDIC classification (Construction, Commercial Mortgage, Commercial, Financial and Agricultural, Leases, Residential Mortgage, Consumer). Third,
loans within the Construction category are further subdivided by collateral type (Commercial and Residential). Fourth, loans within the Residential Mortgage category are further
subdivided by ownership type (Investorowned and Owneroccupied). Fifth, loans are subdivided by state or for some, by county (All Hawaii, Hawaii Island, Kauai, Maui, Oahu,
Other Hawaii, All U.S. Mainland, Los Angeles/Orange County CA, Riverside/San Bernardino CA, Sacramento/Placer/El Dorado/Yolo CA, San Diego CA, Washington/Oregon,
Other U.S. Mainland). Finally, loans are further subdivided by risk rating (Pass, Special Mention, Substandard, and Doubtful).
For the purpose of determining general allowance loss factors, loss experience is derived from chargeoffs and recoveries. From 2010 through 2013, the calculation of subsector
loss factors involved the summation of chargeoffs and recoveries that occurred within the last eight quarters (for loans secured by real estate) or four quarters (for all other loans)
divided by the average loan balance over the last eight or four quarters, respectively. The eight or four quarter period is referred to as the lookback period. We did not apply any
weighting schema to our loss experience over the lookback period. A rolling eight quarter period was utilized for FDIC classifications involving real estate collateral to account
for prolonged loss recognition and ultimate disposition periods associated with loans secured by real estate. The Company’s rapidly evolving loss experience necessitated the use
of shorter loss analysis periods in order to ensure that loss rates would be adequately responsive to changes in loss experience. During that period, the Company considered recent
loss data to be more relevant to the period then under analysis. The lookback period was also consistent with commentary provided by our primary banking regulator following
our 2010 Safety and Soundness Examination.
During 2012 through 2014, economic conditions stabilized, and improved credit quality trends have contributed to consistent reductions to the Allowance. Given the
diminishing loss rates, in the first quarter of 2014 the lookback period was extended to 17 quarters, with the intention of extending the lookback period each quarter thereafter to
a total of 24 quarters or six years to incorporate broader loss experience through a more complete economic cycle and reduce the Company’s reliance on proxy loss rates by
capturing more of the Company’s own historical loss experience in this extended lookback period. The enhanced methodology does not incorporate data from before 2010
because the Company has reason to believe that anomalous chargeoff activity may cause pre2010 internal loss data to be an inappropriate representation of future loss
experience. We believe that this longer lookback period is appropriate in light of the Company’s limited loss experience throughout the recent economic recovery and
stabilization. Additionally, as economic conditions have stabilized over 2012 through 2014, lower loss rate volatility has diminished the need for shorter loss analysis periods
that are more responsive to shifts in loss experience. In our revised approach, the losses during the six year lookback period will be weighted to place more emphasis on recent
loss experience. Also in late 2013, the Company received guidance from its primary banking regulator supporting the use of
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extended loss analysis periods. The Supervisory Examiner recommended a periodic reassessment of the lookback period and suggested that a lookback period beyond eight
quarters may be more reasonable given the then current economic conditions and portfolio performance.
Our Allowance methodology uses qualitative adjustments for economic/market conditions and Companyspecific conditions. The economic/market conditions factor is applied
on a regional/geographic basis. The Companyspecific condition factor is applied on a category basis. Two key indicators, personal income and unemployment, comprise the
economic/market adjustment factor.
Personal income is analyzed by comparing average quartertoquarter percentage change trends reported by the U.S. Bureau of Economic Analysis. Specifically, the rolling four
quarter average percentage change in personal income is calculated and compared to a baseline historical factor, calculated as the average quartertoquarter percentage change
over the prior 10 years. The difference between the current average change and the historical average change is utilized as the personal income component of the economic/market
adjustment factor.
The second component of the economic/market factor, unemployment, is derived by comparing the current quarter unemployment rate, reported by the U.S. Bureau of Labor
Statistics, to its 10 year historical average. A constant scaling factor is applied to the difference between the current rate and the historical average in order to smooth significant
periodtoperiod fluctuations. The result is utilized as the unemployment component of the economic factor. The personal income factor and unemployment factor are added
together to determine each region’s total economic/market adjustment factor.
The general allowance also incorporates qualitative adjustment factors that capture companyspecific conditions for which national/regional statistics are not available, or for
which significant localized market specific events have not yet been captured within regional statistics or the Company’s historical loss experience.
Since we cannot predict with certainty the amount of loan and lease chargeoffs that will be incurred and because the eventual level of loan and lease chargeoffs are impacted by
numerous conditions beyond our control, we use our historical loss experience adjusted for current conditions to determine both our Allowance and Provision. In addition,
various regulatory agencies, as an integral part of their examination processes, periodically review our Allowance. The determination of the Allowance requires us to make
estimates of losses that are highly uncertain and involves a high degree of judgment. Accordingly, actual results could differ from those estimates. Changes in the estimate of the
Allowance and related Provision could materially affect our operating results.
Unallocated Reserve
The Company may also maintain an unallocated Allowance amount to provide for other credit losses inherent in our loan and lease portfolio that may not have been
contemplated in the credit loss factors. The unallocated reserve is a measure to address judgmental estimates that are inevitably imprecise and it reflects an adjustment to the
Allowance that is not attributable to specific categories of the loan portfolio. The unallocated reserve is distinct from and not captured in the Company’s qualitative adjustments
in the general component of the Allowance. Accordingly, the unallocated reserve is intended to capture broader national and global economic risks that could potentially have a
ripple effect on our loan portfolio.
The decrease in the unallocated reserve in 2015 was primarily due to amounts that were included in the unallocated reserve in 2014 being captured in the allocated reserve in
2015.
Reserve for Unfunded Commitments
Our process for determining the reserve for unfunded loan commitments is consistent with our process for determining the Allowance and is adjusted for estimated loan funding
probabilities. The reserve for unfunded loan commitments is recorded separately through a valuation allowance included in other liabilities. Credit losses for offbalance sheet
credit exposures are deducted from the allowance for credit losses on offbalance sheet credit exposures in the period in which the liability is settled. The allowance for credit
losses on offbalance sheet credit losses is established by a charge to other operating expense.
Premises and Equipment
Premises and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are included in other operating expense and are
computed using the straightline method over the shorter of the estimated useful lives of the assets or the applicable leases. Useful lives generally range from five to thirtynine
years for premises and improvements, and one to seven years for equipment. Major improvements and betterments are capitalized, while recurring
84
maintenance and repairs are charged to operating expense. Net gains or losses on dispositions of premises and equipment are included in other operating expense.
Other Intangible Assets
Other intangible assets include a core deposit premium and mortgage servicing rights.
Our core deposit premium is being amortized over 14 years which approximates the estimated life of the purchased deposits. The carrying value of our core deposit premium is
periodically evaluated to estimate the remaining periods of benefit. If these periods of benefit are determined to be less than the remaining amortizable life, an adjustment to reflect
such shorter life will be made.
We utilize the amortization method to measure our mortgage servicing rights. Under the amortization method, we amortize our mortgage servicing rights in proportion to and over
the period of net servicing income. Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans. Amortization of the servicing rights is
reported as amortization of other intangible assets in our consolidated statements of income. Ancillary income is recorded in other income. Mortgage servicing rights are recorded
when loans are sold to thirdparties with servicing of those loans retained and we classify our entire mortgage servicing rights into one class.
Initial fair value of the servicing right is calculated by a discounted cash flow model prepared by a third party service provider based on market value assumptions at the time of
origination and we assess the servicing right for impairment using current market value assumptions at each reporting period. Critical assumptions used in the discounted cash
flow model include mortgage prepayment speeds, discount rates, costs to service and ancillary income. Variations in our assumptions could materially affect the estimated fair
values. Changes to our assumptions are made when current trends and market data indicate that new trends have developed. Current market value assumptions based on loan
product types (fixed rate, adjustable rate and balloon loans) include average discount rates, servicing cost and ancillary income. Many of these assumptions are subjective and
require a high level of management judgment. Our mortgage servicing rights portfolio and valuation assumptions are periodically reviewed by management.
The fair value of our mortgage servicing rights is validated by first ensuring the completeness and accuracy of the loan data used in the valuation analysis. Reconciliation is
performed by comparing the loan data from our loan system to a valuation report prepared by a third party. Additionally, the critical assumptions which come from the third party
are reviewed by management. This review may include comparing actual assumptions to forecast or evaluating the reasonableness of market assumptions by reviewing them in
relation to the values and trends of assumptions used by peer banks. The validation process also includes reviewing key metrics such as the fair value as a percentage of the total
unpaid principal balance of the mortgages serviced, and the resulting percentage as a multiple of the net servicing fee. These key metrics are tracked to ensure the trends are
reasonable, and are periodically compared to peer banks.
Prepayment speeds may be affected by economic factors such as home price appreciation, market interest rates, the availability of other credit products to our borrowers and
customer payment patterns. Prepayment speeds include the impact of all borrower prepayments, including full payoffs, additional principal payments and the impact of loans paid
off due to foreclosure liquidations.
We perform an impairment assessment of our other intangible assets whenever events or changes in circumstance indicate that the carrying value of those assets may not be
recoverable. Our impairment assessments involve, among other valuation methods, the estimation of future cash flows and other methods of determining fair value. Estimating
future cash flows and determining fair values is subject to judgments and often involves the use of significant estimates and assumptions. The variability of the factors we use to
perform our impairment tests depend on a number of conditions, including uncertainty about future events and cash flows. All such factors are interdependent and, therefore, do
not change in isolation. Accordingly, our accounting estimates may materially change from period to period due to changing market factors.
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Other Real Estate
Other real estate is composed of properties acquired through foreclosure proceedings and is initially recorded at fair value less estimated costs to sell the property, thereby
establishing the new cost basis of other real estate. Losses arising at the time of acquisition of such properties are charged against the Allowance. Subsequent to acquisition, such
properties are carried at the lower of cost or fair value less estimated selling expenses, determined on an individual asset basis. Any deficiency resulting from the excess of cost
over fair value less estimated selling expenses is recognized as a valuation allowance. Any subsequent increase in fair value up to its cost basis is recorded as a reduction of the
valuation allowance. Increases or decreases in the valuation allowance are included in other operating expense. Net gains or losses recognized on the sale of these properties are
included in other operating income.
NonControlling Interest
Noncontrolling interest at December 31, 2015 was comprised of capital and undistributed profits of the member of One Hawaii HomeLoans, LLC, other than the bank. Non
controlling interest on our consolidated balance sheet at December 31, 2015 totaled $25 thousand.
Share Based Compensation
Sharebased compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite service
period. We use the BlackScholes optionpricing model to determine the fairvalue of stockbased awards and we recognize compensation expense for all sharebased payment
awards on a straightline basis over their respective vesting period. See Note 14 for further discussion of our stockbased compensation.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax effects attributable to temporary differences and carryforwards. A valuation allowance may be
required if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining whether a
valuation allowance is necessary, we consider the level of taxable income in prior years, to the extent that carrybacks are permitted under current tax laws, as well as estimates of
future taxable income and tax planning strategies that could be implemented to accelerate taxable income, if necessary. If our estimates of future taxable income were materially
overstated or if our assumptions regarding the tax consequences of tax planning strategies were inaccurate, some or all of our deferred tax assets may not be realized, which would
result in a charge to earnings. We recognize interest and penalties related to income tax matters in other expense.
We establish income tax contingency reserves for potential tax liabilities related to uncertain tax positions. Tax benefits are recognized when we determine that it is more likely
than not that such benefits will be realized. Where uncertainty exists due to the complexity of income tax statutes, and where the potential tax amounts are significant, we
generally seek independent tax opinions to support our positions. If our evaluation of the likelihood of the realization of benefits is inaccurate, we could incur additional income
tax and interest expense that would adversely impact earnings, or we could receive tax benefits greater than anticipated which would positively impact earnings.
Earnings per Share
Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period,
excluding unvested restricted stock. Diluted earnings per share is computed by dividing net income available to common shareholders by the weighted average number of
common shares outstanding during the period, increased by the dilutive effect of stock options and stock awards, less shares held in a Rabbi trust pursuant to a deferred
compensation plan for directors.
Forward Foreign Exchange Contracts
We are periodically a party to a limited amount of forward foreign exchange contracts to satisfy customer requirements for foreign currencies. These contracts are not utilized for
trading purposes and are carried at market value, with realized gains and losses included in fees on foreign exchange.
86
Derivatives and Hedging Activities
We recognize all derivatives on the balance sheet at fair value. On the date that we enter into a derivative contract, we designate the derivative as (1) a hedge of the fair value of
an identified asset or liability (“fair value hedge”), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to an identified asset or
liability (“cash flow hedge”) or (3) a transaction not qualifying for hedge accounting (“free standing derivative”). For a fair value hedge, changes in the fair value of the derivative
and, to the extent that it is effective, changes in the fair value of the hedged asset or liability, attributable to the hedged risk, are recorded in current period net income in the same
financial statement category as the hedged item. For a cash flow hedge, changes in the fair value of the derivative, to the extent that it is effective, is recorded in other
comprehensive income (loss) (“OCI”). These changes in fair value are subsequently reclassified to net income in the same period(s) that the hedged transaction affects net income
in the same financial statement category as the hedged item. For free standing derivatives, changes in fair values are reported in current period other operating income.
Recent Accounting Pronouncements
In January 2014, the FASB issued Accounting Standards Update (“ASU”) 201401, "Investments Equity Method and Joint Ventures: Accounting for Investments in Qualified
Affordable Housing Projects." The provisions of ASU 201401 provide guidance on accounting for investments by a reporting entity in flowthrough limited liability entities
that manage or invest in affordable housing projects that qualify for the lowincome housing tax credit. The ASU permits entities to make an accounting policy election to
account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The Company did not elect the use
of the proportional amortization method of ASU 201401 on January 1, 2015, which has no material impact on our consolidated financial statements.
In January 2014, the FASB issued ASU 201404, "Receivables Troubled Debt Restructurings by Creditors Reclassification of Residential Real Estate Collateralized
Consumer Mortgage Loans upon Foreclosure." The provisions of ASU 201404 provide guidance on when an in substance repossession or foreclosure occurs, which is, when a
creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be
derecognized and the real estate property recognized. Additionally, the amendments in this update require interim and annual disclosure of both: 1) the amount of foreclosed
residential real estate property held by the creditor and 2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the
process of foreclosure according to local requirements of the applicable jurisdiction. The Company adopted the prospective transition method of ASU 201404 on January 1,
2015, and the adoption did not have a material impact on our consolidated financial statements.
In June 2014, the FASB issued ASU 201411, “RepurchasetoMaturity Transactions, Repurchase Financings, and Disclosures.” ASU 201411 requires two accounting changes.
First, the amendments change the accounting for repurchasetomaturity transactions to secured borrowings. Second, for repurchase financing arrangements, the amendments
require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured
borrowing accounting for the repurchase agreement. ASU 201411 requires disclosures for certain transactions comprising a transfer of a financial asset accounted for as a sale, and
an agreement with the same transferee entered into in contemplation of the initial transfer which results in the transferor retaining substantially all of the exposure to the economic
return on the transferred financial asset throughout the term of the transaction. ASU 201411 also requires additional disclosures for repurchase agreements, securities lending
transactions, and repurchasetomaturity transactions that are accounted for as secured borrowings. The adoption of ASU 201411 on January 1, 2015 did not have a material
impact on our consolidated financial statements.
In August 2014, the FASB issued ASU 201414, “Receivables Troubled Debt Restructurings by Creditors Subtopic 31040): Classification of Certain GovernmentGuaranteed
Mortgage Loans upon Foreclosure.” ASU 201414 requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the
following conditions are met: 1) the loan has a government guarantee that is not separable from the loan before foreclosure; 2) at the time of foreclosure, the creditor has the intent
to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and 3) at the time of foreclosure,
any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the
amount of the loan balance expected to be recovered from the guarantor. The adoption of ASU 201414 on January 1, 2015 did not have a material impact on our consolidated
financial statements.
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2. RESERVE REQUIREMENTS
The bank is required by the Federal Reserve Bank of San Francisco to maintain reserves based on the amount of deposits held. The amount held as a reserve by our bank at
December 31, 2015 and 2014 was $59.5 million and $64.2 million, respectively.
3. INVESTMENT SECURITIES
A summary of our investment securities portfolio as of December 31, 2015 and 2014 is as follows:
December 31, 2015
HeldtoMaturity:
Mortgagebacked securities:
Residential U.S. Government sponsored entities
Commercial U.S. Government sponsored entities
Total
AvailableforSale:
Debt securities:
States and political subdivisions
Corporate securities
Mortgagebacked securities:
Residential U.S. Government sponsored entities
Residential Nongovernment sponsored entities
Commercial Nongovernment sponsored entities
Other
Total
December 31, 2014
HeldtoMaturity:
Mortgagebacked securities:
Residential U.S. Government sponsored entities
Commercial U.S. Government sponsored entities
Total
AvailableforSale:
Debt securities:
States and political subdivisions
Corporate securities
Mortgagebacked securities:
Residential U.S. Government sponsored entities
Residential Nongovernment sponsored entities
Commercial Nongovernment sponsored entities
Other
Total
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in thousands)
Estimated
Fair
Value
152,315 $
95,602
247,917 $
123 $
—
123 $
(2,915) $
(989)
(3,904) $
187,552 $
107,721
771,657
64,286
135,439
848
3,819 $
1,077
5,885
733
2,033
68
(898) $
(227)
(5,633)
(987)
(1,118)
—
149,523
94,613
244,136
190,473
108,571
771,909
64,032
136,354
916
1,267,503 $
13,615 $
(8,863) $
1,272,255
140,741 $
97,546
238,287 $
196 $
—
196 $
(2,150) $
(736)
(2,886) $
191,280 $
99,237
2,054 $
1,492
(1,689) $
(125)
744,527
45,275
135,630
757
11,064
1,510
2,946
120
(4,033)
(92)
(935)
—
138,787
96,810
235,597
191,645
100,604
751,558
46,693
137,641
877
$
$
$
$
$
$
$
$
1,216,706 $
19,186 $
(6,874) $
1,229,018
88
The amortized cost and estimated fair value of our investment securities at December 31, 2015 by contractual maturity are shown below. Actual maturities will differ from
contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
HeldtoMaturity:
Mortgagebacked securities
AvailableforSale:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgagebacked securities
Other
Total
December 31, 2015
Amortized
Cost
Estimated
Fair Value
(Dollars in thousands)
247,917 $
244,136
15,596 $
106,255
73,452
99,970
971,382
848
15,797
107,125
74,980
101,142
972,295
916
1,267,503 $
1,272,255
$
$
$
Proceeds from sales of investment securities available for sale were $117.5 million, $162.5 million, and $271.9 million in 2015, 2014 and 2013, respectively, resulting in no gross
realized gains in 2015, and gross gains of $0.9 million and $3.9 million in 2014 and 2013, respectively. Gross realized losses were $1.9 million, $0.7 million, and $3.4 million in
2015, 2014 and 2013, respectively. The specific identification method was used as the basis for determining the cost of all securities sold.
In the second quarter of 2015, we completed an investment portfolio repositioning strategy designed to reduce net interest income volatility and enhance the potential
prospective earnings and an improved net interest margin. In connection with the repositioning, we sold $119.4 million in loweryielding availableforsale nonagency
collateralized mortgage obligation securities, and purchased $120.6 million in higher yielding, longer duration mortgagebacked securities. The securities sold had an average net
yield of 1.35% and a weighted average life of 4.4 years. Gross proceeds of the sale were reinvested into agency mortgagebacked securities with an average net yield of 2.71% and
weighted average life of 7.6 years. The new securities were classified in the availableforsale portfolio. Gross realized losses on the sale of the available for sale investment
securities were $1.9 million.
In the second quarter of 2014, we sold certain availableforsale investment securities for gross proceeds of $162.5 million. Gross realized gains and losses on the sales of the
availableforsale investment securities were $0.9 million and $0.7 million, respectively. The securities sold had an average net yield of 2.69% and weighted average life of 5.7
years. Proceeds of the sale were used to reduce overnight borrowings, improving the bank's interest rate position in a rising rate environment.
Investment securities of $1.0 billion and $900.5 million at December 31, 2015 and 2014, respectively, were pledged to secure public funds on deposit and other longterm and
shortterm borrowings.
89
There were a total of 155 and 195 securities in an unrealized loss position at December 31, 2015 and 2014, respectively. Provided below is a summary of investment securities
which were in an unrealized loss position at December 31, 2015 and 2014:
Description of Securities
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Less than 12 months
12 months or longer
Total
(Dollars in thousands)
December 31, 2015
Debt securities:
States and political subdivisions
Corporate securities
Mortgagebacked securities:
Residential U.S. Government sponsored entities
Residential Nongovernment sponsored entities
Commercial U.S. Government sponsored entities
Commercial Nongovernment sponsored entities
Total temporarily impaired securities
December 31, 2014
Debt securities:
States and political subdivisions
Corporate securities
Mortgagebacked securities:
Residential U.S. Government sponsored entities
Residential Nongovernment sponsored entities
Commercial U.S. Government sponsored entities
Commercial Nongovernment sponsored entities
$
30,481
$
(532)
$
12,576
$
32,977
(227)
—
(366) $
—
43,057 $
32,977
(898)
(227)
$
$
507,525
37,975
94,613
62,555
(6,241)
(987)
(989)
(961)
88,271
—
—
4,644
(2,307)
595,796
—
—
(157)
37,975
94,613
67,199
766,126
$
(9,937)
$
105,491
$
(2,830) $
871,617 $
(8,548)
(987)
(989)
(1,118)
(12,767)
23,591
$
(145)
$
68,622
$
(1,544) $
23,938
(125)
—
—
92,213 $
23,938
(1,689)
(125)
107,755
15,895
11,455
4,962
(487)
(92)
(34)
(8)
318,571
—
85,355
47,539
(5,696)
426,326
—
(702)
(927)
15,895
96,810
52,501
(6,183)
(92)
(736)
(935)
Total temporarily impaired securities
$
187,596
$
(891)
$
520,087
$
(8,869) $
707,683 $
(9,760)
The unrealized losses on the Company’s investment securities were caused by market conditions. Investment securities are evaluated on a quarterly basis, and include evaluating
the changes in the investment securities’ ratings issued by rating agencies and changes in the financial condition of the issuer, and for mortgage related securities, delinquency
and loss information with respect to the underlying collateral, changes in levels of subordination for the Company’s particular position within the repayment structure, and
remaining credit enhancement as compared to expected credit losses of the security. Substantially all of these investment securities continue to be investment grade rated by one
or more major rating agencies.
Otherthantemporary impairment (“OTTI”)
Unrealized losses for all investment securities are reviewed to determine whether the losses are “otherthantemporary.” Investment securities are evaluated for OTTI on at least a
quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value below amortized cost is other
thantemporary. In conducting this assessment, we evaluate a number of factors including, but not limited to:
•
•
The length of time and the extent to which fair value has been less than the amortized cost basis;
Adverse conditions specifically related to the security, an industry, or a geographic area;
90
•
•
•
•
•
The historical and implied volatility of the fair value of the security;
The payment structure of the debt security and the likelihood of the issuer being able to make payments;
Failure of the issuer to make scheduled interest or principal payments;
Any rating changes by a rating agency; and
Recoveries or additional decline in fair value subsequent to the balance sheet date.
The term “otherthantemporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a nearterm recovery of value are not necessarily
favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is
determined to be otherthantemporary, the value of the security is reduced and a corresponding charge to earnings is recognized for anticipated credit losses.
The declines in market value were primarily attributable to changes in interest rates and disruptions in the credit and financial markets. Because we have no intent to sell securities
in an unrealized loss position and it is not more likely than not that we will be required to sell such securities before recovery of its amortized cost basis, we do not consider our
investments to be otherthantemporarily impaired.
4. LOANS AND LEASES
Loans and leases, excluding loans held for sale, consisted of the following:
Commercial, financial & agricultural
Real estate:
Construction
Mortgage residential
Mortgage commercial
Consumer
Leases
Net deferred costs
Total loans and leases
December 31,
2015
2014
(Dollars in thousands)
$
520,457 $
463,070
85,196
1,433,862
761,566
408,024
1,028
3,210,133
1,399
$
3,211,532 $
115,023
1,280,089
704,099
365,662
3,140
2,931,083
1,115
2,932,198
There are different types of risk characteristics for the loans in each portfolio segment. The construction and real estate segment’s predominant risk characteristics are the collateral
and the geographic location of the property collateralizing the loan, as well as the operating cash flow for the commercial real estate properties. The commercial and industrial
(including leases) segment’s predominant risk characteristics are the cash flows of the business we lend to, the global cash flows and liquidity of the guarantors of such losses, as
well as economic and market conditions. The consumer segment’s predominant risk characteristics are employment and income levels as they relate to the consumer.
During the year ended December 31, 2015, we transferred the collateral in eight portfolio loans with a carrying value of $2.2 million to other real estate. In the second quarter of
2015, we transferred two portfolio loans with a carrying value of $6.6 million to the heldforsale category, and later sold the two loans in the second quarter of 2015 at its
carrying value. In 2015, we purchased two auto loan portfolios totaling $52.8 million, which included a $1.7 million premium over the $51.1 million outstanding balance. At the
time of purchase, the auto loan portfolios had a weighted average remaining term of 74 months. In 2015, we also purchased unsecured consumer loans totaling $15.9 million,
which represented the outstanding balance at the time of purchases. At the time of purchases, the unsecured consumer loans had a weighted average remaining term of 37 months.
During the year ended December 31, 2014, we transferred the collateral in six portfolio loans with a carrying value of $2.8 million to other real estate. We did not transfer any
portfolio loans to the heldforsale category and we did not sell any portfolio loans in 2014. In 2014, we purchased auto loan portfolios for $11.2 million, which included a $0.3
million premium over the $10.9 million outstanding balance. At the time of purchase, the auto loan portfolios had a weighted average remaining
91
term of 71 months. In 2014, we also purchased participation interests in student loans totaling $51.5 million, which represented the outstanding balance at the time of purchases.
At the time of purchases, the student loans had a weighted average remaining term of 123 months.
In the normal course of business, our bank makes loans to certain directors, executive officers and their affiliates. An analysis of the activity of such loans follows:
Balance, beginning of year
Additions
Repayments
Other changes
Balance, end of year
December 31,
2015
2014
(Dollars in thousands)
$
$
$
29,231 $
10,392
(20,863)
(8,285) $
10,475 $
12,942
19,448
(3,159)
—
29,231
Other changes represent changes in the composition of directors, executive officers and their affiliates that occurred during the year.
92
Impaired Loans
The following table presents by class, the balance in the Allowance and the recorded investment in loans and leases based on the Company’s impairment method as of
December 31, 2015 and 2014:
Commercial,
Financial &
Agricultural
Construction
Real estate
Mortgage
Residential
Mortgage
Commercial
(Dollars in thousands)
Consumer
Leases
Total
December 31, 2015
Allowance for loan and lease losses:
Ending balance attributable to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Unallocated
Total ending balance
Loans and leases:
Individually evaluated for impairment
Collectively evaluated for impairment
Net deferred costs (income)
Total ending balance
December 31, 2014
Allowance for loan and lease losses:
Ending balance attributable to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Unallocated
Total ending balance
Loans and leases:
Individually evaluated for impairment
Collectively evaluated for impairment
Net deferred costs (income)
Total ending balance
$
$
$
$
$
$
$
$
—
$
—
$
—
$
51
$
— $
6,905
6,905
8,454
8,454
17,738
17,738
21,796
21,847
6,230
6,230
6,905
$
8,454
$
17,738
$
21,847
$
6,230
$
— $
—
—
— $
1,044
$
519,413
520,457
629
4,126
81,070
85,196
(311)
$
22,716
$
10,318
$
— $
— $
1,411,146
1,433,862
2,443
751,248
761,566
(817)
408,024
408,024
(545)
1,028
1,028
—
521,086
$
84,885
$
1,436,305
$
760,749
$
407,479
$
1,028
$
1,533
7,421
8,954
$
— $
— $
— $
— $
— $
14,969
14,969
17,927
17,927
20,869
20,869
7,314
7,314
8,954
$
14,969
$
17,927
$
20,869
$
7,314
$
7
7
7
$
13,369
$
4,888
$
30,893
$
23,126
$
— $
— $
449,701
463,070
693
110,135
115,023
(469)
1,249,196
1,280,089
2,235
680,973
704,099
(826)
365,662
365,662
(518)
3,140
3,140
—
463,763
$
114,554
$
1,282,324
$
703,273
$
365,144
$
3,140
$
2,932,198
93
51
61,123
61,174
2,140
63,314
38,204
3,171,929
3,210,133
1,399
3,211,532
1,533
68,507
70,040
4,000
74,040
72,276
2,858,807
2,931,083
1,115
The following table presents by class, impaired loans as of December 31, 2015 and 2014:
December 31, 2015
Impaired loans with no related allowance recorded:
Commercial, financial & agricultural
Real estate:
Construction
Mortgage residential
Mortgage commercial
Total impaired loans with no related allowance recorded
Impaired loans with an allowance recorded:
Real estate: Mortgage commercial
Total impaired loans with an allowance recorded
Total
December 31, 2014
Impaired loans with no related allowance recorded:
Commercial, financial & agricultural
Real estate:
Construction
Mortgage residential
Mortgage commercial
Total impaired loans with no related allowance recorded
Impaired loans with an allowance recorded:
Commercial, financial & agricultural
Total impaired loans with an allowance recorded
Total
Unpaid
Principal
Balance
Recorded
Investment
Allowance
Allocated
(Dollars in thousands)
1,155 $
1,044 $
10,472
24,792
10,010
46,429
1,166
1,166
4,126
22,716
9,152
37,038
1,166
1,166
47,595 $
38,204 $
738 $
738 $
11,275
34,131
30,249
76,393
16,630
16,630
93,023 $
4,888
30,893
23,126
59,645
12,631
12,631
72,276 $
—
—
—
—
—
51
51
51
—
—
—
—
—
1,533
1,533
1,533
$
$
$
$
94
The following table presents by class, the average recorded investment and interest income recognized on impaired loans as of December 31, 2015, 2014 and 2013:
December 31, 2015
Commercial, financial & agricultural
Real estate:
Construction
Mortgage residential
Mortgage commercial
Total
December 31, 2014
Commercial, financial & agricultural
Real estate:
Construction
Mortgage residential
Mortgage commercial
Total
December 31, 2013
Commercial, financial & agricultural
Real estate:
Construction
Mortgage residential
Mortgage commercial
Leases
Total
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars in thousands)
$
$
$
$
$
$
6,273 $
4,428
26,101
14,240
51,042 $
14,303 $
5,517
33,102
18,692
71,614 $
4,138 $
24,545
38,325
21,160
33
88,201 $
17
190
78
373
658
22
163
627
397
1,209
24
1,442
586
833
—
2,885
95
Aging Analysis of Accruing and NonAccruing Loans and Leases
For all loan types, the Company determines delinquency status by considering the number of days full payments required by the contractual terms of the loan are past due. The
following table presents by class, the aging of the recorded investment in past due loans and leases as of December 31, 2015 and 2014:
30 59
Days
Past Due
60 89
Days
Past Due
Accruing Loans
Greater Than
90 Days Past Due
Nonaccrual
Loans
Total
Past Due
(Dollars in thousands)
Loans and
Leases Not
Past Due
Total
December 31, 2015
Commercial, financial & agricultural
$
276
$
140
$
— $
1,044
$
1,460 $
519,626 $
521,086
Real estate:
Construction
Mortgage residential
Mortgage commercial
Consumer
Leases
Total
December 31, 2014
Commercial, financial & agricultural
Real estate:
Construction
Mortgage residential
Mortgage commercial
Consumer
Leases
Total
—
3,834
54
1,443
—
—
545
—
521
—
—
—
—
273
—
—
—
84,885
84,885
6,130
7,094
—
—
10,509
1,425,796
1,436,305
7,148
2,237
—
753,601
405,242
1,028
760,749
407,479
1,028
5,607
$
1,206
$
273
$
14,268
$
21,354 $
3,190,178 $
3,211,532
183
$
85
$
— $
13,007
$
13,275 $
450,488 $
463,763
$
$
—
3,078
68
1,500
—
—
379
—
417
—
—
—
—
77
—
310
13,048
12,722
—
—
310
16,505
12,790
1,994
—
114,244
114,554
1,265,819
1,282,324
690,483
363,150
3,140
703,273
365,144
3,140
$
4,829
$
881
$
77
$
39,087
$
44,874 $
2,887,324 $
2,932,198
Interest income totaling $0.5 million, $0.4 million, and $0.4 million was recognized on nonaccrual loans, including loans held for sale, in 2015, 2014 and 2013, respectively.
Additional interest income of $1.5 million, $4.0 million, and $4.9 million would have been recognized in 2015, 2014 and 2013, respectively, had these loans been accruing
interest throughout those periods. Additionally, interest income of $0.8 million, $0.2 million, and $2.5 million was collected and recognized on chargedoff loans in 2015, 2014
and 2013, respectively.
Modifications
TDRs included in nonperforming assets at December 31, 2015 consisted of 22 Hawaii residential mortgage loans with a combined principal balance of $3.5 million, one Hawaii
commercial mortgage loan with a principal balance of $2.1 million, and three Hawaii commercial loans with a combined principal balance of $1.0 million. Concessions made to
the original contractual terms of these loans consisted primarily of the deferral of interest and/or principal payments due to deterioration in the borrowers’ financial condition. The
principal balances on these TDRs had matured and/or were in default at the time of restructure and we have no commitments to lend additional funds to any of these borrowers.
There were $20.3 million of TDRs still accruing interest at December 31, 2015, none of which were more than 90 days delinquent. At December 31, 2014, there were $29.5
million of TDRs still accruing interest, none of which were more than 90 days delinquent.
Some loans modified in a TDR may already be on nonaccrual status and partial chargeoffs may have already been taken against the outstanding loan balance. Thus, these loans
have already been identified as impaired and have already been evaluated under the Company’s Allowance methodology. As a result, some loans modified in a TDR may have
the financial effect of increasing the specific allowance associated with the loan. The loans modified in a TDR did not have a material effect on our Provision and Allowance
during the years ended December 31, 2015 and 2014.
96
The following table presents by class, information related to loans modified in a TDR during the years ended December 31, 2015 and 2014:
Year ended December 31, 2015
Commercial, financial & agricultural
Real estate: mortgage residential
Year ended December 31, 2014
Real estate: mortgage residential
Number of
Contracts
Recorded
Investment
(as of period end)
(Dollars in thousands)
Increase in
the
Allowance
1 $
3
4
488 $
4,131
4,619
12 $
790 $
—
—
—
—
The following table presents by class, loans modified as a TDR within the previous twelve months that subsequently defaulted during the years ended December 31, 2015 and
2014:
Number of
Contracts
Year Ended December 31,
Recorded
Investment
(as of period end)
Number of
Contracts
(Dollars in thousands)
—
—
2015
— $
— $
2014
1 $
1 $
Recorded
Investment
(as of period end)
25
25
Real estate: mortgage residential
Total
Credit Quality Indicators
The Company categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial
information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases
individually by classifying the loans and leases as to credit risk. This analysis includes nonhomogeneous loans and leases, such as commercial and commercial real estate loans.
This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
Special Mention. Loans and leases classified as special mention, while still adequately protected by the borrower’s capital adequacy and payment capability, exhibit
distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in
deteriorated prospects of repayment. These exposures require management’s close attention so as to avoid becoming undue or unwarranted credit exposures.
Substandard. Loans and leases classified as substandard are inadequately protected by the borrower’s current financial condition and payment capability or of the
collateral pledged, if any. Loans and leases so classified have a welldefined weakness or weaknesses that jeopardize the orderly repayment of debt. They are
characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans and leases classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses
make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is
extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an
estimate loss is deferred until its more exact status may be determined.
97
Loss. Loans and leases classified as loss are considered to be noncollectible and of such little value that their continuance as bankable assets is not warranted. This does
not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be
obtained in the future. Losses are taken in the period in which they surface as uncollectible.
Loans and leases not meeting the criteria above are considered to be pass rated loans and leases. The following table presents by class and credit indicator, the recorded investment
in the Company’s loans and leases as of December 31, 2015 and 2014:
Pass
Special
Mention
Substandard
Subtotal
(Dollars in thousands)
Net Deferred
Costs
(Income)
Total
December 31, 2015
Commercial, financial & agricultural
$
514,971
$
2,168
$
3,318
$
520,457
$
629 $
521,086
Real estate:
Construction
Mortgage residential
Mortgage commercial
Consumer
Leases
Total
December 31, 2014
Commercial, financial & agricultural
Real estate:
Construction
Mortgage residential
Mortgage commercial
Consumer
Leases
Total
83,601
1,427,732
705,520
407,778
1,028
808
—
41,335
95
—
787
6,130
14,711
151
—
85,196
1,433,862
761,566
408,024
1,028
(311)
2,443
(817)
(545)
—
84,885
1,436,305
760,749
407,479
1,028
3,140,630
$
44,406
$
25,097
$
3,210,133
$
1,399 $
3,211,532
432,892
$
14,655
$
15,523
$
463,070
$
693 $
463,763
$
$
111,370
1,265,470
660,492
365,332
3,140
—
352
10,498
294
—
3,653
14,267
33,109
36
—
115,023
1,280,089
704,099
365,662
3,140
(469)
2,235
(826)
(518)
—
114,554
1,282,324
703,273
365,144
3,140
$
2,838,696
$
25,799
$
66,588
$
2,931,083
$
1,115 $
2,932,198
In accordance with applicable Interagency Guidance issued by our primary bank regulators, we define subprime borrowers as typically having weakened credit histories that
include payment delinquencies and possibly more severe problems such as chargeoffs, judgments, and bankruptcies. They may also display reduced repayment capacity as
measured by credit scores, debttoincome ratios, or other criteria that may encompass borrowers with incomplete credit histories. Subprime loans are loans to borrowers
displaying one or more of these characteristics at the time of origination or purchase. Such loans have a higher risk of default than loans to prime borrowers. At December 31, 2015
and 2014, we did not have any loans that we considered to be subprime.
98
5. ALLOWANCE FOR LOAN AND LEASE LOSSES
The following table presents by class, the activity in the Allowance for the periods indicated:
Year ended December 31, 2015
Beginning balance
Provision (credit) for loan and lease losses
Chargeoffs
Recoveries
Net chargeoffs (recoveries)
Ending balance
Year ended December 31, 2014
Beginning balance
Provision (credit) for loan and lease losses
Chargeoffs
Recoveries
Net chargeoffs (recoveries)
Ending balance
Year ended December 31, 2013
Beginning balance
Provision (credit) for loan and lease losses
Chargeoffs
Recoveries
Net chargeoffs
Ending balance
Commercial,
Financial &
Agricultural
Construction
Real estate
Mortgage
Residential
Mortgage
Commercial
(Dollars in thousands)
Consumer
Leases
Unallocated
Total
$
$
$
$
$
$
8,954
$
14,969
$
17,927
$
20,869
$
(1,179)
7,775
5,658
4,788
870
(7,395)
7,574
—
880
(880)
(2,256)
15,671
110
2,177
(2,067)
(4,903)
15,966
838
6,719
(5,881)
6,905
$
8,454
$
17,738
$
21,847
$
13,196
$
2,774
$
25,272
$
29,947
$
(1,522)
11,674
5,046
2,326
2,720
8,954
4,987
9,634
14,621
2,812
1,387
1,425
10,155
12,929
—
2,040
(2,040)
(8,198)
17,074
139
992
(853)
(8,090)
21,857
1,041
53
988
$
14,969
$
17,927
$
20,869
$
$
4,510
$
27,836
$
50,574
$
(4,974)
(464)
358
3,596
(3,238)
(2,588)
25,248
1,083
1,107
(24)
(18,099)
32,475
6,768
4,240
2,528
7,314
1,956
9,270
4,650
1,610
3,040
6,230
6,576
3,289
9,865
3,703
1,152
2,551
7,314
2,421
5,093
7,514
1,595
657
938
$
7
$
4,000
$
$
$
$
$
(34)
(27)
—
27
(27)
— $
(1,860)
2,140
—
—
—
2,140
$
55
$
6,000
$
(48)
7
8
8
—
(2,000)
4,000
—
—
—
7
$
4,000
$
85
$
6,000
$
(376)
(291)
—
346
(346)
—
6,000
—
—
—
13,196
$
2,774
$
25,272
$
29,947
$
6,576
$
55
$
6,000
$
74,040
(15,671)
58,369
11,256
16,201
(4,945)
63,314
83,820
(6,414)
77,406
9,937
6,571
3,366
74,040
96,413
(11,310)
85,103
12,616
11,333
1,283
83,820
In accordance with GAAP, loans held for sale and other real estate assets are not included in our assessment of the Allowance.
Changes in the allowance for loan and lease losses for impaired loans (included in the above amounts) were as follows:
Balance, beginning of year
Provision for loan and lease losses
Other changes
Balance, end of year
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
$
$
1,533 $
51
(1,533)
51 $
349 $
1,354
(170)
1,533 $
3,011
—
(2,662)
349
The amounts included in other changes above represent net chargeoffs and net transfers of allocated allowances for loans and leases that were not classified as impaired for the
entire year. At December 31, 2015 and 2014, all impaired loans were measured based on the fair value of the underlying collateral for collateraldependent loans, at the loan’s
observable market price, or the net present value of future cash flows, as appropriate.
In determining the amount of our Allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions, as well as regulatory
requirements and input. If our assumptions prove to be incorrect, our current Allowance may not be sufficient to cover future loan losses and we may experience significant
increases to our Provision.
99
6. SECURITIZATIONS
In prior years, we securitized certain residential mortgage loans with a U.S. Government sponsored entity and continue to service the residential mortgage loans. The servicing
assets were recorded at their respective fair values which equaled par value at the time of securitization.
All unsold mortgagebacked securities from prior securitizations were categorized as available for sale securities and were therefore recorded at their fair value of $2.7 million and
$3.5 million at December 31, 2015 and 2014, respectively. The fair values of these mortgagebacked securities were based on quoted prices of similar instruments in active
markets. Unrealized gains of $0.2 million and $0.2 million on unsold mortgagebacked securities were recorded in AOCI at December 31, 2015 and 2014, respectively.
7. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following as of December 31, 2015 and 2014:
Land
Office buildings and improvements
Furniture, fixtures and equipment
Gross premises and equipment
Accumulated depreciation and amortization
Net premises and equipment
Depreciation and amortization of premises and equipment were charged to the following operating expenses:
December 31,
2015
2014
(Dollars in thousands)
9,006 $
100,892
30,963
140,861
(91,700)
49,161 $
9,006
98,081
36,916
144,003
(94,789)
49,214
$
$
Net occupancy
Equipment
Total
8. OTHER INTANGIBLE ASSETS
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
$
$
3,997 $
1,873
5,870 $
3,845 $
1,997
5,842 $
3,702
2,305
6,007
Other intangible assets include a core deposit premium and mortgage servicing rights. The following table presents changes in other intangible assets for the periods presented:
Balance as of December 31, 2013
Additions
Amortization
Balance as of December 31, 2014
Additions
Amortization
Balance as of December 31, 2015
Core
Deposit
Premium
Mortgage
Servicing
Rights
Total
$
$
$
(Dollars in thousands)
12,704 $
20,079 $
—
(2,675)
2,246
(2,657)
10,029 $
19,668 $
—
(2,674)
7,355 $
2,314
(4,185)
17,797 $
32,783
2,246
(5,332)
29,697
2,314
(6,859)
25,152
100
The gross carrying value, accumulated amortization and net carrying value related to our other intangible assets are presented below:
Gross
Carrying
Value
December 31, 2015
Accumulated
Amortization
Core deposit premium
Mortgage servicing rights
Total
$
$
44,642 $
59,001
103,643 $
(37,287) $
(41,204)
(78,491) $
Net
Carrying
Value
Gross
Carrying
Value
(Dollars in thousands)
7,355 $
17,797
25,152 $
44,642 $
56,687
101,329 $
December 31, 2014
Accumulated
Amortization
Net
Carrying
Value
(34,613) $
(37,019)
(71,632) $
10,029
19,668
29,697
Based on our other intangible assets held as of December 31, 2015, estimated amortization expense for the next five succeeding fiscal years and all years thereafter are as follows:
2016
2017
2018
2019
2020
Thereafter
Total
Core Deposit
Premium
Estimated Amortization Expense
Mortgage
Servicing
Rights
(Dollars in thousands)
Total
$
$
2,674 $
2,674
2,007
—
—
—
7,355 $
2,393 $
1,720
1,265
878
584
10,957
17,797 $
5,067
4,394
3,272
878
584
10,957
25,152
At December 31, 2015, there were no events or changes in circumstances that would indicate that the assets assigned to our Banking Operations segment, which includes the
entire core deposit premium, were not recoverable.
We utilize the amortization method to measure our mortgage servicing rights. Under the amortization method, we amortize our mortgage servicing rights in proportion to and over
the period of net servicing income. Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans and totaled $2.3 million, $2.2 million,
and $2.7 million in 2015, 2014 and 2013, respectively. Amortization of the servicing rights is reported as amortization of other intangible assets in our consolidated statements of
income. Ancillary income is recorded in other income. Mortgage servicing rights are recorded when loans are sold to thirdparties with servicing of those loans retained and we
classify our entire mortgage servicing rights into one class.
Initial fair value of the servicing right is calculated by a discounted cash flow model prepared by a third party service provider based on market value assumptions at the time of
origination and we assess the servicing right for impairment using current market value assumptions at each reporting period. Critical assumptions used in the discounted cash
flow model include mortgage prepayment speeds, discount rates, costs to service and ancillary income. Variations in our assumptions could materially affect the estimated fair
values. Changes to our assumptions are made when current trends and market data indicate that new trends have developed. Current market value assumptions based on loan
product types (fixed rate, adjustable rate and balloon loans) include average discount rates, servicing costs and ancillary income. Many of these assumptions are subjective and
require a high level of management judgment. Our mortgage servicing rights portfolio and valuation assumptions are periodically reviewed by management.
Prepayment speeds may be affected by economic factors such as home price appreciation, market interest rates, the availability of other credit products to our borrowers and
customer payment patterns. Prepayment speeds include the impact of all borrower prepayments, including full payoffs, additional principal payments and the impact of loans paid
off due to foreclosure liquidations. As market interest rates decline, prepayment speeds will generally increase as customers refinance existing
101
mortgages under more favorable interest rate terms. As prepayment speeds increase, anticipated cash flows will generally decline resulting in a potential reduction, or impairment,
to the fair value of the capitalized mortgage servicing rights. Alternatively, an increase in market interest rates may cause a decrease in prepayment speeds and therefore an
increase in fair value of mortgage servicing rights.
The following table presents the fair market value and key assumptions used in determining the fair market value of our mortgage servicing rights:
Fair market value, beginning of period
Fair market value, end of period
Weighted average discount rate
Weighted average prepayment speed assumption
Year Ended December 31,
2015
2014
(Dollars in thousands)
$
19,975
$
18,345
9.5%
14.3%
21,399
19,975
9.5%
13.2%
Fair values at December 31, 2015 and 2014 reflected approximately $2.17 billion and $2.36 billion, respectively, in loans serviced for others.
9. DERIVATIVES
We utilize various designated and undesignated derivative financial instruments to reduce our exposure to movements in interest rates including interest rate swaps, interest rate
lock commitments and forward sale commitments. We measure all derivatives at fair value on our consolidated balance sheet. At each reporting period, we record the derivative
instruments in other assets or other liabilities depending on whether the derivatives are in an asset or liability position. For derivative instruments that are designated as hedging
instruments, we record the effective portion of the changes in the fair value of the derivative in AOCI, net of tax, until earnings are affected by the variability of cash flows of the
hedged transaction. We immediately recognize the portion of the gain or loss in the fair value of the derivative that represents hedge ineffectiveness in current period earnings. For
derivative instruments that are not designated as hedging instruments, changes in the fair value of the derivative are included in current period earnings.
Interest Rate Lock and Forward Sale Commitments
We enter into interest rate lock commitments on certain mortgage loans that are intended to be sold. To manage interest rate risk on interest rate lock commitments, we also enter
into forward loan sale commitments. The interest rate lock and forward loan sale commitments are accounted for as undesignated derivatives and are recorded at their respective
fair values in other assets or other liabilities, with changes in fair value recorded in current period earnings. These instruments serve to reduce our exposure to movements in
interest rates. At December 31, 2015, we were a party to interest rate lock and forward sale commitments on $24.0 million and $10.0 million of mortgage loans, respectively. At
December 31, 2014, we were a party to interest rate lock and forward sale commitments on $44.3 million and $23.9 million of mortgage loans, respectively.
The following table presents the location of all assets and liabilities associated with our derivative instruments within the consolidated balance sheet:
Derivatives not designated as
hedging instruments
Balance Sheet
Location
Fair Value at
Fair Value at
Fair Value at
Fair Value at
December 31, 2015
December 31, 2014
December 31, 2015
December 31, 2014
Interest rate contracts
Other assets / other liabilities
$
68
$
(Dollars in thousands)
504
$
9
$
122
Asset Derivatives
Liability Derivatives
102
The following tables present the impact of derivative instruments and their location within the consolidated statements of income:
Derivatives not in Cash Flow
Hedging Relationship
Year ended December 31, 2015
Interest rate contracts
Year ended December 31, 2014
Interest rate contracts
10. DEPOSITS
Location of Gain Recognized
in Earnings on Derivatives
Amount of Gain (Loss) Recognized
in Earnings on Derivatives
(Dollars in thousands)
Other operating income
$
Other operating income
(324)
294
Time deposits of $100,000 or more totaled $851.3 million and $804.2 million at December 31, 2015 and 2014, respectively.
Interest expense on certificates of deposits of $100,000 or more totaled $1.5 million, $1.4 million, and $1.5 million for the years ended December 31, 2015, 2014 and 2013,
respectively.
Maturities of time deposits of $100,000 or more as of December 31, 2015 were as follows (in thousands):
Three months or less
Over three through six months
Over six through twelve months
2017
2018
2019
2020
Thereafter
Total
December 31, 2015
(Dollars in thousands)
489,641
238,248
79,869
18,546
12,595
7,657
4,705
—
851,261
$
$
At December 31, 2015 and 2014, overdrawn deposit accounts totaling $0.5 million and $0.7 million have been reclassified as loans on the consolidated balance sheets.
103
11. SHORTTERM BORROWINGS
The bank was a member of the Federal Home Loan Bank of Seattle until its merger with the Federal Home Loan Bank of Des Moines on June 1, 2015. We are now a member of
the Federal Home Loan Bank of Des Moines (the "FHLB") and maintained a $1.22 billion line of credit, of which $1.15 billion remained available as of December 31, 2015. At
December 31, 2015, shortterm borrowings under this arrangement totaled $69.0 million. At December 31, 2014, shortterm borrowings under this arrangement totaled $38.0
million.
At December 31, 2015 and 2014, our bank had additional unused borrowings available at the Federal Reserve discount window of $40.8 million and $33.3 million, respectively.
As of December 31, 2015 and 2014, certain commercial real estate and commercial loans with a carrying value totaling $87.3 million and $72.9 million, respectively, were
pledged as collateral on our line of credit with the Federal Reserve discount window. The Federal Reserve does not have the right to sell or repledge these loans.
Interest expense on shortterm borrowings were $0.3 million, $0.1 million and $6 thousand in 2015, 2014 and 2013, respectively.
A summary of our shortterm borrowings as of December 31, 2015, 2014 and 2013 is as follows:
Amount outstanding at December 31
Average amount outstanding during year
Highest monthend balance during year
Weighted average interest rate on balances outstanding at December 31
Weighted average interest rate during year
12. LONGTERM DEBT
Year Ended December 31,
2015
2014
2013
$
69,000
$
38,000
$
(Dollars in thousands)
92,045
157,000
0.35%
0.28%
31,732
102,000
0.25%
0.29%
8,015
1,988
28,000
0.23%
0.32%
Longterm debt, which is based on original maturity, consisted of the following at December 31, 2015 and 2014:
Subordinated debentures
FHLB Advances
December 31,
2015
2014
(Dollars in thousands)
$
92,785
92,785 $
92,785
92,785
There were no FHLB longterm Advances outstanding as of December 31, 2015 and 2014. At December 31, 2015, our bank had FHLB advances available of approximately $1.15
billion, which was secured by unencumbered investment securities with a fair value of $0.5 million and certain real estate loans with a carrying value of $1.60 billion in
accordance with the collateral provisions of the Advances, Pledge and Security Agreement with the FHLB. There was no interest expense on longterm FHLB advances in 2015,
compared to less than $1 thousand and $2 thousand in 2014 and 2013, respectively.
Subordinated Debentures
In October 2003, we created two whollyowned statutory trusts, CPB Capital Trust II (“Trust II”) and CPB Statutory Trust III (“Trust III”). Trust II issued $20.0 million in trust
preferred securities bearing an interest rate of threemonth LIBOR plus 2.85% and maturing on October 7, 2033. The principal assets of Trust II are $20.6 million of the Company’s
subordinated debentures with an identical interest rate and maturity as the Trust II trust preferred securities. Trust II issued $0.6 million of common securities to the Company.
104
Trust III issued $20.0 million in trust preferred securities bearing an interest rate of threemonth LIBOR plus 2.85% and maturing on December 17, 2033. The principal assets of
Trust III are $20.6 million of the Company’s subordinated debentures with an identical interest rate and maturity as the Trust III trust preferred securities. Trust III issued $0.6
million of common securities to the Company.
In September 2004, we created a whollyowned statutory trust, CPB Capital Trust IV (“Trust IV”). Trust IV issued $30.0 million in trust preferred securities bearing an interest rate
of threemonth LIBOR plus 2.45% and maturing on December 15, 2034. The principal assets of Trust IV are $30.9 million of the Company’s subordinated debentures with an
identical interest rate and maturity as the Trust IV trust preferred securities. Trust IV issued $0.9 million of common securities to the Company.
In December 2004, we created a whollyowned statutory trust, CPB Statutory Trust V (“Trust V”). Trust V issued $20.0 million in trust preferred securities bearing an interest rate
of threemonth LIBOR plus 1.87% and maturing on December 15, 2034. The principal assets of Trust V are $20.6 million of the Company’s subordinated debentures with an
identical interest rate and maturity as the Trust V trust preferred securities. Trust V issued $0.6 million of common securities to the Company.
The trust preferred securities, the subordinated debentures that are the assets of Trusts II, III, IV and V and the common securities issued by Trusts II, III, IV and V are redeemable in
whole or in part on any interest payment date on or after October 7, 2008 for Trusts II and III, and on or after December 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 interest payments on the subordinated debentures, which would result in a deferral of distribution payments on the related trust preferred securities, for up to 20 consecutive
quarterly periods without default or penalty.
On August 20, 2009, we began deferring regularly scheduled interest payments on our outstanding junior subordinated debentures relating to our trust preferred securities. The
terms of the junior subordinated debentures and the trust documents allow us to defer payments of interest for up to 20 consecutive quarterly periods without default or penalty. In
March 2013, the Company paid all deferred interest on its subordinated debentures and related dividend payments on its trust preferred securities and resumed quarterly payments
for each outstanding trust. As a result, deferred accrued interest totaling $13.0 million was paid in full.
At December 31, 2015, future principal payments on longterm debt based on final maturity are as follows (in thousands):
Year ending December 31:
2016
2017
2018
2019
2020
Thereafter
Total
13. EQUITY
December 31, 2015
(Dollars in thousands)
$
$
—
—
—
—
—
92,785
92,785
We have generated considerable tax benefits, including net operating loss carryforwards and federal and state tax credits. Our use of the tax benefits in the future would have
been limited if we had experienced an “ownership change” for U.S. federal income tax purposes. In general, an “ownership change” would have occurred if there was a
cumulative increase in the Company’s ownership by “5percent shareholders” (as defined under U.S. income tax laws) that exceeded 50 percentage points over a rolling threeyear
period.
On November 23, 2010, our board declared a dividend of preferred share purchase rights (“Rights”) in respect to our common stock which were issued pursuant to a Tax Benefits
Preservation Plan, dated as of November 23, 2010 (the “Tax Benefits Preservation Plan”), between the Company and Wells Fargo Bank, National Association, as rights agent.
Each Right represents
105
the right to purchase, upon the terms and subject to the conditions in the Plan, 1/10,000th of a share of our Junior Participating Preferred Stock, Series C, no par value, for $6.00,
subject to adjustment. The Tax Benefits Preservation Plan is designed to reduce the likelihood that the Company will experience an ownership change by discouraging any
person from becoming a beneficial owner of 4.99% or more of our common stock (a “Threshold Holder”). Adoption of the Tax Benefits Preservation Plan was required by our
agreements with the Lead Investors. On January 29, 2014, our Board of Directors approved an amendment to the Tax Benefits Preservation Plan to extend it for up to an additional
2 years (until February 18, 2016). Subsequently, our Board of Directors determined in January 2016 that it was no longer necessary to continue the Tax Benefits Preservation Plan
because we have utilized a significant portion of our tax benefits and we expect to be able to utilize the remaining benefits even if an ownership change occurs. As a result, our
Tax Benefits Preservation Plan expired in accordance with its terms on February 18, 2016.
To further protect our tax benefits, on January 26, 2011, our Board approved an amendment to our restated articles of incorporation to restrict transfers of our stock if the effect of
an attempted transfer would cause the transferee to become a Threshold Holder or to cause the beneficial ownership of a Threshold Holder to increase (the “Protective Charter
Amendment”). At our annual meeting of shareholders on April 27, 2011, we proposed the amendment which shareholders approved. On January 29, 2014, our Board of Directors
approved an amendment to the Protective Charter Amendment to extend it for up to an additional two years (until May 2, 2016). Our shareholders approved the Protective Charter
Amendment on April 25, 2014. Our Board of Directors has determined to let the Protective Charter Amendment naturally expire in accordance with its terms on May 2, 2016
because we have utilized a significant portion of our tax benefits and we expect to be able to utilize the remaining benefits even if an ownership change occurs.
As a Hawaii statechartered bank, Central Pacific Bank may only pay dividends to the extent it has retained earnings as defined under Hawaii banking law (“Statutory Retained
Earnings”), which differs from GAAP retained earnings. As of December 31, 2015, the bank had Statutory Retained Earnings of $63.7 million.
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 and Hawaii 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.
On February 21, 2014, we announced a tender offer to purchase for cash up to $68.8 million in value of shares of our common stock at a price not greater than $21.00 nor less than
$18.50 per share (the “Tender Offer”).
The Tender Offer expired on March 21, 2014 and 3,369,850 shares of our common stock were properly tendered and not withdrawn at or below the purchase price of $20.20 per
share (“Purchase Price”). In addition, 167,572 shares were tendered through notice of guaranteed delivery at or below the Purchase Price. Based on these results, we accepted for
purchase 3,405,888 shares, at the Purchase Price for a total cost of $68.8 million, excluding fees and expenses related to the Tender Offer. The Tender Offer closed on March 28,
2014.
Due to the oversubscription of the Tender Offer, we accepted for purchase on a pro rata basis approximately 96.6% of the shares properly tendered and not properly withdrawn at
or below the Purchase Price by each tendering shareholder, except for tenders of odd lots, which were accepted in full, and except for certain conditional tenders automatically
regarded as withdrawn pursuant to the terms of the Tender Offer.
On February 20, 2014, we also entered into repurchase agreements (the “Repurchase Agreements”) with each of Carlyle Financial Services Harbor, L.P. (“Carlyle”) and ACMO
CPF, L.L.C. (“Anchorage” and together with Carlyle, the “Lead Investors”), each of whom was the owner of 9,463,095 shares (representing 22.5% of the outstanding shares or
44.9% in the aggregate at that time) of our common stock, pursuant to which we agreed to purchase up to $28.1 million of shares of common stock from each of the Lead Investors
at the Purchase Price of the Tender Offer (the “Private Repurchases”) (or an aggregate of $56.2 million of shares). Conditions to the Private Repurchases were satisfied and we
purchased 1,391,089 shares from each of Carlyle and Anchorage at the Purchase Price for a total cost of $56.2 million, excluding fees and expenses related to the Private
Repurchases. The Private Repurchases closed on April 7, 2014, the eleventh business day following the expiration of the Tender Offer.
The completion of the Tender Offer and the Private Repurchases resulted in the aggregate repurchase by us of 6,188,066 shares totaling $125 million, or 14.7% of our issued and
outstanding shares of our common stock prior to the completion of the Tender Offer and the Private Repurchases. Upon completion of the Tender Offer and Private Repurchases,
we had approximately 35.9 million shares outstanding.
106
On March 26, 2015, the Company, Carlyle and Anchorage (together the “Selling Shareholders”), and Citigroup Global Markets, Inc. (the “Underwriter”) entered into a secondary
offering underwriting agreement (the “March 2015 Underwriting Agreement”) pursuant to which the Selling Shareholders agreed to each sell 3,802,694 shares for a total of
7,605,388 shares of CPF common stock, no par value per share, to the Underwriter at a price of $23.01 per common share for a total of approximately $175.0 million. In
connection with the March 2015 Underwriting Agreement, the Company repurchased 3,259,452 shares of its common stock from the Underwriter at a price of $23.01 per share for
an aggregate cost of approximately $75.0 million, excluding fees and expenses. The transactions were consummated on April 1, 2015. The Company did not receive any of the
proceeds from the sale of these shares by the Selling Shareholders and no shares were sold by the Company. The Company incurred $0.4 million in costs recorded in other
operating expenses related to the secondary offering by the Selling Shareholders. In addition, the Company incurred $0.2 million in costs recorded in equity related to the
repurchase of its common stock from the Underwriter.
On June 4, 2015, the Company, the Selling Shareholders, and the Underwriter entered into another secondary offering underwriting agreement (the “June 2015 Underwriting
Agreement”) pursuant to which the Selling Shareholders agreed to each sell 1,500,000 shares for a total of 3,000,000 shares of CPF common stock, no par value per share, to the
Underwriter at a price of $22.15 per common share for a total of approximately $66.5 million. The Company did not receive any of the proceeds from the sale of these shares by
the Selling Shareholders and no shares were sold by the Company. In the second quarter of 2015, the Company accrued $0.3 million of costs recorded in other operating expenses
related to the secondary offering by the Selling Shareholders.
On August 3, 2015, the Company, the Selling Shareholders, and the Underwriter and UBS Investment Bank ("UBS") entered into a final underwriting agreement (the “August
2015 Underwriting Agreement”) pursuant to which the Selling Shareholders sold their aggregate remaining interest in the Company of 5,538,624 shares of CPF common stock, no
par value per share, to the Underwriter and UBS at a price of $22.11 per common share for a total of approximately $122.5 million. The Company did not receive any of the
proceeds from the sale of these shares by the Selling Shareholders and no shares were sold by the Company.
On May 20, 2014, our Board of Directors authorized the repurchase and retirement of up to $30.0 million of the Company’s outstanding common stock (the “CPF Repurchase
Plan”). Repurchases under the CPF Repurchase Plan may be made from time to time on the open market or in privately negotiated transactions. In 2014, 857,554 shares of
common stock, at a cost of $16.5 million, were repurchased under this program.
In January 2015, our Board of Directors increased the authorization under the CPF Repurchase Plan by $25.0 million. In March 2015, our Board of Directors increased the
authorization under the CPF Repurchase Plan by an additional $75.0 million in connection with the March 2015 Underwriting Agreement. In the year ended December 31, 2015,
an additional 4,122,881 shares of common stock, at a cost of $93.3 million, excluding fees and expenses, were repurchased under this program. A total of $20.2 million remained
available for repurchase under the CPF Repurchase Plan at December 31, 2015.
14. SHAREBASED COMPENSATION
In accordance with ASC 718, compensation expense is recognized only for those shares expected to vest, based on the Company’s historical experience and future expectations.
The following table summarizes the effects of sharebased compensation to options and awards granted under the Company’s equity incentive plans for each of the periods
presented:
Salaries and employee benefits
Directors stock awards
Income tax benefit
Net sharebased compensation effect
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
$
$
4,181 $
78
(1,694)
2,565 $
6,101 $
37
(2,443)
3,695 $
6,367
45
(2,570)
3,842
107
The Company’s sharebased compensation arrangements are described below:
Equity Incentive Plans
We have adopted equity incentive plans for the purpose of granting options, restricted stock and other equity based awards for the Company’s common stock to directors, officers
and other key individuals. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant; those option
awards generally vest based on three or five years of continuous service and have 10year contractual terms. Certain option and share awards provide for accelerated vesting if
there is a change in control (as defined in the stock option plans below). We have historically issued new shares of common stock upon exercises of stock options and purchases
of restricted awards.
In February 1997, we adopted the 1997 Stock Option Plan (“1997 Plan”) basically as a continuance of the 1986 Stock Option Plan. In April 1997, our shareholders approved the
1997 Plan, which provided 2,000,000 shares of the Company’s common stock for grants to employees as qualified incentive stock options and to directors as nonqualified stock
options. On January 1, 2013, the last options issued under the 1997 Plan expired.
In September 2004, we adopted and our shareholders approved the 2004 Stock Compensation Plan (“2004 Plan”) making available 1,500,000 shares for grants to employees and
directors. Upon adoption of the 2004 Plan, all unissued shares from the 1997 Plan were frozen and no new options were granted under the 1997 Plan. In May 2007, the 2004 Plan
was amended to increase the number of shares available for grant by an additional 1,000,000 shares. In April 2011, the 2004 Plan was amended to increase the number of shares
authorized from 1,402,589 to 4,944,831.
In April 2013, we adopted and our shareholders approved the 2013 Stock Compensation Plan (“2013 Plan”) making available 2,200,000 shares for grants to employees and
directors. Upon adoption of the 2013 Plan, all unissued shares from the 2004 Plan were frozen and no new grants will be granted under the 2004 Plan. Shares may continue to be
settled under the 2004 Plan pursuant to previously outstanding awards. New shares are issued from the 2013 Plan.
At December 31, 2015, 2014 and 2013, a total of 1,922,130, 1,993,385 and 2,185,454 shares, respectively, were available for future grants.
Stock Options
The fair value of each option award is estimated on the date of grant based on the following:
Valuation and amortization method—We estimate the fair value of stock options granted using the BlackScholes option pricing formula and a single option award approach. We
use historical data to estimate option exercise and employee termination activity within the valuation model; separate groups of employees that have similar historical exercise
behavior are considered separately for valuation purposes. This fair value is then amortized on a straightline basis over the requisite service periods of the awards, which is
generally the vesting period.
Expected life—The expected life of options represents the period of time that options granted are expected to be outstanding.
Expected volatility—Expected volatilities are based on the historical volatility of the Company’s common stock.
Riskfree interest rate—The riskfree interest rate for periods within the contractual life of the option is based on the Treasury yield curve in effect at the time of grant.
Expected dividend—The expected dividend assumption is based on our current expectations about our anticipated dividend policy.
The following is a summary of option activity for our stock option plans for the year ended December 31, 2015:
108
Weighted
Average
Exercise
Price
Weighted Average
Remaining Contractual
Term (in years)
Aggregate
Intrinsic
Value
(in thousands)
Shares
Outstanding at January 1, 2015
Changes during the year:
Exercised
Expired
Forfeited
Outstanding at December 31, 2015
286,407 $
33.32
(25,040)
(4,177)
(17,773)
239,417
14.37
730.00
48.60
22.01
Exercisable at December 31, 2015
163,109
25.61
6.2 $
6.2
1,778
1,192
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying option awards and the quoted price of the Company’s common stock for
the options that were inthemoney at December 31, 2015. During the years ended December 31, 2015, 2014 and 2013, the aggregate intrinsic value of options exercised under
our stock option plan was $0.2 million, $31 thousand and $22 thousand, respectively, determined as of the date of exercise.
As of December 31, 2015, the total compensation cost that was not yet recognized related to stock options granted to employees under our stock option plans was approximately
$0.5 million, net of estimated forfeitures. This cost will be amortized on a straightline basis over a weightedaverage period of 1.3 years and will be adjusted for subsequent
changes in estimated forfeitures. The total fair value of shares vested during the years ended December 31, 2015, 2014 and 2013 was $0.4 million, $0.7 million and $0.7 million,
respectively.
No stock options were granted during 2015, 2014 and 2013.
Restricted Stock Awards and Units
Under the 1997, 2004 and 2013 Plans, we awarded restricted stock awards and units to our nonofficer directors and certain senior management personnel. The awards typically
vest over a three or five year period. Compensation expense is measured as the market price of the stock awards on the grant date, and is recognized over the specified vesting
periods.
The table below presents the activity of restricted stock awards and units for the year ended December 31, 2015:
Unvested at January 1, 2015
Changes during the year:
Granted
Forfeited
Vested
Unvested at December 31, 2015
Weighted
Average
Grant Date
Fair Value
15.77
19.50
16.73
15.21
17.41
Shares
715,460 $
173,897
(82,373)
(343,067)
463,917
As of December 31, 2015, there was $4.1 million of total unrecognized compensation cost related to restricted stock awards and units that is expected to be recognized over a
weightedaverage period of 2.25 years.
109
15. PENSION PLANS
Defined Benefit Retirement Plan
The bank has a defined benefit retirement plan that covered substantially all of its employees who were employed during the period that the plan was in effect. The plan was
initially curtailed in 1986, and accordingly, plan benefits were fixed as of that date. Effective January 1, 1991, the bank reactivated its defined benefit retirement plan. As a result
of the reactivation, employees for whom benefits were fixed in 1986 began to accrue additional benefits under a new formula that became effective January 1, 1991. Employees
who were not participants at curtailment, but who were subsequently eligible to join, became participants effective January 1, 1991. Under the reactivated plan, benefits are based
upon the employees’ years of service and their highest average annual salaries in a 60consecutivemonth period of service, reduced by benefits provided from the bank’s
terminated money purchase pension plan. The reactivation of the defined benefit retirement plan resulted in an increase of $5.9 million in the unrecognized prior service cost,
which was amortized over a period of 13 years. Effective December 31, 2002, the bank curtailed its defined benefit retirement plan, and accordingly, plan benefits were fixed as of
that date.
The following tables set forth information pertaining to the defined benefit retirement plan:
Change in benefit obligation
Benefit obligation at beginning of year
Interest cost
Actuarial (gains) losses
Benefits paid
Benefit obligation at end of the year
Change in plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Funded status at end of year
Amounts recognized in AOCI
Net actuarial losses
Benefit obligation actuarial assumptions
Weighted average discount rate
110
Year Ended December 31,
2015
2014
(Dollars in thousands)
$
36,330
$
1,383
(2,228)
(2,418)
33,067
27,891
(152)
1,000
(2,418)
26,321
32,183
1,485
5,709
(3,047)
36,330
27,782
1,813
1,343
(3,047)
27,891
$
$
(6,746)
$
(8,439)
(13,887)
$
(15,647)
4.3%
4.0%
Components of net periodic benefit cost
Interest cost
Expected return on plan assets
Amortization of net actuarial losses
Net periodic benefit cost
Net periodic cost actuarial assumptions
Weighted average discount rate
Expected longterm rate of return on plan assets
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
$
$
1,383
$
1,485
$
(1,893)
1,577
1,067
(1,924)
1,068
$
629
$
1,370
(1,762)
2,390
1,998
4.0%
7.0%
4.7%
7.0%
4.0%
7.5%
The unrecognized net actuarial losses included in AOCI expected to be recognized in net periodic benefit cost during 2016 is approximately $1.4 million.
The longterm rate of return on plan assets reflects the weightedaverage longterm rates of return for the various categories of investments held in the plan. The expected long
term rate of return is adjusted when there are fundamental changes in expected returns on the plan investments.
The defined benefit retirement plan assets consist primarily of equity and debt securities. Our asset allocations by asset category were as follows:
Equity securities
Debt securities
Other
Total
December 31,
2015
2014
40.6%
41.6
17.8
100.0%
56.1%
41.8
2.1
100.0%
Equity securities included the Company’s common stock in the amount of $0.1 million at December 31, 2015 and 2014.
Our investment strategy for the defined benefit retirement plan is to maximize the longterm rate of return on plan assets while maintaining an acceptable level of risk. The
investment policy establishes a target allocation for each asset class that is reviewed periodically and rebalanced when considered appropriate.
111
The fair values of the defined benefit retirement plan as of December 31, 2015 and 2014 by asset category were as follows:
Level 1
Level 2
Level 3
Total
(Dollars in thousands)
December 31, 2015
Money market accounts
Mutual funds
Government obligations
Common stocks
Preferred stocks
Corporate bonds and debentures
December 31, 2014
Money market accounts
Mutual funds
Government obligations
Common stocks
Preferred stocks
Corporate bonds and debentures
$
$
$
$
4,672 $
9,140
—
5,552
187
—
19,551 $
958 $
9,946
—
9,765
250
—
20,919 $
— $
—
4,117
—
—
2,653
6,770 $
— $
—
3,900
—
—
3,072
6,972 $
We do not expect to make any contributions to our defined benefit retirement plan in 2016.
Estimated future benefit payments are as follows (in thousands):
Year Ending December 31:
2016
2017
2018
2019
2020
20212025
Total
Supplemental Executive Retirement Plans
— $
—
—
—
—
—
4,672
9,140
4,117
5,552
187
2,653
— $
26,321
— $
—
—
—
—
—
958
9,946
3,900
9,765
250
3,072
— $
27,891
$
$
2,531
2,494
2,479
2,435
2,390
11,131
23,460
In 1995, 2001, 2004 and 2006, our bank established Supplemental Executive Retirement Plans (“SERP”) that provide certain officers of the Company with supplemental
retirement benefits. On December 31, 2002, the 1995 and 2001 SERP were curtailed. In conjunction with the merger with CB Bancshares, Inc. (“CBBI”), we assumed CBBI’s
SERP obligation.
112
The following tables set forth information pertaining to the SERP:
Change in benefit obligation
Benefit obligation at beginning of year
Interest cost
Actuarial (gains) losses
Benefits paid
Benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Funded status at end of year
Amounts recognized in AOCI
Net transition obligation
Prior service cost
Net actuarial losses
Total amounts recognized in AOCI
Benefit obligation actuarial assumptions
Weighted average discount rate
Components of net periodic benefit cost
Interest cost
Amortization of net transition obligation
Amortization of prior service cost
Amortization of net actuarial (gains) losses
Net periodic benefit cost
Net periodic cost actuarial assumptions
Weighted average discount rate
Year Ended December 31,
2015
2014
(Dollars in thousands)
$
10,930
$
440
(504)
(215)
10,651
—
215
(215)
—
9,107
450
1,588
(215)
10,930
—
215
(215)
—
$
$
$
10,651
$
10,930
(129)
$
(84)
(1,353)
(1,566)
$
(147)
(101)
(1,965)
(2,213)
4.4%
4.1%
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
440
$
450
$
16
18
111
585
17
18
2
$
487
$
411
17
18
71
517
4.1%
5.0%
4.2%
$
$
113
The estimated amortization of components included in AOCI that will be recognized into net periodic cost for 2016 is as follows (in thousands):
Amortization of net transition obligation
Amortization of prior service cost
Amortization of net actuarial losses
$
The SERP holds no plan assets other than employer contributions that are paid as benefits during the year. We expect to contribute $0.2 million to the SERP in 2016.
Estimated future benefit payments reflecting expected future service for the SERP are as follows (in thousands):
Year Ending December 31:
2016
2017
2018
2019
2020
20212025
Total
16. 401(K) RETIREMENT SAVINGS PLAN
$
$
17
18
111
232
423
419
415
407
3,116
5,012
We maintain a 401(k) Retirement Savings Plan (“Retirement Savings Plan”) that covers substantially all employees of the Company. The Retirement Savings Plan allows
employees to direct their own investments among a selection of investment alternatives and is funded by employee elective deferrals, employer matching contributions and
employer profit sharing contributions.
We match 100% of an employee’s elective deferrals, up to 4% of the employee’s pay each pay period. Our employer matching contributions to the Retirement Savings Plan
totaled $1.6 million, $1.5 million and $1.7 million in 2015, 2014 and 2013, respectively.
We also have the option of making discretionary profit sharing contributions into the Retirement Savings Plan. Our Board of Directors has sole discretion in determining the
annual profit sharing contribution, subject to limitations of the Internal Revenue Code. We did not make any profit sharing contributions in 2015, 2014 and 2013.
17. OPERATING LEASES
We lease certain properties and equipment with lease terms expiring through 2045. In most instances, the property leases provide for the renegotiation of rental terms at fixed
intervals, and generally contain renewal options for periods ranging from five to 15 years.
Net rent expense for all operating leases for the years ended December 31, 2015, 2014 and 2013 is summarized as follows:
Rent expense charged to net occupancy
Less sublease income
Net rent expense charged to net occupancy
Rent expense charged to equipment expense
Total net rent expense
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
9,287 $
(25)
9,262
30
9,292 $
10,210 $
—
10,210
53
10,263 $
9,840
(52)
9,788
93
9,881
$
$
114
The following is a schedule of future minimum rental commitments for all noncancellable operating leases that had initial lease terms in excess of one year at December 31, 2015
(in thousands):
Year Ending December 31:
2016
2017
2018
2019
2020
Thereafter
Total
$
$
7,317
5,991
4,903
4,095
3,640
23,817
49,763
In addition, the Company, as lessor, leases certain properties that it owns. The following is a schedule of future minimum rental income for those noncancellable operating leases
that had initial lease terms in excess of one year at December 31, 2015 (in thousands):
Year Ending December 31:
2016
2017
2018
2019
2020
Thereafter
Total
$
$
2,602
2,063
1,170
559
248
421
7,063
In instances where the lease calls for a renegotiation of rental payments, the lease rental payment in effect prior to renegotiation was used throughout the remaining lease term.
115
18. INCOME AND FRANCHISE TAXES
Components of income tax expense (benefit) for the years ended December 31, 2015, 2014 and 2013 were as follows:
Year ended December 31, 2015
Federal
State
Total
Year ended December 31, 2014
Federal
State
Total
Year ended December 31, 2013
Federal
State
Total
Current
Deferred
Total
(Dollars in thousands)
$
$
$
$
$
$
1,128 $
(119)
1,009 $
— $
(93)
(93) $
— $
(109)
(109) $
20,061 $
6,018
26,079 $
18,710 $
1,772
20,482 $
21,189
5,899
27,088
18,710
1,679
20,389
(81,613) $
(30,525)
(112,138) $
(81,613)
(30,634)
(112,247)
Income tax expense (benefit) for the periods presented differed from the “expected” tax expense (computed by applying the U.S. Federal corporate tax rate of 35% to income (loss)
before income taxes) for the following reasons:
Computed “expected” tax expense (benefit)
Increase (decrease) in taxes resulting from:
Taxexempt interest
Other taxexempt income
Lowincome housing and energy tax credits
State income taxes, net of Federal income tax effect, excluding impact of deferred tax valuation
allowance
Change in the beginningoftheyear balance of the valuation allowance for deferred tax assets
allocated to income tax expense
Other
Total
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
$
25,535 $
21,295 $
20,940
(1,420)
(712)
(1,225)
3,958
(44)
996
(1,412)
(1,023)
(2,088)
2,638
(180)
1,159
$
27,088 $
20,389 $
(1,431)
(810)
(1,557)
2,389
(129,806)
(1,972)
(112,247)
At December 31, 2015, there was $0.6 million current Federal income taxes receivable, compared to no receivable at December 31, 2014. Current state income taxes receivable
was $1.7 million at December 31, 2015 and 2014.
116
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
December 31,
2015
2014
(Dollars in thousands)
Deferred tax assets
Allowance for loan and lease losses
Accrued expenses
Employee retirement benefits
Federal and state tax credit carryforwards
Interest on nonaccrual loans
Federal and state net operating loss carryforwards
Restricted stock and nonqualified stock options
Other
Total deferred tax assets
Deferred tax liabilities
Intangible assets
FHLB stock dividends received
Leases
Deferred gain on curtailed retirement plan
Liability on utilization of state tax credits
Other
Total deferred tax liabilities
Deferred tax valuation allowance
Net deferred tax assets
$
22,275 $
2,555
6,921
34,821
606
19,850
1,049
9,227
97,304 $
10,006 $
—
423
—
—
2,093
12,522 $
2,803 $
26,052
2,981
11,023
30,593
1,600
57,173
—
13,357
142,779
11,803
10,742
1,203
3,315
6,237
2,234
35,534
2,847
81,979 $
104,398
$
$
$
$
$
In assessing the realizability of our net deferred tax assets ("DTA"), management considers whether it is more likely than not that some portion or all of the DTA will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become
deductible. Management considers the reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income
and taxplanning strategies in making this assessment.
In the first quarter of 2013, the Company reversed a significant portion of the valuation allowance that was established against our net DTA during the third quarter of 2009. The
valuation allowance was established during 2009 due to uncertainty at the time regarding our ability to generate sufficient future taxable income to fully realize the benefit of our
net DTA. The quarter ended March 31, 2013 marked our ninth consecutive quarter of profitability. Based on this earnings performance trend, improvements in our financial
condition, asset quality and capital ratios, and the expectation of continued profitability, the Company determined that it was more likely than not that a significant portion of our
net DTA would be realized. The net impact of reversing the valuation allowance and recording the provision for income tax expense was a net income tax benefit of $119.8
million in the first quarter of 2013.
As of December 31, 2015, the remaining valuation allowance on our net deferred tax assets totaled $2.8 million, which related to our California state income taxes as we do not
expect to generate sufficient income in California to utilize the DTA. The net change in the valuation allowance was a decrease of $44.0 thousand and $3.9 million in 2015 and
2014, respectively.
Net of this valuation allowance, the Company’s net DTA totaled $82.0 million as of December 31, 2015, compared to a net DTA of $104.4 million as of December 31, 2014.
At December 31, 2015, the Company had net operating loss carryforwards for Federal income tax purposes of $48.8 million, which are available to offset future Federal taxable
income, if any, through 2030. At December 31, 2015, the Company had net operating loss carryforwards for California state income tax purposes of $39.3 million, which are
available to offset future state
117
taxable income, if any, through 2030. The Company did not have any net operating loss carryforwards for Hawaii state income tax purposes. In addition, we have state tax credit
carryforwards of $14.8 million that do not expire, and federal tax credit carryforwards of $18.3 million, of which $11.8 million will expire within 20 years, and $6.5 million do
not expire.
At December 31, 2015, we have no unrecognized tax benefits that, if recognized would favorably affect the effective income tax rate in future periods. We do not expect our
unrecognized tax benefits to change significantly over the next 12 months.
We are subject to U.S. Federal income tax as well as income tax of multiple state jurisdictions. Taxable years through 2011 are closed.
19. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the components of other comprehensive income (loss) for the years ended December 31, 2015, 2014 and 2013, by component:
Year ended December 31, 2015
Net unrealized losses on investment securities:
Net unrealized losses arising during the period
Less: Reclassification adjustment for losses realized in net income
Net unrealized losses on investment securities
Defined benefit plans:
Net actuarial gains arising during the period
Amortization of net actuarial losses
Amortization of net transition obligation
Amortization of prior service cost
Defined benefit plans, net
Other comprehensive income
Year ended December 31, 2014
Net unrealized gains on investment securities:
Net unrealized gains arising during the period
Less: Reclassification adjustment for losses realized in net income
Net unrealized gains on investment securities
Defined benefit plans:
Net actuarial losses arising during the period
Amortization of net actuarial losses
Amortization of net transition obligation
Amortization of prior service cost
Defined benefit plans, net
Other comprehensive income
Year ended December 31, 2013
Net unrealized losses on investment securities:
Net unrealized losses arising during the period
Less: Reclassification adjustment for gains realized in net income
118
Before Tax
Tax Effect
Net of Tax
(Dollars in thousands)
$
(9,184)
$
1,866
(7,318)
687
1,688
16
18
2,409
(3,655) $
742
(2,913)
274
672
7
7
960
(5,529)
1,124
(4,405)
413
1,016
9
11
1,449
$
$
$
$
(4,909)
$
(1,953) $
(2,956)
36,780
$
1,071
37,851
14,714 $
426
15,140
(7,409)
1,070
17
18
(6,304)
(3,052)
441
7
7
(2,597)
22,066
645
22,711
(4,357)
629
10
11
(3,707)
31,547
$
12,543 $
19,004
(43,687)
$
(6,266)
(15,577) $
(2,511)
(28,110)
(3,755)
Net unrealized losses on investment securities
Net unrealized losses on derivatives:
Reclassification adjustment for losses realized in net income
Net unrealized losses on derivatives
Defined benefit plans:
Net actuarial gains arising during the period
Amortization of net actuarial losses
Amortization of net transition obligation
Amortization of prior service cost
Defined benefit plans, net
Before Tax
Tax Effect
Net of Tax
(Dollars in thousands)
(49,953)
(18,088)
(31,865)
394
394
6,952
2,461
17
18
9,448
(10,599)
(10,599)
2,591
986
7
7
3,591
10,993
10,993
4,361
1,475
10
11
5,857
Other comprehensive loss
$
(40,111)
$
(25,096) $
(15,015)
The following table presents the changes in each component of AOCI, net of tax, for the years ended December 31, 2015, 2014 and 2013:
Year ended December 31, 2015
Balance at beginning of period
Other comprehensive income (loss) before reclassifications
Amounts reclassified from AOCI
Total other comprehensive income (loss)
Balance at end of period
Year ended December 31, 2014
Balance at beginning of period
Other comprehensive income (loss) before reclassifications
Amounts reclassified from AOCI
Total other comprehensive income (loss)
Balance at end of period
Year ended December 31, 2013
Balance at beginning of period
Other comprehensive loss before reclassifications
Amounts reclassified from AOCI
Total other comprehensive loss
Balance at end of period
Investment
Securities
Derivatives
Defined
Benefit
Plans
Accumulated Other
Comprehensive
Income (Loss)
(Dollars in thousands)
13,586 $
— $
(10,427) $
3,159
(5,529)
1,124
(4,405)
—
—
—
413
1,036
1,449
9,181 $
— $
(8,978) $
(5,116)
2,160
(2,956)
203
(9,125) $
— $
(6,720) $
(15,845)
22,066
645
22,711
—
—
—
(4,357)
650
(3,707)
13,586 $
— $
(10,427) $
17,709
1,295
19,004
3,159
22,740 $
(10,993) $
(12,577) $
(830)
(28,110)
(3,755)
(31,865)
—
10,993
10,993
4,361
1,496
5,857
(9,125) $
— $
(6,720) $
(23,749)
8,734
(15,015)
(15,845)
$
$
$
$
$
$
119
The following table presents the amounts reclassified out of each component of AOCI for the years ended December 31, 2015, 2014 and 2013:
Details about AOCI Components (Dollars in Thousands)
2015
2014
2013
Amount Reclassified from AOCI
Year ended December 31,
Affected Line Item in the
Statement Where Net
Income is Presented
Sale of investment securities available for sale
Unrealized gains (losses) on derivatives
Amortization of defined benefit plan items
Net actuarial losses
Net transition obligation
Prior service cost
Total reclassifications for the period
$
$
$
$
$
$
$
(1,866) $
(1,071) $
6,266 Investment securities gains (losses)
742
(1,124) $
426
(645) $
(2,511) Tax (expense) benefit
3,755 Net of tax
— $
—
— $
— $
—
— $
(394) Interest income
(10,599) Tax expense
(10,993) Net of tax
(1,688) $
(1,070) $
(2,461) (1)
(16)
(18)
(1,722)
686
(17)
(18)
(1,105)
455
(17) (1)
(18) (1)
(2,496) Total before tax
1,000 Tax benefit
(1,036) $
(650) $
(1,496) Net of tax
(2,160) $
(1,295) $
(8,734) Net of tax
(1) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 15 for additional details).
120
20. EARNINGS PER SHARE
The table below presents the information used to compute basic and diluted earnings per share for the years ended December 31, 2015, 2014 and 2013:
Net income
Weighted average shares outstanding basic
Dilutive effect of employee stock options and awards
Dilutive effect of deferred salary restricted stock units
Dilutive effect of Treasury warrants
Weighted average shares outstanding diluted
Basic earnings per share
Diluted earnings per share
Year Ended December 31,
2015
2014
2013
(In thousands, except per share data)
45,868 $
40,453 $
172,075
32,238
37,366
413
—
—
32,651
571
—
—
37,937
1.42 $
1.40 $
1.08 $
1.07 $
41,961
341
1
14
42,317
4.10
4.07
$
$
$
A total of 8,217, 13,510 and 24,526 potentially dilutive securities have been excluded from the dilutive share calculation for the year ended December 31, 2015, 2014 and 2013,
respectively, as their effect was antidilutive.
21. CONTINGENT LIABILITIES AND OTHER COMMITMENTS
The Company and its subsidiaries are involved in legal actions arising in the ordinary course of business. Management, after consultation with legal counsel, believes the ultimate
disposition of those matters will not have a material adverse effect on our consolidated financial statements.
In the normal course of business there are outstanding contingent liabilities and other commitments such as unused letters of credit, items held for collections and unsold traveler’s
checks, which are not reflected in the accompanying consolidated financial statements. Management does not anticipate any material losses as a result of these transactions.
22. FINANCIAL INSTRUMENTS WITH OFFBALANCE SHEET RISK
We are a party to financial instruments with offbalance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments
include commitments to extend credit, standby letters of credit and financial guarantees written, forward foreign exchange contracts, and interest rate contracts. Those instruments
involve, to varying degrees, elements of credit, interest rate and foreign exchange risk in excess of the amounts recognized in the consolidated balance sheets. The contract or
notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.
Our exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit and standby letters of credit and
financial guarantees written is represented by the contractual amount of those instruments. For forward foreign exchange contracts and interest rate contracts, the contract amounts
do not represent exposure to credit loss. We control the credit risk of these contracts through credit approvals, limits and monitoring procedures. We use the same credit policies in
making commitments and conditional obligations as we do for onbalance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a casebycase basis. The amount of collateral
obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property,
plant and equipment, and incomeproducing commercial properties.
121
Standby letters of credit and financial guarantees written are conditional commitments issued by us to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. We hold collateral supporting those commitments for which
collateral is deemed necessary.
Interest rate options issued on residential mortgage loans expose us to interest rate risk, which is economically hedged with forward interest rate contracts. These derivatives are
carried at fair value with changes in fair value recorded as a component of other operating income in the consolidated statements of income.
Forward interest rate contracts represent commitments to purchase or sell loans at a future date at a specified price. Risks arise from the possible inability of counterparties to meet
the terms of their contracts and from movements in market rates. Management reviews and approves the creditworthiness of the counterparties to its forward interest rate contracts.
Forward foreign exchange contracts represent commitments to purchase or sell foreign currencies at a future date at a specified price. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movements in foreign currency exchange rates. Management reviews and approves the creditworthiness of its forward
foreign exchange counterparties. At December 31, 2015 and 2014, we did not have any forward foreign exchange contracts.
At December 31, 2015 and 2014, financial instruments with offbalance sheet risk were as follows:
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit
Standby letters of credit and financial guarantees written
Financial instruments whose contract amounts exceed the amount of credit risk:
Interest rate options
Forward interest rate contracts
23. FAIR VALUE OF ASSETS AND LIABILITIES
Disclosures about Fair Value of Financial Instruments
Fair value estimates, methods and assumptions are set forth below for our financial instruments.
ShortTerm Financial Instruments
December 31,
2015
2014
(Dollars in thousands)
$
801,835 $
13,434
720,255
18,797
24,009
9,973
44,266
23,919
The carrying values of shortterm financial instruments are deemed to approximate fair values. Such instruments are considered readily convertible to cash and include cash and
due from banks, interestbearing deposits in other banks, accrued interest receivable, the majority of shortterm borrowings and accrued interest payable.
Investment Securities
The fair value of investment securities is based on market price quotations received from securities dealers. Where quoted market prices are not available, fair values are based on
quoted market prices of comparable securities.
Loans
Fair values of loans are estimated based on discounted cash flows of portfolios of loans with similar financial characteristics including the type of loan, interest terms and
repayment history. Fair values are calculated by discounting scheduled cash flows through estimated maturities using estimated market discount rates. Estimated market discount
rates are reflective of credit and interest rate risks inherent in the Company’s various loan types and are derived from available market information, as well as specific borrower
information. The fair value of loans are not based on the notion of exit price.
122
Loans Held for Sale
The fair value of loans classified as held for sale are generally based upon quoted prices for similar assets in active markets, acceptance of firm offer letters with agreed upon
purchase prices, discounted cash flow models that take into account market observable assumptions, or independent appraisals of the underlying collateral securing the loans. We
report the fair values of Hawaii and U.S. Mainland construction and commercial real estate loans net of applicable selling costs on our consolidated balance sheets.
Other InterestEarning Assets
The equity investment in common stock of the FHLB, which is redeemable for cash at par value, is reported at its par value.
Deposit Liabilities
The fair values of deposits with no stated maturity, such as noninterestbearing demand deposits and interestbearing demand and savings accounts, are equal to the amount
payable on demand. The fair value of time deposits is estimated using discounted cash flow analyses. The discount rate is estimated using the rates currently offered for deposits of
similar remaining maturities.
LongTerm Debt
The fair value of our longterm debt is estimated by discounting scheduled cash flows over the contractual borrowing period at the estimated market rate for similar borrowing
arrangements.
OffBalance Sheet Financial Instruments
The fair values of offbalance sheet financial instruments are estimated based on the fees currently charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties, current settlement values or quoted market prices of comparable instruments.
For derivative financial instruments, the fair values are based upon current settlement values, if available. If there are no relevant comparables, fair values are based on pricing
models using current assumptions for interest rate swaps and options.
Limitations
Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument. Because no market exists for a significant portion of
our financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined
with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and offbalance sheet financial instruments without attempting to estimate the value of future business and the value of assets and
liabilities that are not considered financial instruments. For example, significant assets and liabilities that are not considered financial assets or liabilities include deferred tax
assets, premises and equipment and intangible assets. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in many of the estimates.
123
December 31, 2015
Financial assets
Cash and due from banks
Interestbearing deposits in other banks
Investment securities
Loans held for sale
Net loans and leases
Accrued interest receivable
Financial liabilities
Deposits:
Noninterestbearing deposits
Interestbearing demand and savings deposits
Time deposits
Shortterm debt
Longterm debt
Accrued interest payable (included in other liabilities)
Offbalance sheet financial instruments
Commitments to extend credit
Standby letters of credit and financial guarantees written
Interest rate options
Forward interest rate contracts
December 31, 2014
Financial assets
Cash and due from banks
Interestbearing deposits in other banks
Investment securities
Loans held for sale
Net loans and leases
Accrued interest receivable
Financial liabilities
Deposits:
Noninterestbearing deposits
Interestbearing demand and savings deposits
Time deposits
Shortterm debt
Longterm debt
Accrued interest payable (included in other liabilities)
Offbalance sheet financial instruments
Commitments to extend credit
Standby letters of credit and financial guarantees written
Interest rate options
Forward interest rate contracts
Carrying
Amount
Estimated
Fair Value
Fair Value Measurement Using
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
(Dollars in thousands)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
71,797
$
71,797
$
$
8,397
1,516,391
14,109
3,094,404
14,898
1,145,244
2,223,988
1,064,255
69,000
67,421
1,072
1,014
202
43
15
72,316
13,691
1,464,615
9,683
2,752,420
13,584
1,034,146
2,030,870
1,047,322
38,000
42,454
1,018
3,601
141
444
(62)
8,397
1,520,172
14,109
3,148,218
14,898
1,145,244
2,223,988
1,064,207
69,000
92,785
1,072
801,835
13,434
24,009
9,973
72,316
13,691
1,467,305
9,683
2,858,158
13,584
1,034,146
2,030,870
1,045,284
38,000
92,785
1,018
720,255
18,797
44,266
23,919
124
$
71,797
$
8,397
916
—
—
14,898
— $
—
1,502,996
—
38,205
—
1,145,244
2,223,988
—
—
—
1,072
—
—
—
—
—
—
—
69,000
67,421
—
1,014
202
43
15
$
$
72,316
13,691
877
—
—
13,584
— $
—
1,450,643
—
70,743
—
1,034,146
2,030,870
—
—
—
1,018
—
—
—
—
—
—
—
38,000
42,454
—
3,601
141
444
(62)
—
—
12,479
14,109
3,056,199
—
—
—
1,064,255
—
—
—
—
—
—
—
—
—
13,095
9,683
2,681,677
—
—
—
1,047,322
—
—
—
—
—
—
—
Fair Value Measurements
We group our financial assets and liabilities at fair value into three levels based on the markets in which the financial assets and liabilities are traded and the reliability of the
assumptions used to determine fair value as follows:
•
•
•
Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities traded in active markets. A quoted price in an active market provides the
most reliable evidence of fair value and shall be used to measure fair value whenever available.
Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active,
and modelbased valuation techniques for which all significant assumptions are observable in the market.
Level 3 — Valuation is generated from modelbased techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect
our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models
and similar techniques that requires the use of significant judgment or estimation.
We base our fair values on the price that we would expect to receive if an asset were sold or pay to transfer a liability in an orderly transaction between market participants at the
measurement date. We also maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.
We use fair value measurements to record adjustments to certain financial assets and liabilities and to determine fair value disclosures. Available for sale securities and derivatives
are recorded at fair value on a recurring basis. From time to time, we may be required to record other financial assets at fair value on a nonrecurring basis such as loans held for sale,
impaired loans and mortgage servicing rights. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or writedowns
of individual assets.
There were no transfers of financial assets and liabilities between Level 1 and Level 2 of the fair value hierarchy during the year ended December 31, 2015.
125
The following table below presents the balances of assets and liabilities measured at fair value on a recurring basis:
December 31, 2015
Available for sale securities:
Debt securities:
States and political subdivisions
Corporate securities
Mortgagebacked securities:
U.S. Government sponsored entities
Nonagency collateralized mortgage obligations
Other
Derivatives Interest rate contracts
Total
December 31, 2014
Available for sale securities:
Debt securities:
States and political subdivisions
Corporate securities
Mortgagebacked securities:
U.S. Government sponsored entities
Nonagency collateralized mortgage obligations
Other
Derivatives Interest rate contracts
Total
Fair
Value
Fair Value at Reporting Date Using
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
190,473
$
108,571
771,909
200,386
916
59
— $
—
—
—
916
—
177,994 $
108,571
771,909
200,386
—
59
12,479
—
—
—
—
—
1,272,314
$
916
$
1,258,919 $
12,479
191,645
$
100,604
751,558
184,334
877
382
— $
—
—
—
877
—
178,550 $
100,604
751,558
184,334
—
382
13,095
—
—
—
—
—
1,229,400
$
877
$
1,215,428 $
13,095
$
$
$
$
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
Balance at December 31, 2013
Principal payments received
Purchases
Unrealized net loss included in other comprehensive loss
Balance at December 31, 2014
Principal payments received
Purchases
Unrealized net gain included in other comprehensive income
Balance at December 31, 2015
Available for Sale Debt
Securities States and
Political Subdivisions
(Dollars in thousands)
10,518
(275)
2,706
146
13,095
(987)
—
371
12,479
$
$
$
Within the state and political subdivisions debt securities category, the Company holds four mortgage revenue bonds issued by the City & County of Honolulu with an aggregate
fair value of $12.5 million and $13.1 million at December 31, 2015 and
126
2014, respectively. The Company estimates the fair value of its mortgage revenue bonds by using a discounted cash flow model to calculate the present value of estimated future
principal and interest payments.
The significant unobservable input used in the fair value measurement of the Company’s mortgage revenue bonds is the weighted average discount rate. As of December 31,
2015, the weighted average discount rate utilized was 4.13%, which was derived by incorporating a credit spread over the FHLB FixedRate Advance curve. Significant increases
(decreases) in the weighted average discount rate could result in a significantly lower (higher) fair value measurement.
For assets measured at fair value on a nonrecurring basis that were recorded at fair value on our balance sheet, the following table provides the level of valuation assumptions used
to determine the respective fair values:
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
Fair Value
December 31, 2015
Impaired loans (1)
Other real estate (2)
December 31, 2014
Impaired loans (1)
Other real estate (2)
$
$
38,153
$
1,962
70,743
$
2,948
Fair Value Measurements Using
Significant Other
Observable Inputs
(Level 2)
(Dollars in thousands)
— $
—
— $
—
38,153
$
1,962
70,743
$
2,948
Significant
Unobservable
Inputs
(Level 3)
Total
Losses
— $
—
$
— $
—
$
111
220
331
2,532
1,540
4,072
(1) Represents carrying value and related writedowns of loans for which adjustments are based on agreed upon purchase prices for the loans or the appraised value of the collateral.
(2) Represents other real estate that is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral.
24. SEGMENT INFORMATION
We have the following three reportable segments: Banking Operations, Treasury and All Others. The segments are consistent with our internal functional reporting lines and are
managed separately because each unit has different target markets, technological requirements, marketing strategies and specialized skills.
The Banking Operations segment includes construction and real estate development lending, commercial lending, residential mortgage lending, consumer lending, trust services,
retail brokerage services and our retail branch offices, which provide a full range of deposit and loan products, as well as various other banking services. The Treasury segment is
responsible for managing the Company’s investment securities portfolio and wholesale funding activities. The All Others segment includes activities not captured by the Banking
Operations or Treasury segments described above and includes activities such as electronic banking, data processing and management of bank owned properties.
The accounting policies of the segments are consistent with those described in Note 1. The majority of the Company’s net income is derived from net interest income.
Accordingly, management focuses primarily on net interest income, rather than gross interest income and expense amounts, in evaluating segment profitability.
Intersegment net interest income (expense) was allocated to each segment based upon a funds transfer pricing process that assigns costs of funds to assets and earnings credits to
liabilities based on market interest rates that reflect interest rate sensitivity and maturity characteristics. All administrative and overhead expenses are allocated to the segments at
cost. Cash, investment securities, loans and leases and their related balances are allocated to the segment responsible for acquisition and maintenance of those assets. Segment
assets also include all premises and equipment used directly in segment operations.
127
Segment net income (loss) and assets are provided in the following table for the periods indicated:
Year ended December 31, 2015
Net interest income
Intersegment net interest income (expense)
Credit (provision) for loan and lease losses
Other operating income
Other operating expense
Administrative and overhead expense allocation
Income taxes
Net income (loss)
At December 31, 2015:
Investment securities
Loans and leases (including loans held for sale)
Other
Total assets
Year ended December 31, 2014
Net interest income
Intersegment net interest income (expense)
Credit (provision) for loan and lease losses
Other operating income
Other operating expense
Administrative and overhead expense allocation
Income taxes
Net income
At December 31, 2014:
Investment securities
Loans and leases (including loans held for sale)
Other
Total assets
Year ended December 31, 2013
Net interest income
Intersegment net interest income (expense)
Credit (provision) for loan and lease losses
Other operating income
Other operating expense
Administrative and overhead expense allocation
Net income (loss)
Banking
Operations
Treasury
All Others
Total
(Dollars in thousands)
115,936
$
43,686
15,671
23,447
(59,273)
(59,266)
(28,070)
33,592
$
(31,576)
—
967
(1,859)
(1,042)
(29)
— $
(12,110)
—
14,570
(70,095)
60,308
1,011
52,131
$
53
$
(6,316) $
— $
1,520,172
$
3,225,641
74,963
—
226,172
3,300,604
$
1,746,344
$
108,815
$
34,308
6,414
24,496
(60,587)
(59,610)
(18,843)
34,603
$
(33,356)
—
4,042
(2,086)
(1,126)
(727)
— $
—
84,340
84,340 $
— $
(952)
—
15,285
(70,140)
60,736
(819)
34,993
$
1,350
$
4,110 $
— $
1,467,305
$
2,941,881
111,071
—
248,455
3,052,952
$
1,715,760
$
101,282
$
16,947
11,310
26,140
(58,891)
(54,851)
117,088
31,827
$
(30,675)
—
3,137
(3,788)
(2,004)
218
— $
—
84,275
84,275 $
— $
13,728
—
25,668
(76,857)
56,855
(5,059)
159,025
$
(1,285)
$
14,335 $
$
$
$
$
$
$
$
$
$
$
128
149,528
—
15,671
38,984
(131,227)
—
(27,088)
45,868
1,520,172
3,225,641
385,475
5,131,288
143,418
—
6,414
43,823
(132,813)
—
(20,389)
40,453
1,467,305
2,941,881
443,801
4,852,987
133,109
—
11,310
54,945
(139,536)
—
112,247
172,075
25. PARENT COMPANY AND REGULATORY RESTRICTIONS
At December 31, 2015, the accumulated deficit of the parent company, Central Pacific Financial Corp., included $417.9 million of equity in undistributed losses of Central Pacific
Bank.
Central Pacific Bank, as a Hawaii statechartered bank, may only pay dividends to the extent it has retained earnings as defined under Hawaii banking law (“Statutory Retained
Earnings”), which differs from GAAP retained earnings. As of December 31, 2015, the bank had Statutory Retained Earnings of $63.7 million. For further information, see Note
13.
Section 131 of the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) required the Board of Governors of the Federal Reserve System, FDIC, and the
Comptroller of the Currency (collectively, the “Agencies”) to develop a mechanism to take prompt corrective action to resolve the problems of insured depository institutions.
The final rules to implement FDICIA’s Prompt Corrective Action provisions established minimum regulatory capital standards to determine an insured depository institution’s
capital category. However, the Agencies may impose higher minimum standards on individual institutions or may downgrade an institution from one capital category to a lower
capital category because of safety and soundness concerns.
The Prompt Corrective Action provisions impose certain restrictions on institutions that are undercapitalized. The restrictions become increasingly more severe as an institution’s
capital category declines from undercapitalized to critically undercapitalized.
The following table sets forth actual and required capital and capital ratios for the Company and the bank, as well as the minimum capital adequacy requirements applicable
generally to all financial institutions as of the dates indicated. The Company’s and the bank’s leverage capital, Tier 1, total riskbased capital ratios, and common equity Tier 1
(CET1) risk based capital as of December 31, 2015 were above the levels required for a “wellcapitalized” regulatory designation.
Company
As of December 31, 2015
Leverage capital
Tier 1 riskbased capital
Total riskbased capital
CET1 riskbased capital
As of December 31, 2014
Leverage capital
Tier 1 riskbased capital
Total riskbased capital
Central Pacific Bank
As of December 31, 2015
Leverage capital
Tier 1 riskbased capital
Total riskbased capital
CET1 riskbased capital
As of December 31, 2014
Leverage capital
Tier 1 riskbased capital
Total riskbased capital
Actual
Minimum required for
capital adequacy purposes
Minimum required to
be wellcapitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$
532,787
532,787
579,651
472,698
562,063
562,063
603,939
518,617
518,617
565,231
518,617
540,273
540,273
582,068
10.7% $
14.4
15.7
12.8
12.0
17.0
18.2
10.4
14.1
15.3
14.1
11.6
16.3
17.6
199,350
221,808
295,745
166,356
186,922
132,475
264,949
199,098
221,435
295,247
166,076
186,828
132,376
264,752
129
4.0% $
6.0
8.0
4.5
4.0
4.0
8.0
4.0
6.0
8.0
4.5
4.0
4.0
8.0
249,187
295,745
369,681
240,292
233,652
198,712
331,187
248,872
295,247
369,058
239,888
233,535
198,564
330,940
5.0%
8.0
10.0
6.5
5.0
6.0
10.0
5.0
8.0
10.0
6.5
5.0
6.0
10.0
Condensed financial statements of the parent company are as follows:
CENTRAL PACIFIC FINANCIAL CORP.
CONDENSED BALANCE SHEETS
Assets
Cash and cash equivalents
Investment securities available for sale
Investment in subsidiary bank, at equity in underlying net assets
Investment in other subsidiaries, at equity in underlying assets
Accrued interest receivable and other assets
Total assets
Liabilities and Shareholders’ Equity
Longterm debt
Other liabilities
Total liabilities
Shareholders’ equity:
Preferred stock, no par value, authorized 1,100,000 shares; issued and outstanding none at December 31, 2015 and 2014
Common stock, no par value, authorized 185,000,000 shares; issued and outstanding 31,361,452 and 35,233,674 shares at
December 31, 2015 and 2014, respectively
Surplus
Accumulated deficit
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Noncontrolling interest
Total Equity
Total liabilities and shareholders’ equity
130
December 31,
2015
2014
(Dollars in thousands)
12,559 $
917
551,156
—
24,560
589,192 $
92,785 $
1,768
94,553
22,775
877
612,505
—
26,136
662,293
92,785
1,467
94,252
—
—
548,878
82,847
(137,314)
203
494,614
25 $
494,639 $
642,205
79,716
(157,039)
3,159
568,041
—
568,041
589,192 $
662,293
$
$
$
$
$
$
CENTRAL PACIFIC FINANCIAL CORP.
CONDENSED STATEMENTS OF INCOME
Income:
Dividends from subsidiary banks
Interest income:
Interest from subsidiary banks
Other income
Total income
Expense:
Interest on longterm debt
Other expenses
Total expenses
Gain (loss) before income taxes and equity in undistributed income of subsidiaries
Income tax expense (benefit)
Income before equity in undistributed income of subsidiaries
Equity in undistributed income (loss) of subsidiary bank
Equity in undistributed income of other subsidiaries
Net income
131
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
$
111,765 $
159,319 $
9
91
16
89
111,865
159,424
2,626
2,551
5,177
106,688
670
106,018
(60,150)
—
2,572
2,262
4,834
154,590
(2,520)
157,110
(116,657)
—
$
45,868 $
40,453 $
—
30
2,001
2,031
3,118
2,679
5,797
(3,766)
(31,891)
28,125
143,945
5
172,075
CENTRAL PACIFIC FINANCIAL CORP.
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Deferred income tax expense (benefit)
Equity in undistributed income (loss) of subsidiary bank
Equity in undistributed income of other subsidiaries
Sharebased compensation
Accrued interest payable
Other, net
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
$
45,868 $
40,453 $
172,075
670
60,150
—
1,429
—
983
(2,520)
116,657
—
4,218
—
(923)
Net cash provided by (used in) operating activities
109,100
157,885
Cash flows from investing activities
Distributions from unconsolidated subsidiaries
Contributions to unconsolidated subsidiaries
Net cash provided by investing activities
Cash flows from financing activities
Net proceeds from issuance of common stock and stock option exercises
Repayments of longterm debt
Repurchases of common stock
Dividends paid
Net cash used in financing activities
—
—
—
360
—
(93,533)
(26,143)
(119,316)
479
518
997
74
—
(142,405)
(13,405)
(155,736)
(25,707)
(143,945)
(5)
4,931
(11,919)
(362)
(4,932)
9,000
(9,000)
—
74
(15,464)
—
(6,735)
(22,125)
Net increase (decrease) in cash and cash equivalents
(10,216)
3,146
(27,057)
Cash and cash equivalents
At beginning of year
At end of year
$
22,775
12,559 $
19,629
22,775 $
46,686
19,629
132
26. UNAUDITED QUARTERLY FINANCIAL INFORMATION
2015
Total interest income
Total interest expense
Net interest income
Provision (credit) for loan and lease losses
Net interest income after provision (credit) for loan and lease losses
Investment securities losses
Income before income taxes
Net income
Basic earnings per share
Diluted earnings per share
2014
Total interest income
Total interest expense
Net interest income
Provision (credit) for loan and lease losses
Net interest income after provision (credit) for loan and lease losses
Investment securities gains
Income before income taxes
Net income
Basic earnings per share
Diluted earnings per share
27. SUBSEQUENT EVENTS
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full Year
(Dollars in thousands, except per share data)
$
37,781 $
38,896 $
39,442 $
39,916 $
1,546
36,235
(2,747)
38,982
—
16,154
10,395
1,602
37,294
(7,319)
44,613
(1,866)
20,279
12,335
0.30 $
0.29
0.39 $
0.39
1,637
37,805
(3,647)
41,452
19,106
12,206
0.39 $
0.38
1,722
38,194
(1,958)
40,152
—
17,417
10,932
0.35 $
0.34
37,393 $
37,536 $
37,139 $
37,741 $
1,597
35,796
(1,316)
37,112
—
15,326
9,808
1,630
35,906
1,995
33,911
240
13,027
9,150
1,607
35,532
(1,722)
37,254
—
13,471
8,230
1,557
36,184
(5,371)
41,555
—
19,018
13,265
0.23 $
0.23
0.25 $
0.25
0.23 $
0.23
0.37 $
0.37
$
$
$
156,035
6,507
149,528
(15,671)
165,199
(1,866)
72,956
45,868
1.42
1.40
149,809
6,391
143,418
(6,414)
149,832
240
60,842
40,453
1.08
1.07
On January 27, 2016, the Company's Board of Directors authorized the repurchase of up to $30.0 million of the Company's common stock from time to time in the open market or
in privately negotiated transactions, pursuant to a newly authorized share repurchase program (the "2016 Repurchase Plan"). The 2016 Repurchase Plan replaces and supersedes in
its entirety the CPF Repurchase Plan previously approved by the Company's Board of Directors, which had approximately $20.2 million in remaining repurchase authority at
December 31, 2015.
133
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of the Company’s management, including the principal executive officer
and principal financial officer, the Company conducted an evaluation of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a15(e) promulgated
under the Exchange Act) as of the end of the period covered by this report, or the Evaluation Date. Based on that evaluation, the principal executive officer and principal financial
officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective.
Management’s Report on Internal Control Over Financial Reporting. Management of Central Pacific Financial Corp., together with its consolidated subsidiaries, is
responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed
under the supervision of the Company’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
As of the end of the Company’s 2015 fiscal year, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on
the framework established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on this
assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2015 is effective.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the
Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a
material effect on our financial statements.
The Company’s internal control over financial reporting as of December 31, 2015 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in
their report appearing herein under the heading “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting, as such term is defined in
Rule 13a15(f) under the Exchange Act during the Company’s fiscal quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
134
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
Except as hereinafter noted, the information concerning directors and executive officers of the Company is incorporated by reference from the section entitled “Directors’ and
Executive Officers’ Information” of the Company’s definitive Proxy Statement for the 2016 Annual Meeting of Shareholders (the “2016 Proxy Statement”) to be filed with the
SEC within 120 days of the fiscal year ended December 31, 2015. Information concerning the Company’s Code of Conduct and Ethics is set forth above under “Available
Information” and incorporated by reference from the section entitled “Corporate Governance and Board Matters—Code of Conduct & Ethics” of the Company’s 2016 Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference from the section entitled “Compensation of Directors and Executive Officers” of the Company’s
2016 Proxy Statement.
Information concerning the members of the Compensation Committee of the Company is incorporated by reference from the section entitled “Compensation Committee Interlocks
and Insider Participation” of the Company’s 2016 Proxy Statement.
Information concerning the report of the Compensation Committee of the Company is incorporated by reference from the section entitled “Compensation Committee Report” of
the Company’s 2016 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners and management is incorporated by reference from the sections entitled “Introduction—Principal
Shareholders,” and “Introduction—Security Ownership of Directors, Nominees and Executive Officers” of the Company’s 2016 Proxy Statement.
The following table provides information as of December 31, 2015 regarding securities issued under our equity compensation plans that were in effect during fiscal 2015.
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
(a)
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(b)
Weightedaverage
exercise price of
outstanding options,
warrants and rights
239,417 $
—
239,417 $
22.01
—
22.01
(c)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in column (a))
1,921,943
—
1,921,943
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning certain relationships and related transactions is incorporated by reference from the section entitled “Election of Directors” and “Corporate Governance
and Board Matters—Director Independence and Relationships, and Loans to Related Persons” of the Company’s 2016 Proxy Statement.
Information concerning director independence is incorporated by reference from the section entitled “Corporate Governance and Board Matters—Director Independence and
Relationships” of the Company’s 2016 Proxy Statement.
135
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning principal accountant fees and services is incorporated by reference from the section entitled “Discussion of Proposals Recommended by the Board of
Directors—Proposal 2—Ratification of the Appointment of Independent Registered Public Accounting Firm—Services Rendered By and Fees Paid To Independent Registered
Public Accounting Firm” of the Company’s 2016 Proxy Statement.
136
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
The following consolidated financial statements are included in Item 8 of this report:
PART IV
Central Pacific Financial Corp. and Subsidiaries:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2015 and 2014
Consolidated Statements of Income for the Years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income for the Years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Changes in Equity for the Years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the Years ended December 31, 2015, 2014 and 2013
Notes to Consolidated Financial Statements
(a) 2. All schedules required by this Item 15(a) 2 are omitted because they are not applicable, not material or because the information is included in the consolidated
financial statements or the notes thereto.
(a) 3. Exhibits
137
Exhibit No.
Document
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
Restated Articles of Incorporation of the Registrant (1)
Bylaws of the Registrant, as amended (2)
Split Dollar Life Insurance Plan (3) (4)
Central Pacific Bank Supplemental Executive Retirement Plan (4) (5)
The Registrant’s Directors’ Deferred Compensation Plan (4) (6)
The Registrant’s 2004 Stock Compensation Plan, as amended (4) (7)
Form of Restricted Stock Award Agreement to NonEmployee Director under 2004 Stock Compensation Plan (4) (7)
Supplemental Executive Retirement Agreement for Blenn A. Fujimoto, effective July 1, 2005 (4) (10)
Amendment No. 1 to the Supplemental Executive Retirement Plan between the Registrant and Blenn A. Fujimoto, effective December 31, 2008 (4) (9)
Supplemental Executive Retirement Agreement for Dean K. Hirata, effective July 1, 2005 (4) (10)
Amendment No. 1 to the Supplemental Executive Retirement Plan between the Registrant and Dean K. Hirata, effective December 31, 2008 (4) (9)
The Registrant’s LongTerm Executive Incentive Plan, effective January 1, 2005 (4) (11)
Amendment No. 20081 to the Registrant’s LongTerm Executive Incentive Plan (4) (9)
The Registrant’s 2004 Annual Executive Incentive Plan (4) (7)
Amendment No. 20081 to the Registrant’s 2004 Annual Executive Incentive Plan dated December 31, 2008 (4) (9)
Amendment No. 20111 to the Registrant’s 2004 Annual Executive Incentive Plan (4) (12)
Amendment No. 201201 to the Registrant's 2004 Stock Compensation Plan (13)
Form of Stock Option Grant Agreement for the Registrant's 2004 Stock Compensation Plan (13)
Form of Restricted Stock Unit Grant Agreement for the Registrant's 2004 Stock Compensation Plan (13)
The Registrant’s 2013 Stock Compensation Plan (14)
Form of Stock Option Grant Agreement for the Registrant's 2013 Stock Compensation Plan (14)
Form of Restricted Stock Grant Agreement for the Registrant's 2013 Stock Compensation Plan (14)
138
Exhibit No.
Document
10.21
10.22
10.23
10.24
10.25
12.1
14.1
14.2
21
23
31.1
31.2
32.1
32.2
Form of Restricted Stock Unit Agreement for the Registrant's 2013 Stock Compensation Plan (14)
Form of Stock Appreciation Rights Grant Agreement for the Registrant's 2013 Stock Compensation Plan (14)
Form of Key Employee Restricted Stock Unit Grant Agreement for the Registrant's 2013 Stock Compensation Plan (14)
Repurchase Agreement dated February 20, 2014 by and between the Registrant and ACMOCPF, L.L.C. (15)
Repurchase Agreement dated February 20, 2014 by and between the Registrant and Carlyle Financial Services Harbor, L.P. (15)
Statements re. Computation of Ratios *
The Registrant’s Code of Conduct and Ethics (11)
The Registrant’s Code of Conduct and Ethics for Senior Financial Officers (11)
Subsidiaries of the Registrant *
Consent of Independent Registered Public Accounting Firm *
Rule 13a14(a) Certification of Chief Executive Officer in accordance with Section 302 of the SarbanesOxley Act of 2002 *
Rule 13a14(a) Certification of Chief Financial Officer in accordance with Section 302 of the SarbanesOxley Act of 2002 *
Section 1350 Certification of Chief Executive Officer in accordance with Section 906 of the SarbanesOxley Act of 2002 **
Section 1350 Certification of Chief Financial Officer in accordance with Section 906 of the SarbanesOxley Act of 2002 **
101.INS
XBRL Instance Document*
101.SCH
XBRL Taxonomy Extension Schema Document*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
139
*
Filed herewith.
** Furnished herewith.
All of the references to Form 8K, Form 10K, Form 10Q, Form DEF 14A and Form S1/A identified in the exhibit index have SEC file number 00131567.
Upon request of the Securities and Exchange Commission, we will furnish any agreements relating to our longterm debt not otherwise contained herein.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
Incorporated herein by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10K for the fiscal year ended December 31, 2014, filed with the Securities
and Exchange Commission on February 27, 2015.
Incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8K, filed with the Securities and Exchange Commission on January 27,
2012.
Incorporated herein by reference to Exhibit 10.16 to the Registrant’s Annual Report on Form 10K for the fiscal year ended December 31, 1991, filed with the
Securities and Exchange Commission on March 27, 1992.
Denotes management contract or compensation plan or arrangement.
Incorporated herein by reference to Exhibits 10.8 and 10.9 to the Registrant’s Annual Report on Form 10K for the fiscal year ended December 31, 1996, filed with the
Securities and Exchange Commission on March 28, 1997.
Incorporated herein by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10K for the fiscal year ended December 31, 2000, filed with the
Securities and Exchange Commission on March 30, 2001.
Incorporated herein by reference to Exhibits 10.8, 10.9 and 10.20 to the Registrant’s Annual Report on Form 10K for the fiscal year ended December 31, 2004, filed
with the Securities and Exchange Commission on March 16, 2005.
Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10Q for the quarter ended September 30, 2004, filed with the Securities
and Exchange Commission on November 9, 2004.
Incorporated herein by reference to Exhibits 10.1, 10.15, 10.17, 10.19 and 10.21 to the Registrant’s Annual Report on Form 10K/A for the year ended December 31,
2008, filed with the Securities and Exchange Commission on March 2, 2009.
Incorporated herein by reference to Exhibits 99.1 and 99.2 to the Registrant’s Current Report on Form 8K, filed with the Securities and Exchange Commission on
January 31, 2006.
Incorporated herein by reference to Exhibits 10.19, 14.1 and 14.2 to the Registrant’s Annual Report on Form 10K for the fiscal year ended December 31, 2005, filed
with the Securities and Exchange Commission on March 15, 2006.
Incorporated herein by reference to Appendix B to the Registrant’s Definitive Proxy Statement on Form DEF 14A filed with the Securities and Exchange Commission
on March 4, 2011.
Incorporated herein by reference to Exhibits 10.1, 10.2 and 10.3 to the Registrant’s Current Report on Form 8K, filed with the Securities and Exchange Commission
on April 30, 2012.
Incorporated herein by reference to Exhibits 10.1, 10.2, 10.3, 10.4, 10.5 and 10.6 to the Registrant’s Current Report on Form 8K, filed with the Securities and
Exchange Commission on May 1, 2013.
Incorporated herein by reference to Exhibits 10.1 and 10.2 to the Registrant’s Current Report on Form 8K, filed with the Securities and Exchange Commission on
February 24, 2014.
140
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SIGNATURES
Dated:
February 25, 2016
CENTRAL PACIFIC FINANCIAL CORP.
(Registrant)
/s/ A. Catherine Ngo
A. Catherine Ngo
President and Chief Executive Officer
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates
indicated.
Signature
/s/ A. Catherine Ngo
A. Catherine Ngo
/s/ David S. Morimoto
David S. Morimoto
/s/ John C. Dean
John C. Dean
/s/ Christine H. H. Camp
Christine H. H. Camp
/s/ Earl E. Fry
Earl E. Fry
/s/ Wayne K. Kamitaki
Wayne K. Kamitaki
/s/ Paul J. Kosasa
Paul J. Kosasa
/s/ Duane K. Kurisu
Duane K. Kurisu
/s/ Colbert M. Matsumoto
Colbert M. Matsumoto
/s/ Lance A. Mizumoto
Lance A. Mizumoto
/s/ Saedene K. Ota
Saedene K. Ota
/s/ Crystal K. Rose
Crystal K. Rose
Title
Date
President and Chief Executive Officer
(Principal Executive Officer)
February 25, 2016
Executive Vice President and Chief
February 25, 2016
Financial Officer (Principal Financial and Accounting Officer)
Executive Chair
February 25, 2016
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016
(Back To Top)
Section 2: EX12.1 (EXHIBIT 12.1)
141
Central Pacific Financial Corp. & Subsidiaries
Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
Exhibit 12.1
For the Year Ended December 31,
2015
2014
2013
2012
2011
(Dollars in thousands)
$
72,956
$
60,842
$
59,828
$
47,421 $
6,533
6,421
7,201
8,802
36,571
18,757
Ratio 1 including deposit interest
Earnings:
Pretax income (loss) from continuing operations
Fixed charges
Total
Fixed charges:
Interest on deposits
Interest on other shortterm borrowings
Interest on longterm debt
Interest on preferred stock dividends
Portion of rents representative of the interest factor of rental expense
Total fixed charges
Preferred stock dividend requirements
Fixed charges and preferred stock dividends
Ratio of earnings to fixed charges
Coverage deficiency
Ratio of earnings to fixed charges and preferred stock dividends
Coverage deficiency
Ratio 2 excluding deposit interest
Earnings:
Pretax income (loss) from continuing operations
Fixed charges
Total
Fixed charges:
Interest on other shortterm borrowings
Interest on longterm debt
Interest on preferred stock dividends
Portion of rents representative of the interest factor of rental expense
Total fixed charges
Preferred stock dividend requirements
Fixed charges and preferred stock dividends
Ratio of earnings to fixed charges
Coverage deficiency
Ratio of earnings to fixed charges and preferred stock dividends
Coverage deficiency
(Back To Top)
Section 3: EX21 (EXHIBIT 21)
$
$
$
$
$
$
$
$
$
$
$
$
$
79,489
$
67,263
$
67,029
$
56,223 $
55,328
3,627
$
3,727
$
4,044
$
5,033 $
254
2,626
—
26
92
2,572
—
30
6
3,119
—
32
—
3,701
—
68
9,610
204
8,815
69
59
6,533
$
6,421
$
7,201
$
8,802 $
18,757
—
—
—
—
1,502
6,533
$
6,421
$
7,201
$
8,802 $
20,259
12.2
10.5
— $
— $
12.2
10.5
— $
— $
9.3
— $
9.3
— $
6.4
— $
6.4
— $
72,956
$
60,842
$
59,828
$
47,421 $
2,906
2,694
3,157
3,769
75,862
$
63,536
$
62,985
$
51,190 $
254
$
92
$
6
$
2,626
2,572
3,119
—
26
—
30
—
32
— $
3,701
—
68
2.9
—
2.7
—
36,571
9,147
45,718
204
8,815
69
59
2,906
$
2,694
$
3,157
$
3,769 $
9,147
—
—
—
—
1,502
2,906
$
2,694
$
3,157
$
3,769 $
10,649
26.1
23.6
20.0
— $
— $
— $
26.1
23.6
20.0
— $
— $
— $
13.6
— $
13.6
— $
5.0
—
4.3
—
Subsidiaries of the Registrant
Exhibit 21
The Company or one of its whollyowned subsidiaries owned the following percent of the outstanding common stock, voting securities and interests of each of the corporations
listed below as of December 31, 2015:
Name
State or Other Jurisdiction of Incorporation
Percent Owned
Central Pacific Bank
CPB Capital Trust II
CPB Statutory Trust III
CPB Capital Trust IV
CPB Statutory Trust V
One Hawaii HomeLoans, LLC
Pacific Access Mortgage, LLC
Gentry HomeLoans, LLC
Haseko HomeLoans, LLC
Island Pacific HomeLoans, LLC
Hawaii
Delaware
Connecticut
Delaware
Delaware
Hawaii
Hawaii
Hawaii
Hawaii
Hawaii
100%
100%
100%
100%
100%
50% (1)
50%
50%
50%
50%
(1) Established in 2015.
(Back To Top)
Section 4: EX23 (EXHIBIT 23)
Consent of Independent Registered Public Accounting Firm
Exhibit 23
The Board of Directors
Central Pacific Financial Corp:
We consent to the incorporation by reference in the registration statements No. 333‑141232, No. 333‑188445 and No. 333‑196873 on Form S‑8 of Central Pacific Financial Corp.
of our reports dated February 25, 2016, with respect to the consolidated balance sheets of Central Pacific Financial Corp. as of December 31, 2015 and 2014, and the related
consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years in the threeyear period ended December 31, 2015, and the
effectiveness of internal control over financial reporting as of December 31, 2015, which reports appear in the December 31, 2015 annual report on Form 10‑K of Central Pacific
Financial Corp.
/s/ KPMG LLP
Honolulu, Hawaii
February 25, 2016
(Back To Top)
Section 5: EX31.1 (EXHIBIT 31.1)
Exhibit 31.1
CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a14(a)
I, A. Catherine Ngo, Chief Executive Officer of Central Pacific Financial Corp. (the “Company”), certify that:
1.
have reviewed this Annual Report on Form 10K of the Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a
15(e) and 15d15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a15(f) and 15d15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date:
February 25, 2016
By:
/s/ A. Catherine Ngo
A. Catherine Ngo
President and Chief Executive Officer
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Section 6: EX31.2 (EXHIBIT 31.2)
Exhibit 31.2
I, David S. Morimoto, Executive Vice President and Chief Financial Officer of Central Pacific Financial Corp. (the “Company”), certify that:
CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a14(a)
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10K of the Company;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a
15(e) and 15d15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a15(f) and 15d15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date:
February 25, 2016
By:
/s/ David S. Morimoto
David S. Morimoto
Executive Vice President and Chief Financial Officer
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Section 7: EX32.1 (EXHIBIT 32.1)
Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the SarbanesOxley Act of 2002
Exhibit 32.1
I, A. Catherine Ngo, Chief Executive Officer of Central Pacific Financial Corp. (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the SarbanesOxley Act of 2002, that, to my knowledge:
1.
The Annual Report on Form 10K of the Company for the fiscal year ended December 31, 2015, as filed with the Securities and Exchange Commission (the “Report”), fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
February 25, 2016
By:
/s/ A. Catherine Ngo
A. Catherine Ngo
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and
Exchange Commission or its staff upon request.
This certification accompanies the Report pursuant to Section 906 of the SarbanesOxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended.
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Section 8: EX32.2 (EXHIBIT 32.2)
Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the SarbanesOxley Act of 2002
Exhibit 32.2
I, David S. Morimoto, Executive Vice President and Chief Financial Officer of Central Pacific Financial Corp. (the “Company”), do hereby certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002, that, to my knowledge:
1.
The Annual Report on Form 10K of the Company for the fiscal year ended December 31, 2015, as filed with the Securities and Exchange Commission (the “Report”), fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
February 25, 2016
By:
/s/ David S. Morimoto
David S. Morimoto
Executive Vice President and Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and
Exchange Commission or its staff upon request.
This certification accompanies the Report pursuant to Section 906 of the SarbanesOxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended.
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