UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal year ended December 31, 2016
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number: 001-31567
Central Pacific Financial Corp.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Hawaii
99-0212597
220 South King Street, Honolulu, Hawaii
(Address of principal executive offices)
96813
(Zip Code)
Registrant’s telephone number, including area code:
(808) 544-0500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, No Par Value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known 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
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 S-T 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 S-K 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 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of
"large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Non-Accelerated Filer
Accelerated Filer
Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes
No
As of June 30, 2016, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $705,554,000. As of February 10, 2017,
the number of shares of common stock of the registrant outstanding was 30,773,493 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement for the 2017 annual meeting of shareholders are incorporated by reference into Part III of this annual report on Form 10-K 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 10-K.
Forward-Looking Statements and Factors that Could Affect Future Results
PART I
Certain statements contained in this annual report on Form 10-K that are not statements of historical fact constitute forward-
looking 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 forward-looking statements within the meaning of the Act.
Examples of forward-looking 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 forward-looking statements but are not the exclusive means of
identifying such statements.
Forward-looking 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 forward-looking 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 Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), changes in
capital standards, other regulatory reform, including but not limited to regulations promulgated by the Consumer
Financial Protection Bureau (the "CFPB"), government-sponsored 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 forward-
looking 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 forward-looking statements contained in this Form 10-K. Forward-looking statements speak
only as of the date on which such statements are made. We undertake no obligation to update any forward-looking 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, 2016, we had total assets of $5.38 billion, total loans of $3.52 billion, total
deposits of $4.61 billion and shareholders' equity of $504.7 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 full-service commercial banking with 35 bank branches and 103 ATMs located
throughout the state of Hawaii. Our administrative and main offices are located in Honolulu and we have 27 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 full-service 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 26 - 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 and the tourism industry, as well as the fiscal and
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regulatory policies of the federal 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 adjustable-rate loans primarily secured
by single-family, owner-occupied residences in Hawaii and home equity lines of credit and loans. We typically require
loan-to-value 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 $0.5
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 middle-market 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 multi-family 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 FDIC-insured financial institutions in Hawaii, Central Pacific Bank was the fourth-
largest depository institution in the state at December 31, 2016.
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 73% of our loan portfolio at December 31, 2016
consisted of real estate-related loans, including residential mortgage loans, commercial mortgage loans and construction 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 wholly-owned principal subsidiary of Central Pacific Financial Corp. Other wholly-owned
subsidiaries include: CPB Capital Trust II; CPB Statutory Trust III; CPB Capital Trust IV; and CPB Statutory Trust V.
As of December 31, 2016, Central Pacific Bank does not have any wholly-owned 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. In addition, President Trump has announced
generally that he intends to scale back regulatory requirements on businesses. We also cannot predict whether or when
regulatory requirements may be reduced or eliminated and the overall affect such reduction or elimination may have on the
Company and the bank.
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 Sarbanes-Oxley 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.
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Central Pacific Bank, as a Hawaii state-chartered 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
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 Dodd-Frank 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 of new capital rules ("New Capital Rules") and the
so called Volcker Rule restrictions on certain proprietary trading and investment activities, recent developments include:
(i) the extension of the Volcker Rule conformance period until July 21, 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, 2016 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 continued implementation of an additional "capital conservation buffer" increasing to 1.25% in 2017 for
minimum risk-weighted 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 of the final TILA-RESPA Integrated Disclosure ("TRID") rules issued by the CFPB as required
by the Dodd-Frank 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 state-bank, the bank holds no reserve bank stock.
(vii) the pronouncement by the Office of the Comptroller of the Currency of a limited-purpose “fintech” national bank
charter which would enable a fintech company to originate loans and access the payment system directly, without relying on
third-party banks. Such a development could further increase competition in the financial services sector, including with the
Company and the bank.
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; anti-money 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 risk-based 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 off-balance sheet items, such as commitments, letters of credit
and recourse arrangements. The risk-based capital ratio is determined by classifying assets and certain off-balance sheet
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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 risk-adjusted assets and off-balance 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 risk-based capital standards. To the
extent that the new rules are not fully phased in, the prior capital rules continue to apply.
The New Capital Rules revised the previous risk-based 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 phased-in basis to all banking organizations, including the Company and the bank.
Management believes that, as of December 31, 2016, the Company and the bank would meet all applicable capital requirements
under the New Capital Rules on a fully phased-in basis if such requirements were currently in effect. If the Company were to
cross the $10 billion or more asset threshold, its compliance costs and regulatory requirements, including the requirement to
conduct an annual company-run stress test, would increase.
Under the risk-based capital guidelines in place prior to the effectiveness of the new capital Rules, there were three
fundamental capital ratios: a total risk-based capital ratio, a Tier 1 risk-based capital ratio and a Tier 1 leverage ratio. To be
deemed "well capitalized," a bank must have a total risk-based capital ratio, a Tier 1 risk-based 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 phased-in beginning January 1, 2015:
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an increase in the minimum Tier 1 capital ratio from 4.00% to 6.00% of risk-weighted assets;
a new category and a required 4.50% of risk-weighted assets ratio is established for common equity Tier 1 ("CET1")
as a subset of Tier 1 capital limited to common equity;
a minimum non-risk-based 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 risk-weights of certain assets for purposes of calculating the risk-based capital ratios are changed for high volatility
commercial real estate acquisition, development and construction loans, certain past due non-residential mortgage
loans and certain mortgage-backed 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 over four years beginning in 2016 at the rate of
0.625% of risk-weighted assets (1.25% in 2017) 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, 2016, the respective capital ratios of the Company and the bank exceeded the
minimum percentage requirements to be deemed "well-capitalized" 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 high-quality 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
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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: well-capitalized, adequately capitalized,
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 well-capitalized, 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 well-capitalized, 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 Dodd-Frank 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, 2016 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
Requirements" 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 source-of-strength 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;
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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;
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 anti-money 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 Gramm-Leach-Bliley 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
Dodd-Frank 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 non-compliance 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 the 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
Company is also subject to restrictions on dividends under applicable Hawaii law.
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, including restrictions under applicable Hawaii law,
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 state-chartered 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 collateral for certain loans, servicing and foreclosing on loans,
transactions with affiliates, officers, directors and other insiders, borrowings, capital requirements, certain check-clearing
activities, branching, and mergers and acquisitions.
9
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) interest-rate 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
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 currently 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, or receive adverse results from an
examination 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 Dodd-Frank 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. Effective July 1, 2016, the FDIC imposed 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.
Compensation
The Dodd-Frank Act requires the federal bank regulators and the SEC to establish joint regulations or guidelines prohibiting
incentive-based payment arrangements at specified regulated entities, including the Company and the Bank, having at least $1
billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal
stockholder with excessive compensation, fees or benefits or that could lead to material financial loss to the entity. In addition,
these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based
10
compensation arrangements. The agencies proposed such regulations initially in April 2011 and in April 2016, the Federal
Reserve and other federal financial agencies re-proposed restrictions on incentive-based compensation. For institutions with at
least $1 billion but less than $50 billion in total consolidated assets, such as the Company and the Bank, the proposal would
impose principles-based restrictions that are broadly consistent with existing interagency guidance on incentive-based
compensation. Such institutions would be prohibited from entering into incentive compensation arrangements that encourage
inappropriate risks by the institution (1) by providing an executive officer, employee, director, or principal shareholder with
excessive compensation, fees, or benefits, or (2) that could lead to material financial loss to the institution. The proposal would
also impose certain governance and recordkeeping requirements on institutions of the Company’s and the Bank’s size. The
regulatory organizations would reserve the authority to impose more stringent requirements on institutions of the Company’s
and the Bank’s size. We are evaluating the expected impact of the proposal on our business.
Operations and Consumer Compliance Laws
The bank must comply with numerous federal and state anti-money 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 CAN-SPAM 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, and the loss of certain
contractual rights.
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. The bank's next
examination is expected to take place in 2017.
CFPB
The Dodd-Frank Act provided for the creation of the CFPB as an independent entity with broad rulemaking, supervisory and
enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-
equity loans and credit cards. The CFPB’s functions include investigating consumer complaints, conducting market research,
rulemaking, and enforcing rules related to consumer financial products and services. CFPB regulations and guidance apply to
all covered persons, and banks with $10 billion or more in assets are subject to supervision including examination by the
CFPB. Banks with less than $10 billion in assets, including the bank, will continue to be examined for compliance by their
primary federal banking agency.
The CFPB has finalized a number of significant rules which impact nearly every aspect of the lifecycle of a residential
mortgage loan. These rules implement the Dodd-Frank Act amendments to the Equal Credit Opportunity Act, the Truth in
Lending Act and the Real Estate Settlement Procedures Act. Among other things, the rules adopted by the CFPB require
covered persons including banks making residential mortgage loans to: (i) develop and implement procedures to ensure
compliance with an "ability-to-repay" test and identify whether a loan meets a new definition for a "qualified mortgage", in
which case a rebuttable presumption exists that the creditor extending the loan has satisfied the ability-to-repay test; (ii)
implement new or revised disclosures, policies and procedures for originating and servicing mortgages including, but not
limited to, pre-loan counseling, early intervention with delinquent borrowers and specific loss mitigation procedures for loans
secured by a borrower's principal residence; (iii) comply with additional restrictions on mortgage loan originator hiring and
compensation; (iv) comply with new disclosure requirements and standards for appraisals and certain financial products; and
(v) maintain escrow accounts for higher-priced mortgage loans for a longer period of time.
The review of products and practices to prevent unfair, deceptive or abusive acts or practices ("UDAAP") is a continuing focus
of the CFPB, and of banking regulators more broadly. The ultimate impact of this heightened scrutiny is uncertain but could
result in changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory
oversight, supervision and examination, additional remediation efforts and possible penalties. In addition, the Dodd-Frank Act
11
provides the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products
and services, including the ability to require reimbursements and other payments to customers for alleged violations of UDAAP
and other legal requirements and to impose significant penalties, as well as injunctive relief that prohibits lenders from
engaging in allegedly unlawful practices. The CFPB also has the authority to obtain cease and desist orders providing for
affirmative relief or monetary penalties. The Dodd-Frank Act does not prevent states from adopting stricter consumer
protection standards. State regulation of financial products and potential enforcement actions could also adversely affect the
bank’s business, financial condition or results of operations.
The federal bank regulators have adopted rules limiting the ability of banks and other financial institutions to disclose non-
public information about consumers to unaffiliated third parties. These limitations require disclosure of privacy policies to
consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated
third party. These regulations affect how consumer information is transmitted through diversified financial companies and
conveyed to outside vendors. In addition, consumers may also prevent disclosure of certain information among affiliated
companies that is assembled or used to determine eligibility for a product or service, such as that shown on consumer credit
reports and asset and income information from applications. Consumers also have the option to direct banks and other financial
institutions not to share information about transactions and experiences with affiliated companies for the purpose of marketing
products or services.
Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve adopted rules establishing standards for assessing
whether the interchange fees that may be charged with respect to certain electronic debit transactions are “reasonable and
proportional” to the costs incurred by issuers for processing such transactions.
Interchange fees, or “swipe” fees, are charges that merchants pay to us and other card-issuing banks for processing electronic
payment transactions. Under the final rules, the maximum permissible interchange fee is equal to no more than 21 cents plus 5
basis points of the transaction value for many types of debit interchange transactions. The Federal Reserve also adopted a rule
to allow a debit card issuer to recover one cent per transaction for fraud prevention purposes if the issuer complies with certain
fraud-related requirements required by the Federal Reserve. The Federal Reserve also has rules governing routing and
exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product.
Currently, we qualify for the small issuer exemption from the interchange fee cap, which applies to any debit card issuer that,
together with its affiliates, has total assets of less than $10 billion as of the end of the previous calendar year. We will become
subject to the interchange fee cap beginning July 1 of the year following the time when our total assets reaches or exceeds $10
billion. Reliance on the small issuer exemption does not exempt us from federal regulations prohibiting network exclusivity
arrangements or from routing restrictions, however .
Commercial Real Estate Concentration Limits
In December 2006, the federal banking regulators issued guidance entitled “Concentrations in Commercial Real Estate
Lending, Sound Risk Management Practices” to address increased concentrations in commercial real estate, or CRE, loans. In
addition, in December 2015, the federal bank agencies issued additional guidance entitled “Statement on Prudent Risk
Management for Commercial Real Estate Lending.” Together, these guidelines describe the criteria the agencies will use as
indicators to identify institutions potentially exposed to CRE concentration risk. An institution that has (i) experienced rapid
growth in CRE lending, (ii) notable exposure to a specific type of CRE, (iii) total reported loans for construction, land
development, and other land representing 100% or more of the institution’s capital, or (iv) total CRE loans representing 300%
or more of the institution’s capital, and the outstanding balance of the institutions CRE portfolio has increased by 50% or more
in the prior 36 months, may be identified for further supervisory analysis of the level and nature of its CRE concentration risk.
As of December 31, 2016, the bank’s total CRE loans represented 25.1% of its capital.
Future Legislation and Regulation
Congress may enact, modify or repeal legislation from time to time that affects the regulation of the financial services industry,
and state legislatures may enact, modify or repeal legislation from time to time affecting the regulation of financial institutions
chartered by or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to
their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future
legislation or regulation, or the application thereof, cannot be predicted, although enactment of proposed legislation (or
modification or repeal of existing legislation) could impact the regulatory structure under which the Company and bank operate
and may significantly increase its costs, impede the efficiency of its internal business processes, require the bank to increase its
regulatory capital and modify its business strategy, and limit its ability to pursue business opportunities in an efficient manner.
The Company's business, financial condition, results of operations or prospects may be adversely affected, perhaps materially.
12
Employees
At December 31, 2016, we employed 837 persons, 745 on a full-time basis and 92 on a part-time 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 carry-forwards 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 "5-percent shareholders" (as defined under U.S. income tax laws) that exceeded 50 percentage points over a
rolling three-year 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 was 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"). 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 did 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 allowed the
Protective Charter Amendment to also naturally expire in accordance with its terms on May 2, 2016.
Available Information
Our internet website can be found at www.centralpacificbank.com. Our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K 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 non-GAAP 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.
13
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.
Our business and operations are sensitive to business and economic conditions globally and domestically. Adverse economic
and business conditions in the U.S. generally, and in our market areas, in particular, could reduce our growth rate, affect our
borrowers' ability to repay their loans and, consequently, adversely affect our financial condition and performance. Other
economic conditions that affect our financial performance include short-term and long-term interest rates, the prevailing yield
curve, inflation and price levels (particularly for real estate), monetary policy, unemployment and the strength of the domestic
economy as a whole. Unfavorable market conditions can result in a deterioration in the credit quality of our borrowers and the
demand for our products and services, an increase in the number of loan delinquencies, defaults and charge-offs, additional
provisions for loan losses, adverse asset values and an overall material adverse effect on the quality of our loan portfolio.
Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or
investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in
inflation or interest rates; high unemployment; natural disasters; or a combination of these or other factors.
Difficult economic and market conditions in Hawaii would result in significant adverse effects on us because of the
geographic concentration of our business.
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 service-based 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.
In addition, the high concentration of Hawaii real estate loans in our portfolio, combined with the deterioration in these sectors
caused by an 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 and concentration of our loan
portfolio, which will have an adverse effect on our financial condition and results of operations.
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 six consecutive years from 2011 through 2016, 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
14
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 charge-offs, and our allowance for loan and lease losses. Even if economic conditions improve or stay
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 73% of our loan portfolio as of
December 31, 2016 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 single-family 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:
•
•
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 real estate loans, we made significant enhancements to our allowance for loan and lease losses methodology
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. See Note 1 - Summary of Significant Accounting Policies.
We are required to act as a source of financial and managerial strength for our bank.
We are required to act as a source of financial and managerial strength to the bank. We may be required to commit additional
resources to the bank at times when we may not be in a financial position to provide such resources or when it may not be in
15
our, or our shareholders’ best interests to do so. Providing such support is more likely during times of financial stress for us and
the bank, which may make any capital we are required to raise to provide such support more expensive than it might otherwise
be. In addition, any capital loans we make to the bank are subordinate in right of payment to depositors and to certain other
indebtedness of the bank.
Changes in our accounting policies or in accounting standards could materially affect how we report our financial results
and condition.
Periodically the Financial Accounting Standards Board (the "FASB") and the Securities and Exchange Commission change the
financial accounting and reporting standards that govern the preparation of our financial statements. As a result of changes to
financial accounting or reporting standards, whether promulgated or required by the FASB or other regulators, we could be
required to change certain of the assumptions or estimates we have previously used in preparing our financial statements, which
could adversely affect our business, financial condition and results of operations.
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 multi-family residential properties,
industrial, warehouse, general office, retail, health care and religious dwellings. Commercial and commercial real estate loans
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, charge-offs 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.
We rely on the mortgage secondary market for some of our liquidity.
We originate and sell mortgage loans. We rely on Federal National Mortgage Association ("Fannie Mae"), Federal Home Loan
Mortgage Corporation ("Freddie Mac") and other purchasers to purchase first mortgage loans in order to reduce our credit risk
and provide funding for additional loans we desire to originate. We cannot provide assurance that these purchasers will not
materially limit their purchases from us due to capital constraints or other factors, including, with respect to Fannie Mae and
Freddie Mac, a change in the criteria for conforming loans. In addition, various proposals have been made to reform the U.S.
residential mortgage finance market, including the role of Fannie Mae and Freddie Mac. The exact effects of any such reforms
are not yet known, but may limit our ability to sell conforming loans to Fannie Mae or Freddie Mac. In addition, mortgage
lending is highly regulated, and our inability to comply with all federal and state regulations and investor guidelines regarding
the origination, underwriting documentation and servicing of mortgage loans may also impact our ability to continue selling
mortgage loans. If we are unable to continue to sell loans in the secondary market, our ability to fund, and thus originate,
additional mortgage loans may be adversely affected, which could have a material adverse effect on our business, financial
condition or results of operations.
16
Consumer protection initiatives related to the foreclosure process could materially affect our ability as a creditor to obtain
remedies.
In 2011, Hawaii revised its rules for nonjudicial, or out-of-court, foreclosures. Prior to the revision, most lenders used the
nonjudicial foreclosure method to handle foreclosures in Hawaii, as the process was less expensive and quicker than going
through the court foreclosure process. After the revised rules went into effect, many lenders ended up forgoing nonjudicial
foreclosures entirely and filing all foreclosures in court, which has created a backlog and slowed the judicial foreclosure
process. Many lenders continue to exclusively use the judicial foreclosure process, making the foreclosure process very
lengthy. Additionally, the joint federal-state settlement with several mortgage services over abuse of foreclosure practices
creates further uncertainty for us and the mortgage servicing industry in general with respect to implementation of mortgage
loan modifications and loss mitigation practices going forward. The manner in which these issues are ultimately resolved could
impact our foreclosure procedures, which in turn could adversely affect our business, financial condition or results of
operations.
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 borrower-in-custody 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
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.
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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 interest-earning assets, such as loans and investment securities, and interest expense on interest-
bearing 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 interest-bearing liabilities will be more sensitive to changes in
market interest rates than our interest-earning 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 interest-bearing 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 non-banks 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 certain 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 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;
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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 institution-affiliated parties, and the enforcement
of such actions through injunctions or restraining orders. In addition, 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 stress-testing on our business
and operations.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money 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 anti-money 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 as well as our financial condition 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 and risk 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.
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 20.9% of our interest income in the year ended December 31, 2016, as
compared to 23.7% of our interest income in the year ended December 31, 2015. 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 non-agency 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.
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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 market-wide 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 non-depository 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 non-bank service providers. Additional increases in short-term 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 short-term and long-term interest rates, could also
reduce our net interest income and net interest margin. Historically, the yield curve is upward sloping, meaning short-term rates
are lower than long-term 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 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 and our liquidity.
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, 2016, the bank had Statutory Retained
Earnings of $83.9 million. In addition, regulatory authorities could limit the ability of the bank to pay dividends to CPF. The
inability to receive dividends from the bank could have a material adverse effect on our financial condition, results of
operations and prospects.
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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. We cannot provide any assurance that we will continue to pay dividends.
The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related
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 cybersecurity-related
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 cybersecurity-related incidents may include fraudulent or unauthorized
access to systems used by us, our vendors, or our clients, denial or degradation of service attacks, and malware or other cyber-
attacks. In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks
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 cybersecurity-related 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 third-party 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 cyber-attacks 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 cyber-related problems could inhibit the use or growth of
electronic or web-based 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
technology-driven 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
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.
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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 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 non-banks 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.
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 long-term 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.
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In addition, 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 Chief Financial Officer, our Chief Information Officer, our Chief Credit Officer, and
certain other employees.
We are subject to environmental liability risk associated with our bank branches and any real estate collateral we acquire
upon foreclosure.
During the ordinary course of business, we may foreclose on and take title to properties securing certain loans that we have
originated or acquired. We also own several of our branch locations. For any real property that we may possess, there is a risk
that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be
liable for remediation costs, as well as for personal injury and property damage and costs of complying with applicable
environmental regulatory requirements. Failure to comply with such requirements can result in penalties. Environmental laws
may require us to incur substantial expenses and may materially reduce the affected property's value or limit our ability to use,
sell or lease the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect
to existing laws may increase our exposure to environmental liability. The remediation costs and any other financial liabilities
associated with an environmental hazard could have a material adverse effect on our business, financial condition or results of
operations.
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.
Frequent or rapid changes in procedures, methodologies, systems and technology exacerbate the challenge of developing and
maintaining a system of internal controls and can increase the cost and level of effort to develop and maintain such systems.
As of December 31, 2016, management conducted an assessment of the effectiveness of the Company’s internal control over
financial reporting based on the framework established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013). Based on this assessment, management identified a material
weakness in internal controls over the completeness and accuracy of the information used in determining the allowance for loan
and lease losses. See Item 9A, “Controls and Procedures” in this Form 10-K for additional information. Although the
Company has already commenced efforts to remediate the material weakness, there can be no assurance that management will
be able to remediate the material weakness in a timely manner, which could adversely affect our business and our ability to
report our financial condition and results of operations accurately and on a timely basis.
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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:
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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.
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Anti-takeover 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 third-party from acquiring us, even if doing so might be beneficial to our shareholders. These include, among other
things, 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, 2016,
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 short-term borrowings of $135.0 million as of December 31, 2016. 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.
25
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
Certifications
We have filed the required certifications under Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 to this
annual report on Form 10-K for the fiscal year ended December 31, 2016. Last year, we submitted to the NYSE on May 5,
2016 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 28, 2017.
ITEM 2.
PROPERTIES
We hold title to the land and building in which our Main branch office and headquarters, Hilo branch office, Kailua-Kona
branch office, Pearl City branch office and certain operations offices are located. We also hold title to a portion of the land our
operations center is located. The remaining portion of the land where our operations center is located is 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, 2016, see Note 19 - Operating
Leases 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
26
PART II
ITEM 5.
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS
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, 2011 and ending December 31, 2016. The graph assumes the investment of $100
on December 31, 2011.
Indexed Total Annual Return
(as of December 31, 2016)
Index
Central Pacific Financial Corp.
Russell 2000
S&P 600 Commercial Bank Index
2011
2012
2013
2014
2015
2016
$
100.00
$
120.67
$
156.78
$
171.11
$
181.61
$
100.00
100.00
116.35
114.85
161.52
174.13
169.43
180.09
161.95
191.70
265.60
196.45
277.59
December 31,
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 2016 and 2015:
27
First quarter
Second quarter
Third quarter
Fourth quarter
Year Ended December 31,
2016
2015
High
Low
High
Low
$
21.98
$
18.47
$
25.34
$
24.91
25.99
31.99
20.15
22.61
24.54
24.81
24.31
24.69
20.52
20.75
20.38
21.61
As of February 10, 2017, there were 2,571 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
2016 and 2015. 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,
2016
2015
$
$
0.14
0.14
0.16
0.16
0.12
0.12
0.12
0.46
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.
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. During the third quarter of 2016, the Company increased its quarterly cash dividend to $0.16 per share.
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.
Under the terms of our trust preferred securities, our ability to pay dividends with respect to common stock would be restricted
if our obligations under our trust preferred securities were not current. Our obligations on our outstanding trust preferred
securities are current as of December 31, 2016.
Additionally, our ability to pay dividends depends on our ability to obtain dividends from our bank. As a Hawaii state-chartered
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, 2016, the bank had Statutory Retained
Earnings of $83.9 million. In addition, the bank's regulators could impose limitations or conditions on the bank's ability to pay
dividends to the Company.
See "Part I, Item 1. Business — Supervision and Regulation — Regulatory Actions" for a discussion on regulatory restrictions.
Issuer Purchases of Equity Securities
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
28
program (the "2016 Repurchase Plan"). The 2016 Repurchase Plan replaced and superseded in its entirety the previous share
repurchase program.
During the quarter ended December 31, 2016, 159,900 shares of common stock, at a cost of $4.1 million, excluding fees and
expenses, were repurchased under the 2016 Repurchase Plan. A total of $11.8 million remained available for repurchase under
the 2016 Repurchase Plan at December 31, 2016.
Issuer Purchases of Equity Securities
Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Programs
Maximum
Number
of Shares
that May Yet
Be Purchased
Under the
Program
Dollar Value
of Shares
Purchased
as Part of
Publicly
Announced
Programs
Maximum
Dollar Value
of Shares
that May Yet
Be Purchased
Under the
Program
Total Number
of Shares
Purchased
Average
Price Paid
per Share
84,000
$
69,550
6,350
159,900
$
25.23
26.08
29.77
25.78
84,000
69,550
6,350
159,900
— $
2,119,467
$ 13,793,350
—
—
1,814,017
189,063
11,979,333
11,790,270
— $
4,122,547
$ 11,790,270
Period
October 1-31
November 1-30
December 1-31
Total
During the entire year of 2016, 796,822 shares of common stock, at a cost of $18.2 million, excluding fees and expenses, were
repurchased under the 2016 Repurchase Plan.
In January 2017, 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 "2017 Repurchase Plan"). The 2017 Repurchase Plan replaces and supersedes in its entirety the 2016 Repurchase
Plan. We cannot provide any assurance that we will be able to repurchase any of our common stock. In addition, our ability to
repurchase common stock may be restricted by applicable federal or Hawaii law or by our regulators.
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."
29
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial information for each of the years in the five-year period ended December 31,
2016. 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 Income 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 (1)
Other operating expense (1)
Income before income taxes
Income tax expense (benefit)
Net income
Balance Sheet Data (as of Year-End):
Interest-bearing deposits in other banks
Investment securities (2)
Loans and leases
Allowance for loan and lease losses
Mortgage servicing rights
Other intangible assets
Total assets
Core deposits (3)
Total deposits
Long-term debt
Total shareholders’ equity
Per Share Data:
Basic earnings per common share
Diluted earnings per common share
Cash dividends declared per common share
Book value per common share
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
Dividend payout ratio
Efficiency ratio (1) (4)
Net interest margin (5)
Asset Quality:
Net loan charge-offs (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
Year Ended December 31,
2016
2015
2014
2013
2012
(Dollars in thousands, except per share data)
$ 167,139
$ 156,035
$ 149,809
$ 140,278
$ 128,445
9,189
157,950
(5,517)
163,467
42,316
133,563
72,220
25,228
46,992
6,507
149,528
(15,671)
165,199
34,799
127,042
72,956
27,088
45,868
6,391
143,418
(6,414)
149,832
41,166
130,156
60,842
20,389
40,453
7,169
133,109
(11,310)
144,419
50,201
134,792
59,828
(112,247)
172,075
8,734
119,711
(18,885)
138,596
54,239
145,414
47,421
—
47,421
$
9,069
$
8,397
$
13,691
$
4,256
$ 120,902
1,461,515
3,524,890
1,520,172
3,211,532
1,467,305
2,932,198
1,660,046
2,630,601
1,698,593
2,203,944
56,631
15,779
4,680
5,384,236
3,713,567
4,608,201
92,785
504,650
63,314
17,797
7,355
5,131,288
3,582,178
4,433,439
92,785
494,614
74,040
19,668
10,029
4,852,987
3,306,133
4,110,300
92,785
568,041
83,820
20,079
12,704
4,741,198
3,093,279
3,936,173
92,799
660,113
96,413
22,121
15,378
4,370,368
3,006,657
3,680,772
108,281
504,822
$
1.52
1.50
0.60
16.39
31,225
$
1.42
1.40
0.82
16.06
32,651
$
1.08
1.07
0.36
16.12
37,937
$
4.10
4.07
0.16
15.68
42,317
$
1.14
1.13
—
12.06
42,084
0.90%
0.92%
0.85%
3.73%
1.13%
9.16
9.27
9.78
40.00
66.69
3.27
0.03
0.24
1.61
8.91
9.06
10.37
58.57
68.92
3.30
(0.16)
0.44
1.97
6.80
6.93
12.50
33.64
70.51
3.32
0.12
1.33
2.53
27.70
28.34
13.47
3.93
73.53
3.19
0.05
1.58
3.19
9.81
10.17
11.49
N/A
83.60
3.10
0.32
3.60
4.37
Allowance for loan and lease losses to nonaccrual loans (6)
674.50
443.75
189.42
201.55
121.53
(1)
(2)
(3)
(4)
(5)
(6)
Amortization of mortgage servicing rights has been reclassified from other operating expense to other operating income in the consolidated
statements of income. Prior period amounts have been reclassified to conform to the current period presentation. See Note 1 - Summary of
Significant Accounting Policies and Note 15 - Mortgage Banking Income.
Held-to-maturity securities at amortized cost, available-for-sale securities at fair value.
Noninterest-bearing demand, interest-bearing demand and savings deposits, and time deposits under $100,000.
The efficiency ratio is a non-GAAP 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). Prior period amounts have been revised to conform to current period which reflects reclassifications referred to in note (1).
See Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations —Table 5 - Reconciliation of Efficiency
Ratio.
Computed on a taxable equivalent basis using an assumed income tax rate of 35%.
Nonaccrual loans exclude nonaccrual loans-held-for-sale, if any.
Five Year Performance Comparison
Significant items affecting the comparability of the five years' performance include:
(Dollars in thousands)
2016
2015
2014
2013
2012
Year Ended December 31,
Provision (credit) for loan and lease losses:
$
(5,517) $
(15,671) $
(6,414) $
(11,310) $
(18,885)
Other operating income:
Mortgage banking income
Net gain on sales of foreclosed assets
Investment securities gains (losses)
Gain on early extinguishment of debt (included in other)
Gain on sale of premises and equipment
Other operating expense:
Share-based compensation (included in salaries and employee
benefits)
Pension obligation settlement (included in salaries and employee
benefits)
One-time reversal of an accrual for a former executive's
retirement benefits that will not be paid (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)
Write-down of assets
8,069
607
—
—
3,537
3,094
3,848
—
—
152
660
2,052
7,254
568
(1,866)
—
—
8,980
11,636
971
240
—
—
8,584
482
1,000
—
16,727
4,999
789
—
—
4,181
6,101
6,367
4,432
—
(2,400)
—
486
2,559
2,706
—
—
979
1,710
565
2,848
—
—
3,042
1,036
1,142
2,727
—
—
—
6,887
780
4,867
(387)
(1,352)
467
(130)
(2,022)
141
737
—
—
(271)
—
—
—
(373)
1,336
—
—
(3,501)
(1,680)
—
1,895
—
—
—
2,586
Income tax expense (benefit):
25,228
27,088
20,389
(112,247)
—
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.
We strive to provide exceptional customer service and products that meet our customers' needs. Our products and services
consist primarily of the following:
•
Loans: Our loans consist of commercial, commercial mortgage, and construction loans to small and medium-sized
companies, business professionals, and real estate investors and 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 reported in interest income.
• Deposits: We offer a full range of deposit products and services including checking, savings and time deposits, cash
management, and electronic banking services. 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 non-deposit investment products, annuities,
insurance, investment management, asset custody and general consultation and planning services.
Executive Overview
In 2016 we continued to achieve key objectives for the Company.
• We recorded our sixth consecutive profitable year in 2016 with net income of $47.0 million, or $1.50 per diluted
common share.
• We saw continued improvement in our asset quality as our nonperforming assets declined by $7.0 million to $9.2
million at December 31, 2016 from $16.2 million at December 31, 2015.
• As a result of the continued improvement in our credit risk profile, we were able to further reduce our allowance for
loan and lease losses (the "Allowance"), which again resulted in a positive impact to earnings. Our total provision for
loan and lease losses (the "Provision") was a credit of $5.5 million, compared to a credit of $15.7 million in 2015.
• With the improving market conditions in Hawaii, together with our efforts to expand and strengthen customer
relationships, we realized strong loan growth of $313.4 million, or 9.8%, as well as an increase of $131.4 million, or
3.7% in our core deposit base in 2016.
• Our capital position remained strong, supported by six 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 $0.50 per
share in 2015 to $0.60 per share in 2016. In December 2015, we also paid a special cash dividend of $0.32 per share.
•
In 2016, our strong capital position and consistent profitability also allowed us to execute on our stock buyback
program and repurchase 796,822 shares, or approximately 2.5% of outstanding shares as of December 31, 2015.
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 the U.S. economy is in its 7th year of recovery following the downturn, there is continued uncertainty in the U.S. and
global macroeconomic environments. Job gains have been moderate and wages have not increased significantly, while inflation
has remained below the Federal Reserve's long term objective and business fixed investment remains low. Furthermore. the
33
policy actions of the new U.S. Presidential Administration also add further uncertainty to the economic and regulatory
environment until policy details are solidified.
The majority of our operations are concentrated in the state of Hawaii. As a result, our performance is significantly influenced
by the real estate markets and economic environment in Hawaii. Macroeconomic conditions also influence our performance. A
favorable business environment is generally characterized by expanding gross state product, low unemployment and rising
personal income; while an unfavorable business environment is characterized by the reverse.
Hawaii's general economic conditions continued to improve in 2016. Tourism continues to be Hawaii's center of strength and
its most significant economic driver. For the fifth straight year, Hawaii's strong visitor industry broke records for visitor arrivals
and visitor spending. According to the Hawaii Tourism Authority ("HTA"), 8.9 million total visitors arrived in the state in 2016.
This was an increase of 3.0% from the previous high of 8.7 million visitor arrivals in 2015. The HTA also reported that total
spending by visitors increased to $15.61 billion in 2016, an increase of 4.2%, from the previous high of $14.98 billion in 2015.
According to the Hawaii Department of Business Economic Development & Tourism ("DBEDT"), total visitor arrivals and
visitor spending are expected to gain 1.8% and 4.0% in 2017, respectively.
Hawaii's labor market conditions also continued to improve in 2016. The Department of Labor and Industrial Relations
reported that Hawaii's seasonally adjusted annual unemployment rate improved to 2.9% in December 2016, compared to 3.3%
in December 2015. The last time the seasonally adjusted annual unemployment rate was at 2.9% was in September 2007. In
addition, Hawaii's unemployment rate in December 2016 of 2.9%, which is among the lowest in the nation, remained below the
national seasonally adjusted unemployment rate of 4.7%. DBEDT projects Hawaii's seasonally adjusted annual unemployment
rate to be 3.4% in 2017.
Real personal income and real gross state product grew by approximately 2.4% and 2.0%, respectively, in 2016. DBEDT
projects real personal income and real gross state product to grow by 2.6% and 1.9%, respectively, in 2017. 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 2017.
Real estate lending is 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 2016. According
to the Honolulu Board of Realtors, Oahu single-family home prices soared to record highs in 2016. The median resale price in
2016 for single-family homes on Oahu was $735,000, representing an increase of 5.0% from the median resale price of
$700,000 in 2015. The median resale price for condominiums on Oahu was $390,000 in 2016, representing an increase of 8.3%
from the median resale price of $360,000 in 2015. Oahu unit sales volume increased by 6.5% for single-family homes and
increased by 8.4% for condominiums in 2016 from 2015. We believe the Hawaii real estate market will continue to remain
strong in 2017, 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
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.
34
Allowance for Loan and Lease Losses
The Allowance is management's estimate of incurred credit losses 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 incurred in our loan and lease
portfolio. At December 31, 2016, we had an Allowance of $56.6 million, compared to $63.3 million at December 31, 2015.
During the fourth quarter of 2016, the Company implemented an enhanced Allowance methodology due to the growth in the
portfolio and improved credit quality. Management believes the enhanced methodology provides for greater precision in
calculating the Allowance. The following summarizes the key enhancements made to the Allowance methodology:
• Collapsed 128 segments into nine segments. The enhanced methodology uses FDIC Call Report codes to identify the
nine segments.
• Expanded the look-back period to 28 quarters to capture a longer economic cycle.
• Utilized a migration analysis, versus average historical loss rate, to determine the historical loss rates for segments,
with the exception of national syndicated loans due to limited loss history.
• Applied a segment specific loss emergence period.
• Determined qualitative reserves, calculated at the segment level, considering nine qualitative factors and based on a
baseline risk weighting adjusted for current internal and external factors.
• Eliminated the Moody's proxy rate that was applied under the previous methodology.
• Eliminated the unallocated reserve.
These enhancements and continued improvement in portfolio credit quality resulted in a credit to the Provision of $2.6 million
during the fourth quarter of 2016.
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 qualitative
adjustments based on environmental and other factors which may be internal or external to the Company.
Specific Reserve
Individually impaired loans in all loan categories are evaluated using one of three valuation methods as prescribed under
Accounting Standards Codification ("ASC") 310-10, 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: risk-rated 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. The Company did not record a specific reserve as of December 31, 2016, compared to $51 thousand at
December 31, 2015.
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. The enhanced methodology segments the portfolio by FDIC Call Report codes.
This results in nine segments, and is more consistent with industry practice. For the purpose of determining general allowance
loss factors, loss experience is derived from a migration analysis, with the exception of national syndicated loans where an
average historical loss rate is applied due to limited historical loss experience. The key inputs to run a migration analysis are the
length of the migration period, the dates for the migration periods to start and the number of migration periods used for the
analysis. For each migration period, the analysis will determine the outstanding balance in each segment and/or sub-segment at
the start of each period. These loans will then be followed for the length of the migration period to identify the amount of
associated charge-offs and recoveries. A loss rate for each migration period is calculated using the formula ‘net charge-offs over
the period divided by beginning loan balance'. The Allowance methodology applies a look back period to January 1, 2010. The
Company intends to extend its look back period moving forward.
Qualitative Adjustments
Our Allowance methodology uses qualitative adjustments to address changes in conditions, trends, and circumstances such as
economic conditions and industry changes that could have a significant impact on the risk profile of the loan portfolio, and
provide for losses in the loan portfolio that may not be reflected and/or captured in the historical loss data. In order to ensure
that the qualitative adjustments are in compliance with current regulatory standards and U.S. GAAP, the Company is primarily
35
basing adjustments on the nine standard factors outlined in the FRB's 2006 Interagency Policy Statement on the Allowance for
Loan and Lease Losses. These factors include: lending policies, economic conditions, loan profile, lending staff, problem loan
trends, loan review, collateral, credit concentrations and other internal & external factors.
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 adjustments are applied to factor in current loan portfolio and
market intelligence. These adjustments, which are added to the historical loss rate, consider the nature of the Company's
primary markets and are reasonable, consistently determined and appropriately documented. Management reviews the results
of the qualitative adjustment quarterly 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.
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
non-residential Hawaii and U.S. Mainland loans are recorded at the lower of cost or fair value on an individual basis.
When a non-residential 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 write-down 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 non-residential mortgage loans classified as held for sale net of applicable selling costs on our consolidated balance sheets.
As of December 31, 2016 and 2015, 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 a component
of mortgage banking income in the other operating income section of our consolidated statements of income. Ancillary income
is recorded in other income. Mortgage servicing rights are recorded when loans are sold to third-parties 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.
36
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.
We may 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.
Defined Benefit Retirement Plan
Defined benefit plan obligations and related assets of our defined benefit retirement plan are presented in Note 17 - Pension
Plans 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 long-term 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, 2016, we used a weighted-average discount rate of 4.1% and an expected long-term rate of return on plan
assets of 6.0%, which affected the amount of pension liability recorded as of year-end 2016 and the amount of pension expense
to be recorded in 2017. At December 31, 2015, we used a weighted-average discount rate of 4.3% and an expected long-term
rate of return on plan assets of 7.0% in determining the pension liability recorded as of year-end 2015 and the amount of
pension expense recorded in 2016. 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 2016, 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 2017
pension expense by less than $0.1 million and year-end 2016 pension liability by $0.6 million, while a 0.25% change in the
asset return rate would impact 2017 pension expense by less than $0.1 million.
37
Overview of Results of Operations
2016 vs. 2015 Comparison
In 2016, we recognized net income of $47.0 million, or $1.50 per diluted common share, compared to net income of $45.9
million, or $1.40 per diluted common share, in 2015.
We recorded a credit to the Provision of $5.5 million in 2016, compared to $15.7 million in 2015.
Net interest income increased by $8.4 million from 2015 to 2016, primarily due to a significant increase in average loans and
leases, partially offset by lower yields earned on loans and leases and taxable investment securities, combined with higher rates
paid on time deposits $100,000 and over.
Other operating income increased by $7.5 million from 2015 to 2016. The increase in other operating income was due
primarily to a $3.5 million gain on the sale of the Company's fee interest in a former branch location in 2016, combined with
investment securities losses of $1.9 million recorded in 2015. In addition, we recorded higher mortgage banking income of $0.8
million and higher income from bank-owned life insurance of $0.7 million in 2016 compared to 2015.
Other operating expense increased by $6.5 million, primarily due to the increase in salaries and employee benefits of $7.1
million in 2016 compared to 2015. The higher salaries and employee benefits is primarily due to higher pension expense in
2016 of $4.2 million, combined with the one-time reversal of an accrual in the second quarter of 2015 of $2.4 million for a
former executive officer's retirement benefits which will not be paid. In the fourth quarter of 2016, Company executed a
defined benefit pension plan de-risking strategy whereby the Company purchased non-participating annuity contracts to settle
the pension obligation for a portion of its plan participants. This resulted in the immediate recognition of $3.8 million in net
actuarial losses.
In addition, income tax expense decreased by $1.9 million from 2015. The income tax expense and effective tax rate in 2015
was negatively impacted by $0.6 million in additional state income tax expense resulting from the reduction in deferred tax
liabilities related to the redemption of Federal Home Loan Bank of Des Moines membership stock in June 2015. The income
tax expense and effective tax rate in 2016 was positively impacted by $0.6 million in death benefit proceeds from bank-owned
life insurance received in 2016, compared to $0.2 million received in 2015, which are tax-exempt.
Our net income on average assets and average shareholders' equity for 2016 was 0.90% and 9.16%, respectively, compared to
0.92% and 8.91%, respectively, in 2015.
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, write-downs 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
38
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 pre-tax 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
Net Interest Income
The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the
yields and rates thereon. Net interest income, when expressed as a percentage of average interest-earning assets, is referred to
as "net interest margin." Interest income, which includes loan fees and resultant yield information, is expressed on a taxable
equivalent basis using 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 interest-earning assets and interest-bearing 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)
2016
Average
Yield/
Rate
Average
Balance
Amount
of Interest
Average
Balance
2015
Average
Yield/
Rate
Amount
of Interest
Average
Balance
2014
Average
Yield/
Rate
Amount
of Interest
(Dollars in thousands)
Assets
Interest-earning assets:
Interest-bearing deposits in other banks
$
13,143
0.51% $
67
$
13,966
0.25% $
35
$
13,207
0.25% $
33
Taxable investment securities (1)
Tax-exempt investment securities (1)
Total investment securities
1,307,946
173,062
1,481,008
Loans and leases, incl. loans-held-for-sale (2)
3,385,741
Federal Home Loan Bank stock
Total interest-earning assets
Non-earning assets
Total assets
10,534
4,890,426
359,687
$ 5,250,113
2.36
3.53
2.50
3.90
1.70
3.46
30,890
1,339,070
6,116
175,919
37,006
1,514,989
132,028
3,038,100
179
23,631
169,280
4,590,686
375,003
$ 4,965,689
2.46
3.52
2.59
3.91
0.36
3.45
33,005
1,344,821
6,188
178,275
39,193
1,523,096
118,887
2,798,826
86
45,185
158,201
4,380,314
379,502
$ 4,759,816
2.50
3.45
2.61
4.01
0.10
3.47
33,597
6,148
39,745
112,137
46
151,961
Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits
$ 844,507
0.06% $
489
$ 802,121
0.05% $
Savings and money market deposits
Time deposits under $100,000
Time deposits $100,000 and over
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Total liabilities
Shareholders' equity
Non-controlling interests
Total equity
0.07
0.38
0.38
0.17
0.52
3.24
0.26
1,406,754
204,940
879,989
3,336,190
110,928
92,785
3,539,903
1,156,906
40,029
4,736,838
513,255
20
513,275
0.07
0.37
0.17
0.12
0.28
2.83
0.20
1,043
1,276,830
770
3,304
5,606
578
3,005
9,189
227,288
844,376
3,150,615
92,045
92,785
3,335,445
1,072,998
42,203
4,450,646
515,043
—
515,043
373
901
1,069
1,384
3,727
92
2,572
6,391
399
916
838
1,474
3,627
254
2,626
6,507
$ 764,504
0.05% $
0.07
0.42
0.17
0.12
0.29
2.77
0.20
1,227,049
254,572
804,863
3,050,988
31,732
92,790
3,175,510
938,078
51,003
4,164,591
595,210
15
595,225
Total liabilities and equity
$ 5,250,113
$ 4,965,689
$ 4,759,816
Net interest income
Net interest margin
(1) At amortized cost.
(2)
Includes nonaccrual loans.
$
160,091
$
151,694
$
145,570
3.27%
3.30%
3.32%
40
Table 2. Analysis of Changes in Net Interest Income (Taxable Equivalent)
2016 Compared to 2015
2015 Compared to 2014
Increase (Decrease)
Due to Change In:
Increase (Decrease)
Due to Change In:
Volume
Rate
Net
Change
Volume
Rate
Net
Change
(Dollars in thousands)
Interest-earning assets
Interest-bearing deposits in other banks
$
(2) $
Taxable investment securities
Tax-exempt investment securities
Total investment securities
Loans and leases, incl. loans-held-for-sale
Federal Home Loan Bank stock
Total interest-earning assets
Interest-bearing liabilities
Interest-bearing demand deposits
Savings and money market deposits
Time deposits under $100,000
Time deposits $100,000 and over
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Total interest-bearing liabilities
(766)
(101)
(867)
13,593
(47)
12,677
21
91
(83)
61
90
53
—
143
$
34
(1,349)
29
(1,320)
(452)
140
(1,598)
$
32
(2,115)
(72)
(2,187)
13,141
93
11,079
69
36
15
1,769
1,889
271
379
2,539
90
127
(68)
1,830
1,979
324
379
2,682
2
(144)
(81)
(225)
9,587
(22)
9,342
19
35
(115)
67
6
175
—
181
$
— $
(448)
121
(327)
(2,837)
62
(3,102)
7
(20)
(116)
23
(106)
(13)
54
(65)
2
(592)
40
(552)
6,750
40
6,240
26
15
(231)
90
(100)
162
54
116
Net interest income
$
12,534
$
(4,137) $
8,397
$
9,161
$
(3,037) $
6,124
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 taxable-
equivalent basis) totaled $160.1 million in 2016, increasing by $8.4 million, or 5.5%, from $151.7 million in 2015, which
increased by $6.1 million, or 4.2%, from net interest income of $145.6 million recognized in 2014. The increase in net interest
income for 2016 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 10 basis points ("bp") decrease in average
yields earned on our taxable investment securities, combined with a decrease in our average investment securities. In addition,
interest expense on our interest-bearing deposits increased primarily due an increase in interest rates paid on government time
deposits, which is included in time deposits $100,000 and over.
Average rates earned on our interest-earning assets increased by 1 bp in the year ended December 31, 2016, from the year
ended December 31, 2015. Average rates paid on our interest-bearing liabilities in the year ended December 31, 2016 increased
by 6 bp from the year ended December 31, 2015. The increase in average rates paid on our interest-bearing liabilities in 2016
was primarily attributable to the 21 bp increase in average rates paid on our time deposits $100,000 and over.
In the second quarter of 2015, $119.4 million in available-for-sale mortgage-backed 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 available-for-sale portfolio.
41
In the second quarter of 2014, $162.3 million in available-for-sale 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.
Interest Income
Our primary sources of interest income include interest on loans and leases, which represented 78.0%, 75.1%, and 73.8% of
tax-equivalent interest income in 2016, 2015 and 2014, respectively, as well as interest earned on investment securities, which
represented 21.9%, 24.8%, and 26.2% of interest income (on a taxable-equivalent basis), respectively. Interest income
expressed on a taxable-equivalent basis of $169.3 million in 2016 increased by $11.1 million, or 7.0%, from the $158.2 million
earned in 2015, which increased by $6.2 million, or 4.1%, from the $152.0 million earned in 2014.
As depicted in Table 2, the increase in interest income in 2016 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
$347.6 million increase in average loans and leases contributed to an increase of $13.6 million in current year interest income.
This increase was partially offset by the 10 bp decrease in average taxable investment securities yields and the $31.1 million
decrease in average taxable investment securities balances, which contributed to $1.3 million and $0.8 million in lower interest
income, for 2016 respectively. The 1 bp decrease in average loan yields in 2016 contributed to a decrease of $0.5 million in
current year interest income.
The increase in interest income in 2015 from 2014 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 2015 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 2015 interest income.
Interest Expense
In 2016, interest expense was $9.2 million which represented an increase of $2.7 million, or 41.2%, compared to interest
expense of $6.5 million in 2015, which was an increase of $0.1 million, or 1.8%, compared to $6.4 million in 2014.
In 2016, increases in the average rates paid on time deposits $100,000 and over of 21 bp, long-term debt of 41 bp, and short-
term borrowings of 24 bp contributed to the increase in interest expense in 2016 of $1.8 million, $0.4 million, and $0.3 million,
respectively.
In 2015, increases in the average balances of interest-bearing 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 short-term borrowings of $60.3 million
contributed to the increase in interest expense in 2015. The average rate paid on interest-bearing liabilities remained unchanged
from 0.20% in 2014. Decreases in the average rates paid on time deposits under $100,000 of 5 bp and short-term borrowings of
1 bp were offset by an increase in rates paid on long-term debt of 6 bp.
Net Interest Margin
Our net interest margin was 3.27%, 3.30% and 3.32% in 2016, 2015 and 2014, respectively. The decrease in our net interest
margin in 2016 reflected the 10 bp and 1 bp decreases in average taxable-investment securities and loan yields, respectively,
combined with a 21 bp increase in average rates paid on our time deposits $100,000 and over.
The decline in our net interest margin in 2015 from the prior year reflected the 10 bp and 4 bp decreases in average loan and
taxable-investment securities, respectively.
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. Citing
improvement in labor market conditions, a move toward more stable prices and a positive economic outlook, the Federal
Reserve increased the target Fed Funds range to 0.50% to 0.75% in December 2016.
We expect the target Fed Funds rate to gradually increase throughout 2017, as the labor market continues to strengthen and
inflation approaches the FOMC long run objective. Furthermore, the new presidential administration has indicated policy
42
actions that are interpreted as inflationary; however, there is still uncertainty on how fiscal policy will evolve. As a result, we
expect the market to exhibit volatility in interest rates as policy actions unfold, coupled with a moderate increase in the yield
curve throughout 2017.
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
(Dollars in thousands)
Mortgage banking income:
Loan servicing fees
Amortization of mortgage servicing rights
Gain on sale of residential mortgage loans
Unrealized gain (loss) on interest rate locks
Service charges on deposit accounts
Other service charges and fees
Income from fiduciary activities
Income from bank-owned life insurance
Net gain on sales of foreclosed assets
Gain on sale of premises and equipment
Equity in earnings of unconsolidated
subsidiaries
Fees on foreign exchange
Loan placement fees
Investment securities gains (losses)
Other:
Income recovered on nonaccrual loans
previously charged-off
Other recoveries
Commissions on sale of checks
Other
Year Ended December 31,
Dollar Change
Percent Change
2016
2015
2016
2015
2016
2015
2014
to 2015
to 2014
to 2015
to 2014
$
5,421
$
5,656
$
5,798
$
(235) $
(142)
(4.2)%
(2.4)%
(5,066)
7,631
83
7,891
11,449
3,435
2,685
607
3,537
723
519
494
—
1,325
313
340
929
(4,185)
6,107
(324)
7,829
11,461
3,343
2,034
568
—
578
450
720
(1,866)
794
550
325
759
(2,657)
5,545
294
8,113
11,754
3,552
2,922
971
—
480
464
437
240
1,436
672
336
809
(881)
1,524
407
62
(12)
92
651
39
3,537
145
69
(226)
1,866
531
(237)
15
170
(1,528)
562
(618)
(284)
(293)
(209)
(888)
(403)
—
98
(14)
283
21.1
25.0
57.5
10.1
(125.6)
(210.2)
0.8
(0.1)
2.8
32.0
6.9
(3.5)
(2.5)
(5.9)
(30.4)
(41.5)
N.M.
N.M.
25.1
15.3
(31.4)
20.4
(3.0)
64.8
(2,106)
(100.0)
(877.5)
(642)
(122)
(11)
(50)
66.9
(43.1)
4.6
22.4
21.6
(44.7)
(18.2)
(3.3)
(6.2)
(15.5)
Total other operating income
$ 42,316
$ 34,799
$ 41,166
$
7,517
$
(6,367)
Total other operating income as a percentage
of average assets
0.81%
0.70%
0.86%
Total other operating income of $42.3 million in 2016 increased by $7.5 million, or 21.6%, from the $34.8 million earned in
2015, which decreased by $6.4 million, or 15.5%, from the $41.2 million earned in 2014.
The increase in other operating income in 2016 from 2015 was primarily due to a $3.5 million gain on the sale of the
Company's fee interest in a former branch location in 2016, combined with investment securities losses of $1.9 million
recorded in 2015. In addition, in 2016 we recorded higher mortgage banking income of $0.8 million, higher income from bank-
owned life insurance of $0.7 million, and higher income recovered on loans previously charged-off of $0.5 million compared to
2015.
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, lower mortgage banking income of $1.7
million, lower income from bank-owned life insurance of $0.9 million, lower income recovered on nonaccrual loans previously
charged-off of $0.6 million, and lower net gains on sales of foreclosed assets of $0.4 million. The lower mortgage banking
43
income was primarily attributable to higher amortization of mortgage servicing rights of $1.5 million in 2015 compared to
2014, and a reversal of unrealized gains on loans-held-for-sale and interest rate locks of $0.3 million in 2015, compared to an
increase in unrealized gains on loans-held-for-sale and interest rate locks of $0.3 million in 2014, partially offset by an increase
in net gains on sales of residential mortgage loans of $0.6 million in 2015 compared to 2014.
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
(Dollars in thousands)
2016
2015
2014
to 2015
to 2014
to 2015
to 2014
Salaries and employee benefits
$ 73,500
$ 66,429
$ 67,941
$
7,071
$
(1,512)
10.6%
(2.2)%
Year Ended December 31,
Dollar Change
Percent Change
2016
2015
2016
2015
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 low-income
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
Other
14,065
14,432
15,252
6,856
9,475
2,675
3,694
3,399
2,401
152
660
2,052
1,189
1,771
1,045
879
1,101
902
827
7,340
8,831
2,674
3,483
3,475
2,550
486
2,559
2,706
1,348
1,538
1,078
896
1,059
1,026
662
7,806
6,327
2,675
3,635
3,582
2,342
1,710
565
2,848
1,083
1,566
1,363
864
968
1,026
795
(387)
(1,352)
467
141
737
6,429
(271)
—
6,093
(373)
1,336
6,378
(367)
(484)
644
1
211
(76)
(149)
(334)
(820)
(466)
2,504
(1)
(152)
(107)
208
(2.5)
(6.6)
7.3
—
6.1
(2.2)
(5.8)
(5.4)
(6.0)
39.6
—
(4.2)
(3.0)
8.9
(1,224)
(68.7)
(71.6)
(1,899)
1,994
(654)
(159)
233
(33)
(17)
42
(124)
165
965
412
737
336
(142)
265
(28)
(285)
32
91
—
(133)
(74.2)
(24.2)
(11.8)
15.1
(3.1)
(1.9)
4.0
(12.1)
24.9
352.9
(5.0)
24.5
(1.8)
(20.9)
3.7
9.4
—
(16.7)
(1,819)
(71.4)
(389.5)
102
(152.0)
(27.3)
(1,336)
(285)
N.M.
(100.0)
5.5
5.1
(4.5)
(2.4)
Total other operating expense
$133,563
$127,042
$130,156
$
6,521
$
(3,114)
Total other operating expense as a percentage
of average assets
2.54%
2.56%
2.73%
Total other operating expense of $133.6 million in 2016 increased by $6.5 million, or 5.1%, from total operating expense of
$127.0 million in 2015, which decreased by $3.1 million, or 2.4%, compared to 2014.
The increase in total other operating expense in 2016, compared to 2015, was primarily due to higher salaries and employee
benefits of $7.1 million. The higher salaries and employee benefits are primarily due to higher pension expense in 2016 of $4.2
million, combined with the one-time reversal of an accrual in the second quarter of 2015 of $2.4 million for a former executive
officer's retirement benefits which will not be paid. In the fourth quarter of 2016, Company executed a defined benefit pension
plan de-risking strategy whereby the Company purchased non-participating annuity contracts to settle the pension obligation
44
for a portion of its plan participants. This resulted in the immediate recognition of $3.8 million in net actuarial losses. In
addition to the higher salaries and employee benefits, the Company recognized a $0.7 million charge related to the early
termination of a lease and recorded a credit to the provision for residential mortgage loan repurchase losses of $0.4 million in
2016, compared to a credit of $1.4 million in 2015. These increases were partially offset by lower charitable contributions of
$1.9 million in 2016.
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 to $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 and charitable
contributions of $2.0 million.
A key measure of operating efficiency tracked by management is the efficiency ratio, which is calculated by dividing total
operating expenses 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 66.69% in 2016, compared to 68.92% in 2015 and
70.51% in 2014. The decrease in our efficiency ratio was primarily driven by the aforementioned decrease in other operating
expenses and increase in net interest income.
On December 31, 2016, the Company elected to reclassify loan servicing fees, amortization of mortgage servicing rights, net
gain on sale of residential mortgage loans, and unrealized gain (loss) on interest rate locks into a single line item called
"mortgage banking income" in the Company's consolidated statements of income. Loan servicing fees and net gain on sale of
residential mortgage loans were previously recorded in its own line in the other operating income section of the consolidated
statements of income, while unrealized gain (loss) on interest rate locks was included as a component of other operating
income - other. The amortization of mortgage servicing rights was previously recorded as a component of amortization and
impairment of other intangible assets in the other operating expense section of the Company's consolidated statements of
income. The components of mortgage banking income are disclosed in Note 15 - Mortgage Banking Income to the consolidated
financial statements. The Company believes the reclassification provides a better presentation of revenues and costs of our
mortgage banking activities. Comparative financial statements of prior years have been adjusted retrospectively.
The following table sets forth a reconciliation to our efficiency ratio for each of the dates indicated and the impact of the
reclassification of mortgage banking income in the consolidated statements of income:
Table 5. Reconciliation of Efficiency Ratio
As Reclassified:
Year Ended December 31,
Total operating expenses
$
133,563
$
127,042
2016
2015
2014
(Dollars in thousands)
$
130,156
$
Net interest income
Total other operating income
157,950
42,316
149,528
34,799
143,418
41,166
Total revenue
$
200,266
$
184,327
$
184,584
$
$
2013
2012
134,792
133,109
50,201
183,310
$
$
$
145,414
119,711
54,239
173,950
Efficiency ratio
66.69%
68.92%
70.51%
73.53%
83.60%
45
As Previously Reported:
Year Ended December 31,
2016
2015
2014
2013
2012
(Dollars in thousands)
Total operating expenses
$
138,629
$
131,227
$
132,813
Net interest income
Total other operating income
157,950
47,382
149,528
38,984
143,418
43,823
Total revenue
$
205,332
$
188,512
$
187,241
$
$
$
139,536
133,109
54,945
188,054
$
$
$
151,918
119,711
60,743
180,454
Efficiency ratio
67.51%
69.61%
70.93%
74.20%
84.19%
Impact of Change:
Year Ended December 31,
Total operating expenses
$
(5,066)
$
(4,185)
$
(2,657)
$
(4,744)
$
(6,504)
2016
2015
2014
2013
2012
(Dollars in thousands)
Net interest income
Total other operating income
Total revenue
—
(5,066)
(5,066)
$
—
(4,185)
(4,185)
$
— $
— $
(2,657)
(2,657)
$
(4,744)
(4,744)
$
$
—
(6,504)
(6,504)
Efficiency ratio
Income Taxes
(0.82)%
(0.69)%
(0.42)%
(0.67)%
(0.59)%
In 2016, the Company recorded net income tax expense of $25.2 million, compared to $27.1 million in 2015, and $20.4 million
in 2014. Our effective tax rate was 34.9% in 2016 compared to 37.1% in 2015 and 33.5% in 2014. The decrease in the effective
tax rate in 2016 from 2015 was primarily due to lower state income taxes. 2015 state income taxes included an additional
expense for the reversal of a deferred tax liability that was taxed at the Hawaii long-term capital gain tax rate.
As of December 31, 2016, the 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 $58.9 million as of December 31, 2016, compared to a net DTA of $82.0 million as
of December 31, 2015, and is included in other assets on our consolidated balance sheets.
Financial Condition
Total assets of $5.38 billion at December 31, 2016 increased by $252.9 million, or 4.9%, from the $5.13 billion at
December 31, 2015, and total liabilities of $4.88 billion at December 31, 2016 increased by $242.9 million, or 5.2%, from
December 31, 2015. The increase in total assets and total liabilities in 2016 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
medium-sized companies, business professionals, and real estate investors and 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
46
analysis and documentation to include among other things, overall credit worthiness of borrower, guarantor support, use of
funds, loan term, minimum equity, loan-to-value 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) debt-to-income ratio.
Loans and leases totaled $3.52 billion at December 31, 2016, which increased by $313.4 million, or 9.8%, from the $3.21
billion at December 31, 2015, which increased by $279.3 million, or 9.5%, from the $2.93 billion held at December 31, 2014.
The increase in our loan portfolio in 2016 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 mortgage
of $124.7 million, or 16.4%, residential mortgage of $82.9 million, or 7.3%, home equity of $59.2 million, or 19.6%,
automobiles of $22.7 million, or 11.9%, other consumer of $18.2 million, or 8.4%, and construction of $16.7 million, or 19.6%.
These increases were offset by net decreases in the commercial, financial, and agricultural loan portfolio of $10.6 million, or
2.0%, and the lease portfolio of $0.4 million, or 34.1%. In 2016, we transferred the collateral in two portfolio loans with a
carrying value of $1.3 million to other real estate and recorded charge-offs of loans and leases of $6.9 million.
The following table sets forth information regarding outstanding loans by category as of the dates indicated.
Table 6. Loans by Categories
2016
2015
December 31,
2014
(Dollars in thousands)
2013
2012
Commercial, financial and agricultural
$
510,440
$
521,086
$
463,763
$
398,716
$
246,218
Real estate:
Construction
Mortgage:
Residential
Home equity
Commercial
Consumer:
Automobiles
Other consumer
Leases
101,538
84,885
114,554
75,616
96,194
1,217,234
1,134,325
1,054,005
361,209
885,439
212,926
235,427
677
301,980
760,749
190,202
217,277
1,028
228,319
703,273
150,559
214,585
3,140
960,961
175,612
702,767
149,780
160,908
6,241
811,870
154,195
741,580
70,219
73,164
10,504
Total loans and leases
Allowance for loan and lease losses
Net loans and leases
3,524,890
(56,631)
$ 3,468,259
3,211,532
(63,314)
$ 3,148,218
2,932,198
(74,040)
$ 2,858,158
2,630,601
(83,820)
$ 2,546,781
2,203,944
(96,413)
$ 2,107,531
47
The following table sets forth the geographic distribution of our loan portfolio and related Allowance as of December 31, 2016.
Table 7. Geographic Distribution
Commercial, financial and agricultural
$
373,006
$
137,434
$
510,440
Hawaii
U.S. Mainland
Total
(Dollars in thousands)
Real estate:
Construction
Mortgage:
Residential
Home equity
Commercial
Consumer:
Automobiles
Other consumer
Leases
Total loans and leases
Allowance for loan and lease losses
Net loans and leases
Commercial, Financial and Agricultural
97,873
3,665
101,538
1,217,234
361,209
767,586
131,037
177,122
677
3,125,744
(49,350)
3,076,394
$
$
—
—
117,853
81,889
58,305
—
399,146
(7,281)
391,865
$
1,217,234
361,209
885,439
212,926
235,427
677
3,524,890
(56,631)
3,468,259
Loans in this category consist primarily of term loans and lines of credit to small and middle-market 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. Risk 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.
Our commercial, financial, and agricultural loan portfolio decreased by $10.6 million in 2016 after increasing by $57.3 million,
$65.0 million, and $152.5 million in 2015, 2014, and 2013, respectively. The decrease in 2016 was primarily attributable to
run-off of U.S. Mainland shared national credit balances of $43.9 million.
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
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 portfolio decreased by $20.6 million in 2013, then increased by $38.9 million in 2014. In 2015, our
construction loan portfolio decreased by $29.7 million. In 2016, our construction loan portfolio increased by $16.7 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 multi-family projects.
48
The outstanding principal balance of loans with interest reserves was $50.5 million at December 31, 2016, compared to $47.5
million in the prior year, while remaining interest reserves was $1.0 million, or 1.9% of the outstanding principal balance of
loans with interest reserves at December 31, 2016, compared to $2.5 million, or 5.3% of the outstanding principal balance of
loans with interest reserves at December 31, 2015.
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 time-line, 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.
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.
49
Table 8. Mortgage Loan Portfolio Composition
2016
2015
December 31,
2014
2013
2012
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in thousands)
Residential:
Closed-end loans
$ 1,217,234
49.4% $ 1,134,325
51.7% $ 1,054,005
53.1% $ 960,961
52.2% $ 811,870
47.6%
Home equity line-of-
credit ("HELOC")
Subtotal
361,209
1,578,443
14.7
64.1
301,980
1,436,305
13.7
65.4
228,319
1,282,324
11.5
64.6
175,612
1,136,573
9.6
61.8
154,195
966,065
9.0
56.6
Commercial mortgage
885,439
35.9
760,749
34.6
703,273
35.4
702,767
38.2
741,580
43.4
Total mortgage loans $ 2,463,882
100.0% $ 2,197,054
100.0% $ 1,985,597
100.0% $ 1,839,340
100.0% $ 1,707,645
100.0%
Residential
Residential mortgage loans include fixed- and adjustable-rate loans primarily secured by single-family owner-occupied
residences in Hawaii. Maximum loan-to-value ratios of 80% are typically required for fixed- and adjustable-rate loans secured
by single-family owner-occupied residences, although higher levels are permitted with accompanying mortgage insurance. We
emphasize residential mortgage loans for owner-occupied primary residences. First mortgage loans secured by residential
properties generally carry a moderate level of credit risk. With an average loan size of approximately $0.5 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.
Closed-end residential mortgage loan balances as of December 31, 2016 totaled $1.22 billion, increasing by $82.9 million, or
7.3%, from the $1.13 billion held at year-end 2015, which increased by $80.3 million, or 7.6%, from the $1.05 billion held at
year-end 2014. The increase in closed-end residential mortgage loan balances was due primarily to the reinvestment of cash
flow into higher yielding assets and increased demand from both new and existing customers as the real estate economy in
Hawaii has continued to improve.
Residential mortgage loans held for sale at December 31, 2016 totaled $31.9 million, an increase of $17.8 million, or 126.0%,
from the December 31, 2015 balance of $14.1 million, which increased by $1.7 million, or 14.1%, from the December 31, 2014
balance of $12.4 million. In 2016, 2015 and 2014, we did not securitize any residential mortgage loans.
Home Equity
Home equity lines of credit ("HELOCs"), which typically carry floating interest rates, 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, 2016, approximately 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 debt-to-income ratio (DTI), and maximum combined loan-to-value ratio (CLTV). During 2016, 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, 2016, 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.
HELOC balances as of December 31, 2016 totaled $361.2 million, increasing by $59.2 million, or 19.6%, from the $302.0
million held at year-end 2015, which increased by $73.7 million, or 32.3%, from the $228.3 million held at year-end 2014.
50
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
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.
Commercial mortgage balances as of December 31, 2016 totaled $885.4 million, increasing by $124.7 million, or 16.4%, from
the $760.7 million held at year-end 2015, which increased by $57.5 million, or 8.2%, from the $703.3 million held at year-end
2014. The increase in commercial mortgage balances was primarily due to increased demand from both new and existing
customers.
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
2016
2015
December 31,
2014
2013
2012
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in thousands)
Automobile
$ 212,926
47.5% $ 190,202
46.7% $ 150,559
41.2% $ 149,780
48.2% $ 70,219
48.9%
Other revolving credit plans
Student loans
Other
81,124
25,053
129,250
18.1
5.6
28.8
73,756
38,636
104,885
18.1
9.5
25.7
67,099
57,776
89,710
18.4
15.8
24.6
61,835
15,971
83,102
19.9
5.1
26.8
35,074
—
38,090
24.5
—
26.6
Total consumer
$ 448,353
100.0% $ 407,479
100.0% $ 365,144
100.0% $ 310,688
100.0% $ 143,383
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
credit-scoring 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 $448.4 million at December 31, 2016, increasing by $40.9 million, or 10.0%, from 2015's year-end
balance of $407.5 million, which increased by $42.3 million, or 11.6%, compared to the $365.1 million held at year-end 2014.
At December 31, 2016, automobile loans, primarily indirect dealer loans, comprised 47.5% of consumer loans outstanding.
Total automobile loans of $212.9 million at year-end 2016 increased by $22.7 million, or 11.9%, from 2015's year-end balance
of $190.2 million, which increased by $39.6 million, or 26.3%, from $150.6 million at year-end 2014.
In 2016, we purchased two auto loan portfolios totaling $41.2 million, which included a $0.9 million premium over the $40.3
million outstanding balance. 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.
Total student loans of $25.1 million at year-end 2016 decreased by $13.6 million, or 35.2%, from 2015's year-end balance of
$38.6 million, which decreased by $19.1 million, or 33.1%, from $57.8 million at year-end 2014, primarily due to run-off.
In 2014, we purchased participation interests in student loans totaling $51.5 million, which represented the outstanding balance
at the time of purchase.
51
Other consumer loans of $129.3 million at year-end 2016 increased by $24.4 million, or 23.3%, from 2015's year-end balance
of $104.9 million, which increased by $15.2 million, or 16.9%, from $89.7 million at year-end 2014, primarily due to fixed-rate
unsecured consumer loan portfolio purchases.
In 2016 and 2015, we also purchased fixed-rate unsecured consumer loan portfolios (included in other) totaling $35.7 million
and $15.9 million, respectively, which represented the outstanding balances at the time of purchase.
We also issue solar photovoltaic loans (included in other) which totaled $10.4 million at December 31, 2016, compared to
$13.9 million at December 31, 2015 and $17.7 million at December 31, 2014.
Concentrations of Credit Risk
As of December 31, 2016, approximately $2.57 billion, or 72.8% 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 state of Hawaii.
Consistent with our focus of being a Hawaii-based bank, 88.7% of our loan portfolio was concentrated in the Hawaii market
while 11.3% was concentrated in the U.S. Mainland as of December 31, 2016.
Our foreign credit exposure as of December 31, 2016 was minimal and did not exceed 1% of total assets.
Maturities and Sensitivities of Loans to Changes in Interest Rates
At December 31, 2016, commercial, financial and agricultural loans were 36.5% fixed rate and 63.5% variable rate. Real estate
construction loans were 37.1% fixed rate and 62.9% variable rate. Residential mortgage loans, which include home equity lines
and loans, were 63.1% fixed rate and 36.9% variable rate. Commercial mortgage loans were 32.4% fixed rate and 67.6%
variable rate. Consumer loans were 76.5% fixed rate and 23.5% 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%).
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 fixed-rate 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
The following table sets forth the maturity distribution and sensitivities of the loan portfolio to changes in interest rates at
December 31, 2016. Maturities are based on contractual maturity dates and do not factor in principal amortization. This differs
from the assumptions used in Table 21 - Interest Rate Sensitivity.
Table 10. Maturity Distribution and Sensitivities of Loans to Changes in Interest Rates
Maturing
Over One
Through
Five Years
One Year
or Less
Over Five
Years
Total
(Dollars in thousands)
Commercial, financial and agricultural
With fixed interest rates
With variable interest rates
Real estate:
Construction
With fixed interest rates
With variable interest rates
Residential mortgage and home equity
With fixed interest rates
With variable interest rates
Commercial mortgage
With fixed interest rates
With variable interest rates
Consumer - Automobiles and other
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
$
7,317
$
91,351
$
87,811
$
21,459
28,776
164,974
256,325
137,528
225,339
186,479
323,961
510,440
37,636
63,902
101,538
995,609
582,834
16,032
15,478
31,510
986,783
552,858
1,539,641
1,578,443
197,429
458,388
655,817
95,543
30,771
126,314
—
—
—
286,689
598,750
885,439
343,031
105,322
448,353
677
—
677
7,058
11,788
18,846
2,828
4,136
6,964
13,113
22,858
35,971
4,721
31,741
36,462
62
—
62
14,546
36,636
51,182
5,998
25,840
31,838
76,147
117,504
193,651
242,767
42,810
285,577
615
—
615
$
$
$
127,081
$
819,188
$
2,578,621
$
3,524,890
35,099
91,982
127,081
$
$
431,424
387,764
819,188
$
$
1,383,598
1,195,023
2,578,621
$
$
1,850,121
1,674,769
3,524,890
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 charge-off experience, current repayment by borrowers, fair value
53
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 Board-approved 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
2016
2015
2014
2013
2012
Year Ended December 31,
(Dollars in thousands)
Average amount of loans outstanding
$
3,385,741
$ 3,038,100
$
2,798,826
$
2,394,955
$
2,130,758
Allowance for loan and lease losses:
Balance at beginning of year
$
63,314
$
74,040
$
83,820
$
96,413
$
122,093
Charge-offs:
Commercial, financial and agricultural
1,599
5,658
5,268
2,884
Real estate:
Construction
Mortgage:
Residential
Home equity
Commercial
Consumer:
Automobiles
Other consumer
Leases
Total
Recoveries:
—
—
—
209
1,563
3,491
—
6,862
—
—
110
838
1,479
3,171
—
11,256
Commercial, financial and agricultural
2,114
4,788
Real estate:
Construction
Mortgage:
Residential
Home equity
Commercial
Consumer:
Automobiles
Other consumer
Leases
Total
Net loans charged off (recovered)
133
695
15
1,024
888
827
—
5,696
1,166
880
1,121
1,056
6,719
948
662
27
16,201
(4,945)
—
—
139
1,041
907
2,574
8
9,937
2,382
2,040
907
85
53
576
520
8
6,571
3,366
358
750
333
6,768
6
1,517
—
12,616
1,397
3,596
1,091
16
4,240
18
629
346
11,333
1,283
3,798
8,435
689
975
2,033
1
1,470
28
17,429
1,618
6,622
835
41
488
—
1,025
5
10,634
6,795
Provision (credit) charged to operations
(5,517)
(15,671)
(6,414)
(11,310)
(18,885)
Balance at end of year
$
56,631
$
63,314
$
74,040
$
83,820
$
96,413
Ratios:
Allowance for loan and lease losses to loans and
leases outstanding at end of year
Net loans charged off (recovered) during year to
average loans and leases outstanding during year
1.61%
1.97 %
2.53%
3.19%
4.37%
0.03%
(0.16)%
0.12%
0.05%
0.32%
55
Our Allowance at December 31, 2016 totaled $56.6 million, which represented a decrease of $6.7 million, or 10.6%, from year-
end 2015. When expressed as a percentage of total loans and leases, our Allowance decreased to 1.61% at December 31, 2016,
from 1.97% at year-end 2015. The decrease in our Allowance during 2016 was a result of a credit to the Provision of $5.5
million recognized during the year and $1.2 million in net charge-offs during the year. The decrease in our Allowance as a
percentage of total loans and leases from year-end 2015 to year-end 2016 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 390.10% at December 31, 2015 to 616.43% at
December 31, 2016. Our Allowance as a percentage of our nonaccrual loans increased from 443.75% at December 31, 2015 to
674.50% at December 31, 2016.
This trend was consistent with the improving credit quality as represented by non-performing assets of $9.2 million, $16.2
million, and $42.0 million at December 31, 2016, 2015 and 2014, respectively. Net charge-offs were $1.2 million and $3.4
million, respectively, for the years ended December 31, 2016 and 2014, compared to net recoveries for the year ended
December 31, 2015 of $4.9 million.
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
2016
2015
December 31,
2014
2013
2012
Allowance
for Loan
and
Lease
Losses
Loan
Category
as a % of
Total
Loans
Allowance
for Loan
and
Lease
Losses
Loan
Category
as a % of
Total
Loans
Allowance
for Loan
and
Lease
Losses
Loan
Category
as a % of
Total
Loans
Allowance
for Loan
and
Lease
Losses
Loan
Category
as a % of
Total
Loans
Allowance
for Loan
and
Lease
Losses
Loan
Category
as a % of
Total
Loans
(Dollars in thousands)
Commercial, financial and
agricultural
$
8,637
14.5% $
6,905
16.2% $
8,954
15.8% $
13,196
15.2% $
4,987
11.2%
Real estate:
Construction
Mortgage:
Residential
Home equity
Commercial
Consumer:
Automobiles
Other
Leases
Unallocated
Total
4,224
2.9
8,454
2.7
14,969
3.9
2,774
2.9
4,510
4.3
15,055
3,502
19,104
3,000
3,109
—
—
34.5
10.3
25.1
6.0
6.7
—
—
14,642
3,096
21,847
2,891
3,339
—
2,140
35.3
9.4
23.7
5.9
6.8
—
—
15,031
2,896
20,869
3,373
3,941
7
4,000
36.0
7.8
24.0
5.1
7.3
0.1
—
21,303
3,969
29,947
3,170
3,406
55
6,000
36.5
6.7
26.7
5.7
6.1
0.2
—
22,857
4,979
50,574
1,186
1,235
85
6,000
36.8
7.0
33.7
3.2
3.3
0.5
—
$
56,631
100.0% $
63,314
100.0% $
74,040
100.0% $
83,820
100.0% $
96,413
100.0%
The Allowance allocated to commercial loans totaled $8.6 million, or 1.7%, of commercial loans at December 31, 2016,
compared to $6.9 million, or 1.3%, of related loans at December 31, 2015.
The Allowance allocated to construction loans totaled $4.2 million, or 4.2%, of construction loans at December 31, 2016,
compared to $8.5 million, or 10.0%, of construction loans outstanding at December 31, 2015. The decreases in the ending
Allowance amount and the Allowance as a percentage of construction loans were primarily due to improvement in credit
quality of the portfolio and enhancements made to the Allowance methodology which eliminated the use of proxy loss rates.
The Allowance allocated to our residential mortgage loans totaled $15.1 million, or 1.2%, of total residential mortgage loans at
December 31, 2016, compared to $14.6 million, or 1.3%, of related loans at December 31, 2015.
The Allowance allocated to our home equity loans totaled $3.5 million, or 1.0%, of total home equity loans at December 31,
2016, compared to $3.1 million, or 1.0%, of related loans at December 31, 2015.
56
The Allowance allocated to commercial mortgage loans totaled $19.1 million, or 2.2%, of those loans at December 31, 2016,
compared to $21.8 million, or 2.9%, of related loans at December 31, 2015.
The Allowance allocated to automobile loans at December 31, 2016 totaled $3.0 million, or 1.4% of automobile loans at
December 31, 2016, compared to $2.9 million, or 1.5%, of related loans at December 31, 2015.
The allowance for other consumer loans totaled $3.1 million, or 1.3% of other consumer loans at December 31, 2016,
compared to $3.3 million, or 1.5% of related loans at December 31, 2015.
We did not allocate an Allowance for leases as of December 31, 2016 and 2015.
The unallocated portion of the Allowance at December 31, 2015 was $2.1 million. During the fourth quarter of 2016, the
Company enhanced its Allowance methodology and eliminated the unallocated portion of the Allowance.
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
$
1,877
$
1,044
$
13,007
$
3,533
$
3,510
December 31,
2016
2015
2014
2013
2012
(Dollars in thousands)
Real estate:
Construction
Mortgage:
Residential
Home equity
Commercial
Leases
—
—
310
4,015
38,742
5,322
333
864
—
5,464
666
7,094
—
12,571
477
12,722
—
39,087
19,027
1,244
13,769
—
41,588
25,748
1,751
9,487
94
79,332
Total nonaccrual loans
8,396
14,268
Other real estate
Real estate:
Construction
Mortgage:
Residential
Commercial
Other real estate
Total nonperforming assets
Accruing loans delinquent for 90 days or more
Real estate:
Residential mortgage
Home equity
Consumer:
Automobiles
Other consumer
Leases
Total accruing loans delinquent for 90 days or more
—
747
3,770
8,105
1,962
—
1,962
16,230
2,201
—
2,948
42,035
1,184
209
5,163
46,751
2,372
209
10,686
90,018
—
—
151
122
—
273
—
—
37
40
—
77
—
—
—
—
15
15
344
43
—
116
—
503
—
791
—
791
9,187
—
1,120
208
63
—
1,391
57
Restructured loans still accruing interest
Commercial, financial & agricultural
Real estate:
Construction
Mortgage:
Residential
Home equity
Commercial
Total restructured loans still accruing interest
December 31,
2016
2015
2014
2013
2012
(Dollars in thousands)
—
21
14,292
—
1,879
16,192
—
809
16,224
—
3,224
20,257
361
892
16,878
967
10,405
29,503
406
447
3,857
9,522
15,648
860
2,502
23,273
15,366
—
6,425
31,760
Total nonperforming assets, accruing loans delinquent for 90 days or more
and restructured loans still accruing interest
$
26,770
$
36,760
$
71,615
$
70,039
$
122,281
Total nonperforming assets as a percentage of loans and leases and other
real estate
0.26%
0.51%
1.43%
1.77%
4.06%
Total nonperforming assets and accruing loans delinquent for 90 days or
more as a percentage of loans and leases and other real estate
0.30
0.51
1.43
1.77
4.09
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
0.76
1.14
2.44
2.66
5.52
Year-to-date changes in nonperforming assets:
Balance at beginning of year
$
16,230
$
Additions
Reductions:
Payments
Return to accrual status
Sales of foreclosed assets
Charge-offs and/or valuation adjustments
Total reductions
Balance at end of year
6,326
(6,390)
(4,546)
(2,599)
166
(13,369)
$
42,035
11,863
46,751
28,295
$
90,018
$
195,594
27,648
46,641
(9,564)
(11,486)
(13,307)
(3,311)
(37,668)
(9,630)
(15,761)
(3,457)
(4,163)
(41,766)
(17,247)
(9,519)
(2,383)
(63,107)
(26,261)
(53,029)
(9,820)
(33,011)
(70,915)
(152,217)
$
9,187
$
16,230
$
42,035
$
46,751
$
90,018
Nonperforming assets, which includes nonaccrual loans and leases, nonperforming loans classified as held for sale and other
real estate, totaled $9.2 million at December 31, 2016, compared to $16.2 million at December 31, 2015. Nonperforming assets
at December 31, 2016 were comprised of $8.4 million in nonaccrual loans, none of which were loans classified as held for sale,
and $0.8 million in other real estate.
The decline in 2016 was attributable to $6.4 million in repayments, $4.5 million in loans restored to accrual status, the sale of
$2.6 million of foreclosed assets, and charge-offs and valuation adjustments totaling $0.2 million. All of these decreases were
offset by $6.3 million in gross additions.
Net changes to nonperforming assets by category during 2016 included net decreases in Hawaii commercial mortgage assets
totaling $6.2 million, Hawaii home equity assets totaling $0.3 million, and Hawaii residential mortgage assets totaling $1.3
million. These decreases were offset by an increase in Hawaii commercial, financial and agricultural assets totaling $0.8
million.
Loans delinquent for 90 days or more still accruing interest totaled $1.4 million at December 31, 2016, compared to $0.3
million at December 31, 2015. The increase was primarily attributable to a single home equity borrower totaling $1.1 million.
58
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
2016
Held-to-
Maturity
(at
Amortized
Cost)
Available-
for-Sale
(at
Fair
Value)
December 31,
2015
Held-to-
Maturity
(at
Amortized
Cost)
Available-
for-Sale
(at
Fair
Value)
(Dollars in thousands)
2014
Held-to-
Maturity
(at
Amortized
Cost)
Available-
for-Sale
(at
Fair
Value)
Debt securities:
States and political subdivisions
$
— $
185,041
$
— $
190,473
$
— $
191,645
Corporate securities
Mortgage-backed securities:
Residential-U.S. Government sponsored entities
Residential-Non-government sponsored entities
Commercial-U.S. Government sponsored entities
Commercial-Non-government sponsored entities
Other
Total
—
99,389
—
108,571
—
100,604
124,082
—
93,586
769,986
51,547
152,315
—
771,909
64,032
140,741
—
—
95,602
—
97,546
—
—
137,224
660
—
—
136,354
916
—
—
751,558
46,693
—
137,641
877
$
217,668
$ 1,243,847
$
247,917
$ 1,272,255
$
238,287
$ 1,229,018
Investment securities totaled $1.46 billion at December 31, 2016, decreasing by $58.7 million, or 3.9%, from the $1.52 billion
held at December 31, 2015, which increased by $52.9 million, or 3.60%, from the $1.47 billion at year-end 2014.
In the second quarter of 2015, $119.4 million in available-for-sale 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 mortgage-backed securities yielding an average of 2.71% at an average weighted
life of 7.6 years. Gross realized losses on the sales of the available-for-sale 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 available-for-sale 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 available-for-sale 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.
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, 2016.
Table 15. Maturity Distribution of Investment Portfolio
Portfolio Type and Maturity Grouping
Held-to-maturity portfolio:
Mortgage-backed securities - U.S. Government sponsored entities:
Within one year
After one but within five years
59
Carrying
Value
Weighted
Average
Yield (1)
(Dollars in thousands)
$
—
—
—%
—
Portfolio Type and Maturity Grouping
After five but within ten years
After ten years
Total mortgage-backed securities - U.S. Government sponsored entities:
Total held-to-maturity portfolio
Available-for-sale 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
Mortgage-backed 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 mortgage-backed securities - U.S. Government sponsored entities
Mortgage-backed securities - Non-government sponsored entities:
Within one year
After one but within five years
After five but within ten years
After ten years
Total mortgage-backed securities - Non-government sponsored entities
Other:
Within one year
After one but within five years
After five but within ten years
After ten years
Total other
Total available-for-sale portfolio
Total investment securities
$
$
Carrying
Value
Weighted
Average
Yield (1)
(Dollars in thousands)
93,586
124,082
217,668
2.07
1.93
1.99
217,668
1.99%
1,694
44,608
62,045
76,694
185,041
5,005
88,766
5,618
—
99,389
42
9,891
70,587
689,466
769,986
—
26,457
110,767
51,547
188,771
—
—
—
660
660
0.93%
2.55
2.98
3.61
3.12
3.05
2.75
3.15
—
2.79
4.65
2.83
2.41
2.16
2.19
—
3.01
3.27
3.44
3.28
—
—
—
—
—
$
$
1,243,847
1,461,515
2.54%
2.46%
60
(1) Weighted average yields are computed on an annual basis, and yields on tax-exempt obligations are computed on a taxable-equivalent
basis using an assumed tax rate of 35%.
As of December 31, 2016, the weighted average yield of the investment portfolio of 2.46% decreased by 16 bp from 2.62% 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 long-term relationships with
businesses and their principals. Our focus has been to develop a large, stable base of core deposits, which are comprised of non-
interest bearing and interest-bearing 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 price-sensitive than
relationship-based and are thus given less focus in our marketing and sales efforts.
The following table sets forth the composition of our deposits by category as of the dates indicated.
Table 16. Deposits by Categories
December 31,
2016
2015
2014
2013
2012
(Dollars in thousands)
Noninterest-bearing demand deposits
$ 1,265,246
$ 1,145,244
$ 1,034,146
$
891,017
$
843,292
Interest-bearing demand deposits
862,991
824,895
788,272
728,619
672,838
Savings and money market deposits
1,390,600
1,399,093
1,242,598
1,207,016
1,186,011
Time deposits less than $100,000
194,730
212,946
241,117
266,627
304,516
Core deposits
3,713,567
3,582,178
3,306,133
3,093,279
3,006,657
Government time deposits
Other time deposits $100,000 and greater
Total time deposits $100,000 and greater
701,417
193,217
894,634
664,756
186,505
851,261
600,504
203,663
804,167
612,592
230,302
842,894
434,566
239,549
674,115
Total deposits
$ 4,608,201
$ 4,433,439
$ 4,110,300
$ 3,936,173
$ 3,680,772
Total deposits of $4.61 billion at December 31, 2016 reflected an increase of $174.8 million, or 3.9%, from total deposits of
$4.43 billion at December 31, 2015. Total deposits at December 31, 2015 increased by $323.1 million, or 7.9%, over the year-
end 2014 balance of $4.11 billion. The increase in deposits in 2016 reflects net increases in savings and money market deposits
of $8.5 million, noninterest-bearing demand deposits of $120.0 million, time deposits $100,000 and greater of $43.4 million,
and interest-bearing demand deposits of $38.1 million. The net increases were offset by a net decrease in time deposits less than
$100,000 of $18.2 million.
Core deposits totaled $3.71 billion at December 31, 2016 and increased by $131.4 million, or 3.7%, from December 31, 2015,
which increased by $276.0 million or 8.3% from December 31, 2014. Core deposits as a percentage of total deposits was 80.6%
at December 31, 2016, compared to 80.8% at December 31, 2015 and 80.4% at December 31, 2014. For additional information
regarding the maturity of our time deposits of $100,000 or more, See Note 11 - Deposits 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, increased by 16 bp in 2016, while savings and money market deposit rates
and interest-bearing demand deposit rates remained relatively unchanged. The average rate paid on all deposits increased 3 bp
to 0.12% in 2016 from 0.09% in 2015, which remained unchanged from 0.09% in 2014.
61
Table 17. Average Balances and Average Rates on Deposits
2016
Year Ended December 31,
2015
2014
Average
Balance
Average
Rate Paid
Average
Balance
Average
Rate Paid
Average
Balance
Average
Rate Paid
(Dollars in thousands)
Noninterest-bearing demand deposits
$ 1,156,906
—% $ 1,072,998
—% $
938,078
—%
Interest-bearing demand deposits
Savings and money market deposits
Time deposits
Total
844,507
1,406,754
1,084,929
0.06
0.07
0.38
802,121
1,276,830
1,071,664
0.05
0.07
0.22
764,504
1,227,049
1,059,435
0.05
0.07
0.23
$ 4,493,096
0.12% $ 4,223,613
0.09% $ 3,989,066
0.09%
We expect overall deposit rates to increase slightly in 2017 based on the FRB's expected path of interest rate increase
throughout the year. In addition to the external interest rate environment, the overall direction and magnitude 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 considerations.
Contractual Obligations
The following table sets forth contractual obligations (excluding deposit liabilities) as of December 31, 2016.
Table 18. Contractual Obligations
Short-term borrowings
Long-term debt
Pension plan and SERP obligations
Operating leases
Purchase obligations
Total
Payments Due By Period
Less Than
One Year
1-3 Years
3-5 Years
More Than
5 Years
Total
$
135,000
$
—
2,273
6,564
16,761
(Dollars in thousands)
— $
—
4,364
11,124
6,725
— $
— $
135,000
—
4,163
9,168
1,534
92,785
23,169
21,488
107
92,785
33,969
48,344
25,127
$
160,598
$
22,213
$
14,865
$
137,549
$
335,225
Components of short-term borrowings and long-term debt are discussed in Note 12 - Short-Term Borrowings and Note 13 -
Long-Term Debt, 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 17 - Pension Plans 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 19 - Operating Leases 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.
Contractual obligations in Table 18 - Contractual Obligations do not include off-balance sheet arrangements. 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 off-
balance sheet exposures are discussed in detail in Note 24 - Financial Instruments With Off-Balance Sheet Risk to the
Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data."
Capital Resources
62
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 $504.7 million at December 31, 2016, an increase of $10.0 million, or 2.0%, from the $494.6
million at December 31, 2015, which decreased by $73.4 million, or 12.9%, from December 31, 2014. When expressed as a
percentage of total assets, shareholders' equity was 9.4% at December 31, 2016, compared to 9.6% at December 31, 2015 and
11.7% at December 31, 2014.
The increase in shareholders' equity from December 31, 2015 to December 31, 2016 was primarily attributable to net income of
$47.0 million, partially offset by: 1) the repurchase of 796,822 shares of our common stock for a total cost of $18.2 million,
excluding fees and expenses, under our stock repurchase program, and 2) cash dividends paid of $18.6 million. During 2016 we
repurchased approximately 2.5% of our common stock outstanding at December 31, 2015.
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, 2015.
Our tangible common equity ratio was 9.29% at December 31, 2016, compared to 9.51% at December 31, 2015 and 11.52% at
December 31, 2014. Our book value per share was $16.39, $16.06, and $16.12 at year-end 2016, 2015 and 2014, respectively.
The decrease in our tangible common equity ratio in 2015 from 2014 was primarily attributable to the reduction in our common
equity due to common stock repurchases completed in 2015, as well as the quarterly and special dividends paid in 2015. The
increase in our book value per share from 2015 was primarily attributable to net income recorded in 2016 of $47.0 million,
combined with the reduction in common shares outstanding due to the aforementioned common stock repurchases completed in
2016.
The tangible common equity ratio is a non-GAAP 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).
63
The following table sets forth a reconciliation of our tangible common equity ratio for each of the dates indicated:
Table 19. 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
2016
December 31,
2015
2014
(Dollars in thousands)
$
504,650
$
494,614
$
568,041
(4,680)
499,970
5,384,236
(4,680)
5,379,556
(7,355)
487,259
5,131,288
(7,355)
5,123,933
(10,029)
558,012
4,852,987
(10,029)
4,842,958
Tangible common equity to tangible assets
9.29%
9.51%
11.52%
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.
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 canceled with the state of Delaware.
Holding Company Capital Resources
CPF is required to act as a source of strength to the bank under the Dodd-Frank Act. CPF is obligated to pay its expenses and
payments on its junior subordinated debentures which fund payments on the outstanding trust preferred securities.
CPF relies on the bank to pay dividends to it to fund its obligations. As of December 31, 2016, on a stand-alone basis, CPF had
an available cash balance of approximately $19.5 million in order to meet its ongoing obligations.
As a Hawaii state-chartered 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, 2016,
the bank had Statutory Retained Earnings of $83.9 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
64
"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
$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. The Company incurred $0.2
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. The Company did
not incur any costs related to the final underwriting agreement.
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 "2014 Repurchase Plan"). 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 2014 Repurchase Plan by $25.0 million.
In March, 2015, our Board of Directors increased the authorization under the 2014 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,
65
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 2014 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 replaced and superseded in its entirety the 2014 Repurchase
Plan. In 2016, 796,822 shares of common stock, at a cost of $18.2 million, excluding fees and expenses, were repurchased
under this program. A total of $11.8 million authorized remained available for repurchase under the 2016 Repurchase Plan at
December 31, 2016.
In January 2017, our Board of Directors authorized the repurchase of up to $30.0 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 "2017 Repurchase Plan"). The 2017 Repurchase Plan replaces and supersedes in its entirety the 2016 Repurchase
Plan.
Asset/Liability Management and Interest Rate Risk
Our earnings and capital are sensitive to risk of interest rate fluctuations. Interest rate risk arises when rate-sensitive assets and
rate-sensitive liabilities mature or reprice during different periods or in differing amounts. In the normal course of business, we
are subjected to interest rate risk through the activities of making loans and taking deposits, as well as from our investment
securities portfolio and other interest-bearing funding sources. Asset/liability management attempts to coordinate our rate-
sensitive assets and rate-sensitive liabilities to meet our financial objectives.
Our Asset/Liability Management Policy seeks to maximize the risk-adjusted return to shareholders while maintaining
consistently acceptable levels of liquidity, interest rate risk and capitalization. Our Asset/Liability Management Committee, or
ALCO, monitors interest rate risk through the use of interest rate sensitivity gap, net interest income and market value of
portfolio equity simulation and rate shock analyses. This process is designed to measure the impact of future changes in interest
rates on net interest income and market value of portfolio equity. Adverse interest rate risk exposures are managed through the
shortening or lengthening of the duration of assets and liabilities.
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 interest-earning assets and the
amount of interest-bearing 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 interest-bearing 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, 2016. 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 interest-
bearing demand and savings balances are included in the three-months-or-less 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 20. 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
Non-Rate
Sensitive
Total
(Dollars in thousands)
$
9,069
$
— $
— $
— $
— $
— $
9,069
69,504
31,827
847,425
11,572
—
59,951
118,811
395,989
816,600
—
—
—
—
660
54
1,461,515
31,881
256,042
451,177
1,112,453
855,714
2,079
3,524,890
—
—
—
—
—
—
—
—
—
345,309
11,572
345,309
$
969,397
$
315,993
$
569,988
$ 1,508,442
$ 1,672,314
$ 348,102
$ 5,384,236
Assets
Interest-bearing 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
Noninterest-bearing deposits
$ 1,265,246
$
— $
— $
— $
— $
— $ 1,265,246
Interest-bearing deposits
Short-term borrowings
Long-term debt
Other liabilities
Equity
2,714,950
365,573
161,104
77,559
23,769
— 3,342,955
135,000
92,785
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
43,575
504,675
135,000
92,785
43,575
504,675
Total liabilities and equity
$ 4,207,981
$
365,573
$
161,104
$
77,559
$
23,769
$ 548,250
$ 5,384,236
Interest rate sensitivity gap
$(3,238,584) $
(49,580) $
408,884
$ 1,430,883
$ 1,648,545
$ (200,148) $
—
Cumulative interest rate sensitivity
gap
$(3,238,584) $(3,288,164) $(2,879,280) $(1,448,397) $ 200,148
$
— $
—
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, 2016, over a one-year 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
0.31 %
(4.36)%
67
Table 21. Interest Rate Sensitivity
Expected Maturity Within
One
Year
Two
Years
Three
Years
Four
Years
Five
Years
Thereafter
Total
Book
Value
Total
Fair
Value
(Dollars in thousands)
Interest-sensitive assets
Interest-bearing deposits in other banks
$
9,069
$
— $
— $
— $
— $
— $
9,069
$
9,069
Weighted average yields
0.50%
0.00%
0.00%
0.00%
0.00%
0.00%
0.50%
Fixed rate investments
Weighted average yields
Equity investments
Weighted average yields
$
248,772
$
188,076
$
208,720
$
227,515
$
123,098
$ 467,651
$ 1,463,832
$
1,457,553
2.25%
2.24%
2.20%
2.46%
2.48%
2.48%
2.37%
$
— $
— $
— $
— $
— $
564
$
564
$
660
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Fixed rate loans
$
587,901
$
412,663
$
310,990
$
198,135
$
143,574
$ 335,589
$ 1,988,852
$
1,930,502
Weighted average yields
3.93%
3.90%
3.87%
3.94%
4.08%
4.02%
3.94%
Variable rate loans
Weighted average yields
$
540,434
$
322,112
$
222,620
$
168,202
$
128,988
$ 183,430
$ 1,565,786
$
1,528,355
3.96%
3.45%
3.37%
3.32%
3.31%
3.18%
3.56%
Total - December 31, 2016
Total - December 31, 2015
$ 1,386,176
$ 1,234,264
$
$
922,851
797,450
$
$
742,330
598,269
$
$
593,852
496,747
$
$
395,660
$ 987,234
$ 5,028,103
434,296
$ 1,187,417
$ 4,748,443
$
$
4,926,139
4,632,287
Interest-sensitive liabilities
Interest-bearing demand and savings deposits $ 2,253,591
$
— $
— $
— $
— $
— $ 2,253,591
$
2,253,591
Weighted average rates paid
0.08%
0.00%
0.00%
0.00%
0.00%
0.00%
0.08%
Time deposits
$
986,798
$
38,779
$
39,481
$
11,928
$
11,835
$
543
$ 1,089,364
$
1,088,436
Weighted average rates paid
0.48%
0.51%
0.86%
0.99%
1.06%
0.32%
0.51%
Short-term borrowings
$
135,000
$
— $
— $
— $
— $
— $
135,000
$
135,000
Weighted average rates paid
0.74%
0.00%
0.00%
0.00%
0.00%
0.00%
0.74%
Long-term debt
$
— $
— $
— $
— $
— $
92,785
$
92,785
$
68,186
Weighted average rates paid
0.00%
0.00%
0.00%
0.00%
0.00%
3.45%
3.45%
Total - December 31, 2016
Total - December 31, 2015
$ 3,375,389
$ 3,257,440
$
$
38,779
41,513
$
$
39,481
26,016
$
$
11,928
19,395
$
$
11,835
12,275
$
$
93,328
$ 3,570,740
93,341
$ 3,449,980
$
$
3,545,213
3,424,664
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 cash flows 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. Interest-bearing
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 mortgage-related assets and forecasted market interest
rates. This differs from the assumptions used in Table 10 - Maturity Distribution and Sensitivities of Loans to Changes in
Interest Rates. See Note 25 - Fair Value of Assets and Liabilities 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 interest-sensitive 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 short-term funding sources.
Our loan-to-deposit ratio at December 31, 2016 was 76.5% compared to 72.4% at December 31, 2015. 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
$76.5 million in 2016, $74.5 million in 2015, and $71.4 million in 2014. The primary source of cash provided by operating
activities continues to be our net operating income, exclusive of non-cash items such as the Provision and asset impairments.
Net cash used in investing activities amounted to $277.2 million, $315.1 million and $83.1 million in 2016, 2015 and 2014,
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 2016, 2015 and 2014, net loan originations accounted for $239.0 million, $218.2 million and $245.1 million,
respectively, of cash used in investing activities. Net proceeds received from sales and maturities of investment securities
totaled $38.3 million and $223.0 million in 2016 and 2014, respectively, compared to net purchases of investment securities of
$72.3 million in 2014. Investing activities included proceeds from sales of loans originated for investment of $6.7 million in
2015, and other real estate of $2.9 million, $6.7 million, and $3.9 million in 2016, 2015 and 2014, respectively. We did not sell
any loans originated for investment in 2016 and 2014.
Cash provided by financing activities totaled $204.9 million, $234.8 million, and $48.4 million in 2016, 2015 and 2014,
respectively. Deposit activities, borrowings and capital transactions represent the major components of financing activities. In
2016, 2015 and 2014, we increased net deposits by $174.8 million, $323.1 million and $174.1 million, respectively. Net cash
inflows from short-term debt totaled $66.0 million in 2016, $31.0 million in 2015 and $30.0 million in 2014. There were no
cash outflows for long-term debt in 2016 and 2015. Net cash outflows for long-term debt totaled $14 thousand in 2014. 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 $35.9 million, $119.3 million and $155.7
million of cash used in 2016, 2015 and 2014, respectively, due primarily to share repurchases under the Tender Offer, the
Private Repurchases, and the 2014 and 2016 Repurchase Plans.
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 short-term and
long-term funding sources, which include proceeds from maturities of our investment securities, as well as secondary funding
sources such as the FHLB, secured repurchase agreements and 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 $1.41 billion line of credit with the FHLB as of December 31, 2016. Short-term
borrowings under this arrangement totaled $135.0 million and $69.0 million at December 31, 2016 and 2015, respectively.
There were no long-term borrowings under this arrangement at December 31, 2016 and 2015. FHLB advances outstanding at
December 31, 2016 were secured by unencumbered investment securities with a fair value of $0.2 million and certain real
estate loans with a carrying value of $1.84 billion in accordance with the collateral provisions of the Advances Pledge and
Security Agreement with the FHLB. At December 31, 2016, $1.28 billion remained available under this arrangement.
The bank also maintained a line of credit with the Federal Reserve discount window of $63.7 million and $40.8 million as of
December 31, 2016 and 2015, respectively. There were no advances outstanding under this arrangement at December 31, 2016
and 2015. Advances under this arrangement would have been secured by certain commercial and commercial real estate loans
with a carrying value totaling $129.9 million. The Federal Reserve does not have the right to sell or repledge these loans. See
Note 12 - Short-Term Borrowings to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and
Supplementary Data" for additional information regarding our short-term 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 industry-wide
reductions in liquidity.
Holding Company Liquidity
For the holding company on a stand-alone basis, in 2016, net cash provided by operating activities amounted to $42.8 million.
The primary source of funds in operating activities included dividends received from the bank of $30.0 million. Net cash used
in financing activities amounted to $35.9 million. The primary use of funds in financing activities included the repurchases of
common stock totaling $18.2 million and cash dividends of $18.6 million paid to our common shareholders.
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.
Off-Balance Sheet Arrangements
In the normal course of business, we enter into off-balance 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 off-balance sheet exposures are discussed in detail in Note 24 - Financial Instruments With Off-
Balance Sheet Risk 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 off-balance 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 on Future Filings
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 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 2014-09 was
initially effective for the Company's reporting period beginning on January 1, 2017. However, in August 2015, the FASB issued
ASU 2015-14, "Revenue from Contracts with Customers - Deferral of the Effective Date" which defers the effective date by
one year. For financial reporting purposes, the standard allows for either a full retrospective or modified retrospective adoption.
The FASB has also issued additional updates to provide further clarification to specific implementation issues associated with
ASU 2014-09. These updates include ASU 2016-08, "Principal versus Agent Considerations," ASU 2016-10, "Identifying
Performance Obligations and Licensing," and ASU 2016-12, "Narrow-Scope Improvements and Practical Expedients." Our
revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the
scope of of ASU 2014-09, and other operating income. We expect that ASU 2014-09 will require us to change how we
recognize certain recurring revenue streams within trust and investment management fees; however, we do not expect these
changes to have a significant impact on our financial statements. We continue to evaluate the impact of ASU 2014-09 on other
components of other operating income. We expect to adopt the standard in the first quarter of 2018 with a cumulative effect
adjustment to opening retained earnings, if such adjustment is deemed to be significant.
In January 2016, the FASB issued ASU 2016-01, "Accounting for Equity Investments and Financial Liabilities." ASU 2016-01
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 2016-01 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.
In February 2016, the FASB issued ASU 2016-02, "Leases." ASU 2016-02 increases transparency and comparability among
organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing
70
arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and
lease liability on the balance sheet for all leases with a term of longer than 12 months. ASU 2016-02 is effective for the
Company's reporting period beginning January 1, 2019 and must be applied using the modified retrospective approach. Based
on preliminary evaluation, the new pronouncement will not have a significant impact on our consolidated financial statements
as the projected minimum lease payments under existing leases subject to the new pronouncement are less than one percent of
our current total assets.
In March 2016, the FASB issued ASU 2016-09, "Stock Compensation" ASU 2016-09 simplifies the accounting for share-based
payments. Specifically, the amendments: 1) require entities to record all excess tax benefits and tax deficiencies as an income
tax benefit or expense in the income statement; 2) change the classification of excess tax benefits to an operating activity in the
statement of cash flows; 3) allows entities to elect an accounting policy to either estimate the number of forfeitures or account
for forfeitures when they occur; and 4) allows entities to withhold up to the maximum individual statutory tax rate without
classifying the awards as a liability. ASU 2016-09 is effective for the Company's reporting period beginning January 1, 2017.
The adoption of ASU 2016-09 could result in increased volatility to our reported income tax expense related to excess tax
benefits and tax deficiencies for share-based payments. We do not expect the adoption of this guidance to have a material
impact to our consolidated financial statements, however, the actual amounts recognized in income tax expense will be
dependent on the amount of share-based payments and our stock price at the time of vesting or exercise.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments." The ASU requires an organization to measure all expected credit losses for financial assets held at
the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial
institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many
of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to
reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss
estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on
available-for-sale debt securities and purchased financial assets with credit deterioration. This update will be effective for the
Company's reporting period beginning January 1, 2020. We are currently evaluating the potential impact the update will have
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
25 - Fair Value of Assets and Liabilities 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, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in equity, and
cash flows for each of the years in the
period ended December 31, 2016. 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, 2016 and 2015, and the results of their operations and their
cash flows for each of the years in the
period ended December 31, 2016, 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, 2016, based on criteria established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 1, 2017 expressed an adverse opinion on the effectiveness of the Company’s
internal control over financial reporting.
/s/ KPMG LLP
Honolulu, Hawaii
March 1, 2017
73
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Central Pacific Financial Corp.:
We have audited Central Pacific Financial Corp.’s (the Company’s) internal control over financial reporting as of December 31,
2016, 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.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented
or detected on a timely basis. A material weakness related to the Company’s allowance for loan and lease losses has been identified
and included in Management’s Report on Internal Control over Financial Reporting. 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, 2016 and 2015, 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, 2016.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2016
consolidated financial statements, and this report does not affect our report dated March 1, 2017, which expressed an unqualified
opinion on those consolidated financial statements.
In our opinion, because of the effect of the aforementioned material weakness on the achievement of the objectives of the control
criteria, Central Pacific Financial Corp. has not maintained effective internal control over financial reporting as of December 31,
2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We do not express an opinion or any other form of assurance on management’s statements referring to corrective actions taken
after December 31, 2016, relative to the aforementioned material weakness in internal control over financial reporting.
/s/ KPMG LLP
Honolulu, Hawaii
March 1, 2017
74
CENTRAL PACIFIC FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
Cash and due from banks
Interest-bearing deposits in other banks
Investment securities:
Available for sale, at fair value
December 31,
2016
2015
(Dollars in thousands)
$
75,272
$
9,069
71,797
8,397
1,243,847
1,272,255
Held to maturity, at amortized cost (fair value of $214,366 at December 31, 2016 and $244,136 at December 31, 2015)
217,668
247,917
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
Bank-owned life insurance
Federal Home Loan Bank stock
Other assets
Total assets
Liabilities and Equity
Deposits:
Noninterest-bearing demand
Interest-bearing demand
Savings and money market
Time
Total deposits
Short-term borrowings
Long-term debt
Other liabilities
Total liabilities
Equity:
1,461,515
1,520,172
31,881
14,109
3,524,890
3,211,532
(56,631)
(63,314)
3,468,259
3,148,218
48,258
15,675
6,889
791
15,779
4,680
155,593
11,572
79,003
49,161
14,898
6,157
1,962
17,797
7,355
153,967
8,606
108,692
$
5,384,236
$
5,131,288
$
1,265,246
$
1,145,244
862,991
1,390,600
1,089,364
4,608,201
135,000
92,785
43,575
824,895
1,399,093
1,064,207
4,433,439
69,000
92,785
41,425
4,879,561
4,636,649
Preferred stock, no par value, authorized 1,000,000 shares, issued and outstanding none at December 31, 2016 and 2015
—
—
Common stock, no par value, authorized 185,000,000 shares, issued and outstanding 30,796,243 and 31,361,452 shares at
December 31, 2016 and 2015, respectively
Surplus
Accumulated deficit
Accumulated other comprehensive income
Total shareholders' equity
Non-controlling interest
Total equity
Total liabilities and equity
530,932
84,180
548,878
82,847
(108,941)
(137,314)
(1,521)
504,650
25
203
494,614
25
504,675
494,639
$
5,384,236
$
5,131,288
See accompanying notes to consolidated financial statements.
75
CENTRAL PACIFIC FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Interest income:
Interest and fees on loans and leases
Interest and dividends on investment securities:
Taxable interest
Tax-exempt 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 short-term borrowings
Interest on long-term 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:
Mortgage banking income
Service charges on deposit accounts
Other service charges and fees
Income from fiduciary activities
Income from bank-owned life insurance
Net gain on sales of foreclosed assets
Gain on sale of premises and equipment
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
Net income
Per common share data:
Basic earnings per share
Diluted earnings per share
Cash dividends declared
Year Ended December 31,
2016
2015
2014
(Dollars in thousands, except per share data)
$
132,028
$
118,887
$
112,137
30,848
3,975
42
67
179
32,969
4,022
36
35
86
33,574
3,996
23
33
46
167,139
156,035
149,809
489
1,043
4,074
578
3,005
9,189
157,950
(5,517)
163,467
8,069
7,891
11,449
3,435
2,685
607
3,537
723
519
494
—
2,907
42,316
73,500
14,065
6,856
9,475
2,675
3,694
3,399
2,401
152
17,346
133,563
72,220
25,228
399
916
2,312
254
2,626
6,507
149,528
(15,671)
165,199
7,254
7,829
11,461
3,343
2,034
568
—
578
450
720
(1,866)
2,428
34,799
66,429
14,432
7,340
8,831
2,674
3,483
3,475
2,550
486
17,342
127,042
72,956
27,088
373
901
2,453
92
2,572
6,391
143,418
(6,414)
149,832
8,980
8,113
11,754
3,552
2,922
971
—
480
464
437
240
3,253
41,166
67,941
15,252
7,806
6,327
2,675
3,635
3,582
2,342
1,710
18,886
130,156
60,842
20,389
40,453
1.08
1.07
0.36
$
$
46,992
$
45,868
$
$
1.52
1.50
0.60
$
1.42
1.40
0.82
See accompanying notes to consolidated financial statements.
76
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
Minimum pension liability adjustment
Other comprehensive income (loss), net of tax
Comprehensive income
2016
Year Ended December 31,
2015
(Dollars in thousands)
2014
$
46,992
$
45,868
$
40,453
(4,452)
2,728
(1,724)
45,268
$
(4,405)
1,449
(2,956)
42,912
$
22,711
(3,707)
19,004
59,457
$
See accompanying notes to consolidated financial statements.
77
CENTRAL PACIFIC FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Common
Shares
Outstanding
Preferred
Stock
Common
Stock
Surplus
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Non
Controlling
Interests
(Dollars in thousands, except per share data)
Balance at December 31, 2013
42,107,633
$
— $
784,547
$ 75,498
$
(184,087)
Net income
Other comprehensive loss
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
Share-based compensation
Non-controlling interests
—
—
—
—
(7,045,620)
171,661
—
—
—
—
—
—
—
—
—
—
—
(11)
(142,405)
—
—
—
—
—
74
—
4,218
—
40,453
—
(13,405)
—
—
—
—
$
$
(15,845)
$
—
19,004
—
—
—
—
—
61
—
—
—
—
—
—
(61)
Total
$ 660,174
40,453
19,004
(13,405)
(11)
(142,405)
4,292
(61)
Balance at December 31, 2014
35,233,674
$
— $
642,205
$ 79,716
$
(157,039)
$
3,159
$
— $ 568,041
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
Share-based compensation
Non-controlling interests
—
—
—
—
(4,122,881)
250,659
—
—
—
—
—
—
—
—
—
—
—
(154)
(93,533)
360
—
—
—
—
—
—
3,131
—
45,868
—
(26,143)
—
—
—
—
—
(2,956)
—
—
—
—
—
Balance at December 31, 2015
31,361,452
$
— $
548,878
$ 82,847
$
(137,314)
$
203
$
Net income
Other comprehensive income
Cash dividends ($0.60 per share)
22,800 net shares of common stock sold by
directors' deferred compensation plan
796,822 shares of common stock repurchased and
other related costs
Share-based compensation
—
—
—
—
(796,822)
231,613
—
—
—
—
—
—
—
—
—
(681)
(18,206)
—
—
—
—
—
941
1,333
46,992
—
(18,619)
—
—
—
—
(1,724)
—
—
—
—
Balance at December 31, 2016
30,796,243
$
— $
530,932
$ 84,180
$
(108,941)
$
(1,521)
$
—
—
—
—
—
—
25
25
—
—
—
—
—
—
25
45,868
(2,956)
(26,143)
(154)
(93,533)
3,491
25
$ 494,639
46,992
(1,724)
(18,619)
(681)
(18,206)
2,274
$ 504,675
See accompanying notes to consolidated financial statements.
78
CENTRAL PACIFIC FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2016
2015
2014
(Dollars in thousands)
$
46,992
$
45,868
$
40,453
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
Gain on sale of premises and equipment
Amortization of mortgage servicing rights and other intangible assets
Write down of other real estate, net of gain on sale
Net amortization of investment securities
Share-based 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 bank-owned life insurance
Deferred income taxes
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 bank-owned life insurance
Proceeds from sale of premises and equipment
Purchases of premises and equipment
Distributions from unconsolidated subsidiaries
Net return of capital from (contributions to) unconsolidated subsidiaries
Proceeds from redemption (purchases) of FHLB stock
Net cash used in investing activities
Cash flows from financing activities:
Net increase in deposits
Repayments of long-term debt
Net increase in short-term borrowings
Cash dividends paid on common stock
Repurchases of common stock
Net proceeds from issuance of common stock and stock option exercises
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
(5,517)
6,049
(3,537)
7,741
(251)
12,945
1,333
—
(7,631)
432,331
(442,472)
(723)
(3,132)
24,427
7,930
76,485
204,426
—
(195,456)
30,989
(1,644)
(239,006)
(76,946)
—
2,850
1,506
4,287
(5,896)
645
(5)
(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
—
(2,966)
(277,216)
35,326
(315,141)
174,762
—
66,000
(18,619)
(18,206)
941
204,878
4,147
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
49,348
Cash and cash equivalents at beginning of year
80,194
86,007
79
Cash and cash equivalents 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,
2016
2015
2014
(Dollars in thousands)
84,341
$
80,194
$
86,007
8,705
$
—
6,453
$
1,642
1,605
—
681
$
154
$
1,428
—
5,903
6,658
6,413
—
185
11
2,783
—
$
$
$
See accompanying notes to consolidated financial statements.
80
CENTRAL PACIFIC FINANCIAL CORP. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2016, 2015, and 2014
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 full-
service commercial bank with 35 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, mobile 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 non-deposit
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 26 - Segment Information.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
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 also 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, 2016 and 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 non-controlling 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 $0.7 million and $6.2
million, respectively, at December 31, 2016 and $0.6 million and $5.5 million, respectively, at December 31, 2015. Our policy
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
81
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, deferred income tax assets
and income tax expense, valuation of investment securities, other intangible assets and the related amortization thereon,
pension liability and the fair value of certain financial instruments.
Consolidated Statements of Income Reclassification
On December 31, 2016, the Company elected to reclassify loan servicing fees, amortization of mortgage servicing rights, net
gain on sale of residential mortgage loans, and unrealized gain (loss) on interest rate locks into a single line item called
"mortgage banking income" in the Company's consolidated statements of income. Loan servicing fees and net gain on sale of
residential mortgage loans were previously recorded in its own line in the other operating income section of the consolidated
statements of income, while unrealized gain (loss) on interest rate locks was included as a component of other operating
income - other. The amortization of mortgage servicing rights was previously recorded as a component of amortization and
impairment of other intangible assets in the other operating expense section of the Company's consolidated statements of
income. The components of mortgage banking income are disclosed in Note 15 - Mortgage Banking Income to the consolidated
financial statements. The Company believes the reclassification provides a better presentation of revenues and costs of our
mortgage banking activities. Comparative financial statements of prior years have been adjusted retrospectively.
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, interest-bearing 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. Available-for-sale 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 activity-based investment requirement. The securities are reported at cost and are presented
separately in the consolidated balance sheets.
82
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 non-residential 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
included in the basis for determining the gain or loss on sales of loans held for sale. We report the fair values of the non-
residential 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 write-down 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 incurred credit losses resulting from repurchased loans.
Loans
Loans are stated at the principal amount outstanding, net of unearned income. Unearned income represents net deferred loan
fees (costs) that are recognized over the life of the related loan as an adjustment to yield. Net deferred loan fees (costs) are
amortized using the interest method over the contractual term of the loan, adjusted for actual prepayments. Unamortized fees
(costs) 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 well-secured 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.
83
Our lease portfolio has declined over the last eight years and had an outstanding balance of $0.7 million and $1.0 million at
December 31, 2016 and 2015, 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
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 charge-offs.
During the fourth quarter of 2016, the Company implemented an enhanced Allowance methodology due to the growth in the
portfolio and improved credit quality. Management believes the enhanced methodology provides for greater precision in
calculating the Allowance. The following summarizes the key enhancements made to the Allowance methodology:
• Collapsed 128 segments into nine segments. The enhanced methodology uses FDIC Call Report codes to identify the
nine segments.
• Expanded the look-back period to 28 quarters to capture a longer economic cycle.
• Utilized a migration analysis, versus average historical loss rate, to determine the historical loss rates for segments,
with the exception of national syndicated loans due to limited loss history.
• Applied a segment specific loss emergence period.
• Determined qualitative reserves, calculated at the segment level, considering nine qualitative factors and based on a
baseline risk weighting adjusted for current internal and external factors.
• Eliminated the Moody's proxy rate that was applied under the previous methodology.
• Eliminated the unallocated reserve.
These enhancements and continued improvement in portfolio credit quality resulted in a credit to the Provision of $2.6 million
during the fourth quarter of 2016.
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 qualitative
adjustments based on environmental and other factors which may be internal or external to the Company. These three elements
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") 310-10, 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: risk-rated
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. The enhanced methodology segments the portfolio by FDIC Call Report codes.
This results in nine segments, and is more consistent with industry practice. For the purpose of determining general allowance
loss factors, loss experience is derived from a migration analysis, with the exception of national syndicated loans where an
average historical loss rate is applied due to limited historical loss experience. The key inputs to run a migration analysis are the
length of the migration period, the dates for the migration periods to start and the number of migration periods used for the
analysis. For each migration period, the analysis will determine the outstanding balance in each segment and/or sub-segment at
84
the start of each period. These loans will then be followed for the length of the migration period to identify the amount of
associated charge-offs and recoveries. A loss rate for each migration period is calculated using the formula ‘net charge-offs over
the period divided by beginning loan balance'. The Allowance methodology applies a look back period to January 1, 2010. The
Company intends to extend its look back period moving forward.
Qualitative Adjustments
Our Allowance methodology uses qualitative adjustments to address changes in conditions, trends, and circumstances such as
economic conditions and industry changes that could have a significant impact on the risk profile of the loan portfolio, and
provide for losses in the loan portfolio that may not be reflected and/or captured in the historical loss data. In order to ensure
that the qualitative adjustments are in compliance with current regulatory standards and U.S. GAAP, the Company is primarily
basing adjustments on the nine standard factors outlined in the FRB's 2006 Interagency Policy Statement on the Allowance for
Loan and Lease Losses. These factors include: lending policies, economic conditions, loan profile, lending staff, problem loan
trends, loan review, collateral, credit concentrations and other internal & external factors.
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 adjustments are applied to factor in current loan portfolio and
market intelligence. These adjustments, which are added to the historical loss rate, consider the nature of the Company's
primary markets and are reasonable, consistently determined and appropriately documented. Management reviews the results
of the qualitative adjustment quarterly 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.
Reserve for Unfunded Commitments
Our process for determining the reserve for unfunded loan commitments utilizes historical loss rates 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 off-balance sheet credit exposures are deducted from the allowance for
credit losses on off-balance sheet credit exposures in the period in which the liability is settled. The allowance for credit losses
on off-balance 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 straight-line method over the shorter of the estimated useful
lives of the assets or the applicable leases. Useful lives generally range from five to thirty-nine years for premises and
improvements, and one to seven years for equipment. Major improvements and betterments are capitalized, while recurring
maintenance and repairs are charged to operating expense. Net gains or losses on dispositions of premises and equipment are
included in other operating income and 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 a component
of mortgage banking income in our consolidated statements of income. Ancillary income is recorded in other income. Mortgage
servicing rights are recorded when loans are sold to third-parties 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
85
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.
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.
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.
Non-Controlling Interest
Non-controlling interest at December 31, 2016 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,
2016 and December 31, 2015 totaled $25 thousand.
Share Based Compensation
Share-based 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 Black-Scholes option-pricing model to determine the fair-
value of stock options and we recognize compensation expense for all share-based payment awards on a straight-line basis over
their respective vesting period. See Note 16 - Share-Based Compensation for further discussion of our stock-based
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
86
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.
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 June 2014, the FASB issued ASU 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide
That a Performance Target Could Be Achieved after the Requisite Service Period." ASU 2014-12 requires that a performance
target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As
of December 31, 2016, the Company did not have any share-based payment awards that included performance targets that
could be achieved after the requisite service period. As such, the adoption of ASU 2014-12 on January 1, 2016 did not have a
material impact on our consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, "Amendments to the Consolidation Analysis." ASU 2015-02 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 2a-7 of the Investment Company Act of 1940 for registered money market funds. All legal entities are
subject to reevaluation under the revised consolidation model. The adoption of ASU 2015-02 on January 1, 2016 did not have a
material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments (Topic 230)."
ASU 2016-15 provides guidance on eight statement of cash flow classification issues and is intended to reduce the current and
future diversity in practice described in the amendments. Current GAAP is either unclear or does not include specific guidance
on the eight statement of cash flow classification issues included in ASU 2016-15. ASU 2016-15 is effective for the Company's
reporting period beginning January 1, 2018. Early adoption is permitted, provided that all of the amendments are adopted in the
same period. The amendments in ASU 2016-15 should be applied using a retrospective transition method to each period
presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those
issues would be applied prospectively as of the earliest date practicable. Among other things, the update clarifies the
appropriate classification for proceeds from settlement of bank owned life insurance (BOLI) policies. Based on preliminary
87
evaluation, our current practice is consistent with the update and we thus do not expect the update to have a reclassification
impact. Additionally, we do not expect other changes in classification resulting from this update to be significant.
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, 2016 and 2015 was $63.1 million and $59.5 million, respectively.
3. INVESTMENT SECURITIES
A summary of our investment securities portfolio as of December 31, 2016 and 2015 is as follows:
Amortized
Cost
Gross
Gross
Unrealized
Unrealized
Gains
Losses
(Dollars in thousands)
Estimated
Fair
Value
$
$
124,082
93,586
217,668
$
$
92
—
92
$
$
(2,474) $
(920)
(3,394) $
121,700
92,666
214,366
December 31, 2016
Held-to-Maturity:
Mortgage-backed securities:
Residential-U.S. Government sponsored entities
Commercial-U.S. Government sponsored entities
Total
Available-for-Sale:
Debt securities:
States and political subdivisions
$
184,836
$
2,002
$
Corporate securities
Mortgage-backed securities:
Residential-U.S. Government sponsored entities
Residential-Non-government sponsored entities
Commercial-Non-government sponsored entities
Other
Total
98,596
775,803
51,681
135,248
564
974
3,698
627
2,387
96
$
1,246,728
$
9,784
$
(1,797) $
(181)
185,041
99,389
(9,515)
(761)
(411)
—
(12,665) $
769,986
51,547
137,224
660
1,243,847
88
December 31, 2015
Held-to-Maturity:
Mortgage-backed securities:
Residential-U.S. Government sponsored entities
Commercial-U.S. Government sponsored entities
Total
Available-for-Sale:
Debt securities:
States and political subdivisions
Corporate securities
Mortgage-backed securities:
Residential-U.S. Government sponsored entities
Residential-Non-government sponsored entities
Commercial-Non-government sponsored entities
Other
Total
Amortized
Cost
Gross
Gross
Unrealized
Unrealized
Gains
Losses
(Dollars in thousands)
Estimated
Fair
Value
$
$
$
$
152,315
95,602
247,917
187,552
107,721
771,657
64,286
135,439
848
1,267,503
$
$
$
$
123
—
123
3,819
1,077
5,885
733
2,033
68
13,615
$
$
$
$
(2,915) $
(989)
(3,904) $
149,523
94,613
244,136
(898) $
(227)
190,473
108,571
(5,633)
(987)
(1,118)
—
(8,863) $
771,909
64,032
136,354
916
1,272,255
The amortized cost and estimated fair value of our investment securities at December 31, 2016 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.
Held-to-Maturity:
Mortgage-backed securities
Available-for-Sale:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
Other
Total
There were no investment security sales in 2016.
December 31, 2016
Amortized
Cost
Estimated
Fair Value
(Dollars in thousands)
$
$
$
217,668
$
214,366
6,701
$
132,559
67,541
76,631
962,732
564
6,699
133,374
67,664
76,693
958,757
660
1,246,728
$
1,243,847
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 lower-yielding available-for-sale non-agency collateralized mortgage obligation
securities, and purchased $120.6 million in higher yielding, longer duration mortgage-backed 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 of $117.5 million were
reinvested into agency mortgage-backed securities with an average net yield of 2.71% and weighted average life of 7.6 years.
The new securities were classified in the available-for-sale portfolio. There were no gross realized gains on the sale of the
89
available-for-sale investment securities. Gross realized losses on the sale of the available-for-sale investment securities were
$1.9 million. The specific identification method was used as the basis for determining the cost of all securities sold.
In the second quarter of 2014, we sold certain available-for-sale investment securities for gross proceeds of $162.5 million.
Gross realized gains and losses on the sales of the available-for-sale 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. The specific
identification method was used as the basis for determining the cost of all securities sold.
Investment securities of $1.1 billion and $1.0 billion at December 31, 2016 and 2015, respectively, were pledged to secure
public funds on deposit and other long-term and short-term borrowings.
There were a total of 242 and 155 securities in an unrealized loss position at December 31, 2016 and 2015, respectively.
Provided below is a summary of investment securities which were in an unrealized loss position at December 31, 2016 and
2015:
Description of Securities
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Less Than 12 Months
12 Months or Longer
Total
(Dollars in thousands)
December 31, 2016
Debt securities:
States and political subdivisions
$
85,288
$
(1,797) $
Corporate securities
20,357
(181)
— $
—
— $
85,288
$
(1,797)
—
20,357
(181)
Mortgage-backed securities:
Residential-U.S. Government sponsored entities
648,923
(11,766)
3,978
(223)
652,901
(11,989)
Residential-Non-government sponsored entities
Commercial-U.S. Government sponsored entities
Commercial-Non-government sponsored entities
30,596
92,666
52,880
(761)
(920)
(411)
—
—
—
—
—
—
30,596
92,666
52,880
(761)
(920)
(411)
Total temporarily impaired securities
$
930,710
$
(15,836) $
3,978
$
(223) $
934,688
$
(16,059)
Description of Securities
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
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
$
30,481
$
(532) $
12,576
$
(366) $
43,057
$
Corporate securities
32,977
(227)
—
—
32,977
(898)
(227)
Mortgage-backed securities:
Residential-U.S. Government sponsored entities
507,525
(6,241)
88,271
(2,307)
595,796
(8,548)
Residential-Non-government sponsored entities
Commercial-U.S. Government sponsored entities
Commercial-Non-government sponsored entities
37,975
94,613
62,555
(987)
(989)
(961)
—
—
—
—
4,644
(157)
37,975
94,613
67,199
(987)
(989)
(1,118)
Total temporarily impaired securities
$
766,126
$
(9,937) $
105,491
$
(2,830) $
871,617
$
(12,767)
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
90
repayment structure, and remaining credit enhancement as compared to projected credit losses of the security. All of these
investment securities continue to be investment grade rated by one or more major rating agencies.
Other-than-temporary impairment ("OTTI")
Unrealized losses for all investment securities are reviewed to determine whether the losses are "other-than-temporary."
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-than-
temporary. 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;
• 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;
•
• Any rating changes by a rating agency; and
• Recoveries or additional decline in fair value subsequent to the balance sheet date.
Failure of the issuer to make scheduled interest or principal payments;
The term "other-than-temporary" is not intended to indicate that the decline is permanent, but indicates that the prospects for a
near-term 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 other-than-
temporary, 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 volatility 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 other-
than-temporarily 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
Home equity
Commercial
Consumer:
Automobiles
Other consumer
Leases
Subtotal
Net deferred costs
Total loans and leases
December 31,
2016
2015
(Dollars in thousands)
$
509,987
$
520,457
101,729
85,196
1,213,983
1,131,882
361,210
886,615
212,926
235,684
677
301,980
761,566
190,202
217,822
1,028
3,522,811
3,210,133
2,079
1,399
$
3,524,890
$
3,211,532
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)
91
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, 2016, we transferred the collateral in two portfolio loans with a carrying value of $1.3
million to other real estate. We did not transfer any loans to the held-for-sale category during the year ended December 31,
2016. In addition, we did not sell any portfolio loans during the year ended December 31, 2016.
In 2016, we purchased two auto loan portfolios totaling $41.2 million, which included a $0.9 million premium over the $40.3
million outstanding balance. At the time of purchase, the auto loan portfolios had a weighted average remaining term of 64
months. In 2016, we also purchased two unsecured consumer loan portfolios totaling $35.7 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 38 months.
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 held-for-sale 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 for $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.
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,
2016
2015
(Dollars in thousands)
$
$
10,475
$
8,398
(1,726)
—
17,147
$
29,231
10,392
(20,863)
(8,285)
10,475
Other changes represent changes in the composition of directors, executive officers and their affiliates that occurred during the
year.
92
Impaired Loans
The following tables present 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, 2016 and 2015:
Real Estate
Comm.,
Fin. &
Ag.
Constr.
Resi.
Mortgage
Home
Equity
Comml.
Mortgage
Consumer -
Auto.
Consumer -
Other
Leases
Total
(Dollars in thousands)
December 31, 2016
Allowance:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total ending balance
$
$
— $
— $
— $
— $
— $
— $
— $
— $
—
8,637
4,224
15,055
3,502
19,104
3,000
3,109
—
8,637
$
4,224
$
15,055
$
3,502
$
19,104
$
3,000
$
3,109
$
— $
56,631
56,631
Loans and leases:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Subtotal
Net deferred costs (income)
$
1,877
$
2,936
$
19,940
$
333
$
5,637
$
— $
— $
— $
30,723
508,110
509,987
453
98,793
1,194,043
101,729
1,213,983
360,877
361,210
880,978
886,615
(191)
3,251
(1)
(1,176)
212,926
212,926
—
235,684
235,684
(257)
677
677
—
3,492,088
3,522,811
2,079
Total ending balance
$
510,440
$
101,538
$ 1,217,234
$
361,209
$
885,439
$
212,926
$
235,427
$
677
$ 3,524,890
Real Estate
Comm.,
Fin. &
Ag.
Constr.
Resi.
Mortgage
Home
Equity
Comml.
Mortgage
Consumer -
Auto.
Consumer -
Other
Leases
Unallocated
Total
(Dollars in thousands)
December 31, 2015
Allowance:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Subtotal
Unallocated
$
— $
— $
— $
— $
51
$
— $
— $ — $
— $
51
6,905
6,905
—
8,454
8,454
—
14,642
14,642
—
3,096
3,096
—
21,796
21,847
—
2,891
2,891
—
3,339
3,339
—
—
—
—
—
—
2,140
61,123
61,174
2,140
Total ending balance
$
6,905
$
8,454
$
14,642
$
3,096
$
21,847
$
2,891
$
3,339
$ — $
2,140
$
63,314
Loans and leases:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Subtotal
$
1,044
$
4,126
$
21,940
$
776
$
10,318
$
— $
— $ — $
— $
38,204
Net deferred costs (income)
629
(311)
2,443
—
(817)
519,413
520,457
81,070
85,196
1,109,942
301,204
1,131,882
301,980
751,248
761,566
190,202
190,202
—
217,822
217,822
(545)
1,028
1,028
—
— 3,171,929
— 3,210,133
—
1,399
Total ending balance
$ 521,086
$ 84,885
$ 1,134,325
$ 301,980
$ 760,749
$
190,202
$
217,277
$ 1,028
$
— $3,211,532
93
The following table presents by class, impaired loans as of December 31, 2016 and 2015:
December 31, 2016
December 31, 2015
Unpaid
Principal
Balance
Recorded
Investment
Allowance
Allocated
Unpaid
Principal
Balance
Recorded
Investment
Allowance
Allocated
(Dollars in thousands)
Impaired loans with no related Allowance recorded:
Commercial, financial & agricultural
$
1,988
$
1,877
$
— $
1,155
$
1,044
$
Real estate:
Construction
Residential mortgage
Home equity
Commercial mortgage
Total
Impaired loans with an Allowance recorded:
Real estate: Commercial mortgage
Total
Total impaired loans
9,056
21,568
333
5,637
38,582
—
—
2,936
19,940
333
5,637
30,723
—
—
—
—
—
—
—
—
—
10,472
24,016
776
10,010
46,429
1,166
1,166
4,126
21,940
776
9,152
37,038
1,166
1,166
$
38,582
$
30,723
$
— $
47,595
$
38,204
$
—
—
—
—
—
—
51
51
51
The following table presents by class, the average recorded investment and interest income recognized on impaired loans as of
December 31, 2016, 2015 and 2014:
Year Ended
Year Ended
Year Ended
December 31, 2016
December 31, 2015
December 31, 2014
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars in thousands)
Commercial, financial & agricultural
$
1,891
$
10
$
6,273
$
17
$
14,303
$
Real estate:
Construction
Residential mortgage
Home equity
Commercial mortgage
Total
3,509
21,809
472
8,537
36,218
$
$
123
236
17
321
707
$
4,428
25,556
545
14,240
51,042
$
190
60
18
373
658
$
5,517
30,938
2,164
18,692
71,614
$
22
163
564
63
397
1,209
94
Foreclosure Proceedings
The Company had $0.3 million and $0.9 million of residential mortgage loans collateralized by residential real estate property
that were in the process of foreclosure at December 31, 2016 and 2015, respectively.
Aging Analysis of Accruing and Non-Accruing 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 tables present by class, the aging of the recorded investment in
past due loans and leases as of December 31, 2016 and 2015:
December 31, 2016
Commercial, financial &
agricultural
Real estate:
Construction
Mortgage:
Residential
Home equity
Commercial
Consumer:
Automobiles
Other consumer
Leases
Total
December 31, 2015
Commercial, financial &
agricultural
Real estate:
Construction
Mortgage:
Residential
Home equity
Commercial
Consumer:
Automobiles
Other consumer
Leases
Total
Accruing
Loans
30 - 59
Days
Past Due
Accruing
Loans
60 - 89
Days
Past Due
Accruing
Loans
Greater Than
90 Days
Past Due
Nonaccrual
Loans
Total
Past Due
and
Nonaccrual
Loans and
Leases Not
Past Due
Total
(Dollars in thousands)
$
761
$
80
$
— $
1,877
$
2,718
$
507,722
$ 510,440
—
5,014
43
127
743
639
—
—
478
280
—
353
272
—
—
—
1,120
—
208
63
—
—
—
101,538
101,538
5,322
333
864
—
—
—
10,814
1,206,420
1,217,234
1,776
991
1,304
974
—
359,433
884,448
361,209
885,439
211,622
234,453
677
212,926
235,427
677
$
7,327
$
1,463
$
1,391
$
8,396
$
18,577
$ 3,506,313
$3,524,890
Accruing
Loans
30 - 59
Days
Past Due
Accruing
Loans
60 - 89
Days
Past Due
Accruing
Loans
Greater Than
90 Days
Past Due
Nonaccrual
Loans
Total
Past Due
and
Nonaccrual
Loans and
Leases Not
Past Due
Total
(Dollars in thousands)
$
276
$
140
$
— $
1,044
$
1,460
$
519,626
$ 521,086
—
3,134
700
54
912
531
—
—
325
220
—
168
353
—
—
—
—
—
151
122
—
—
—
84,885
84,885
5,464
666
7,094
—
—
—
8,923
1,586
7,148
1,231
1,006
—
1,125,402
1,134,325
300,394
753,601
301,980
760,749
188,971
216,271
1,028
190,202
217,277
1,028
$
5,607
$
1,206
$
273
$
14,268
$
21,354
$ 3,190,178
$3,211,532
95
Interest income totaling $0.6 million, $0.5 million, and $0.4 million was recognized on nonaccrual loans, including loans held
for sale, in 2016, 2015 and 2014, respectively. Additional interest income of $1.2 million, $1.5 million, and $4.0 million would
have been recognized in 2016, 2015 and 2014, respectively, had these loans been accruing interest throughout those periods.
Additionally, interest income of $1.3 million, $0.8 million, and $0.2 million was collected and recognized on charged-off loans
in 2016, 2015 and 2014, respectively.
Modifications
TDRs included in nonperforming assets at December 31, 2016 consisted of 21 Hawaii residential mortgage loans with a
combined principal balance of $2.8 million and three Hawaii commercial loans with a combined principal balance of $0.8
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. At December 31, 2015, TDRs included in nonperforming assets consisted of 26 loans with a combined principal
balance of $6.6 million.
There were $16.2 million of TDRs still accruing interest at December 31, 2016, none of which were more than 90 days
delinquent. At December 31, 2015, there were $20.3 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 charge-offs 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, 2016 and 2015.
The following table presents by class, information related to loans modified in a TDR during the years ended December 31,
2016 and 2015:
Year ended December 31, 2016
Year ended December 31, 2015
Number of
Contracts
Recorded
Investment
(as of period end)
Increase in
the
Allowance
Number of
Contracts
Recorded
Investment
(as of period end)
Increase in
the
Allowance
(Dollars in thousands)
Commercial, financial & agricultural
— $
— $
Real estate: Residential mortgage
Total
3
3
282
282
—
—
—
1
3
4
$
488
$
4,131
4,619
—
—
—
No loans were modified as a TDR within the previous twelve months that subsequently defaulted during the years ended
December 31, 2016 and 2015.
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 non-homogeneous 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.
96
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
well-defined 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.
Loss. Loans and leases classified as loss are considered to be non-collectible 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 tables present
by class and credit indicator, the recorded investment in the Company's loans and leases as of December 31, 2016 and 2015:
Pass
Special
Mention
Substandard
Loss
Subtotal
(Dollars in thousands)
Net
Deferred
Costs
(Income)
Total
December 31, 2016
Commercial, financial & agricultural $ 502,305
$
2,632
$
5,050
$
— $ 509,987
$
453
$ 510,440
Real estate:
Construction
Mortgage:
Residential
Home equity
Commercial
Consumer:
Automobiles
Other consumer
Leases
Total
91,812
9,896
21
—
101,729
(191)
101,538
1,208,552
359,757
852,872
212,718
235,544
677
109
—
18,845
—
—
—
5,322
1,453
14,898
50
140
—
— 1,213,983
3,251
1,217,234
—
—
158
—
—
361,210
886,615
212,926
235,684
677
(1)
(1,176)
361,209
885,439
—
(257)
—
212,926
235,427
677
$ 3,464,237
$
31,482
$
26,934
$
158
$ 3,522,811
$
2,079
$ 3,524,890
97
Pass
Special
Mention
Substandard
Loss
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
Home equity
Commercial
Consumer:
Automobiles
Other consumer
Leases
Total
83,601
808
787
—
85,196
(311)
84,885
1,126,418
301,314
705,520
190,051
217,727
1,028
—
—
41,335
—
95
—
5,464
666
14,711
151
—
—
— 1,131,882
2,443
1,134,325
—
—
—
—
—
301,980
761,566
190,202
217,822
1,028
—
(817)
—
(545)
—
301,980
760,749
190,202
217,277
1,028
$ 3,140,630
$
44,406
$
25,097
$
— $ 3,210,133
$
1,399
$ 3,211,532
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
charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores,
debt-to-income 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, 2016 and 2015, we did not have any loans that we
considered to be subprime.
5. ALLOWANCE FOR LOAN AND LEASE LOSSES
The following tables present by class, the activity in the Allowance for the periods indicated:
Real Estate
Commercial,
Financial &
Agricultural
Construction
Residential
Mortgage
Home
Equity
Commercial
Mortgage
Consumer
- Auto
Consumer
- Other
Leases
Unallocated
Total
(Dollars in thousands)
Year ended December 31, 2016
Beginning balance
$
6,905
$
8,454
$
14,642
$
3,096
$
21,847
$
2,891
$
3,339
$
— $
2,140
$ 63,314
Provision (credit) for
loan and lease losses
Charge-offs
Recoveries
Net charge-offs
(recoveries)
1,217
8,122
1,599
2,114
(4,363)
4,091
—
133
(282)
14,360
—
695
391
3,487
—
15
(3,558)
18,289
209
1,024
784
3,675
1,563
888
(515)
(133)
(695)
(15)
(815)
675
2,434
5,773
3,491
827
2,664
—
—
—
—
—
(2,140)
(5,517)
—
—
—
—
57,797
6,862
5,696
1,166
Ending balance
$
8,637
$
4,224
$
15,055
$
3,502
$
19,104
$
3,000
$
3,109
$
— $
— $ 56,631
98
Real Estate
Commercial,
Financial &
Agricultural
Construction
Residential
Mortgage
Home
Equity
Commercial
Mortgage
Consumer
- Auto
Consumer
- Other
Leases
Unallocated
Total
(Dollars in thousands)
Year ended December 31, 2015
Beginning balance
$
8,954
$
14,969
$
15,031
$
2,896
$
20,869
$
3,373
$
3,941
$
7
$
4,000
$ 74,040
Provision (credit) for
loan and lease losses
Charge-offs
Recoveries
Net charge-offs
(recoveries)
(1,179)
7,775
5,658
4,788
870
(7,395)
7,574
—
880
(1,510)
13,521
—
1,121
(746)
2,150
110
1,056
(4,903)
15,966
838
6,719
49
3,422
1,479
948
(880)
(1,121)
(946)
(5,881)
531
1,907
5,848
3,171
662
2,509
(34)
(27)
—
27
(27)
(1,860)
(15,671)
2,140
—
—
—
58,369
11,256
16,201
(4,945)
Ending balance
$
6,905
$
8,454
$
14,642
$
3,096
$
21,847
$
2,891
$
3,339
$
— $
2,140
$ 63,314
Real Estate
Commercial,
Financial &
Agricultural
Construction
Residential
Mortgage
Home
Equity
Commercial
Mortgage
Consumer
- Auto
Consumer
- Other
Leases
Unallocated
Total
(Dollars in thousands)
Year ended December 31, 2014
Beginning balance
$
13,196
$
2,774
$
22,102
$
3,170
$
29,947
$
3,170
$
3,406
$
55
$
6,000
$ 83,820
Provision (credit) for
loan and lease losses
Charge-offs
Recoveries
Net charge-offs
(1,356)
11,840
5,268
2,382
2,886
10,155
12,929
—
2,040
(2,040)
(7,978)
14,124
—
907
(907)
(220)
2,950
139
85
54
(8,090)
21,857
1,041
53
988
534
3,704
907
576
331
2,589
5,995
2,574
520
2,054
Ending balance
$
8,954
$
14,969
$
15,031
$
2,896
$
20,869
$
3,373
$
3,941
$
(48)
(2,000)
(6,414)
7
8
8
—
7
4,000
77,406
—
—
—
9,937
6,571
3,366
$
4,000
$ 74,040
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
2016
(Dollars in thousands)
$
$
51
$
—
(51)
— $
1,533
$
51
(1,533)
51
$
349
1,354
(170)
1,533
The amounts included in other changes above represent net charge-offs and net transfers of allocated allowances for loans and
leases that were not classified as impaired for the entire year. At December 31, 2016 and 2015, all impaired loans were
measured based on the fair value of the underlying collateral for collateral-dependent 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 mortgage-backed securities from prior securitizations were categorized as available for sale securities and were
therefore recorded at their fair value of $2.0 million and $2.7 million at December 31, 2016 and 2015, respectively. The fair
values of these mortgage-backed securities were based on quoted prices of similar instruments in active markets. Unrealized
gains of $0.1 million and $0.2 million on unsold mortgage-backed securities were recorded in AOCI at December 31, 2016 and
2015, respectively.
7. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following as of December 31, 2016 and 2015:
Land
Office buildings and improvements
Furniture, fixtures and equipment
Gross premises and equipment
Accumulated depreciation and amortization
Net premises and equipment
December 31,
2016
2015
(Dollars in thousands)
8,309
$
96,898
34,191
139,398
(91,140)
48,258
$
9,006
100,892
30,963
140,861
(91,700)
49,161
$
$
Depreciation and amortization of premises and equipment were charged to the following operating expenses:
Net occupancy
Equipment
Total
Year Ended December 31,
2015
2016
2014
$
$
(Dollars in thousands)
4,097
1,952
6,049
$
$
3,997
1,873
5,870
$
$
3,845
1,997
5,842
8. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
Investments in unconsolidated subsidiaries as of December 31, 2016 and 2015 consisted of the following components:
Investments in low income housing tax credit partnerships
Trust preferred investments
Investments in affiliates
Other
Total
December 31,
2016
2015
(Dollars in thousands)
3,353
$
2,792
690
54
6,889
$
2,699
2,792
612
54
6,157
$
$
The Company had $1.7 million in unfunded low income housing commitments as of December 31, 2016. The entire amount is
expected to be paid in 2018. The Company did not have any unfunded low income housing commitments as of December 31,
2015.
100
Investments in low income housing tax credit ("LIHTC") partnerships are accounted for using the cost method. The following
table presents amortization and tax credits recognized associated with our investments in LIHTC partnerships for the periods
presented:
Year Ended December 31,
2015
2016
2014
(Dollars in thousands)
Cost method:
Amortization expense recognized in other operating expense
$
Federal and state tax credits recognized in income tax expense
1,045
$
1,174
1,078
$
1,225
1,363
1,870
9. OTHER INTANGIBLE ASSETS
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, 2014
Additions
Amortization
Balance as of December 31, 2015
Additions
Amortization
Balance as of December 31, 2016
Core
Deposit
Premium
Mortgage
Servicing
Rights
Total
(Dollars in thousands)
10,029
$
19,668
$
—
(2,674)
7,355
—
(2,675)
4,680
$
$
2,314
(4,185)
17,797
3,048
(5,066)
15,779
$
$
$
$
$
29,697
2,314
(6,859)
25,152
3,048
(7,741)
20,459
The gross carrying value, accumulated amortization and net carrying value related to our other intangible assets are presented
below:
December 31, 2016
December 31, 2015
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
Gross
Carrying
Value
(Dollars in thousands)
Accumulated
Amortization
Net
Carrying
Value
Core deposit premium
Mortgage servicing rights
Total
$
$
44,642
62,049
106,691
$
$
(39,962) $
(46,270)
(86,232) $
4,680
15,779
20,459
$
$
44,642
59,001
103,643
$
$
(37,287) $
(41,204)
(78,491) $
7,355
17,797
25,152
101
Based on our other intangible assets held as of December 31, 2016, estimated amortization expense for the next five succeeding
fiscal years and all years thereafter are as follows:
2017
2018
2019
2020
2021
Thereafter
Total
Estimated Amortization Expense
Core Deposit
Premium
Mortgage
Servicing
Rights
Total
(Dollars in thousands)
$
$
2,674
$
2,006
—
—
—
—
2,623
$
2,176
1,848
1,597
1,345
6,190
5,297
4,182
1,848
1,597
1,345
6,190
4,680
$
15,779
$
20,459
At December 31, 2016, 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 a component of mortgage banking income and totaled $3.0 million, $2.3 million, and
$2.2 million in 2016, 2015 and 2014, respectively. Amortization of the servicing rights is reported as a component of mortgage
banking income in our consolidated statements of income. Ancillary income is recorded in other income. Mortgage servicing
rights are recorded when loans are sold to third-parties 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
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.
102
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,
2016
2015
(Dollars in thousands)
$
$
18,345
18,087
9.5%
14.3%
19,975
18,345
9.5%
14.3%
Fair values at December 31, 2016 and 2015 reflected approximately $2.12 billion and $2.17 billion, respectively, in loans
serviced for others.
10. 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. We had no derivative instruments designated as hedging instruments as
of December 31, 2016.
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, 2016, we were a party to interest rate lock and forward sale
commitments on $0.9 million and $32.5 million of mortgage loans, respectively. 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.
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
Balance Sheet
Fair Value at
Fair Value at
Fair Value at
Fair Value at
hedging instruments
Location
December 31, 2016
December 31, 2015
December 31, 2016
December 31, 2015
Asset Derivatives
Liability Derivatives
(Dollars in thousands)
Interest rate contracts
Other assets / other
liabilities
$
260
$
68
$
118
$
9
103
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, 2016
Interest rate contracts
Year ended December 31, 2015
Interest rate contracts
11. DEPOSITS
Location of Gain
Recognized in
Earnings on Derivatives
Amount of Gain (Loss)
Recognized in
Earnings on Derivatives
(Dollars in thousands)
Mortgage banking income
$
Mortgage banking income
83
(324)
Time deposits of $100,000 or more totaled $894.6 million and $851.3 million at December 31, 2016 and 2015, respectively.
Interest expense on certificates of deposits of $100,000 or more totaled $3.3 million, $1.5 million, and $1.4 million for the
years ended December 31, 2016, 2015 and 2014, respectively.
Maturities of time deposits of $100,000 or more as of December 31, 2016 were as follows (in thousands):
Period Ending:
Three months or less
Over three through six months
Over six through twelve months
2018
2019
2020
2021
Thereafter
Total
$
$
421,536
321,475
101,892
19,235
18,234
4,871
7,391
—
894,634
At December 31, 2016 and 2015, overdrawn deposit accounts totaling $0.7 million and $0.5 million have been reclassified as
loans on the consolidated balance sheets.
12. SHORT-TERM 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
$1.41 billion line of credit, of which $1.28 billion remained available as of December 31, 2016. At December 31, 2016, short-
term borrowings under this arrangement totaled $135.0 million. At December 31, 2015, short-term borrowings under this
arrangement totaled $69.0 million.
At December 31, 2016 and 2015, our bank had additional unused borrowings available at the Federal Reserve discount window
of $63.7 million and $40.8 million, respectively. As of December 31, 2016 and 2015, certain commercial real estate and
commercial loans with a carrying value totaling $129.9 million and $87.3 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 short-term borrowings were $0.6 million, $0.3 million and $0.1 million in 2016, 2015 and 2014,
respectively.
104
A summary of our short-term borrowings as of December 31, 2016, 2015 and 2014 is as follows:
Amount outstanding at December 31
Average amount outstanding during year
Highest month-end balance during year
$
Weighted average interest rate on balances outstanding at December 31
Weighted average interest rate during year
13. LONG-TERM DEBT
Year Ended December 31,
2015
(Dollars in thousands)
$
69,000
$
2016
135,000
110,928
226,000
0.74%
0.52%
92,045
157,000
0.35%
0.28%
2014
38,000
31,732
102,000
0.25%
0.29%
Long-term debt, which is based on original maturity, consisted of the following at December 31, 2016 and 2015:
December 31,
2016
2015
(Dollars in thousands)
Subordinated debentures
$
92,785
$
92,785
FHLB Advances
There were no FHLB long-term Advances outstanding as of December 31, 2016 and 2015. At December 31, 2016, our bank
had FHLB advances available of approximately $1.28 billion, which was secured by unencumbered investment securities with
a fair value of $0.2 million and certain real estate loans with a carrying value of $1.84 billion in accordance with the collateral
provisions of the Advances, Pledge and Security Agreement with the FHLB. There was no interest expense on long-term
FHLB advances in 2016 and 2015, compared to less than $1 thousand in 2014, respectively.
Subordinated Debentures
In October 2003, we created two wholly-owned 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 three-month 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.
Trust III issued $20.0 million in trust preferred securities bearing an interest rate of three-month 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 wholly-owned statutory trust, CPB Capital Trust IV ("Trust IV"). Trust IV issued $30.0
million in trust preferred securities bearing an interest rate of three-month 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 wholly-owned statutory trust, CPB Statutory Trust V ("Trust V"). Trust V issued $20.0 million
in trust preferred securities bearing an interest rate of three-month 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
105
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.
At December 31, 2016, future principal payments on long-term debt based on final maturity are as follows (in thousands):
Year Ending December 31:
2017
2018
2019
2020
2021
Thereafter
Total
14. EQUITY
$
$
—
—
—
—
—
92,785
92,785
We have generated considerable tax benefits, including net operating loss carry-forwards 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 "5-percent shareholders" (as defined under U.S. income tax laws) that exceeded 50 percentage points
over a rolling three-year 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
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 was 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"). 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. 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 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 state-chartered 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,
2016, the bank had Statutory Retained Earnings of $83.9 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").
106
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.
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 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 "2014 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 the authorization under the 2014 Repurchase Plan by $25.0 million. In
March 2015, our Board of Directors increased the authorization under the 2014 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.
In January 2016, the 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 2014 Repurchase
Plan previously approved by the Company's Board of Directors. In the year ended December 31, 2016, 796,822 shares of
common stock, at a cost of $18.2 million, excluding fees and expenses, were repurchased under the 2016 Repurchase Plan. A
total of $11.8 million remained available for repurchase under the 2016 Repurchase Plan at December 31, 2016.
107
15. MORTGAGE BANKING INCOME
Noninterest income from the Company's mortgage banking activities include the following components for the periods
presented:
Mortgage banking income:
Loan servicing fees
Amortization of mortgage servicing rights
Gain on sale of residential mortgage loans
Unrealized gain (loss) on interest rate locks
Total mortgage banking income
16. SHARE-BASED COMPENSATION
Year Ended December 31,
2016
2015
2014
(Dollars in thousands)
$
$
$
5,421
(5,066)
7,631
83
8,069
$
5,656
(4,185)
6,107
(324)
7,254
$
$
5,798
(2,657)
5,545
294
8,980
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 share-based
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 share-based compensation effect
Year Ended December 31,
2015
2016
2014
(Dollars in thousands)
3,094
$
4,181
$
97
(1,269)
1,922
$
78
(1,694)
2,565
$
$
$
6,101
37
(2,443)
3,695
The Company's share-based 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 10-year 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 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
previous 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, 2016, 2015 and 2014, a total of 1,671,752, 1,922,130 and 1,993,385 shares, respectively, were available for
future grants under our 2013 Plan.
108
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 Black-Scholes 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 straight-line 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.
Risk-free interest rate—The risk-free 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, 2016:
Outstanding at January 1, 2016
Changes during the year:
Exercised
Expired
Forfeited
Outstanding at December 31, 2016
Exercisable at December 31, 2016
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic
Value
(in thousands)
Shares
239,417
$
22.01
(65,472)
—
(11,882)
162,063
134,331
14.36
—
24.21
24.95
27.14
5.2
$
2,657
5.1
2,183
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 in-the-money at December 31, 2016. During the years
ended December 31, 2016, 2015 and 2014, the aggregate intrinsic value of options exercised under our stock option plan was
$0.8 million, $0.2 million and $31 thousand, respectively, determined as of the date of exercise.
As of December 31, 2016, the total compensation cost that was not yet recognized related to stock options granted to
employees under our stock option plans was approximately $0.1 million, net of estimated forfeitures. This cost will be
amortized on a straight-line basis over a weighted-average period of 0.3 years and will be adjusted for subsequent changes in
estimated forfeitures. The total fair value of shares vested during the years ended December 31, 2016, 2015 and 2014 was $0.4
million, $0.4 million and $0.7 million, respectively.
No stock options were granted during 2016, 2015 and 2014.
Restricted Stock Awards and Units
Under the 1997, 2004 and 2013 Plans, we awarded restricted stock awards and units to our non-officer 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.
109
The table below presents the activity of restricted stock awards and units for the year ended December 31, 2016:
Unvested at January 1, 2016
Changes during the year:
Granted
Forfeited
Vested
Unvested at December 31, 2016
Weighted
Average
Grant Date
Fair Value
Shares
463,917
$
17.41
296,078
(66,972)
(255,326)
437,697
23.65
20.97
15.83
22.01
As of December 31, 2016, there was $7.0 million of total unrecognized compensation cost related to restricted stock awards
and units that is expected to be recognized over a weighted-average period of 2.8 years.
17. 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 60-consecutive-month 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.
In December 2016, the Company purchased non-participating annuity contracts totaling $9.4 million to settle the pension
obligation for a portion of the Company's plan participants. The purchase of the annuity contracts were settled by using plan
assets. As a result of the settlement, we recognized a pro-rata net actuarial loss of $3.8 million in pension expense and other
comprehensive income.
110
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
Annuity purchase
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
Annuity purchase
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
Components of net periodic benefit cost
Interest cost
Expected return on plan assets
Amortization of net actuarial losses
Settlement
Net periodic benefit cost
Net periodic cost actuarial assumptions
Weighted average discount rate
Expected long-term rate of return on plan assets
Year Ended December 31,
2016
2015
(Dollars in thousands)
$
33,067
$
1,374
1,039
(2,413)
(9,390)
23,677
26,321
1,021
3,000
(2,413)
(9,390)
18,539
36,330
1,383
(2,228)
(2,418)
—
33,067
27,891
(152)
1,000
(2,418)
—
26,321
$
$
(5,138)
$
(6,746)
(10,052)
$
(13,887)
4.1%
4.3%
Year Ended December 31,
2015
2016
2014
(Dollars in thousands)
$
$
1,374
(1,542)
1,548
3,847
5,227
$
$
$
1,383
(1,893)
1,577
—
1,067
$
1,485
(1,924)
1,068
—
629
4.3%
6.0%
4.0%
7.0%
4.7%
7.0%
The unrecognized net actuarial losses included in AOCI expected to be recognized in net periodic benefit cost during 2017 is
approximately $1.1 million.
111
The long-term rate of return on plan assets reflects the weighted-average long-term 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,
2016
2015
50.6%
34.0
15.4
100.0%
40.6%
41.6
17.8
100.0%
Equity securities included the Company's common stock in the amount of $0.1 million at December 31, 2016 and 2015.
Our investment strategy for the defined benefit retirement plan is to maximize the long-term 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.
The fair values of the defined benefit retirement plan as of December 31, 2016 and 2015 by asset category were as follows:
December 31, 2016
Money market accounts
Mutual funds
Government obligations
Common stocks
Preferred stocks
Corporate bonds and debentures
December 31, 2015
Money market accounts
Mutual funds
Government obligations
Common stocks
Preferred stocks
Corporate bonds and debentures
Level 1
Level 2
Level 3
Total
(Dollars in thousands)
$
2,852
$
— $
— $
7,250
—
4,474
130
—
—
2,134
—
1,699
—
—
—
—
2,852
7,250
2,134
4,474
130
1,699
$
14,706
$
3,833
$
— $
18,539
Level 1
Level 2
Level 3
(Dollars in thousands)
Total
$
4,672
$
— $
— $
9,140
—
5,552
187
—
—
4,117
—
—
2,653
—
—
—
—
—
4,672
9,140
4,117
5,552
187
2,653
$
19,551
$
6,770
$
— $
26,321
We are not required by funding regulations or laws to make any contributions to our defined benefit retirement plan in 2017.
112
Estimated future benefit payments in each of the next five years and in the aggregate for the five years thereafter are as follows
(in thousands):
Year Ending December 31:
2017
2018
2019
2020
2021
2022-2026
Total
$
$
1,921
1,856
1,816
1,775
1,733
7,797
16,898
Supplemental Executive Retirement Plans
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.
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
Year Ended December 31,
2016
2015
(Dollars in thousands)
$
10,651
$
465
(598)
(226)
10,292
—
226
(226)
—
10,930
440
(504)
(215)
10,651
—
215
(215)
—
$
$
$
(10,292)
$
(10,651)
(112)
(66)
(701)
(879)
$
$
(129)
(84)
(1,353)
(1,566)
4.1%
4.4%
113
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
2016
Year Ended December 31,
2015
(Dollars in thousands)
2014
$
$
465
17
18
51
551
$
$
440
16
18
111
585
$
$
450
17
18
2
487
4.4%
4.1%
5.0%
The estimated amortization of components included in AOCI that will be recognized into net periodic cost for 2017 is as
follows (in thousands):
Amortization of net transition obligation
Amortization of prior service cost
Amortization of net actuarial losses
$
17
18
51
The SERP holds no plan assets other than employer contributions that are paid as benefits during the year. We expect to
contribute $0.4 million to the SERP in 2017.
Estimated future benefit payments reflecting expected future service for the SERP in each of the next five years and in the
aggregate for the five years thereafter are as follows (in thousands):
Year Ending December 31:
2017
2018
2019
2020
2021
2022-2026
Total
$
$
352
348
344
335
320
3,067
4,766
18. 401(K) RETIREMENT SAVINGS PLAN
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 $2.0 million, $1.6 million and $1.5 million in 2016, 2015 and 2014,
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 2016, 2015 and 2014.
114
19. OPERATING LEASES
We lease certain property 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, 2016, 2015 and 2014 is summarized as follows:
Rent expense charged to net occupancy
Less: sublease income
Net rent expense charged to net occupancy
Add: rent expense charged to equipment expense
Total net rent expense
Year Ended December 31,
2015
2016
2014
(Dollars in thousands)
$
$
$
8,700
(43)
8,657
19
$
9,287
(25)
9,262
30
8,676
$
9,292
$
10,210
—
10,210
53
10,263
The following is a schedule of future minimum rental commitments for all non-cancellable operating leases that had initial
lease terms in excess of one year at December 31, 2016 (in thousands):
Year Ending December 31:
2017
2018
2019
2020
2021
Thereafter
Total
$
$
6,564
5,810
5,314
4,851
4,317
21,488
48,344
In addition, the Company, as lessor, leases certain properties that it owns. The following is a schedule of future minimum rental
income for those non-cancellable operating leases that had initial lease terms in excess of one year at December 31, 2016 (in
thousands):
Year Ending December 31:
2017
2018
2019
2020
2021
Thereafter
Total
$
$
2,109
1,089
476
250
200
230
4,354
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
20. INCOME AND FRANCHISE TAXES
Components of income tax expense (benefit) for the years ended December 31, 2016, 2015 and 2014 were as follows:
Year ended December 31, 2016
Federal
State
Total
Year ended December 31, 2015
Federal
State
Total
Year ended December 31, 2014
Federal
State
Total
Current
Deferred
Total
(Dollars in thousands)
805
(4)
801
$
$
19,842
4,585
24,427
$
$
20,647
4,581
25,228
Current
Deferred
Total
(Dollars in thousands)
1,128
(119)
1,009
$
$
20,061
6,018
26,079
$
$
21,189
5,899
27,088
Current
Deferred
Total
(Dollars in thousands)
— $
(93)
(93) $
18,710
1,772
20,482
$
$
18,710
1,679
20,389
$
$
$
$
$
$
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:
Tax-exempt interest
Other tax-exempt income
Low-income housing and energy tax credits
State income taxes, net of Federal income tax effect, excluding impact of
deferred tax valuation allowance
Change in the beginning-of-the-year balance of the valuation allowance
for deferred tax assets allocated to income tax expense
Other
Total
Year Ended December 31,
2015
2016
2014
(Dollars in thousands)
$
25,260
$
25,535
$
21,295
(1,410)
(940)
(899)
(1,420)
(712)
(946)
(1,412)
(1,023)
(1,540)
2,981
3,834
2,569
(52)
288
(44)
841
(158)
658
$
25,228
$
27,088
$
20,389
At December 31, 2016, there was $28 thousand of current federal income taxes payable, compared to a $0.6 million receivable
at December 31, 2015. Current state income taxes receivable was $4 thousand and $1.7 million at December 31, 2016 and
2015, respectively.
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:
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
Premises and equipment
Other
Total deferred tax assets
Deferred tax liabilities
Intangible assets
Leases
Other
Total deferred tax liabilities
Deferred tax valuation allowance
December 31,
2016
2015
(Dollars in thousands)
$
19,926
$
644
6,138
33,803
493
2,732
412
4,106
4,567
72,821
8,138
284
2,722
11,144
2,751
Net deferred tax assets
$
58,926
$
22,275
2,555
6,921
34,821
606
19,850
1,049
4,269
4,958
97,304
10,006
423
2,093
12,522
2,803
81,979
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 tax-planning strategies in making this assessment.
As of December 31, 2016, the 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 $52 thousand and $44 thousand in 2016 and 2015, respectively.
Net of this valuation allowance, the Company's net DTA totaled $58.9 million as of December 31, 2016, compared to a net
DTA of $82.0 million as of December 31, 2015.
At December 31, 2016, the Company had net operating loss carryforwards for California state income tax purposes of $38.8
million, which are available to offset future state taxable income, if any, through 2030. The Company did not have any net
operating loss carryforwards for U.S. federal or Hawaii state income tax purposes. In addition, we have state tax credit
carryforwards of $12.3 million that do not expire, and federal tax credit carryforwards of $19.8 million, of which $12.2 million
will expire within 20 years, and $7.6 million do not expire.
At December 31, 2016, 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 2012 are
closed.
117
21. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the components of other comprehensive income (loss) for the years ended December 31, 2016,
2015 and 2014, by component:
Year ended December 31, 2016
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 losses arising during the period
Amortization of net actuarial losses
Amortization of net transition obligation
Amortization of prior service cost
Settlement
Defined benefit plans, net
Before Tax
Tax Effect
Net of Tax
(Dollars in thousands)
$
(7,397) $
—
(7,397)
(2,945) $
—
(2,945)
(4,452)
—
(4,452)
(963)
1,599
17
18
3,847
4,518
(385)
634
6
7
1,528
1,790
(578)
965
11
11
2,319
2,728
Other comprehensive income
$
(2,879) $
(1,155) $
(1,724)
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
Before Tax
Tax Effect
Net of Tax
(Dollars in thousands)
$
(9,184) $
1,866
(7,318)
(3,655) $
742
(2,913)
(5,529)
1,124
(4,405)
687
1,688
16
18
2,409
274
672
7
7
960
413
1,016
9
11
1,449
Other comprehensive income
$
(4,909) $
(1,953) $
(2,956)
118
Year ended December 31, 2014
Net unrealized gains on investment securities:
Net unrealized gains arising during the period
Less: Reclassification adjustment for gains 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
Before Tax
Tax Effect
Net of Tax
(Dollars in thousands)
$
36,780
$
14,714
$
22,066
1,071
37,851
426
15,140
645
22,711
(7,409)
1,070
17
18
(6,304)
(3,052)
441
7
7
(2,597)
(4,357)
629
10
11
(3,707)
Other comprehensive loss
$
31,547
$
12,543
$
19,004
The following table presents the changes in each component of AOCI, net of tax, for the years ended December 31, 2016, 2015
and 2014:
Investment
Securities
Defined
Benefit
Plans
Accumulated
Other
Comprehensive
Income (Loss)
(Dollars in thousands)
9,181
$
(8,978) $
203
(4,452)
—
(4,452)
4,729
$
(578)
3,306
2,728
(6,250) $
(5,030)
3,306
(1,724)
(1,521)
Investment
Securities
Defined
Benefit
Plans
Accumulated
Other
Comprehensive
Income (Loss)
(Dollars in thousands)
13,586
$
(10,427) $
3,159
(5,529)
1,124
(4,405)
9,181
$
413
1,036
1,449
(8,978) $
(5,116)
2,160
(2,956)
203
$
$
$
$
Year ended December 31, 2016
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, 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
119
Year ended December 31, 2014
Balance at beginning of period
Other comprehensive income (loss) before reclassifications
Amounts reclassified from AOCI
Total other comprehensive loss
Balance at end of period
Investment
Securities
Defined
Benefit
Plans
Accumulated
Other
Comprehensive
Income (Loss)
(Dollars in thousands)
$
$
(9,125) $
(6,720) $
(15,845)
22,066
645
22,711
13,586
$
(4,357)
650
(3,707)
(10,427) $
17,709
1,295
19,004
3,159
The following table presents the amounts reclassified out of each component of AOCI for the years ended December 31, 2016,
2015 and 2014:
Details about AOCI Components (Dollars
in Thousands)
Year ended December 31,
Statement Where Net
2016
2015
2014
Income is Presented
Amount Reclassified from AOCI
Affected Line Item in the
Sale of investment securities available for sale $
$
— $
—
— $
(1,866) $
742
(1,124) $
(1,071)
Investment securities gains (losses)
426 Tax benefit
(645) Net of tax
Defined benefit plan items:
Amortization of net actuarial losses
$
(1,599) $
Amortization of net transition obligation
Amortization of prior service cost
Settlement
Total reclassifications for the period
$
$
(17)
(18)
(3,847)
(5,481)
2,175
(3,306) $
(1,688) $
(16)
(18)
—
(1,722)
686
(1,036) $
(1)
(1)
(1,070)
(17)
(18)
— (1)
(1)
(1,105) Total before tax
455 Tax benefit
(650) Net of tax
(3,306) $
(2,160) $
(1,295) Net of tax
(1) These accumulated other comprehensive income components are included in the computation of net periodic pension cost
(see Note 17 - Pension Plans for additional details).
120
22. EARNINGS PER SHARE
The table below presents the information used to compute basic and diluted earnings per share for the years ended
December 31, 2016, 2015 and 2014:
Year Ended December 31,
2015
2016
2014
(In thousands, except per share data)
Net income
$
46,992
$
45,868
$
40,453
Weighted average shares outstanding - basic
Dilutive effect of employee stock options and awards
Weighted average shares outstanding - diluted
31,009
216
31,225
32,238
413
32,651
Basic earnings per share
Diluted earnings per share
$
$
1.52
1.50
$
$
1.42
1.40
$
$
37,366
571
37,937
1.08
1.07
A total of 1,892, 8,217 and 13,510 potentially dilutive securities have been excluded from the dilutive share calculation for the
years ended December 31, 2016, 2015 and 2014, respectively, as their effect was anti-dilutive.
23. 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.
24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
We are a party to financial instruments with off-balance 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 on-balance 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 case-by-case 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 income-producing commercial
properties.
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
121
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. The amount of interest rate options fluctuates based on
residential mortgage volume.
Forward interest rate contracts represent commitments to purchase or sell loans at a future date at a specified price. We enter
into forward interest rate contracts on our residential mortgage held for sale loans. Risks arise from the possible inability of
counter-parties 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, 2016 and 2015, we did not have any forward foreign exchange contracts.
At December 31, 2016 and 2015, financial instruments with off-balance 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
25. FAIR VALUE OF ASSETS AND LIABILITIES
Disclosures about Fair Value of Financial Instruments
December 31,
2016
2015
(Dollars in thousands)
$
825,304
$
801,835
16,073
13,434
879
32,497
24,009
9,973
Fair value estimates, methods and assumptions are set forth below for our financial instruments.
Short-Term Financial Instruments
The carrying values of short-term financial instruments are deemed to approximate fair values. Such instruments are considered
readily convertible to cash and include cash and due from banks, interest-bearing deposits in other banks, accrued interest
receivable, the majority of short-term 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 Interest-Earning 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 noninterest-bearing demand deposits and interest-bearing 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.
Long-Term Debt
The fair value of our long-term debt is estimated by discounting scheduled cash flows over the contractual borrowing period at
the estimated market rate for similar borrowing arrangements.
Off-Balance Sheet Financial Instruments
The fair values of off-balance 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 off-balance 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.
123
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)
— $
—
1,445,357
31,881
30,723
—
—
—
12,196
—
3,396,253
—
—
—
—
135,000
68,186
—
—
1,088,436
—
—
—
—
—
—
—
December 31, 2016
Financial assets:
Cash and due from banks
$
75,272
$
75,272
$
75,272
$
Interest-bearing deposits in other banks
9,069
9,069
Investment securities
Loans held for sale
Net loans and leases
Accrued interest receivable
Financial liabilities:
Deposits:
Noninterest-bearing deposits
Interest-bearing demand and savings deposits
Time deposits
Short-term debt
Long-term debt
1,461,515
1,458,213
31,881
31,881
3,468,259
3,426,976
15,675
15,675
1,265,246
2,253,591
1,089,364
135,000
92,785
1,265,246
2,253,591
1,088,436
135,000
68,186
9,069
660
—
—
15,675
1,265,246
2,253,591
—
—
—
Accrued interest payable (included in other
liabilities)
1,556
1,556
1,556
—
Off-balance sheet financial instruments:
Commitments to extend credit
825,304
1,046
Standby letters of credit and financial
guarantees written
Interest rate options
Forward interest rate contracts
16,073
879
32,497
241
6
136
—
—
—
—
1,046
241
6
136
124
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)
December 31, 2015
Financial assets:
Cash and due from banks
$
71,797
$
71,797
$
71,797
$
Interest-bearing deposits in other banks
8,397
8,397
Investment securities
Loans held for sale
Net loans and leases
Accrued interest receivable
Financial liabilities:
Deposits:
Noninterest-bearing deposits
Interest-bearing demand and savings deposits
Time deposits
Short-term debt
Long-term debt
1,520,172
1,516,391
14,109
14,109
3,148,218
3,094,404
14,898
14,898
1,145,244
2,223,988
1,064,207
69,000
92,785
1,145,244
2,223,988
1,064,255
69,000
67,421
8,397
916
—
—
14,898
1,145,244
2,223,988
—
—
—
Accrued interest payable (included in other
liabilities)
1,072
1,072
1,072
Off-balance sheet financial instruments:
Commitments to extend credit
801,835
1,014
Standby letters of credit and financial
guarantees written
Interest rate options
Forward interest rate contracts
Fair Value Measurements
13,434
24,009
9,973
202
43
15
—
—
—
—
— $
—
1,502,996
14,109
38,205
—
—
—
—
69,000
67,421
—
1,014
202
43
15
—
—
12,479
—
3,056,199
—
—
—
1,064,255
—
—
—
—
—
—
—
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 model-based valuation techniques for which all significant
assumptions are observable in the market.
Level 3 — Valuation is generated from model-based 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.
125
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 write-downs 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, 2016.
The following table below presents the balances of assets and liabilities measured at fair value on a recurring basis:
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)
Fair
Value
December 31, 2016
Available for sale securities:
Debt securities:
States and political subdivisions
$
185,041
$
Corporate securities
Mortgage-backed securities:
U.S. Government sponsored entities
Non-government sponsored entities
Other
Derivatives - Interest rate contracts
99,389
769,986
188,771
660
142
— $
—
—
—
660
—
172,845
$
12,196
99,389
769,986
188,771
—
142
—
—
—
—
—
Total
$
1,243,989
$
660
$
1,231,133
$
12,196
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)
Fair
Value
December 31, 2015
Available for sale securities:
Debt securities:
States and political subdivisions
$
190,473
$
— $
177,994
$
12,479
Corporate securities
Mortgage-backed securities:
U.S. Government sponsored entities
Non-government sponsored entities
Other
Derivatives - Interest rate contracts
108,571
771,909
200,386
916
59
—
—
—
916
—
108,571
771,909
200,386
—
59
—
—
—
—
—
Total
$
1,272,314
$
916
$
1,258,919
$
12,479
126
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
Balance as of December 31, 2014
Principal payments received
Purchases
Unrealized net loss included in other comprehensive loss
Balance as of December 31, 2015
Principal payments received
Purchases
Unrealized net gain included in other comprehensive income
Balance as of December 31, 2016
Available for Sale
Debt Securities -
States and
Political
Subdivisions
(Dollars in thousands)
$
$
$
13,095
(987)
—
371
12,479
(338)
—
55
12,196
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 $12.2 million and $12.5 million at December 31, 2016 and
2015, 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, 2016, the weighted average discount rate utilized was 3.00%, which was
derived by incorporating a credit spread over the FHLB Fixed-Rate Advance curve. Significant increases (decreases) in the
weighted average discount rate could result in a significantly lower (higher) fair value measurement.
127
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:
Fair Value Measurements Using
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Losses
(Dollars in thousands)
Fair Value
December 31, 2016
Impaired loans (1)
Other real estate (2)
December 31, 2015
Impaired loans (1)
Other real estate (2)
$
30,723
$
791
— $
—
30,723
$
791
$
38,153
$
1,962
— $
—
38,153
$
1,962
— $
—
$
— $
—
$
—
—
—
111
220
331
(1) Represents carrying value and related write-downs 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.
26. 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 - Summary of Significant Accounting
Policies. 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.
128
Segment net income (loss) and assets are provided in the following table for the periods indicated:
Year ended December 31, 2016
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)
Balance as of December 31, 2016
Investment securities
Loans and leases (including loans held for sale)
Other
Total assets
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
Balance as of December 31, 2015
Investment securities
Loans and leases (including loans held for sale)
Other
Total assets
$
$
$
$
Banking
Operations
$
128,673
$
36,655
5,517
25,994
(58,856)
(64,139)
(25,796)
48,048
$
Treasury
All Others
Total
(Dollars in thousands)
$
29,277
(26,618)
—
3,148
(1,616)
(918)
(1,143)
2,130
$
$
— $
157,950
(10,037)
—
13,174
(73,091)
65,057
1,711
(3,186) $
—
5,517
42,316
(133,563)
—
(25,228)
46,992
— $
—
68,081
1,461,515
3,556,771
365,950
— $
3,556,771
56,482
1,461,515
—
241,387
$
3,613,253
$
1,702,902
$
68,081
$
5,384,236
Banking
Operations
$
115,936
$
43,686
15,671
23,447
(59,273)
(59,266)
(28,070)
52,131
$
Treasury
All Others
Total
(Dollars in thousands)
— $
149,528
$
33,592
(31,576)
—
967
(1,859)
(1,042)
(29)
53
(12,110)
—
10,385
(65,910)
60,308
1,011
(6,316) $
$
—
15,671
34,799
(127,042)
—
(27,088)
45,868
— $
1,520,172
$
— $
1,520,172
3,225,641
74,963
—
226,172
—
84,340
3,225,641
385,475
$
3,300,604
$
1,746,344
$
84,340
$
5,131,288
129
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 (loss)
Banking
Operations
Treasury
All Others
Total
(Dollars in thousands)
$
108,815
$
34,308
6,414
24,496
(60,587)
(59,610)
(18,843)
34,993
$
$
$
34,603
(33,356)
—
4,042
(2,086)
(1,126)
(727)
1,350
$
— $
143,418
(952)
—
12,628
(67,483)
60,736
(819)
4,110
$
—
6,414
41,166
(130,156)
—
(20,389)
40,453
27. PARENT COMPANY AND REGULATORY RESTRICTIONS
At December 31, 2016, the accumulated deficit of the parent company, Central Pacific Financial Corp., included $397.7 million
of equity in undistributed losses of Central Pacific Bank.
Central Pacific Bank, as a Hawaii state-chartered 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,
2016, the bank had Statutory Retained Earnings of $83.9 million. For further information, see Note 14 - Equity.
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 under-capitalized. The restrictions
become increasingly more severe as an institution’s capital category declines from under-capitalized to critically under-
capitalized.
130
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 risk-based capital ratios, and common equity Tier 1 (CET1) risk based
capital as of December 31, 2016 were above the levels required for a "well-capitalized" regulatory designation.
Company
As of December 31, 2016
Leverage capital
Tier 1 risk-based capital
Total risk-based capital
CET1 risk-based capital
As of December 31, 2015
Leverage capital
Tier 1 risk-based capital
Total risk-based capital
CET1 risk-based capital
Central Pacific Bank
As of December 31, 2016
Leverage capital
Tier 1 risk-based capital
Total risk-based capital
CET1 risk-based capital
As of December 31, 2015
Leverage capital
Tier 1 risk-based capital
Total risk-based capital
CET1 risk-based capital
Actual
Minimum required for
capital adequacy purposes
Minimum required to
be well-capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$
562,460
10.6% $
211,383
4.0% $
264,229
5.0%
562,460
612,202
485,268
532,787
532,787
579,651
472,698
541,577
541,577
591,185
541,577
518,617
518,617
565,231
518,617
14.2
15.5
12.3
10.7
14.4
15.7
12.8
10.3
13.7
15.0
13.7
10.4
14.1
15.3
14.1
237,157
316,209
177,868
199,350
221,808
295,745
166,356
211,135
236,806
315,741
177,604
199,098
221,435
295,247
166,076
6.0
8.0
4.5
4.0
6.0
8.0
4.5
4.0
6.0
8.0
4.5
4.0
6.0
8.0
4.5
316,209
395,261
256,920
249,187
295,745
369,681
240,292
263,918
315,741
394,677
256,540
248,872
295,247
369,058
239,888
8.0
10.0
6.5
5.0
8.0
10.0
6.5
5.0
8.0
10.0
6.5
5.0
8.0
10.0
6.5
131
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
Accrued interest receivable and other assets
Total assets
Liabilities and Equity
Long-term debt
Other liabilities
Total liabilities
Shareholders’ equity:
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding none at
December 31, 2016 and 2015
Common stock, no par value, authorized 185,000,000 shares; issued and outstanding
30,796,243 and 31,361,452 shares at December 31, 2016 and 2015 , respectively
Surplus
Accumulated deficit
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Non-controlling interest
Total equity
Total liabilities and equity
December 31,
2015
2016
(Dollars in thousands)
19,500
$
12,559
660
569,898
10,682
917
551,156
24,560
600,740
$
589,192
$
92,785
3,280
96,065
92,785
1,768
94,553
—
—
530,932
84,180
(108,941)
(1,521)
504,650
25
504,675
600,740
$
$
$
548,878
82,847
(137,314)
203
494,614
25
494,639
589,192
$
$
$
$
$
$
132
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 long-term 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
2016
Year Ended December 31,
2015
(Dollars in thousands)
2014
$
29,965
$
111,765
$
159,319
6
100
9
91
16
89
30,071
111,865
159,424
3,005
2,739
5,744
24,327
(2,467)
26,794
20,198
2,626
2,551
5,177
106,688
670
106,018
2,572
2,262
4,834
154,590
(2,520)
157,110
(60,150)
45,868
$
(116,657)
40,453
Net income
$
46,992
$
133
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 operating
activities:
Deferred income tax expense (benefit)
Equity in undistributed income (loss) of subsidiary bank
Share-based compensation
Other, net
Net cash provided by operating activities
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
Repurchases of common stock
Dividends paid
Net cash used in financing activities
2016
Year Ended December 31,
2015
(Dollars in thousands)
2014
$
46,992
$
45,868
$
40,453
15,683
(20,198)
1,045
(697)
42,825
—
—
—
670
60,150
1,429
983
109,100
—
—
—
(2,520)
116,657
4,218
(923)
157,885
479
518
997
941
(18,206)
(18,619)
(35,884)
360
(93,533)
(26,143)
(119,316)
74
(142,405)
(13,405)
(155,736)
Net increase (decrease) in cash and cash equivalents
6,941
(10,216)
3,146
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
12,559
22,775
$
19,500
$
12,559
$
19,629
22,775
134
28. UNAUDITED QUARTERLY FINANCIAL INFORMATION
As discussed in Note 1 - Summary of Significant Accounting Policies, on December 31, 2016, the Company elected to
reclassify loan servicing fees, amortization of mortgage servicing rights, net gain on sale of residential mortgage loans, and
unrealized gain (loss) on interest rate locks into a single line item called "mortgage banking income" in the Company’s
consolidated statements of income. Loan servicing fees and net gain on sale of residential mortgage loans were previously
recorded in its own line in the other operating income section of the consolidated statements of income, while unrealized gain
(loss) on interest rate locks was included as a component of other operating income - other. The amortization of mortgage
servicing rights was previously recorded as a component of amortization and impairment of other intangible assets in the other
operating expense section of the Company’s consolidated statements of income. The components of mortgage banking income
are disclosed in Note 15 - Mortgage Banking Income to the consolidated financial statements. The Company believes the
reclassification provides a better presentation of revenues and costs of our mortgage banking activities. The following
unaudited quarterly financial information has been adjusted retrospectively for the reclassification.
2016
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
Income before income taxes
Net income
Basic earnings per share
Diluted earnings per share
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 gains (losses)
Income before income taxes
Net income
Basic earnings per share
Diluted earnings per share
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full Year
(Dollars in thousands, except per share data)
$
41,249
$
41,870
$
41,765
$
42,255
$
167,139
2,038
39,211
(747)
39,958
17,248
11,181
2,261
39,609
(1,382)
40,991
18,468
12,137
2,339
39,426
(743)
40,169
17,858
11,466
2,551
39,704
(2,645)
42,349
18,646
12,208
$
$
0.36
0.35
$
0.39
0.39
$
0.37
0.37
$
0.40
0.39
9,189
157,950
(5,517)
163,467
72,220
46,992
1.52
1.50
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
$
156,035
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
1,637
37,805
(3,647)
41,452
—
19,106
12,206
1,722
38,194
(1,958)
40,152
—
17,417
10,932
$
$
0.30
0.29
$
0.39
0.39
$
0.39
0.38
$
0.35
0.34
6,507
149,528
(15,671)
165,199
(1,866)
72,956
45,868
1.42
1.40
135
29. SUBSEQUENT EVENTS
On January 24, 2017, 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 "2017 Repurchase Plan"). The 2017 Repurchase Plan replaces and supersedes in its entirety the 2016 Repurchase
Plan, previously approved by the Company's Board of Directors, which had approximately $11.8 million in remaining repurchase
authority at December 31, 2016.
136
ITEM 9.
FINANCIAL DISCLOSURE
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
None.
ITEM 9A.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including our 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 13a-15(e) promulgated under the Exchange Act) as of December 31, 2016. Based on that evaluation,
because of the material weakness in internal control over financial reporting described below, the principal executive officer
and principal financial officer concluded that, as of December 31, 2016, the Company’s disclosure controls and procedures
were not effective.
Notwithstanding the material weakness discussed below, the Company’s management, including the principal executive officer
and principal financial officer, has concluded that the Company’s financial statements included in this Form 10-K present fairly,
in all material respects, the Company’s financial position, results of operations, and cash flows for the periods presented in
conformity with U.S. generally accepted accounting principles.
(b) Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting
(as such term is defined in Rule 13a-15(f) under the Exchange Act). The Company’s internal control over financial reporting is
a process designed under the supervision of the Company’s principal executive and principal financial officer 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.
The Company’s 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 its
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.
As of December 31, 2016, management conducted an assessment of the effectiveness of the Company’s internal control over
financial reporting based on the framework established in Internal Control-Integrated 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, 2016 was not effective because of the material
weakness described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not
be prevented or detected on a timely basis.
Based on the assessment described above, management identified a material weakness in internal controls over the
completeness and accuracy of the information used in determining the allowance for loan and lease losses (Allowance). In the
fourth quarter of 2016, the Company implemented an enhanced Allowance methodology and a new Allowance software model.
In connection with this implementation, the Company’s internal controls were not properly designed or operating effectively to
timely verify the completeness and accuracy of certain information which are inputs into the calculation of the Allowance
reserve.
The control deficiencies did not result in a misstatement that was considered to be material to the Company’s consolidated
137
financial statements at December 31, 2016.
The Company’s internal control over financial reporting as of December 31, 2016 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.”
(c) Remediation Plan for Material Weakness in Internal Control Over Financial Reporting
Management is committed to timely remediating the identified deficiencies, with appropriate oversight from the Company’s
Audit Committee. The Company has already commenced efforts to remediate the material weakness identified above and has
engaged a national third party consulting firm to assist in the process.
Additionally, our remediation plan includes the following components:
•
•
•
Enhance the level of data validation (completeness and accuracy testing) in critical model calculations;
Establish a more comprehensive management review control framework for critical data input, assumptions and
results generated from the Allowance model; and
On an annual basis, engage an independent third-party to review the Allowance methodology and calculation for
conformity with U.S. generally accepted accounting principles and regulatory compliance and to validate the accuracy
of the information used in the analysis.
Given the remediation steps outlined above, management believes the efforts will effectively remediate the material weakness.
Additionally, management will continually assess the effectiveness of the remediation efforts and may determine to take
additional measures to address control deficiencies or modify the remediation plan described above.
(d) 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 13a-15(f) under the Exchange Act during the Company’s fiscal quarter ended December 31, 2016 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, other than the
identification of the material weakness described above.
ITEM 9B.
OTHER INFORMATION
None.
138
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 2017 Annual Meeting of Shareholders (the "2017 Proxy Statement") to be filed with the SEC within 120 days
of the fiscal year ended December 31, 2016. 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 2017 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 2017 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 2017 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 2017 Proxy Statement.
ITEM 12.
RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
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 2017 Proxy Statement.
The following table provides information as of December 31, 2016 regarding securities issued under our equity compensation
plans that were in effect during fiscal 2016.
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)
Weighted-
average
exercise price
of outstanding
options,
warrants
and rights
(c)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in
column (a))
162,063
—
162,063
$
$
24.95
—
24.95
1,671,752
—
1,671,752
ITEM 13.
INDEPENDENCE
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
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
"Corporate Governance and Board Matters—Loans to Related Persons" of the Company’s 2017 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 2017 Proxy Statement.
139
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 4—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 2017 Proxy Statement.
140
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
The following consolidated financial statements are included in Item 8 of this report:
Central Pacific Financial Corp. and Subsidiaries:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2016 and 2015
Consolidated Statements of Income for the Years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the Years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Changes in Equity for the Years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the Years ended December 31, 2016, 2015 and 2014
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
ITEM 16.
FORM 10-K SUMMARY
Not applicable.
141
Exhibit No.
3.1
Restated Articles of Incorporation of the Registrant (1)
Document
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
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 Non-Employee 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)
The Registrant’s Long-Term Executive Incentive Plan, effective January 1, 2005 (4) (11)
Amendment No. 2008-1 to the Registrant’s Long-Term Executive Incentive Plan (4) (9)
10.10
The Registrant’s 2004 Annual Executive Incentive Plan (4) (7)
10.11
10.12
10.13
10.14
10.15
10.16
10.17
Amendment No. 2008-1 to the Registrant’s 2004 Annual Executive Incentive Plan dated December 31, 2008
(4) (9)
Amendment No. 2011-1 to the Registrant’s 2004 Annual Executive Incentive Plan (4) (12)
Amendment No. 2012-01 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)
10.18
Form of Restricted Stock Grant Agreement for the Registrant's 2013 Stock Compensation Plan (14)
10.19
Form of Restricted Stock Unit Agreement for the Registrant's 2013 Stock Compensation Plan (14)
10.20
Form of Stock Appreciation Rights Grant Agreement for the Registrant's 2013 Stock Compensation Plan (14)
142
Exhibit No.
10.21
Document
Form of Key Employee Restricted Stock Unit Grant Agreement for the Registrant's 2013 Stock Compensation
Plan (14)
12.1
14.1
14.2
21
23
31.1
31.2
32.1
32.2
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 13a-14(a) Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley
Act of 2002 *
Rule 13a-14(a) Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley
Act of 2002 *
Section 1350 Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley
Act of 2002 **
Section 1350 Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley
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 *
*
**
Filed herewith.
Furnished herewith.
All of the references to Form 8-K, Form 10-K, Form 10-Q, Form DEF 14A and Form S-1/A identified in the
exhibit index have SEC file number 001-31567.
Upon request of the Securities and Exchange Commission, we will furnish any agreements relating to our long-
term debt not otherwise contained herein.
143
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
Incorporated herein by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K 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 8-K, 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 10-K 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 10-K 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 10-K 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
10-K 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 10-Q 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 10-K/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 8-K,
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
10-K 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 8-
K, 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 8-K, filed with the Securities and Exchange Commission on May 1, 2013.
144
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: March 1, 2017
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
Title
Date
/s/ A. Catherine Ngo
A. Catherine Ngo
President and Chief Executive Officer
(Principal Executive Officer)
March 1, 2017
/s/ David S. Morimoto
David S. Morimoto
Executive Vice President and Chief
Financial Officer (Principal Financial and
Accounting Officer)
March 1, 2017
/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/ Saedene K. Ota
Saedene K. Ota
/s/ Crystal K. Rose
Crystal K. Rose
Executive Chair
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
Director
Director
Director
Director
Director
Director
Director
Director
145
Central Pacific Financial Corp. & Subsidiaries
Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
Exhibit 12.1
Ratio 1 - including deposit interest
Earnings:
Pre-tax income (loss) from continuing operations
Fixed charges
Total
Fixed charges:
Interest on deposits
Interest on other short-term borrowings
Interest on long-term debt
Interest on preferred stock dividends
Portion of rents representative of the interest factor of rental expense
For the Year Ended December 31,
2016
2015
2014
2013
2012
(Dollars in thousands)
$
$
72,220
9,234
81,454
$
$
72,956
6,533
79,489
$
$
60,842
6,421
67,263
$
$
59,828
7,201
67,029
$
$
47,421
8,802
56,223
$
5,606
$
3,627
$
3,727
$
4,044
$
5,033
578
3,005
—
45
254
2,626
—
26
92
2,572
—
30
6
3,119
—
32
—
3,701
—
68
Total fixed charges
$
9,234
$
6,533
$
6,421
$
7,201
$
8,802
Preferred stock dividend requirements
—
—
—
—
—
Fixed charges and preferred stock dividends
$
9,234
$
6,533
$
6,421
$
7,201
$
8,802
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:
Pre-tax income (loss) from continuing operations
Fixed charges
Total
Fixed charges:
Interest on other short-term borrowings
Interest on long-term debt
Interest on preferred stock dividends
Portion of rents representative of the interest factor of rental expense
$
$
$
$
$
8.8
12.2
10.5
9.3
— $
— $
— $
— $
8.8
12.2
10.5
9.3
— $
— $
— $
— $
6.4
—
6.4
—
72,220
3,628
75,848
$
$
72,956
2,906
75,862
$
$
60,842
2,694
63,536
$
$
59,828
3,157
62,985
$
$
47,421
3,769
51,190
578
$
254
$
92
$
6
$
3,005
2,626
2,572
3,119
—
45
—
26
—
30
—
32
—
3,701
—
68
Total fixed charges
$
3,628
$
2,906
$
2,694
$
3,157
$
3,769
Preferred stock dividend requirements
—
—
—
—
—
Fixed charges and preferred stock dividends
$
3,628
$
2,906
$
2,694
$
3,157
$
3,769
Ratio of earnings to fixed charges
Coverage deficiency
Ratio of earnings to fixed charges and preferred stock dividends
Coverage deficiency
20.9
26.1
23.6
20.0
— $
— $
— $
— $
20.9
26.1
23.6
20.0
— $
— $
— $
— $
13.6
—
13.6
—
$
$
Subsidiaries of the Registrant
Exhibit 21
The Company or one of its wholly-owned 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, 2016:
Name
State or Other Jurisdiction of Incorporation
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
Percent
Owned
100%
100%
100%
100%
100%
50%
50%
50%
50%
50%
Consent of Independent Registered Public Accounting Firm
Exhibit 23
The Board of Directors
Central Pacific Financial Corp:
No. 333-188445, No. 333-119538,
We consent to the incorporation by reference in the registration statement
No. 333-196873, and No. 333-211155) on Form S-8 of Central Pacific Financial Corp. of our reports dated March 1, 2017, with
respect to the consolidated balance sheets of Central Pacific Financial Corp. as of December 31, 2016 and 2015, 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, 2016, and all related financial statement schedules, and the effectiveness of internal control over
financial reporting as of December 31, 2016, which reports appear in the December 31, 2016 annual report on Form
of
Central Pacific Financial Corp.
/s/ KPMG LLP
Honolulu, Hawaii
March 1, 2017
CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(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 10-K of the Company;
Exhibit 31.1
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 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(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: March 1, 2017
By:
/s/ A. Catherine Ngo
A. Catherine Ngo
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(a)
I, David S. Morimoto, Executive Vice President and Chief Financial Officer of Central Pacific Financial Corp. (the
“Company”), certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K 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 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(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: March 1, 2017
By:
/s/ David S. Morimoto
David S. Morimoto
Executive Vice President and Chief Financial Officer
Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley 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 Sarbanes-Oxley Act of 2002, that, to my
knowledge:
1.
2.
The Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2016, 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
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 1, 2017
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 Sarbanes-Oxley 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.
Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley 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 Sarbanes-Oxley
Act of 2002, that, to my knowledge:
1.
2.
The Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2016, 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
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 1, 2017
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 Sarbanes-Oxley 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.