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, 2019
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 96813
(Address of principal executive offices) (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
Trading Symbol(s)
Name of each exchange on which registered
CPF
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes
No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of
the Exchange Act.
Large Accelerated Filer
Non-Accelerated Filer
Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act .
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, 2019, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $830,574,000. As of January 31,
2020, the number of shares of common stock of the registrant outstanding was 28,531,087 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement for the 2020 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.
CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
Form 10-K
Table of Contents
Part I.
Item 1.
Item 1A.
Item 1B.
Item 2
Item 3
Item 4
Part II.
Item 5
Item 6
Item 7
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
Selected Consolidated Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9
Item 9A
Item 9B
Part III.
Item 10
Item 11
Item 12
Item 13
Item 14
Part IV.
Item 15
Exhibits
Item 16
Signatures
Financial Statements and Supplementary Data
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
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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, net interest margin or 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 including anticipated performance results from our
RISE2020 initiative; and (iv) statements of assumptions underlying or relating to any of the foregoing. Words such as
"believes," "plans," "anticipates," "expects," "intends," "forecasts," "hopes," "targeting," "continue," "remain," "will," "should,"
"estimates," "may" and other similar expressions are intended to identify forward-looking statements but are not the exclusive
means of identifying such statements.
While we believe that our forward-looking statements and the assumptions underlying them are reasonably based, such
statements and assumptions are by their nature subject to risks and uncertainties, and thus could later prove to be inaccurate or
incorrect. Accordingly, actual results could differ materially from those in such statements or projections. 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;
our ability to successfully implement and achieve the objectives of our RISE2020 initiative;
the impact of local, national, and international economies and events (including natural disasters such as wildfires,
volcanic eruptions, hurricanes, tsunamis, storms, earthquakes and pandemic virus and disease) 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 and federal and state legislation, 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, the results of regulatory examinations or reviews
and the effect of, and our ability to comply with, any regulatory orders or actions we are or may become subject to;
ability to successfully implement our initiatives to lower our efficiency ratio;
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, including the anticipated replacement of the
London Interbank Offered Rate ("LIBOR") Index and the impact on our loans and debt which are tied to that index;
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negative trends in our market capitalization and adverse changes in the price of the Company’s common stock;
political instability;
acts of war or terrorism;
changes in consumer spending, borrowings and savings habits;
failure to maintain effective internal control over financial reporting or disclosure controls and procedures;
cybersecurity and data privacy breaches and the consequences therefrom;
the ability to address deficiencies in our internal controls 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 and the cost and resources required to implement such changes;
our ability to attract and retain key personnel;
changes in our organization, compensation and benefit plans; and
our success at managing any of the risks involved in the foregoing items.
For further information with respect to factors that could cause actual results to materially differ from the expectations or
projections stated in the forward-looking statements, please 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 statements 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, 2019, we had total assets of $6.01 billion, total loans of $4.45 billion, total
deposits of $5.12 billion and shareholders' equity of $528.5 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 77 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.
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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
regulatory policies of the federal and state government and the regulatory authorities that govern financial institutions. See the
"Supervision and Regulation" section 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-rate 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. A portion of our first residential
mortgage loan originations are sold in the secondary market and a portion is put into our loan portfolio.
(2) Commercial, Financial and Agricultural Lending and Leasing. Loans in this category consist primarily of term loans
and lines of credit 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 land development and other land loans 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, 2019.
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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, financial technology ("fintech") 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,
and have greater access to capital markets.
In order to compete with the other financial services providers in the state of Hawaii, we principally rely upon 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 to
our customers, coupled with competitive interest rates and pricing and local promotional activities.
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 74% of our loan portfolio at December 31, 2019
consisted of real estate-related loans, including residential mortgage loans, home equity 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. As of December 31, 2019,
other wholly-owned subsidiaries include CPB Capital Trust IV and CPB Statutory Trust V. CPB Capital Trust II and CPB
Statutory Trust III were terminated in January 2019.
As of December 31, 2019, Central Pacific Bank does not have any wholly-owned subsidiaries. Central Pacific Bank owns 50%
of Gentry HomeLoans, LLC, Haseko HomeLoans, LLC and Island Pacific HomeLoans, LLC.
The Company sponsors the Central Pacific Foundation, which is not consolidated in the Company's financial statements.
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 United States
of America ("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. 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.
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Regulatory Agencies
Central Pacific Financial Corp. is a legal entity separate and distinct from its subsidiaries. As the 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.
In addition, 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 establishment and testing on internal
control over financial reporting.
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 the new capital rules under Basel III ("Basel III
Capital Rule") and the so-called Volcker Rule which restricts certain proprietary trading and investment activities, on February
3, 2017 the President of the United States of America issued an executive order identifying certain “core principles” for the
administration’s financial services regulatory policy and directing the Secretary of the Treasury, in consultation with the heads
of other financial regulatory agencies, to evaluate how the current regulatory framework promotes or inhibits the principles
and what actions have been, and are being, taken to promote the principles. In response to the executive order, on June 12,
2017, October 6, 2017, October 26, 2017 and July 31, 2018, respectively, the U.S. Department of the Treasury issued four
reports recommending a number of comprehensive changes in the current regulatory system for U.S. depository institutions, the
U.S. capital markets, the U.S. asset management and insurance industries, and non-bank financial institutions, fintech and
financial innovation around the following principles.
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Improving regulatory efficiency and effectiveness by critically evaluating mandates and regulatory fragmentation,
overlap, and duplication across regulatory agencies;
• Aligning the financial system to help support the U.S. economy;
• Reducing regulatory burden by decreasing unnecessary complexity;
• Tailoring the regulatory approach based on size and complexity of regulated firms and requiring greater regulatory
cooperation and coordination among financial regulators; and
• Aligning regulations to support market liquidity, investment, and lending in the U.S. economy.
• Creating a regulatory landscape that better supports nonbank financial institutions, embraces financial technology and
fosters innovation.
The scope and breadth of regulatory changes that will be implemented in response to the President’s executive order continue
to be determined.
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In 2018, President Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act which repeals or
modifies certain provisions of the Dodd-Frank Act and eases regulations on all but the largest banks. Highlights from this
legislation include, among other things: (i) creating a new category of "qualified mortgages" presumed to satisfy ability-to-
repay requirements for loans that meet certain criteria and are held in portfolio by banks with less than $10 billion in assets
from the ability-to-repay requirements for certain qualified residential mortgage loans held in portfolio; (ii) not require
appraisals for certain transactions valued at less than $400,000 in rural areas; (iii) clarify that, subject to various conditions,
reciprocal deposits of another depository institution obtained using a deposit broker through a deposit placement network for
purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC's brokered-
deposit regulations; and (iv) simplify capital calculations by requiring regulators to establish for institutions under $10 billion
in assets a community bank leverage ratio (tangible equity to average consolidated assets) at a percentage not less than 8% and
not greater than 10% that such institutions may elect to replace the general applicable risk-based capital requirements for
determining well-capitalized status (discussed in further detail below).
Capital Adequacy Requirements
Bank holding companies and banks are subject to various regulatory capital requirements administered by state and federal
banking agencies. The Basel III Capital Rule, which initially became effective on January 1, 2015 have now been fully phased
in. 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 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.
The Federal Reserve monitors our capital adequacy on a consolidated basis, and the FDIC and the DFI monitor the capital
adequacy of our bank. The Company and the bank are required to maintain minimum risk-based and leverage capital ratios, as
well as a Capital Conservation Buffer, pursuant to the Basel III Capital Rule.
Regulatory Capital and Risk-weighted Assets
The Federal Reserve monitors our capital adequacy on a consolidated basis, and the FDIC and the DFI monitor the capital
adequacy of our bank. These rules implement the Basel III international regulatory capital standards in the United States, as
well as certain provisions of the Dodd-Frank Act. These quantitative calculations are minimums, and the Federal Reserve,
FDIC or DFI may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher
level of capital in order to operate in a safe and sound manner.
Under the Basel III Capital Rule, the Company's and the bank's assets, exposures and certain off-balance sheet items are subject
to risk weights used to determine the institutions' risk-weighted assets. These risk-weighted assets are used to calculate the
following minimum capital ratios for the Company and the bank:
• Tier 1 Leverage Ratio, equal to the ratio of Tier 1 capital to quarterly average assets (net of goodwill, certain other
intangible assets and certain other deductions).
• Common Equity Tier 1 ("CET1") Risk-Based Capital Ratio, equal to the ratio of CET1 capital to risk-weighted
assets. CET1 capital primarily includes common stockholders' equity subject to certain regulatory adjustments and
deductions, including with respect to goodwill, intangible assets and certain deferred tax assets. Certain of these
adjustments and deductions were subject to phase-in periods that began on January 1, 2015 and ended on January 1,
2018. The last phase of the Basel III Capital Rule's transition provisions relating to capital deductions for mortgage
servicing assets, certain deferred tax assets and investments in the capital instruments of unconsolidated financial
institutions, and the recognition of minority interests in regulatory capital was delayed for certain bank holding
companies and banks, including us and the bank, but a revised rule was finalized in July 2019 that will be effective in
April 2020. Hybrid securities, such as trust preferred securities, generally are excluded from being counted as Tier 1
capital. However, for bank holding companies like us that have less than $15 billion in total consolidated assets,
certain trust preferred securities were grandfathered in as a component of Tier 1 capital. In addition, because we are a
not an advanced approach banking organization, we were permitted to make a one-time permanent election to exclude
accumulated other comprehensive income items from regulatory capital. We made this election in order to avoid
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significant variations in our levels of capital depending upon the impact of interest rate fluctuations on the fair value of
our bank’s available-for-sale securities portfolio.
• Tier 1 Risk-Based Capital Ratio, equal to the ratio of Tier 1 capital to risk-weighted assets. Tier 1 capital is primarily
comprised of CET1 capital, perpetual preferred stock and certain qualifying capital instruments.
• Total Risk-Based Capital Ratio, equal to the ratio of total capital, including CET1 capital, Tier 1 capital and Tier 2
capital, to risk-weighted assets. Tier 2 capital primarily includes qualifying subordinated debt and qualifying ALLL.
Tier 2 capital also includes, among other things, certain trust preferred securities.
The total minimum regulatory capital ratios and well-capitalized minimum ratios are reflected in the charts below. The Federal
Reserve has not yet revised the well-capitalized standard for bank holding companies to reflect the higher capital requirements
imposed under the Basel III Capital Rule. For purposes of the Federal Reserve's Regulation Y, including determining whether a
bank holding company meets the requirements to be a financial holding company, bank holding companies, such as the
Company, must maintain a Tier 1 Risk-Based Capital Ratio of 6.0% or greater and a Total Risk-Based Capital Ratio of 10.0%
or greater. If the Federal Reserve were to apply the same or a very similar well-capitalized standard to bank holding companies
as that applicable to the bank, the Company's capital ratios as of December 31, 2019 would exceed such revised well-
capitalized standard. The Federal Reserve may require bank holding companies, including the Company, to maintain capital
ratios substantially in excess of mandated minimum levels, depending upon general economic conditions and a bank holding
company's particular condition, risk profile and growth plans.
Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our operations or
financial condition. Failure to be well-capitalized or to meet minimum capital requirements could also result in restrictions on
the Company's or the bank's ability to pay dividends or otherwise distribute capital or to receive regulatory approval of
applications.
In addition to meeting the minimum capital requirements, under the Basel III Capital Rule, the Company and the bank must
also maintain the required Capital Conservation Buffer to avoid becoming subject to restrictions on capital distributions and
certain discretionary bonus payments to management. The Capital Conservation Buffer is calculated as a ratio of CET1 capital
to risk-weighted assets, and it effectively increases the required minimum risk-based capital ratios. The Capital Conservation
Buffer requirement was phased in over a three-year period that began on January 1, 2016. The phase-in period ended on
January 1, 2019, and the Capital Conservation Buffer is now at its fully phased-in level of 2.5%.
The Tier 1 Leverage Ratio is not impacted by the Capital Conservation Buffer, and a banking institution may be considered
well-capitalized while remaining out of compliance with the Capital Conservation Buffer.
The table below summarizes the capital requirements that the Company and the bank must satisfy to avoid limitations on
capital distributions and certain discretionary bonus payments (i.e., the required minimum capital ratios plus the Capital
Conservation Buffer):
CET1 risk-based capital ratio.......................................................................
Tier 1 risk-based capital ratio.......................................................................
Total risk-based capital ratio........................................................................
7.0%
8.5%
10.5%
Minimum Basel III Regulatory Capital Ratio
Plus Capital Conservation Buffer
As of December 31, 2019, the Company and the bank are well-capitalized for regulatory purposes. For a tabular presentation of
the Company’s and the bank’s capital ratios as of December 31, 2019, see Note 27 - Parent Company and Regulatory
Restrictions to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data."
If the Company were to cross the $10 billion or more asset threshold, its compliance costs and regulatory requirements, would
increase.
In September 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying
community banking organizations (i.e., the community bank leverage ratio ("CBLR") framework), as required by the Economic
Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the
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15 requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt
into the framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1
leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-
sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR
framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio
requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.
The CBLR framework will be available for banks to use in their March 31, 2020, Call Report. We have determined that we will
opt out of the CBLR framework as it was currently deemed not in the Company and the bank's best interest. The FDIC also
finalized a rule that permits non-advanced approaches banking organizations to use the simpler regulatory capital requirements
for mortgage-servicing assets, certain deferred tax assets arising from temporary differences, investments in the capital of
unconsolidated financial institutions, and minority interest when measuring their tier 1 capital as of January 1, 2020. Banking
organizations may use this new measure of tier 1 capital under the CBLR framework.
In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis
regulatory reforms (the standards are commonly referred to as “Basel IV”). Among other things, these standards revise the
Basel Committee's standardized approach for credit risk (including by recalibrating risk weights and introducing new capital
requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provides a
new standardized approach for operational risk capital. Under the Basel framework, these standards will generally be effective
on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S. capital rules,
operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the
Company and the bank. The impact of Basel IV on us will depend on the manner in which it is implemented by the federal
bank regulators.
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 Basel III Capital Rule 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 on items such as 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." Notwithstanding these provisions, in July 2019,
the federal bank regulatory agencies finalized a rule which provides that community banks with $10 billion or less in total
consolidated assets and total trading assets and liabilities of 5 percent or less of total consolidated assets, such as the bank, are
excluded from the Volcker Rule.
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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 the "Capital Adequacy
Requirements" section above and the "Capital Resources" section in the MD&A);
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 the "Prompt Corrective Action Provisions" section above);
limit dividends payable to shareholders and restrict the ability of bank holding companies to obtain dividends or other
distributions from their subsidiary banks;
require a bank holding company to terminate an activity or terminate control of or liquidate or divest certain
subsidiaries, affiliates or investments if the Federal Reserve believes the activity or the control of the subsidiary or
affiliate constitutes a significant risk to the financial safety, soundness or stability of any bank subsidiary;
require the prior approval for changes in senior executive officers or directors and prohibit golden parachute
payments, including change in control agreements, or new employment agreements with such payment terms, which
are contingent upon termination when a bank holding company is deemed to be in troubled condition;
regulate provisions of certain bank holding company debt, including the authority to impose interest ceilings and
reserve requirements on such debt and require prior approval to purchase or redeem securities in certain situations;
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 non-banking 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.
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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.
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:
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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.
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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. On September 30, 2018, the DRR reached 1.36%. Because the reserve ratio has exceeded 1.35%, two deposit
insurance assessment changes occurred under the FDIC regulations: 1) Surcharges on large banks (total consolidated assets of
$10 billion or more) ended; the last surcharge on large banks was collected on December 28, 2018. and 2) Small banks (total
consolidated assets of less than $10 billion) were awarded assessment credits for the portion of their assessments that
contributed to the growth in the reserve ratio from 1.15% to 1.35%. Credits will be applied until exhausted when the reserve
ratio is at least 1.35%. The reserve ratio reached 1.40% and 1.41% on June 30, 2019 and September 30, 2019, respectively.
Therefore, credits were applied on the September 30, 2019 and December 31, 2019 invoices.
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
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 record-keeping 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.
Cybersecurity
Federal regulators have issued multiple statements regarding cybersecurity stating that financial institutions need to design
multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address
the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing
internet-based services of the financial institution. In addition, a financial institution’s management is expected to maintain
sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s
operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate
processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if
the institution or its critical service providers fall victim to this type of cyber-attack. If we fail to observe the regulatory
guidance, we could be subject to various regulatory sanctions, including financial penalties.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations,
including California which adopted the California Consumer Privacy Act in 2018 and New York which adopted the Shield Act
in 2019. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity
programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many
states have also recently implemented or modified their data breach notification and data privacy requirements. We expect this
trend of state-level activity in those areas to continue, and are continually monitoring developments in the states in which our
customers are located in or in which we conduct business.
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In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations
and to store sensitive data. We employ an in-depth, layered, defensive approach that leverages people, processes and
technology to manage and maintain cybersecurity controls. We employ a variety of preventative and detective tools to monitor,
block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats.
Notwithstanding the strength of our defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and
increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date we have not detected a
significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, our systems and
those of our customers and third-party service providers are under constant threat and it is possible that we could experience a
significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the
foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of
Internet banking, mobile banking and other technology-based products and services by us and our customers. See Item 1A.
Risk Factors for a further discussion of risks related to cybersecurity.
Office of Foreign Assets Control Regulation
The U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC, administers and enforces economic and trade
sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign
countries, nationals and others. OFAC publishes lists of specially designated targets and countries. We are responsible for,
among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and
financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these
sanctions could have serious financial, legal and reputational consequences, including causing applicable bank regulatory
authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such
transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money
penalties against institutions found to be violating these obligations.
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 2017 Community Reinvestment Act performance evaluation that
measures how financial institutions support their communities in the areas of lending, investment and service.
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
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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") has been a focus of
the CFPB, and of banking regulators more broadly. In addition, the Dodd-Frank Act 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.
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 and construction, 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, 2019, the bank’s construction, land development, and other land and total CRE
loans represented 18.1% and 230.7% of its capital, respectively.
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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.
Under these circumstances, the Company's business, financial condition, results of operations or prospects may be adversely
affected, perhaps materially.
Employees
At December 31, 2019, we employed 854 persons, 789 on a full-time basis and 65 on a part-time basis. We are not a party to
any collective bargaining agreement.
Available Information
Our internet website can be found at www.cpb.bank. 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.
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ITEM 1A.
RISK FACTORS
Our business faces significant risks, including credit, market/liquidity, operational, legal/regulatory and strategic/reputation
risks. The factors described below may not be the only risks we face and are not intended to serve as a comprehensive listing or
be applicable only to the category of risk under which they are disclosed. The risks described below are generally applicable to
more than one of the following categories of risks. Additional risks that we do not yet know of or that we currently think are
immaterial may also impair our business operations. If any of the events or circumstances described in the following factors
actually occurs, our business, financial condition and/or results of operations could be materially and adversely affected.
Risk Factors Related to our Business
Negative developments in the global and U.S. economies could have an adverse effect on us.
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 strength of the real estate
markets in which we operate. As we have previously 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.
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 74% of our loan portfolio as of
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December 31, 2019 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, domestic or foreign,
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. The underwriting and credit monitoring
policies and procedures that we have adopted to address this risk may not prevent unexpected losses that could have a material
adverse effect on our business, financial condition, results of operations and cash flows. We maintain an allowance for loan and
lease losses to provide for loan and lease defaults and non-performance, which also includes increases for new loan growth.
While we believe that our allowance for loan and lease losses is appropriate to cover inherent losses, we cannot assure you that
we will not increase the allowance for loan and lease losses further or that regulators will not require us to increase the
allowance for loan and lease losses which could have a material adverse effect on our net income and financial condition.
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.
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 which could have a
material adverse effect on our net income and financial condition. See Note 1 - Summary of Significant Accounting Policies to
the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data."
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The implementation of CECL, including the design and maintenance of related internal controls over financial reporting,
will require a significant amount of time and resources which may have a material impact on our results of operations, and
we anticipate will require us to increase our allowance for credit losses.
The Financial Accounting Standards Board (the "FASB") has adopted a new accounting standard that is effective for our fiscal
year beginning on January 1, 2020. This standard, referred to as Current Expected Credit Loss, or ("CECL"), requires financial
institutions to determine periodic estimates of lifetime expected credit losses on financial instruments, and recognize the
expected credit losses as allowances for credit losses. This changes the current method of providing allowances for credit losses
that are probable, which we anticipate will require us to increase our allowance for credit losses. Our CECL implementation
initiative has increased the amount of data and assumptions we need to collect and review to determine the appropriate level of
the allowance for credit losses. A significant amount of time and resources has been spent and will continue to be spent in order
to implement CECL effectively, including the design and implementation of related adequate internal controls, which may
adversely affect our results of operations. If we are unable to maintain effective internal control over financial reporting relating
to CECL, our ability to report our financial condition and results of operations accurately and on a timely basis could also be
adversely affected.
Our RISE2020 initiative may not be successful.
During the second half of 2019 and throughout 2020, we intend to invest an aggregate of approximately $40 million to upgrade
our branch spaces, digital banking platforms and ATM network through a new initiative we call RISE2020. RISE2020 is
intended to enhance customer experience, drive stronger long-term growth and profitability, improve shareholder returns and
lower our efficiency ratio. However, we cannot provide any assurance that RISE2020 will achieve any of our objectives or will
achieve our objectives to the extent we have forecasted. In particular, the costs of RISE2020 may exceed our expectations;
there may be timing delays as we execute our plans; we may not be able to attract new business from existing customers; new
customers may not be attracted to our platform despite the amount of expense we incur; and implementation of RISE2020
initiatives may disrupt our operations. Additionally, given the number of key projects involved in our RISE2020 initiative, there
is execution risk which may include vendors failing to perform or deliver as expected, issues with system conversions or
integrations, lack of internal resource capacity, among other things. If our RISE2020 initiative is not successful, our overall
noninterest expense will have increased without a corresponding increase in revenue and growth which could have a material
adverse effect on our business, financial condition or results of operations.
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
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 FASB and the SEC 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.
See Note 1 - Summary of Significant Accounting Policies to the Consolidated Financial Statements under "Part II, Item 8.
Financial Statements and Supplementary Data."
Our commercial, financial and agricultural 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, financial and agricultural 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, financial
and agricultural 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.
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Accordingly, charge-offs on commercial, financial and agricultural 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 interest rate 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.
We may incur future losses in connection with certain representations and warranties we have made with respect to
mortgages that we have sold in the secondary market.
In connection with the sale of mortgage loans into the secondary market, we make representations and warranties, which, if
breached, may require us to repurchase such loans, substitute other loans or indemnify the purchasers of such loans for actual
losses incurred in respect of such loans. A substantial decline in residential real estate values in the markets in which we
originated such loans could increase the risk of such consequences. While we currently believe our repurchase risk is low, it is
possible that requests to repurchase loans could occur in the future and such requests may have a material adverse effect on our
financial condition and results of operations.
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 servicers 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.
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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 which could affect or limit our ability to satisfy our
obligations and our ability to grow profitability at the same rate. 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 a 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.
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:
•
inflation;
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•
recession;
• market conditions;
•
•
•
•
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 FRB, 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:
•
•
•
•
•
•
•
•
the capital that must be maintained;
the kinds of activities that can be engaged in;
the kinds and amounts of investments that can be made;
the locations of offices;
insurance of deposits and the premiums that we must pay for this insurance;
procedures and policies we must adopt;
conditions and restrictions on our executive compensation; and
how much cash we must set aside as reserves for deposits.
In addition, bank regulatory authorities may 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
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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 and our compliance costs would increase.
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 15.0% of our interest income in the year ended December 31, 2019, as
compared to 19.3% of our interest income in the year ended December 31, 2018. 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, remains important. If we are unable to effectively
manage our investment securities portfolio or if the interest income generated by our investment securities portfolio declines,
our net interest income and net interest margin could be adversely affected.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of
other financial institutions. Defaults by, or even rumors or questions about, one or more financial services institutions, or the
financial services industry generally, have led to 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
23
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.
The FRB has increased interest rates seven times over the last two years. 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 may be adversely impacted by the transition from LIBOR as a reference rate.
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit
the rates required to calculate the LIBOR. This announcement indicates that the continuation of LIBOR on the current basis cannot
and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks
will continue to provide submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will
continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR or what
the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments.
We have a significant number of loans and debt with attributes that are either directly or indirectly dependent on LIBOR. The
transition from LIBOR could create considerable costs and additional risk. Since proposed alternative rates are calculated
differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition may change
our market risk profile, and require changes to risk and pricing models, valuation tools, product design and hedging strategies.
Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation.
Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately
manage the transition could have a material adverse effect on our business, financial condition and results of operations.
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, 2019, the bank had Statutory Retained
Earnings of $66.6 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, data privacy breaches, 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 data security breaches and cyber-attacks and
periodically test our security, we may fail to anticipate or adequately mitigate breaches of security or experience data privacy
breaches that 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, including resulting violations of law (whether federal or one or more various states);
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 and other data privacy breaches 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 materially adversely affected.
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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.
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:
•
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;
26
•
•
•
•
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.
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 Chief
Executive Officer, our President, our Group Executive Vice President of Revenue, our Executive Vice President and Small
Business and Wealth Management Manager, our Executive Vice President of Retail Markets, our Executive Vice President and
Chief Marketing Officer, our Executive Vice President and Chief Financial 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, personnel and technology exacerbate the challenge of
27
developing and maintaining a system of internal controls and can increase the cost and level of effort to develop and maintain
such systems.
Natural disasters and other external events (including pandemic viruses or disease) could have a material adverse affect on
our financial condition and results of operations.
Our branch offices as well as a substantial majority of our loan portfolio is in the state of Hawaii. As a result, natural disasters
and other severe weather occurrences such as tsunamis, volcanic eruptions (such as the recent eruption of Mount Kilauea),
hurricanes and earthquakes and other adverse external events, including the effects of any pandemic viruses or diseases, could
have a significant effect on our ability to conduct our business and adversely affect the tourism and visitor industry in the state
of Hawaii. Such events could affect the ability of our borrowers to repay their outstanding loans, impair the value of collateral
securing our loans, cause significant property damage, result in loss of revenue, adversely impact our deposit base and/or cause
us to incur additional expenses. Accordingly, the occurrence of any such natural disasters, severe weather events, or other
occurrences over which we have no control could have a material adverse effect on our business, which, in turn, could
adversely affect our financial condition and results of operations.
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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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
28
•
domestic and international economic factors unrelated to our performance.
The stock market generally may experience significant volatility. 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.
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 or a significant block of common stock, 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 certain percentage thresholds 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 the "Supervision and Regulation" section. We
are also subject to the provisions of the Hawaii Control Share Acquisitions Act which prohibits the consummation of a “control
share acquisition” (with threshold ranges starting at 10% and set at 10% intervals up to a majority) unless approved by our
shareholders or otherwise exempt. Unless approved or otherwise exempt, for a period of one year after acquisition, the shares
acquired by a person in a control share acquisition will be (i) denied voting rights, (ii) be nontransferable, and (iii) be subject to
redemption at our option. 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, limit the ability of another
party to acquire a significant block of our common stock, 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, 2019,
we had $50.0 million in face amount of trust preferred securities outstanding and accrued and unpaid dividends thereon of $0.1
million. We also had short-term FHLB borrowings of $150.0 million and long-term FHLB borrowings of $50.0 million as of
December 31, 2019. 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.
29
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, 2019. Last year, we submitted to the NYSE on April 29,
2019 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 23, 2020.
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 on
which 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 bank training classes are held and residential mortgage sales and operations are located. In February
2020, the Company closed on the purchase of a parcel of land where our Kaneohe branch is 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, 2019, 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
30
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 Standard and Poor's ("S&P") SmallCap 600
Commercial Bank Index for the five year period commencing December 31, 2014 and ending December 31, 2019. The graph
assumes the investment of $100 on December 31, 2014.
Indexed Total Annual Return
(as of December 31, 2019)
Index
Central Pacific Financial Corp. .............
Russell 2000 ..........................................
S&P 600 Commercial Bank Index ........
2014
2015
2016
2017
2018
2019
$
100.00
$
106.14
$
155.22
$
150.73
$
126.63
$
100.00
100.00
95.59
106.44
115.95
154.13
132.94
150.74
118.30
135.89
158.74
148.49
163.84
December 31,
As of January 31, 2020, there were 2,830 shareholders of record, excluding individuals and institutions for which shares were
held in the names of nominees and brokerage firms.
31
Dividends
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, 2019.
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, 2019, the bank had Statutory Retained
Earnings of $66.6 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 June 2019, the Company's Board of Directors authorized the repurchase of up to $30.0 million of its common stock from
time to time on the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase
program (the "2019 Repurchase Plan"). The 2019 Repurchase Plan replaced and superseded in its entirety the share repurchase
program previously approved by the Company's Board of Directors, which had $6.8 million in remaining repurchase authority.
During the quarter ended December 31, 2019, 165,703 shares of common stock, at a cost of $4.8 million, were repurchased
under the 2019 Repurchase Plan. A total of $21.1 million remained available for repurchase under the 2019 Repurchase Plan at
December 31, 2019. In January 2020, our Board of Directors authorized the repurchase of up to $30 million of our common
stock. This authorization supersedes the remaining repurchase authority under our 2019 Repurchase Plan. The current
repurchase plan is subject to a one year expiration.
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
Total Number
of Shares
Purchased
Average
Price Paid
per Share
$
71,000
47,535
47,168
165,703
28.53
29.56
29.59
29.13
71,000
47,535
47,168
165,703
— $
—
—
2,025,739
1,405,354
1,395,484
— $
4,826,577
Maximum
Dollar Value
of Shares
that May Yet
Be Purchased
Under the
Program
$ 23,901,697
22,496,343
21,100,859
21,100,859
Period
October 1-31.............
November 1-30.........
December 1-31 .........
Total..........................
During the entire year of 2019, 797,003 shares of common stock, at a cost of $22.8 million or an average cost per share of
$28.60, were repurchased under the Company's share repurchase programs.
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."
32
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,
2019. 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." Significant items affecting the comparability of the information presented in this table follows this presentation.
Selected Financial Data
Statement of Income Data:
Year Ended December 31,
2019
2018
2017
2016
2015
(Dollars in thousands, except per share data)
Total interest income..............................................................................................
$ 216,383
$ 198,294
$ 182,562
$ 167,139
$ 156,035
Total interest expense.............................................................................................
Net interest income ................................................................................................
Provision (credit) for loan and lease losses............................................................
Net interest income after provision for loan and lease losses................................
Other operating income ..........................................................................................
Other operating expense (1)...................................................................................
Income before income taxes ..................................................................................
Income tax expense (1) ..........................................................................................
Net income .............................................................................................................
32,309
184,074
6,317
177,757
41,801
141,631
77,927
19,605
58,322
25,296
172,998
(1,124)
174,122
38,804
134,682
78,244
18,758
59,486
14,859
167,703
(2,674)
170,377
36,496
131,073
75,800
34,596
41,204
9,189
157,950
(5,517)
163,467
42,316
132,518
73,265
26,273
46,992
6,507
149,528
(15,671)
165,199
34,799
125,964
74,034
28,166
45,868
Balance Sheet Data (as of Year-End):
Interest-bearing deposits in other financial institutions .........................................
$
24,554
$
21,617
$
6,975
$
9,069
$
8,397
Investment securities (2) ........................................................................................
1,128,110
Loans and leases ....................................................................................................
4,449,540
1,354,812
4,078,366
1,496,644
3,770,615
1,461,515
1,520,172
3,524,890
3,211,532
Allowance for loan and lease losses ......................................................................
Mortgage servicing rights ......................................................................................
Core deposit premium............................................................................................
47,971
14,718
—
Total assets .............................................................................................................
6,012,672
Core deposits (3) ....................................................................................................
4,259,325
Total deposits .........................................................................................................
5,120,023
Long-term debt.......................................................................................................
Total shareholders’ equity ......................................................................................
101,547
528,520
47,916
15,596
—
5,807,026
4,015,942
4,946,490
122,166
491,725
50,001
15,843
2,006
5,623,708
3,991,234
4,956,354
92,785
500,011
56,631
15,779
4,680
63,314
17,797
7,355
5,384,236
5,131,288
3,713,567
3,582,178
4,608,201
4,433,439
92,785
504,650
92,785
494,614
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) ................................
2.05
2.03
0.90
18.68
28,677
$
2.02
2.01
0.82
16.97
29,610
$
1.36
1.34
0.70
16.65
30,638
$
1.52
1.50
0.60
16.39
31,225
$
1.42
1.40
0.82
16.06
32,651
Financial Ratios:
Return on average assets........................................................................................
0.99%
1.05%
0.75%
0.90%
0.92 %
Return on average shareholders’ equity .................................................................
Net income to average tangible shareholders’ equity ............................................
Average shareholders’ equity to average assets .....................................................
Dividend payout ratio ............................................................................................
Efficiency ratio (1) .................................................................................................
Net interest margin (4) ...........................................................................................
11.36
11.36
8.72
44.33
62.70
3.35
12.22
12.24
8.56
40.80
63.59
3.22
8.03
8.08
9.32
52.24
64.19
3.28
9.16
9.27
9.78
40.00
66.17
3.27
8.91
9.06
10.37
58.57
68.34
3.30
Regulatory Capital Ratios:
Leverage capital .....................................................................................................
9.5%
9.9%
10.4%
10.6%
10.7 %
Tier 1 risk-based capital.........................................................................................
Total risk-based capital ..........................................................................................
CET1 risk-based capital.........................................................................................
12.6
13.6
11.5
13.5
14.7
11.9
14.7
15.9
12.4
14.2
15.5
12.3
14.4
15.7
12.8
33
Selected Financial Data
Asset Quality:
Year Ended December 31,
2019
2018
2017
2016
2015
(Dollars in thousands, except per share data)
Net loan charge-offs (recoveries) to average loans and leases...............................
Nonaccrual loans to total loans and leases .............................................................
Allowance for loan and lease losses to total loans and leases................................
0.15%
0.03
1.08
0.02%
0.06
1.17
0.11%
0.07
1.33
0.03%
(0.16)%
0.24
1.61
0.44
1.97
Allowance for loan and lease losses to nonaccrual loans.......................................
3,084.95
2,062.68
1,801.84
674.50
443.75
(1)
(2)
(3)
(4)
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 other operating expense, income tax expense and efficiency ratio have been revised to conform to current
period, which reflects reclassifications related to the change in accounting policy for our investments in low-income housing tax credit partnerships
referred to in Note 1 - Summary of Significant Accounting Policies. See Item 7 — Management's Discussion and Analysis of Financial Condition
and Results of Operations —Table 5 - Reconciliation of Efficiency Ratio.
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.
Computed on a taxable-equivalent basis using a federal statutory tax rate of 21% for the years ended December 31, 2019 and 2018 and 35% for the
previous years.
34
Five Year Performance Comparison
Significant items affecting the comparability of the five years' performance include:
(Dollars in thousands)
2019
2018
2017
2016
2015
Year Ended December 31,
Provision (credit) for loan and lease losses.......................................
$
6,317
$
(1,124) $
(2,674) $
(5,517) $
(15,671)
Other operating income:
Mortgage banking income..............................................................
Net gain (loss) on sales of foreclosed assets ..................................
Gain on sale of premises and equipment........................................
Investment securities gains (losses) ...............................................
5,983
(145)
—
36
Gain on sale of MasterCard stock (included in other)....................
2,555
7,315
—
—
(279)
—
6,962
205
—
(1,410)
—
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) .........................................................................
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) ......
8,069
607
3,537
—
—
3,094
3,848
—
152
660
7,254
568
—
(1,866)
—
4,181
—
(2,400)
486
2,559
2,706
4,289
3,787
3,266
—
—
574
635
—
—
151
593
—
—
251
681
868
(403)
29
—
1,732
1,724
2,052
150
(425)
—
209
94
—
(387)
(1,352)
141
737
(271)
—
Income tax expense ...........................................................................
19,605
18,758
34,596
26,273
28,166
35
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, financial and agricultural, commercial mortgage, and construction loans to
small and medium-sized companies, business professionals, and real estate investors and developers, as well as
residential mortgage, home equity 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 2019 we continued to deliver strong financial performance for the Company.
• We recorded net income of $58.3 million, or $2.03 per diluted common share in 2019, compared to $59.5 million, or
$2.01 per diluted common share in 2018.
• We recorded return on average assets ("ROA") and return on average shareholders' equity ("ROE") ratios of 0.99%
and 11.36%, respectively, in 2019, compared to ROA and ROE ratios of 1.05% and 12.22%, respectively, in 2018.
• We saw continued improvement in our asset quality as our nonperforming assets declined by $1.0 million to $1.7
million at December 31, 2019 from $2.7 million at December 31, 2018.
• With the healthy market conditions in Hawaii, together with our efforts to expand and strengthen customer
relationships, we realized strong loan growth of $371.2 million, or 9.1%, as well as core deposit growth of $243.4
million, or 6.1% in 2019.
• Our capital position remained strong, supported by nine 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 $0.82 per
share in 2018 to $0.90 per share in 2019.
•
In 2019, our strong capital position and consistent profitability also allowed us to execute on our stock repurchase
program and repurchase 797,003 shares, or approximately 2.8% of outstanding shares as of December 31, 2018.
RISE2020
Commencing in the second quarter of 2019, the Company launched RISE2020, a new multifaceted initiative intended to
enhance customer experience, drive stronger long-term growth and profitability, improve shareholder returns and lower our
efficiency ratio. RISE2020 includes initiatives in the following key areas of opportunity: Digital Banking, Revenue
Enhancements, Branch Transformation and Operational Excellence. RISE2020 is intended to provide Central Pacific Bank with
best-in class products and services in several strategic areas. During 2019, the outsourcing of the Company's residential
mortgage loan servicing, the launch of its new website under the cpb.bank domain name and the implementation of its end-to-
end commercial loan origination system was completed. The development of the Company's new online and mobile banking
platforms is progressing, with a pilot of the new platforms scheduled for the first half of 2020. Key steps toward the Company's
36
2020 milestones in the areas of branch and ATM modernization were achieved with construction underway at the Main Branch
headquarters and new ATMs selected.
The Company plans to invest approximately $40 million in RISE2020 in 2019 and 2020. Some of these investments will be
capitalized, while others are recurring annually. During 2019, the Company incurred approximately $3.5 million in RISE2020-
related expenses. While operating expenses are expected to increase, the Company is forecasting enhanced revenue growth. As
a result, we expect our efficiency ratio to be in the 63-65% range in 2020. Longer-term, the Company is targeting a 15% return
on average shareholders' equity and a 57% efficiency ratio by the fourth quarter of 2022.
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
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.
Following the solid performances of our leading economic indicators in 2018, Hawaii's general economic conditions continued
to improve but at a slower pace in 2019. Tourism continues to be Hawaii's center of strength and its most significant economic
driver. For the eighth consecutive year, Hawaii's strong visitor industry broke records in several key categories, including
visitor arrivals and visitor spending. According to preliminary year-end statistics from the Hawaii Tourism Authority ("HTA"),
approximately 10.4 million total visitors arrived in the state in 2019. This was an increase of 5.4% from the previous record
high of 9.9 million visitor arrivals in 2018. The HTA also reported that total spending by visitors increased to $17.75 billion in
2019, an increase of 1.4%, from the previous record high of $17.51 billion in 2018. According to the Hawaii Department of
Business Economic Development and Tourism ("DBEDT"), total visitor arrivals and visitor spending are expected to increase
by 2.5% and 2.5% in 2020, respectively.
DBEDT reported Hawaii's economy, as measured by the growth of real personal income and real gross state product, continued
positive growth in 2019. DBEDT is expected to report real personal income and real gross state product growth of
approximately 1.7% and 1.2%, respectively, for 2019 and projects a growth rate of 1.7% and 1.2%, respectively, for 2020.
Hawaii's labor market continues to be among the best in the nation. The Department of Labor and Industrial Relations reported
that Hawaii's seasonally adjusted annual unemployment rate in December 2019, which was 2.6%, compared to 2.5% in
December 2018. Hawaii's unemployment rate in December 2019 of 2.6%, which is among the lowest in the nation, remained
below the national seasonally adjusted unemployment rate of 3.5%. DBEDT projects Hawaii's seasonally adjusted annual
unemployment rate to be at 3.2% in 2020.
Real estate lending is a primary focus for us, including residential mortgage and commercial mortgage loans. As a result, we
are dependent on the strength of Hawaii's real estate market. The Oahu real estate market saw steady activity in 2019.
According to the Honolulu Board of Realtors, the median price for a single-family home on Oahu for the year ended December
31, 2019 was $789,000, representing a decrease of 0.1% from the median resale price of $790,000 for the year ended December
31, 2018. The median resale price for condominiums on Oahu was $425,000 for the year ended December 31, 2019,
representing an increase of 1.2% from the median resale price of $420,000 for the year ended December 31, 2018. Oahu unit
sales volume increased by 3.9% for single-family homes, but decreased by 4.8% for condominiums in 2019 from 2018.
As we have seen in the past, our operating results are significantly impacted by the economy in Hawaii and 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 our results of operations would be negatively impacted. See the "Overview of Results of Operations—
Concentrations of Credit Risk" section 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.
In late 2008, the Federal Reserve lowered the target Federal Funds range to 0%-0.25%. In an attempt to help the overall
economy, the FRB has kept interest rates low through its targeted Fed Funds rate until the recession was safely over. In recent
years, the Federal Reserve has begun raising the target Federal Funds range. During 2018, the Federal Reserve increased the
37
Federal Funds range four times, each by 25 basis points to 2.25%-2.50% as of December 31, 2018. The Federal Reserve left the
Federal Funds range unchanged during the first half of 2019 but cut the Federal Funds range three times by 25 basis points
during the second half of 2019 to 1.50%-1.75% as of December 31, 2019.
Further decreases in the Federal Funds rate would likely result in lower overall interest rates and may support the continued
expansion of the U.S. economy. Changes in monetary policy, including changes in interest rates, could influence, among other
things, (i) the amount of interest we receive on loans and securities, (ii) the amount of interest we pay on deposits and
borrowings, (iii) our ability to originate loans and obtain deposits, and (iv) the fair value of our assets and liabilities.
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 a number of judgments, estimates and assumptions that affect the reported
amounts of assets, liabilities, income and expense in the financial statements and the related disclosures made. Various elements
of our accounting policies, by their nature, involve the application of highly sensitive and judgmental estimates and
assumptions. Some of these policies and estimates relate to matters that are highly complex and contain substantial inherent
uncertainties. Actual amounts and values as of the balance sheet dates may be materially different than the amounts and values
reported due to the inherent uncertainty in the estimation process. Also, future amounts and values could differ materially from
those estimates due to changes in values and circumstances after the balance sheet date.
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 identified the following accounting policy and estimates that, due to
inherent judgments and assumptions and the potential sensitivity of the financial statements to those judgments and
assumptions, are critical to an understanding of our financial statements. Management has discussed the development and
selection of the critical accounting policy and estimates noted below with the Audit Committee of the Board of Directors, and
the Audit Committee has reviewed the accompanying disclosures.
Allowance for Loan and Lease Losses ("Allowance")
The Allowance is management's estimate of incurred 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 incurred in our loan and
lease portfolio.
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 recorded a specific reserve of $0.2 million as of December 31, 2019. The Company did not
record a specific reserve as of December 31, 2018.
General Allowance
In determining the general allowance component of the Allowance, the Company utilizes a comprehensive approach to segment
the loan portfolio into homogeneous groups. The methodology segments the portfolio generally by FDIC Call Report codes. In
the second quarter of 2017, an additional segment was added for auto dealer purchased loans. In the third quarter of 2018,
another segment was broken out for multifamily commercial real estate loans. This results in eleven segments, and is consistent
with general 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 and auto dealer purchased 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
38
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
extends its look back period with each additional quarter passing. As of December 31, 2019, the look back period was ten
years.
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 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 and 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.
Overview of Results of Operations
2019 vs. 2018 Comparison
In 2019, we recognized net income of $58.3 million, or $2.03 per diluted common share, compared to net income of $59.5
million, or $2.01 per diluted common share, in 2018. Our ROA and ROE for 2019 was 0.99% and 11.36%, respectively,
compared to 1.05% and 12.22%, respectively, in 2018.
We recorded a provision for loan and lease losses of $6.3 million in 2019, compared to a credit of $1.1 million in 2018.
Net interest income increased by $11.1 million from 2018 to 2019, primarily due to a significant increase in average loans and
leases funded by runoff of the investment securities portfolio and a significant increase in core deposits, combined with an
increase in average yields earned on loans and leases and higher interest recoveries on nonaccrual loans. In addition, average
government time deposits (included in time deposits of $100,000 and over) declined significantly. Partially offsetting these
positive variances were increases in interest rates paid on interest-bearing deposits, primarily attributable to the four 25 basis
point increases in the Federal Funds rate in 2018.
Other operating income increased by $3.0 million from 2018 to 2019. The increase in other operating income was primarily
due to conversion of MasterCard Class B common stock received during their initial public offering to Class A common stock
and immediate sale of the converted shares resulting in a gain of $2.6 million during the first quarter of 2019, combined with
higher income from bank-owned life insurance, higher merchant and bank card fees and higher commissions and fees on
investment services. These increases were partially offset by lower mortgage banking income and lower income recovered on
nonaccrual loans previously charged-off. See Table 3 - Components of Other Operating Income for more information.
Other operating expense increased by $6.9 million from 2018 to 2019. The increase was primarily due to higher salaries and
employee benefits, higher entertainment and promotions expense (included in other), higher computer software expense and
higher net occupancy expense. These increases were partially offset by lower amortization of core deposit premium, lower
FDIC insurance expense and a credit to the reserve for residential mortgage loan repurchase losses in 2019, compared to an
increase to the reserve in 2018. See Table 4 - Components of Other Operating Expense for more information.
39
2018 vs. 2017 Comparison
In 2018, we recognized net income of $59.5 million, or $2.01 per diluted common share, compared to net income of $41.2
million, or $1.34 per diluted common share, in 2017. Our ROA and ROE for 2018 was 1.05% and 12.22%, respectively,
compared to 0.75% and 8.03%, respectively, in 2017. Our ROA and ROE in 2017 were negatively impacted by a one-time non-
cash charge of $7.4 million to income tax expense related to the estimated impact of Tax Reform, as defined below, on our
DTA.
The significant increase in net income and diluted earnings per share was primarily due to lower income tax expense of $15.8
million, primarily attributable to federal tax legislation. On December 22, 2017, the U.S. government enacted comprehensive
tax legislation H.R.1., commonly referred to as the Tax Cuts and Jobs Act ("Tax Reform"), which among other items, reduced
the corporate federal income tax rate from 35% to 21% and changed or limited certain tax deductions effective January 1, 2018.
The Company's net deferred tax assets ("DTA") represent expected corporate tax benefits anticipated to be realized in the
future. The reduction in the corporate federal income tax rate reduced these benefits. Based on the Company's evaluation of the
estimated impact of Tax Reform on its DTA, the Company recorded a one-time, non-cash estimated charge of $7.4 million of
additional income tax expense in December 2017. In the first quarter of 2018, the Company recorded an income tax benefit of
$0.7 million related to a refinement of the revaluation of our DTA. In the second quarter of 2018, the Company recorded an
income tax benefit of $0.6 million related to a tax accounting method change strategy that allows the deduction for certain
expenses to be accelerated into the 2017 tax year under the higher corporate tax rate.
We recorded a credit to the provision for loan and lease losses of $1.1 million in 2018, compared to a credit of $2.7 million in
2017.
Net interest income increased by $5.3 million from 2017 to 2018, primarily due to a significant increase in average loans and
leases, combined with increases in average yields earned on the loans and leases and taxable investment securities portfolios.
Partially offsetting the increase was the significant increase in rates paid on time deposits of $100,000 and over, which
primarily consists of public funds.
Other operating income increased by $2.3 million from 2017 to 2018. The increase in other operating income was primarily
due to net losses on sales of investment securities recognized in 2017 primarily attributable to an investment portfolio
repositioning. In addition, in 2018 we recognized higher commissions and fees on investment services, higher income from
fiduciary activities, higher mortgage banking income and higher fees on foreign exchange. These increases were partially offset
by lower income from bank-owned life insurance and lower equity in earnings of unconsolidated subsidiaries. See Table 3 -
Components of Other Operating Income for more information.
Other operating expense increased by $3.6 million, primarily due to the increase in salaries and employee benefits, higher ATM
and debit card expenses, higher computer software expense and higher equipment expense. These increases were partially
offset by lower amortization of core deposit premium, lower entertainment and promotions expense and a credit to the reserve
for unfunded commitments. See Table 4 - Components of Other Operating Expense for more information.
40
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 a federal statutory tax rate of 21% for the years ended December 31, 2019 and December 31, 2018 and
35% for the year ended December 31, 2017. 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 and (ii) changes in rates. The change in volume is calculated as change in average
balance, multiplied by prior period average yield/rate. The change in rate is calculated as change in average yield/rate,
multiplied by current period volume. The change in interest income not solely due to change in volume or change in rate has
been allocated proportionately to change in volume and change in average yield/rate.
Table 1. Average Balances, Interest Income and Expense, Yields, and Rates (Taxable-Equivalent)
41
2019
Average
Yield/
Rate
Average
Balance
Amount
of Interest
Average
Balance
2018
Average
Yield/
Rate
Amount
of Interest
Average
Balance
2017
Average
Yield/
Rate
Amount
of Interest
(Dollars in thousands)
9,842
2.04% $
201
$
20,104
1.81% $
365
$
33,012
1.08% $
356
Assets
Interest-earning assets:
Interest-bearing deposits in other financial
institutions ....................................................... $
Investment securities, excluding valuation
allowance:
Taxable (1)....................................................
1,120,711
Tax-exempt (1) .............................................
130,411
Total investment securities........................
1,251,122
Loans and leases, incl. loans-held-for-sale (2)
4,241,308
Federal Home Loan Bank ("FHLB") stock .....
16,369
Total interest-earning assets......................
5,518,641
Noninterest-earning assets ..................................
369,974
Total assets................................................ $ 5,888,615
2.63
2.95
2.67
4.31
5.89
3.94
29,517
1,304,523
3,853
163,610
33,370
1,468,133
182,657
3,898,250
964
8,990
217,192
5,395,477
292,599
$ 5,688,076
2.65
2.86
2.67
4.09
2.40
3.69
34,562
1,351,436
4,678
169,318
39,240
1,520,754
159,456
3,622,033
215
7,033
199,276
5,182,832
328,174
$ 5,511,006
2.51
3.52
2.63
3.98
1.79
3.56
33,982
5,960
39,942
144,224
126
184,648
Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits .................... $ 984,298
0.08% $
800
$ 936,034
0.08% $
734
$ 901,171
0.07% $
Savings and money market deposits................
1,556,766
Time deposits under $100,000.........................
Time deposits of $100,000 and over................
171,064
897,670
Total interest-bearing deposits .....................
3,609,798
FHLB advances and other short-term
borrowings .......................................................
Long-term debt ................................................
185,909
101,547
Total interest-bearing liabilities ................
3,897,254
Noninterest-bearing deposits...............................
1,375,903
Other liabilities....................................................
101,848
Total liabilities .................................................
5,375,005
Shareholders' equity ............................................
513,610
Non-controlling interest ......................................
—
Total equity ......................................................
513,610
Total liabilities and equity......................... $ 5,888,615
0.33
0.69
1.88
0.66
2.31
4.02
0.83
5,100
1,183
16,861
23,944
4,285
4,080
1,494,658
177,936
1,016,643
3,625,271
50,630
97,746
32,309
3,773,647
0.13
0.51
1.56
0.54
2.44
4.66
0.67
2,000
1,449,379
910
15,860
19,504
1,236
4,556
188,951
984,069
3,523,570
15,531
92,785
25,296
3,631,886
0.08
0.40
0.88
0.32
1.18
3.75
0.41
1,385,427
42,157
5,201,231
486,841
4
486,845
$ 5,688,076
1,325,583
40,097
4,997,566
513,416
24
513,440
$ 5,511,006
641
1,099
758
8,699
11,197
183
3,479
14,859
Net interest income .............................................
$
184,883
$
173,980
$
169,789
Interest rate spread ..............................................
Net interest margin..............................................
3.11%
3.35%
3.02%
3.22%
3.15%
3.28%
(1) At amortized cost.
(2) Includes nonaccrual loans.
42
Table 2. Analysis of Changes in Net Interest Income (Taxable-Equivalent)
2019 Compared to 2018
2018 Compared to 2017
Increase (Decrease)
Due to Change In:
Volume
Rate
Increase (Decrease)
Due to Change In:
Net
Change
Volume
Rate
Net
Change
(Dollars in thousands)
Interest-earning assets
Interest-bearing deposits in other financial
institutions ................................................................ $
Investment securities, excluding valuation
allowance:
Taxable...................................................................
Tax-exempt ............................................................
Total investment securities ..................................
Loans and leases, incl. loans-held-for-sale ...............
FHLB stock ..............................................................
Total interest-earning assets......................................
Interest-bearing liabilities
Interest-bearing demand deposits .............................
Savings and money market deposits.........................
Time deposits under $100,000..................................
Time deposits of $100,000 and over.........................
Total interest-bearing deposits ...............................
FHLB advances and other short-term borrowings ...
Long-term debt .........................................................
Total interest-bearing liabilities ................................
(187) $
23
$
(164) $
(156) $
165
$
9
(4,823)
(941)
(5,764)
13,934
177
8,160
66
79
(35)
(1,827)
(1,717)
3,290
178
1,751
(222)
116
(106)
9,267
572
9,756
—
3,021
308
2,828
6,157
(241)
(654)
5,262
(5,045)
(825)
(5,870)
23,201
749
17,916
66
3,100
273
1,001
4,440
3,049
(476)
7,013
(1,054)
(201)
(1,255)
10,958
35
9,582
19
41
(44)
285
301
414
186
901
1,634
(1,081)
553
4,274
54
5,046
74
860
196
6,876
8,006
639
891
9,536
580
(1,282)
(702)
15,232
89
14,628
93
901
152
7,161
8,307
1,053
1,077
10,437
Net interest income...................................................... $
6,409
$
4,494
$
10,903
$
8,681
$
(4,490) $
4,191
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 $184.9 million in 2019, which increased by $10.9 million, or 6.3%, from $174.0 million in 2018,
which increased by $4.2 million, or 2.5%, from net interest income of $169.8 million recognized in 2017. The increase in net
interest income for 2019 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, combined with an increase in average yields earned on loans and
leases and higher nonrecurring interest recoveries. Partially offsetting the increase was the 12 basis points ("bp") increase in
interest rates paid on interest-bearing deposits and higher average Federal Home Loan Bank ("FHLB") advances and other
short-term borrowings.
Average yields earned on our interest-earning assets increased by 25 bp in the year ended December 31, 2019, from the year
ended December 31, 2018. Average rates paid on our interest-bearing liabilities in the year ended December 31, 2019 increased
by 16 bp from the year ended December 31, 2018. The increase in average rates paid on our interest-bearing liabilities in 2019
was primarily attributable to the 20 bp increase in average rates paid on our savings and money market deposits and the 32 bp
increase in average rates paid on our time deposits of $100,000 and over. Time deposits of $100,000 and over primarily consists
of public funds which may be opportunistic sources of funding, but fluctuate more directly with changes in Federal Funds rates.
In the third quarter of 2019, $53.9 million in lower-yielding available-for-sale securities were sold as part of an investment
portfolio repositioning strategy designed to enhance potential prospective earnings and improve net interest margin. We
received $53.9 million in gross proceeds and reinvested the proceeds in $52.5 million in higher-yielding, longer duration
investment securities with an average yield of 2.54% and a weighted average life of 6.6 years. The investment securities sold
had an average yield of 2.10% and a weighted average life of 3.2 years. Gross realized gains on the sale of the investment
43
securities were $36 thousand. The specific identification method was used as the basis for determining the cost of all securities
sold.
In the second quarter of 2017, we completed an investment portfolio repositioning strategy designed to enhance potential
prospective earnings and improve net interest margin. In connection with the repositioning, we sold $97.7 million in lower-
yielding available-for-sale securities, and purchased $97.4 million in higher-yielding, longer duration investment securities. The
investment securities sold had an average yield of 1.91% and a weighted average life of 3.3 years. Gross proceeds of the sale of
$96.0 million were immediately reinvested back into investment securities with an average yield of 2.57% and a weighted
average life of 4.6 years. The new securities were classified in the available-for-sale portfolio. There were no gross realized
gains on the sale of the investment securities. Gross realized losses on the sale of the investment securities were $1.6 million.
The specific identification method was used as the basis for determining the cost of all securities sold.
Interest Income
Our primary sources of interest income include interest on loans and leases, which represented 84.1%, 80.0%, and 78.1% of
taxable-equivalent interest income in 2019, 2018 and 2017, respectively, as well as interest earned on investment securities,
which represented 15.4%, 19.7% and 21.6% of taxable-equivalent interest income, respectively. Interest income expressed on a
taxable-equivalent basis of $217.2 million in 2019 increased by $17.9 million, or 9.0%, from the $199.3 million earned in
2018, which increased by $14.6 million, or 7.9%, from the $184.6 million earned in 2017.
As depicted in Table 2, the increase in interest income in 2019 from 2018 was primarily due to a significant increase in average
loans and leases, combined with higher yields earned on loans and leases and higher nonrecurring interest. The $343.1 million
increase in average loans and leases contributed to an increase of $13.9 million in current year interest income. The 22 bp
increase in average yields earned on loans and leases, which was benefited by higher interest recoveries of $1.9 million,
contributed to an increase of $9.3 million in current year interest income. These positive variances were partially offset by the
$217.0 million decrease in average investment securities which contributed to a decrease of $5.8 million in current year interest
income.
The increase in interest income in 2018 from 2017 was primarily due to a significant increase in average loans and leases and
taxable investment securities balances, combined with higher yields earned on the loans and leases and taxable investment
securities portfolios. The $276.2 million increase in average loans and leases contributed to an increase of $11.0 million in
current year interest income. The 11 bp and 14 bp increases in average yields earned on loans and leases and taxable investment
securities contributed to increases of $4.3 million and $1.6 million in current year interest income, respectively. These positive
variances were partially offset by the $46.9 million decrease in average taxable investment securities which contributed to a
decrease of $1.1 million in current year interest income, combined with a $1.0 million lower taxable-equivalent adjustment on
tax-exempt investment securities due to the reduction in the corporate federal income tax rate from 35% to 21% due to Tax
Reform.
Interest Expense
In 2019, interest expense was $32.3 million which represented an increase of $7.0 million, or 27.7%, compared to interest
expense of $25.3 million in 2018, which was an increase of $10.4 million, or 70.2%, compared to $14.9 million in 2017.
In 2019, the increase in the average rates paid on savings and money market deposits of 20 bp and time deposits of $100,000
and over of 32 bp contributed to the increase in interest expense in 2019 from 2018 of $3.0 million and $2.8 million,
respectively. In addition, the increase in average FHLB advances and other short-term borrowings contributed to the increase in
interest expense of $3.3 million. These increases were partially offset by the 64 bp decrease in rates paid on long-term debt
resulting in a $0.7 million decline in interest expense. The decline in rates paid were primarily attributable to the pay off of
junior subordinated debentures of CPB Capital Trust II ("Trust II") and CPB Statutory Trust III ("Trust III"), both of which
carried an interest rate of three-month LIBOR plus 2.85%.
In 2018, the increase in the average rates paid on time deposits of $100,000 and over of 68 bp, long-term debt of 91 bp, and
FHLB advances and other short-term borrowings of 126 bp contributed to the increase in interest expense in 2018 from 2017 of
$6.9 million, $0.9 million, and $0.6 million, respectively.
Net Interest Margin
Our net interest margin was 3.35%, 3.22% and 3.28% in 2019, 2018 and 2017, respectively. The increase in our net interest
margin in 2019 from 2018 was primarily due to a significant increase in loans and leases, combined with the 25 bp increase in
44
the average yield earned on total interest-earning assets, which outpaced the 16 bp increase in average rates paid on total
interest-bearing liabilities. The average yield earned on loans and leases increased by 22 bp, which was benefited by higher
nonrecurring interest recoveries of $1.9 million.
The decline in our net interest margin in 2018 from 2017 was primarily due to the 68 bp, 91 bp and 126 bp increases in average
rates paid on time deposits of $100,000 and over, long-term debt, and FHLB advances and other short-term borrowings,
respectively. The decline also reflected the reduction of the taxable-equivalent yield on tax-exempt investment securities due to
Tax Reform, which resulted in an approximate 2 bp reduction of the net interest margin.
In late 2008, the Federal Reserve lowered the target Federal Funds range to 0%-0.25%. In an attempt to help the overall
economy, the FRB has kept interest rates low through its targeted Fed Funds rate until the recession was safely over. In recent
years, the Federal Reserve has begun raising the target Federal Funds range. During 2018, the Federal Reserve increased the
Federal Funds range four times, each by 25 basis points to 2.25%-2.50% as of December 31, 2018. The Federal Reserve left the
Federal Funds range unchanged during the first half of 2019 but cut the Federal Funds range three times by 25 basis points
during the second half of 2019 to 1.50%-1.75% as of December 31, 2019.
In light of global economic and financial developments and muted inflation pressures, the Federal Reserve indicated it will be
patient as it determines what future adjustments to the target Federal Funds rate may be appropriate.
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.
45
Table 3. Components of Other Operating Income
Year Ended December 31,
2019
2018
2019
2018
2019
2018
2017
to 2018
to 2017
to 2018
to 2017
Dollar Change
Percent Change
(Dollars in thousands)
Mortgage banking income:
Net loan servicing fees.................................... $ 4,252
$ 5,159
$ 5,337
$
(907) $
(178)
(17.6)%
(3.3)%
Amortization of mortgage servicing rights.....
(2,460)
(1,859)
(2,288)
(601)
429
32.3
(18.8)
Net gain on sale of residential mortgage
loans ................................................................
Unrealized gain (loss) on interest rate locks...
4,128
63
Service charges on deposit accounts .................
8,406
Other service charges and fees ..........................
14,358
Income from fiduciary activities .......................
Income from bank-owned life insurance...........
4,395
3,105
Net gain (loss) on sales of foreclosed assets .....
(145)
Equity in earnings of unconsolidated
subsidiaries ........................................................
Fees on foreign exchange ..................................
Loan placement fees ..........................................
Net gains (losses) on sales of investment
securities ............................................................
Other:
Income recovered on nonaccrual loans
previously charged-off ....................................
Other recoveries..............................................
Commissions on sale of checks ......................
Gain on sale of MasterCard stock...................
Other ...............................................................
257
755
702
36
320
130
309
2,555
635
4,085
(70)
8,406
13,123
4,245
2,117
—
233
905
747
4,069
(156)
8,468
11,518
3,674
3,388
205
602
529
536
43
133
—
1,235
150
988
(145)
24
(150)
(45)
16
86
(62)
1,605
571
1.1
(190.0)
—
9.4
3.5
(1,271)
46.7
0.4
(55.1)
(0.7)
13.9
15.5
(37.5)
(205)
N.M.
(100.0)
*
(369)
376
211
10.3
(16.6)
(6.0)
(61.3)
71.1
39.4
(279)
(1,410)
315
1,131
(112.9)
(80.2)
720
221
328
—
723
767
149
341
—
767
(400)
(91)
(19)
2,555
(88)
(47)
72
(13)
—
(44)
(55.6)
(41.2)
(5.8)
(6.1)
48.3
(3.8)
N.M.
N.M. *
(12.2)
7.7
(5.7)
6.3
Total other operating income............................. $ 41,801
$ 38,804
$ 36,496
$
2,997
$
2,308
Total other operating income as a percentage
of average assets ................................................
0.71%
0.68%
0.66%
* Not meaningful ("N.M.")
Total other operating income of $41.8 million in 2019 increased by $3.0 million, or 7.7%, from the $38.8 million earned in
2018, which increased by $2.3 million, or 6.3%, from the $36.5 million earned in 2017.
The increase in other operating income in 2019 from 2018 was primarily due to the conversion of MasterCard Class B common
stock received during their initial public offering to Class A common stock and immediate sale of the converted shares resulting
in a gain of $2.6 million in the first quarter of 2019, combined with higher income from bank-owned life insurance of $1.0
million, higher merchant and bank card fees of $0.7 million (included in other service charges and fees) and higher
commissions and fees on investment services of $0.7 million (included in other service charges and fees). The higher income
from bank-owned life insurance was primarily attributable to volatility in the equity markets. These increases were partially
offset by lower mortgage banking income of $1.3 million and lower income recovered on nonaccrual loans previously charged-
off of $0.4 million. During the third quarter of 2019, the outsourcing of the Company's residential mortgage loans servicing
was completed. Costs related to the outsourcing are included in net loan servicing fees as a component of mortgage banking
income.
The increase in other operating income in 2018 from 2017 was primarily due to net losses on sales of investment securities of
$1.4 million recognized in 2017, primarily attributable to the investment portfolio repositioning completed in 2017, compared
to net losses on sales of investment securities of $0.3 million recognized in 2018. In addition, in 2018 we recognized higher
commissions and fees on investment services of $1.2 million (included in other service charges and fees), higher income from
46
fiduciary activities of $0.6 million, higher mortgage banking income of $0.4 million and higher fees on foreign exchange of
$0.4 million. The higher mortgage banking income was primarily due to lower amortization of mortgage servicing rights of
$0.4 million. These increases were partially offset by lower income from bank-owned life insurance of $1.3 million and lower
equity in earnings of unconsolidated subsidiaries of $0.4 million. The lower income from bank-owned life insurance was
primarily attributable to death benefit income of $1.1 million recognized in 2017 compared to $0.5 million recognized in 2018,
combined with volatility in the equity markets in 2018.
Other Operating Expense
As discussed in Note 1 - Summary of Significant Accounting Policies, during the fourth quarter of 2018, we voluntarily
changed our accounting policy for investments in low income housing tax credit ("LIHTC") partnerships from the cost method
to the proportional amortization method using the practical expedient available under Financial Accounting Standards Board
("FASB") Accounting Standards Codification ("ASC") 323, "Investments - Equity Method and Joint Ventures", which permits
an investor to amortize the initial cost of the investment in proportion to only the tax credits allocated to the investor. We
believe the proportional amortization method is preferable because it better reflects the economics of an investment that is
made for the primary purpose of receiving tax credits and other tax benefits and is consistent with the accounting method used
by most financial institutions that have disclosed their accounting policies for investments in LIHTC partnerships. In addition
to a change in the timing of the recognition of amortization of investments in LIHTC partnerships, amortization expense is now
reflected in the income tax expense line, which provides users a better understanding of the nature of the returns of such
investments, instead of in other operating expenses on the consolidated statements of income. The change did not impact net
income, the consolidated balance sheets and the consolidated statements of cash flows. As a result of this accounting policy
change, other operating expenses on our consolidated statements of income were retrospectively adjusted for periods prior to
the fourth quarter of 2018.
47
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)
2019
2018
2017
to 2018
to 2017
to 2018
to 2017
Salaries and employee benefits ......................... $ 82,290
$ 75,352
$ 72,286
$
6,938
$
3,066
9.2%
4.2%
Year Ended December 31,
2019
2018
2019
2018
Dollar Change
Percent Change
Net occupancy ...................................................
14,299
13,763
13,571
Legal and professional services.........................
7,354
Computer software expense ..............................
10,812
7,330
9,841
2,006
3,410
4,239
2,675
574
635
1,732
1,365
2,645
822
1,062
914
1,040
Amortization of core deposit premium..............
Communication expense ...................................
Equipment..........................................................
Advertising expense ..........................................
Foreclosed asset expense...................................
Other:
Charitable contributions..................................
FDIC insurance assessment ............................
Miscellaneous loan expenses ..........................
ATM and debit card expenses.........................
Armored car expenses.....................................
Entertainment and promotions........................
Stationery and supplies ...................................
Directors' fees and expenses ...........................
Provision (credit) for residential mortgage
loan repurchase losses.....................................
—
3,551
4,353
2,661
251
681
868
1,246
2,602
815
2,071
1,049
968
Reserve (credit) for unfunded loan
commitments...................................................
29
Other ...............................................................
6,134
(425)
5,552
(403)
150
7,724
9,192
2,674
3,659
3,785
2,408
151
593
1,724
1,144
1,961
873
1,660
814
873
209
94
5,678
536
24
971
(2,006)
141
114
(14)
(323)
46
(864)
(119)
(43)
(7)
1,009
135
(72)
192
(394)
649
(668)
(249)
454
267
423
42
8
221
684
(51)
(598)
100
167
3.9
0.3
9.9
(100.0)
4.1
2.7
(0.5)
(56.3)
7.2
(49.9)
(8.7)
(1.6)
(0.9)
95.0
14.8
(6.9)
1.4
(5.1)
7.1
(25.0)
(6.8)
12.0
11.1
280.1
7.1
0.5
19.3
34.9
(5.8)
(36.0)
12.3
19.1
(553)
(59)
(368.7)
(28.2)
454
582
(519)
(126)
(106.8)
(552.1)
10.5
5.2
(2.2)
2.8
Total other operating expense............................ $141,631
$134,682
$131,073
$
6,949
$
3,609
Total other operating expense as a percentage
of average assets ................................................
2.41%
2.37%
2.38%
Total other operating expense of $141.6 million in 2019 increased by $6.9 million, or 5.2%, from total operating expense of
$134.7 million in 2018, which increased by $3.6 million, or 2.8%, compared to 2017.
The increase in total other operating expense in 2019, compared to 2018, was primarily due to higher salaries and employee
benefits of $6.9 million, higher entertainment and promotions expense of $1.0 million and higher computer software expense of
$1.0 million. The increase in salaries and employee benefits was partially attributable to the addition of positions in strategic
areas and higher commissions, combined with annual merit increases effective beginning the second quarter of 2019. These
increases were partially offset by lower amortization of core deposit premium of $2.0 million, as the intangible asset was fully
amortized as of September 30, 2018, and lower FDIC insurance expense of $0.9 million, primarily attributable to $0.9 million
in Small Bank Assessment Credits received in the second half of 2019. During 2019, the Company incurred approximately $3.5
million in RISE2020-related expenses.
The increase in total other operating expense in 2018, compared to 2017, was primarily due to the increase in salaries and
employee benefits of $3.1 million, higher ATM and debit card expenses of $0.7 million, higher computer software expense of
$0.6 million and higher equipment expense of $0.5 million. The increase in salaries and employee benefits was primarily
attributable to increases in the Company's starting pay rate effective January 1, 2018, combined with merit salary increases
effective beginning the second quarter of 2018. During the fourth quarter of 2018, the Company increased its starting pay rate
48
for the second time in a year, effective December 1, 2018. These increases were partially offset by lower amortization of core
deposit premium of $0.7 million, lower entertainment and promotions expense of $0.6 million and a credit to the reserve for
unfunded commitments of $0.4 million in 2018, compared to an increase to the reserve for unfunded commitments of $0.1
million in 2017.
A key measure of operating efficiency tracked by management is the efficiency ratio, which is calculated by dividing total other
operating expenses by total pre-provision revenue (net interest income plus other operating income). Management believes that
the efficiency ratio provides useful supplemental information that is important to a proper understanding of the company's core
business results by investors. Our efficiency ratio should not be viewed as a substitute for results determined in accordance with
GAAP, nor is it necessarily comparable to the efficiency ratio presented by other companies. Our efficiency ratio improved to
62.70% in 2019, compared to 63.59% in 2018 and 64.19% in 2017. The improvement in our efficiency ratio in 2019 was
primarily driven by the aforementioned increases in net interest income and other operating income, partially offset by an
increase in other operating expenses.
As previously discussed, in 2018, the amortization of investments in LIHTC partnerships was reclassified from other operating
expense and is now included in income tax expense in the consolidated statements of income, which provides users a better
understanding of the nature of the returns of such investments. The efficiency ratio in periods prior to the fourth quarter of 2018
have been adjusted retrospectively to reflect this change.
The following table sets forth a reconciliation to our efficiency ratio for each of the dates indicated and the impact of the
reclassification of amortization of investments in LIHTC partnerships in the consolidated statements of income:
Table 5. Reconciliation of Efficiency Ratio
2019
2018
2017
2016
2015
Year Ended December 31, 2019
(Dollars in thousands)
As Reclassified:
Total other operating expenses ........................ $
141,631
$
134,682
$
131,073
Net interest income..........................................
Total other operating income...........................
184,074
41,801
172,998
38,804
167,703
36,496
Total revenue ................................................... $
225,875
$
211,802
$
204,199
Efficiency ratio ................................................
62.70%
63.59 %
64.19 %
Unadjusted:
Total other operating expenses ........................ $
141,631
Net interest income.......................................... $
Total other operating income...........................
Total revenue ................................................... $
184,074
41,801
225,875
$
$
$
135,687
172,998
38,804
211,802
$
$
$
131,817
167,703
36,496
204,199
$
$
$
$
$
$
132,518
157,950
42,316
200,266
66.17 %
133,563
157,950
42,316
200,266
$
$
$
$
$
$
125,964
149,528
34,799
184,327
68.34 %
127,042
149,528
34,799
184,327
Efficiency ratio ................................................
62.70%
64.06 %
64.55 %
66.69 %
68.92 %
Impact of Change:
Total operating expenses ................................. $
— $
(1,005)
$
(744)
$
(1,045)
$
(1,078)
Net interest income..........................................
Total other operating income...........................
—
—
—
—
— $
— $
—
—
Total revenue ................................................... $
— $
— $
— $
— $
—
—
—
Efficiency ratio ................................................
—%
(0.47)%
(0.36)%
(0.52)%
(0.58)%
49
Income Taxes
In 2019, the Company recorded income tax expense of $19.6 million, compared to $18.8 million in 2018, and $34.6 million in
2017. Our effective tax rate was 25.2% in 2019 compared to 24.0% in 2018 and 45.6% in 2017.
The decreases in income tax expense and the effective tax rate in 2018 from 2017 were primarily due to the reduction in the
corporate federal income tax rate due to Tax Reform. In addition and as previously discussed, based on the Company's
evaluation of the impact of Tax Reform on its DTA, the Company recorded a one-time, non-cash estimated charge of $7.4
million of additional income tax expense in December 2017 to reflect the reduction of the future tax benefits and liabilities in
the balance sheet based on this reduced rate. In 2018, the Company recorded an income tax benefit of $1.5 million related to
the finalization of the impact of Tax Reform, which also included the impact of a tax method change for software development
and prepaid expenses that was filed in 2018.
The increase in income tax expense and the effective tax rate in 2019 from 2018 was primarily attributable to the
aforementioned $1.5 million income tax benefit recorded in 2018 related to the finalization of the impact of Tax Reform and
the impact of a tax method change for software development and prepaid expenses.
As of December 31, 2019, the valuation allowance on our net DTA totaled $3.4 million, of which $3.2 million related to our
DTA from net apportioned net operating loss ("NOL") carryforwards for California state income tax purposes as we do not
expect to generate sufficient income in California to utilize the DTA. The remaining $0.2 million relates to a valuation
allowance on the Hawaii capital loss carryforward balance that we do not expect to be able to utilize. Net of this valuation
allowance, the Company's net DTA totaled $16.5 million as of December 31, 2019, compared to a net DTA of $21.5 million as
of December 31, 2018, and is included in other assets on our consolidated balance sheets.
As discussed in Note 1 - Summary of Significant Accounting Policies, in 2018, the amortization expense related to our
investments in LIHTC partnerships was reclassified from other operating expense and is now included in income tax expense.
Income tax expense and the Company's effective tax rate in periods prior to the fourth quarter of 2018 have been
retrospectively adjusted to reflect this change.
Financial Condition
Total assets of $6.01 billion at December 31, 2019 increased by $205.6 million, or 3.5%, from the $5.81 billion at
December 31, 2018, and total liabilities of $5.48 billion at December 31, 2019 increased by $168.9 million, or 3.2%, from the
$5.32 billion at December 31, 2018. The increase in total assets and total liabilities in 2019 was primarily due to our strong loan
growth, funded by the proceeds from maturities of our available-for-sale investment securities portfolio and an increase in core
deposits.
Loan Portfolio
Our lending activities are focused on commercial, financial and agricultural loans, commercial mortgages, and construction
loans to small and medium-sized companies, business professionals, and real estate investors and developers, as well as
residential mortgages, home equity and consumer loans to local home-buyers and individuals. Our strategy for generating
commercial loans has traditionally relied upon teams of commercial real estate and commercial banking officers organized by
geographical and industry lines who are responsible for client prospecting and business development.
To manage credit risk (i.e., the ability of borrowers to repay their loan obligations), management analyzes the borrower's
financial condition, repayment source, collateral and other factors that could impact credit quality, such as national and local
economic conditions and industry conditions related to respective borrowers. The general underwriting guidelines require
analysis and documentation to include among other things, overall credit worthiness of borrower, guarantor support, use of
funds, loan term, minimum equity, 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
50
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 $4.45 billion at December 31, 2019, which increased by $371.2 million, or 9.1%, from the $4.08
billion at December 31, 2018, which increased by $307.8 million, or 8.2%, from the $3.77 billion held at December 31, 2017.
The increase in our loan portfolio in 2019 was representative of our continued effort to deploy excess liquidity into higher
yielding assets. The increase in loans and leases was primarily due to net increases in the following loan portfolios: residential
mortgage of $171.6 million, or 12.0%, commercial mortgage of $83.1 million, or 8.0%, consumer of $77.2 million, or 15.7%,
construction of $28.9 million, or 43.2%, and home equity of $21.8 million, or 4.6%, partially offset by a decrease in
commercial, financial, and agricultural of $11.4 million, or 2.0%. In 2019, we foreclosed on one portfolio loan with a carrying
value of $0.1 million, and recorded a gain on the transfer of $22 thousand. In addition, we recorded charge-offs of loans and
leases of $10.7 million.
The following table sets forth information regarding outstanding loans by category as of the dates indicated.
Table 6. Loans by Categories
December 31,
2019
2018
2017
2016
2015
(Dollars in thousands)
Commercial, financial and agricultural ........................ $
570,304
$
581,660
$
504,019
$
510,440
$
521,086
Real estate:
Construction...............................................................
95,854
Residential mortgage .................................................
1,599,801
Home equity...............................................................
490,734
Commercial mortgage................................................
1,123,415
Consumer......................................................................
569,432
Leases ...........................................................................
—
66,927
1,428,205
468,966
1,040,278
492,206
124
64,240
1,341,221
412,230
977,797
470,746
362
101,538
1,217,234
361,209
885,439
448,353
677
84,885
1,134,325
301,980
760,749
407,479
1,028
Total loans and leases ...................................................
4,449,540
4,078,366
3,770,615
3,524,890
3,211,532
Allowance for loan and lease losses ..........................
(47,971)
(47,916)
(50,001)
(56,631)
(63,314)
Net loans and leases...................................................... $
4,401,569
$
4,030,450
$
3,720,614
$
3,468,259
$
3,148,218
The following table sets forth the geographic distribution of our loan portfolio and related Allowance as of the dates indicated.
Table 7. Geographic Distribution
December 31, 2019
December 31, 2018
Hawaii
U.S.
Mainland
Total
Hawaii
(Dollars in thousands)
U.S.
Mainland
Total
Commercial, financial and agricultural .................... $
454,582
$
115,722
$
570,304
$
439,112
$
142,548
$
581,660
Real estate:
Construction...........................................................
95,854
Residential mortgage .............................................
1,599,801
Home equity...........................................................
Commercial mortgage............................................
Consumer..................................................................
Leases .......................................................................
490,734
909,798
373,451
—
—
—
—
213,617
195,981
—
95,854
64,654
2,273
66,927
1,599,801
1,428,205
490,734
1,123,415
569,432
—
468,966
861,086
357,908
124
—
—
179,192
134,298
—
1,428,205
468,966
1,040,278
492,206
124
Total loans and leases ...............................................
3,924,220
525,320
4,449,540
3,620,055
458,311
4,078,366
Allowance for loan and lease losses ......................
(42,592)
(5,379)
(47,971)
(42,993)
(4,923)
(47,916)
Net loans and leases.................................................. $ 3,881,628
$
519,941
$ 4,401,569
$ 3,577,062
$
453,388
$ 4,030,450
51
Commercial, Financial and Agricultural
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.
In 2019, our commercial, financial, and agricultural loan portfolio decreased by $11.4 million. Our commercial, financial, and
agricultural loan portfolio increased by $77.6 million in 2018, decreased by $6.4 million in 2017 and decreased by $10.6
million in 2016. The decrease in 2019 was primarily attributable to planned runoff of U.S. Mainland shared national credit
balances of $26.8 million, partially offset by growth in the Hawaii portfolio of $15.5 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.
In 2019, our construction loan portfolio increased by $28.9 million. Our construction loan portfolio increased by $2.7 million in
2018, decreased by $37.3 million in 2017, and increased by $16.7 million in 2016. 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.
The outstanding principal balance of loans with interest reserves was $37.1 million at December 31, 2019, compared to $25.2
million in the prior year, while remaining interest reserves was $4.0 million, or 10.9% of the outstanding principal balance of
loans with interest reserves at December 31, 2019, compared to $4.0 million, or 15.7% of the outstanding principal balance of
loans with interest reserves at December 31, 2018.
Interest reserves allow the Company to advance funds to borrowers to make scheduled payments during the construction
period. These advances typically are capitalized and added to the borrower's outstanding loan balance, although we have the
right to demand payment under certain circumstances. Our policy is to determine if interest reserve amounts are appropriately
included in each project's construction budget and are adequate to cover the expected duration of the construction period.
The amount, terms, and conditions of the interest reserve are established when a loan is originated, although we generally have
the option to demand payment if the credit profile of the borrower changes. We evaluate the viability and appropriateness of the
construction project based on the project's complexity and feasibility, the timeline, as well as the creditworthiness of the
borrowers, sponsors and/or guarantors, and the value of the collateral.
In the event that unfavorable circumstances alter the original project schedule (e.g., cost overruns, project delays, etc.), our
policy is to evaluate whether or not it is appropriate to maintain interest capitalization or demand payment of interest in cash
and we will work with the borrower to explore various restructuring options, which may include obtaining additional equity
and/or requiring additional collateral. We may also require borrowers to directly pay scheduled interest payments.
Our process for determining that construction projects are moving as planned are detailed in our lending policies and
guidelines. Prior to approving a loan, the Company and borrower generally agree on a construction budget, a proforma 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.
52
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.
Table 8. Mortgage Loan Portfolio Composition
2019
2018
December 31,
2017
2016
2015
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in thousands)
Residential:
Closed-end loans......... $ 1,599,801
49.7% $ 1,428,205
48.6% $ 1,341,221
49.1% $ 1,217,234
49.4% $ 1,134,325
51.7%
Home equity line-of-
credit ("HELOC") .......
490,734
Subtotal ..........................
2,090,535
15.3
65.0
468,966
1,897,171
16.0
64.6
412,230
1,753,451
15.1
64.2
361,209
1,578,443
14.7
64.1
301,980
1,436,305
13.7
65.4
Commercial mortgage....
1,123,415
35.0
1,040,278
35.4
977,797
35.8
885,439
35.9
760,749
34.6
Total mortgage loans...... $ 3,213,950
100.0% $ 2,937,449
100.0% $ 2,731,248
100.0% $ 2,463,882
100.0% $ 2,197,054
100.0%
Residential
Residential mortgage loans include fixed-rate and adjustable-rate loans primarily secured by single-family owner-occupied
primary residences in Hawaii. Maximum loan-to-value ratios of 80% are typically required for fixed-rate and adjustable-rate
loans secured by single-family owner-occupied residences, although higher levels are permitted with accompanying mortgage
insurance. 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 stable Hawaii residential real estate market, credit
losses on residential mortgage loans have 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, 2019 totaled $1.60 billion, increasing by $171.6 million, or
12.0%, from the $1.43 billion held at year-end 2018, which increased by $87.0 million, or 6.5%, from the $1.34 billion held at
year-end 2017. The increase in closed-end residential mortgage loan balances in 2019 was primarily due to the reinvestment of
cash flow into higher yielding assets and increased demand from both new and existing customers.
Residential mortgage loans held for sale at December 31, 2019 totaled $9.1 million, an increase of $2.4 million, or 36.6%, from
the December 31, 2018 balance of $6.6 million, which decreased by $9.7 million, or 59.3%, from the December 31, 2017
balance of $16.3 million. We did not securitize any residential mortgage loans in 2019, 2018 and 2017.
53
Home Equity
Home equity lines of credit ("HELOCs"), which typically carry floating interest rates, are underwritten according to policy and
guidelines reviewed and approved by the Board of Directors. 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. HELOCs are
underwritten using a qualifying payment which assumes the line is fully drawn and is amortizing as if it 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). HELOCs are monitored based on default, delinquency, end of draw period, and maturity.
HELOC balances as of December 31, 2019 totaled $490.7 million, increasing by $21.8 million, or 4.6%, from the $469.0
million held at December 31, 2018, which increased by $56.7 million, or 13.8%, from the $412.2 million held at December 31,
2017.
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, 2019 totaled $1.12 billion, increasing by $83.1 million, or 8.0%, from the
$1.04 billion held at December 31, 2018, which increased by $62.5 million, or 6.4%, from the $977.8 million held at
December 31, 2017. The increase in commercial mortgage balances in 2019 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
2019
2018
December 31,
2017
2016
2015
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in thousands)
Automobile ......................... $ 297,186
52.2% $ 284,170
57.7% $ 275,793
58.6% $ 212,926
47.5% $ 190,202
46.7%
Other revolving credit plans
Student loans.......................
82,089
5,188
Other ...................................
184,969
14.4
0.9
32.5
83,158
8,644
116,234
16.9
1.8
23.6
77,305
14,920
102,728
16.4
3.2
21.8
81,124
25,053
129,250
18.1
5.6
28.8
73,756
38,636
104,885
18.1
9.5
25.7
Total consumer.................... $ 569,432
100.0% $ 492,206
100.0% $ 470,746
100.0% $ 448,353
100.0% $ 407,479
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. From time to time, we will tactically deploy funds, which are not utilized in our current short-
term core lending markets, by purchasing certain consumer loan portfolios.
Consumer loans totaled $569.4 million at December 31, 2019, increasing by $77.2 million, or 15.7%, from December 31, 2018
of $492.2 million, which increased by $21.5 million, or 4.6%, compared to the $470.7 million held at December 31, 2017. At
December 31, 2019, automobile loans, primarily indirect dealer loans, comprised 52.2% of consumer loans outstanding.
54
Total automobile loans of $297.2 million at December 31, 2019 increased by $13.0 million, or 4.6%, from December 31, 2018
of $284.2 million, which increased by $8.4 million, or 3.0%, from $275.8 million at December 31, 2017.
In 2019, we purchased a U.S.Mainland automobile loan portfolio totaling $30.2 million, which included a $0.6 million
premium over the $29.6 million outstanding balance. In 2018, we purchased a U.S.Mainland automobile loan portfolio totaling
$20.6 million, which included a $0.1 million premium over the $20.5 million outstanding balance. In 2017, we purchased three
U.S.Mainland automobile loan portfolios totaling $83.8 million, which included $2.3 million in premiums over the $81.4
million outstanding balance. In 2016, we purchased two U.S.Mainland automobile loan portfolios totaling $41.2 million, which
included $0.9 million in premiums over the $40.3 million outstanding balance. In 2015, we purchased two U.S.Mainland
automobile loan portfolios totaling $52.8 million, which included $1.7 million in premiums over the $51.1 million outstanding
balance.
Other revolving credit plans loans include extensions of credit to individuals and totaled $82.1 million at December 31, 2019,
which decreased by $1.1 million, or 1.3%, from December 31, 2018 of $83.2 million, which increased by $5.9 million, or
7.6%, from $77.3 million at December 31, 2017.
Total student loans of $5.2 million at December 31, 2019 decreased by $3.5 million, or 40.0%, from December 31, 2018 of
$8.6 million, which decreased by $6.3 million, or 42.1%, from $14.9 million at December 31, 2017, primarily due to run-off.
Other consumer loans of $185.0 million at December 31, 2019 increased by $68.7 million, or 59.1%, from December 31, 2018
of $116.2 million, which increased by $13.5 million, or 13.1%, from $102.7 million at December 31, 2017. Other consumer
loans at December 31, 2019 include U.S. Mainland unsecured consumer loan portfolio balances of $110.1 million, $37.6
million and $13.7 million at December 31, 2019,
In 2019, we purchased U.S. Mainland unsecured consumer loan portfolios (included in other) with outstanding balances
totaling $112.2 million for $109.9 million, reflecting a net discount of $2.3 million. In 2018, 2016 and 2015, we also purchased
U.S. Mainland unsecured consumer loan portfolios totaling $38.0 million, $35.7 million and $15.9 million, respectively, which
represented the outstanding balances at the time of purchase.
Concentrations of Credit Risk
As of December 31, 2019, approximately $3.31 billion, or 74.4% of loans outstanding were real estate-related, including
construction loans, residential mortgage loans, home equity 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, 88.2% of our loan portfolio was concentrated in the Hawaii market
while 11.8% was concentrated in the U.S. Mainland as of December 31, 2019.
Our foreign credit exposure as of December 31, 2019 was minimal and did not exceed 1% of total assets.
Maturities and Sensitivities of Loans to Changes in Interest Rates
At December 31, 2019, commercial, financial and agricultural loans were 44.8% fixed-rate and 55.2% variable-rate. Real estate
construction loans were 46.7% fixed-rate and 53.3% variable-rate. Residential mortgage loans were 67.1% fixed-rate and
32.9% variable-rate. Home equity lines and loans were 9.9% fixed-rate and 90.1% variable-rate. Commercial mortgage loans
were 38.7% fixed-rate and 61.3% variable-rate. Consumer loans were 84.8% fixed-rate and 15.2% 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.
55
The following table sets forth the maturity distribution and sensitivities of the loan portfolio to changes in interest rates at
December 31, 2019. 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............................................................ $
8,245
$
113,885
$
133,315
$
With variable interest rates .......................................................
Total commercial, financial and agricultural............................
Construction
With fixed interest rates............................................................
With variable interest rates .......................................................
Total construction .....................................................................
Residential mortgage
With fixed interest rates............................................................
With variable interest rates .......................................................
Total residential mortgage ........................................................
Home equity
With fixed interest rates............................................................
With variable interest rates .......................................................
Total home equity .....................................................................
Commercial mortgage
With fixed interest rates............................................................
With variable interest rates .......................................................
Total commercial mortgage......................................................
Consumer
With fixed interest rates............................................................
With variable interest rates .......................................................
Total consumer .........................................................................
Leases
With fixed interest rates............................................................
With variable interest rates .......................................................
Total leases ...............................................................................
44,591
52,836
—
14,715
14,715
87
603
690
1,000
6,012
7,012
3,606
6,835
10,441
6,477
38,265
44,742
—
—
—
4,613
27,763
32,376
13,858
4,126
17,984
5,695
9,800
15,495
123,460
300,189
423,649
402,066
22,455
424,521
—
—
—
158,682
272,567
111,371
244,686
40,276
8,772
49,048
255,445
314,644
570,089
44,889
51,250
96,139
1,057,030
520,097
1,577,127
1,070,975
524,826
1,595,801
42,051
425,681
467,732
307,909
382,912
690,821
74,298
25,955
100,253
—
—
—
48,746
441,493
490,239
434,975
689,936
1,124,911
482,841
86,675
569,516
—
—
—
Total loans and leases..................................................................... $
130,436
$
1,186,592
$
3,129,667
$
4,446,695
All loans
With fixed interest rates............................................................ $
With variable interest rates .......................................................
Total loans and leases ............................................................... $
19,415
111,021
130,436
$
$
663,577
523,015
1,186,592
$
$
1,654,879
1,474,788
3,129,667
$
$
2,337,871
2,108,824
4,446,695
56
Provision and Allowance for Loan and Lease Losses
As described above under the "Critical Accounting Policies and Use of Estimates" section, 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 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.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments," and subsequent amendments to the guidance, ASU 2019-04 in April 2019 and ASU 2019-05 in May
2019. The standard significantly changes how entities will measure credit losses for most financial assets and certain other
instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism
that today’s “incurred loss” guidance delays the recognition of credit losses on loans, leases, held-to-maturity debt securities,
loan commitments, and financial guarantees, and instead provides for a current expected credit loss (“CECL”) approach to
determine the allowance for credit losses. At adoption, the change to the allowance for credit losses as a result of CECL
implementation will be recorded as a cumulative effect adjustment to retained earnings on the consolidated balance sheet.
While the CECL implementation effort is near completion, the Company is unable to determine the final adoption impact on
our consolidated financial statements as certain internal controls over the calculation and inputs have not yet fully operated.
Additional work will be completed on internal controls over significant assumptions utilized. However, based on preliminary
analyses completed thus far, management estimates its allowance for credit losses, including reserves for unfunded
commitments, to increase by roughly 0%-15%. The foregoing range is based on the Company's calculation models and the
underlying assumptions embedded in its methodology, including economic forecasts and sensitivity analyses. The final
calculation, including assumptions, economic forecasts and inputs are subject to change based on the final completion of all
internal controls and related testing.
57
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
2019
2018
2017
2016
2015
Year Ended December 31,
(Dollars in thousands)
Average loans and leases outstanding ........................ $
4,241,308
$
3,898,250
$
3,622,033
$
3,385,741
$ 3,038,100
Allowance for Loan and Lease Losses
Balance at beginning of year ................................... $
47,916
$
50,001
$
56,631
$
63,314
$
74,040
Charge-offs:
Commercial, financial and agricultural.................
2,478
2,852
1,704
1,599
5,658
Real estate:
Construction .......................................................
Residential mortgage..........................................
Home equity .......................................................
Commercial mortgage ........................................
Consumer ..............................................................
Leases....................................................................
Total....................................................................
—
—
5
—
8,265
—
10,748
Recoveries:
Commercial, financial and agricultural.................
1,174
Real estate:
Construction .......................................................
Residential mortgage..........................................
Home equity .......................................................
Commercial mortgage ........................................
Consumer ..............................................................
Leases....................................................................
Total....................................................................
Net loan charge-offs (recoveries) ............................
610
524
42
25
2,111
—
4,486
6,262
—
—
—
—
7,323
—
10,175
1,203
5,759
204
27
52
1,969
—
9,214
961
—
73
—
—
6,294
—
8,071
—
—
—
209
5,054
—
6,862
—
—
110
838
4,650
—
11,256
1,366
2,114
4,788
169
879
44
157
1,500
—
4,115
3,956
133
695
15
1,024
1,715
—
5,696
1,166
880
1,121
1,056
6,719
1,610
27
16,201
(4,945)
Provision (credit) for loan and lease losses .............
6,317
(1,124)
(2,674)
(5,517)
(15,671)
Balance at end of year.............................................. $
47,971
$
47,916
$
50,001
$
56,631
$
63,314
Ratios:
Allowance to loans and leases outstanding .............
1.08%
1.17%
1.33%
1.61%
1.97 %
Net loan charge-offs (recoveries) to average loans
and leases outstanding .............................................
0.15%
0.02%
0.11%
0.03%
(0.16)%
Our Allowance at December 31, 2019 totaled $48.0 million, which increased by $0.1 million, or 0.1%, from December 31,
2018. When expressed as a percentage of total loans and leases, our Allowance decreased to 1.08% at December 31, 2019, from
1.17% at December 31, 2018. The Provision of $6.3 million recognized during the year was offset by $6.3 million in net
charge-offs during the year. The decrease in our Allowance as a percentage of total loans and leases from December 31, 2018 to
December 31, 2019 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.
58
Our Allowance as a percentage of our nonperforming assets increased from 1,750.68% at December 31, 2018 to 2,790.63% at
December 31, 2019. Our Allowance as a percentage of our nonaccrual loans increased from 2,062.68% at December 31, 2018
to 3,084.95% at December 31, 2019.
This trend was consistent with the improving credit quality as represented by nonperforming assets of $1.7 million, $2.7
million, and $3.6 million at December 31, 2019, 2018 and 2017, respectively. Net charge-offs were $6.3 million, $1.0 million,
and $4.0 million, respectively, for the years ended December 31, 2019, 2018 and 2017.
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
2019
2018
December 31,
2017
2016
2015
Loan
Category
as a % of
Total
Loans
Allowance
Loan
Category
as a % of
Total
Loans
Allowance
Loan
Category
as a % of
Total
Loans
Allowance
Loan
Category
as a % of
Total
Loans
Allowance
Loan
Category
as a % of
Total
Loans
Allowance
(Dollars in thousands)
Commercial, financial and
agricultural........................... $
Real estate:
Construction .....................
Residential mortgage........
Home equity .....................
Commercial mortgage ......
Consumer.............................
Leases ..................................
Unallocated..........................
8,136
12.8% $
8,027
14.3% $
7,594
13.4% $
8,637
14.5% $
6,905
16.2%
1,792
13,327
4,206
11,113
9,397
—
—
2.2
36.0
11.0
25.2
12.8
—
—
1,202
14,349
3,788
13,358
7,192
—
—
1.6
35.0
11.5
25.5
12.1
—
—
1,835
14,328
3,317
16,801
6,126
—
—
1.7
35.6
10.9
25.9
12.5
—
—
4,224
15,055
3,502
19,104
6,109
—
—
2.9
34.5
10.3
25.1
12.7
—
—
8,454
14,642
3,096
21,847
6,230
—
2,140
2.7
35.3
9.4
23.7
12.7
—
—
Total ..................................... $
47,971
100.0% $
47,916
100.0% $
50,001
100.0% $
56,631
100.0% $
63,314
100.0%
The Allowance allocated to commercial, financial and agricultural loans totaled $8.1 million, or 1.4%, of total commercial,
financial and agricultural loans at December 31, 2019, compared to $8.0 million, or 1.4%, of related loans at December 31,
2018.
The Allowance allocated to construction loans totaled $1.8 million, or 1.9%, of total construction loans at December 31, 2019,
compared to $1.2 million, or 1.8%, of construction loans outstanding at December 31, 2018. The increases in the ending
Allowance amount and the Allowance as a percentage of construction loans were primarily due to and consistent with the
increase in the construction loan portfolio. In 2018, the Company received a $4.5 million recovery on a U.S. mainland land
loan, which is included in the construction loan category.
The Allowance allocated to our residential mortgage loans totaled $13.3 million, or 0.8%, of total residential mortgage loans at
December 31, 2019, compared to $14.3 million, or 1.0%, of related loans at December 31, 2018. The decreases in the ending
Allowance amount and the Allowance as a percentage of commercial mortgage loans were due to continued improvement in
credit quality of the portfolio.
The Allowance allocated to our home equity loans totaled $4.2 million, or 0.9%, of total home equity loans at December 31,
2019, compared to $3.8 million, or 0.8%, of related loans at December 31, 2018. The increases in the ending Allowance
amount and the Allowance as a percentage of home equity loans were primarily due to and consistent with the increase in the
home equity loan portfolio.
The Allowance allocated to commercial mortgage loans totaled $11.1 million, or 1.0%, of total commercial mortgage loans at
December 31, 2019, compared to $13.4 million, or 1.3%, of related loans at December 31, 2018. The decreases in the ending
Allowance amount and the Allowance as a percentage of commercial mortgage loans were due to continued improvement in
credit quality of the portfolio.
59
The Allowance allocated to consumer loans totaled $9.4 million, or 1.7% of total consumer loans at December 31, 2019,
compared to $7.2 million, or 1.5% of related loans at December 31, 2018. The increases in the ending Allowance amount and
the Allowance as a percentage of consumer loans were consistent with the growth and increase in charge-offs in the consumer
loan portfolio.
We had no remaining leases as of December 31, 2019. We did not allocate an Allowance for leases as of December 31, 2019
and 2018.
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
December 31,
2019
2018
2017
2016
2015
(Dollars in thousands)
Nonaccrual loans
Commercial, financial and agricultural ....................................................... $
467
$
— $
— $
1,877
$
1,044
Real estate:
Residential mortgage................................................................................
Home equity .............................................................................................
Commercial mortgage ..............................................................................
Consumer.....................................................................................................
979
92
—
17
2,048
275
—
—
2,280
416
79
—
5,322
333
864
—
5,464
666
7,094
—
Total nonaccrual loans........................................................................
1,555
2,323
2,775
8,396
14,268
Other real estate
Real estate:
Residential mortgage................................................................................
Home equity .............................................................................................
Other real estate...........................................................................................
—
164
164
414
—
414
851
—
851
791
—
791
Total nonperforming assets.................................................................
1,719
2,737
3,626
9,187
Accruing loans delinquent for 90 days or more
Real estate:
Residential mortgage.............................................................................
Home equity ..........................................................................................
Consumer.....................................................................................................
724
—
286
Total accruing loans delinquent for 90 days or more .........................
1,010
—
298
238
536
49
—
515
564
Restructured loans still accruing interest
Commercial, financial and agricultural .......................................................
135
220
491
Real estate:
Construction .............................................................................................
Residential mortgage................................................................................
Commercial mortgage ..............................................................................
Total restructured loans still accruing interest....................................
—
5,502
1,839
7,476
—
7,330
1,036
8,586
—
10,677
1,466
12,634
—
1,120
271
1,391
—
21
14,292
1,879
16,192
1,962
—
1,962
16,230
—
—
273
273
—
809
16,224
3,224
20,257
Total nonperforming assets, accruing loans delinquent for 90 days or more
and restructured loans still accruing interest .................................................. $
10,205
$
11,859
$
16,824
$
26,770
$
36,760
60
December 31,
2019
2018
2017
2016
2015
(Dollars in thousands)
Total nonperforming assets as a percentage of loans and leases and other
real estate........................................................................................................
0.04%
0.07%
0.10%
0.26%
0.51%
Total nonperforming assets and accruing loans delinquent for 90 days or
more as a percentage of loans and leases and other real estate ......................
0.06%
0.08%
0.11%
0.30%
0.51%
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 .............................................................................
0.23%
0.29%
0.45%
0.76%
1.14%
Year-to-date changes in nonperforming assets:
Balance at beginning of year .......................................................................... $
Additions ........................................................................................................
2,737
1,617
Reductions:
Payments .....................................................................................................
(2,211)
Return to accrual status ...............................................................................
Sales of foreclosed assets ............................................................................
Charge-offs, valuation and other adjustments ................................................
(27)
(302)
(95)
$
3,626
$
593
(467)
(538)
(40)
(437)
9,187
3,678
(5,522)
(3,645)
(165)
93
$
16,230
$
6,326
(6,390)
(4,546)
(2,599)
166
Total reductions ........................................................................................
(2,635)
(1,482)
(9,239)
(13,369)
42,035
11,863
(9,564)
(11,486)
(13,307)
(3,311)
(37,668)
Balance at end of year .................................................................................... $
1,719
$
2,737
$
3,626
$
9,187
$
16,230
Nonperforming assets, which includes nonaccrual loans and leases, nonperforming loans classified as held for sale and other
real estate, totaled $1.7 million at December 31, 2019, compared to $2.7 million at December 31, 2018. Nonperforming assets
at December 31, 2019 were comprised of $1.6 million in nonaccrual loans, none of which were loans classified as held for sale,
and $0.2 million in other real estate.
The decline in 2019 was attributable to $2.2 million in repayments, the sale of $0.3 million of foreclosed assets and $0.1 million
in charge-offs, valuation and other adjustments. All of these decreases were offset by $1.6 million in gross additions.
Net changes to nonperforming assets by category during 2019 included net decreases in Hawaii residential mortgage assets
totaling $1.5 million.
Loans delinquent for 90 days or more still accruing interest totaled $1.0 million at December 31, 2019, compared to $0.5
million at December 31, 2018.
61
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
December 31,
Held-to-
Maturity
(Amortized
Cost)
2019
Available-
for-Sale
(Fair
Value)
Equity
Securities
(Fair
Value)
Held-to-
Maturity
(Amortized
Cost)
2018
Available-
for-Sale
(Fair
Value)
Equity
Securities
(Fair
Value)
Held-to-
Maturity
(Amortized
Cost)
2017
Available-
for-Sale
(Fair
Value)
Equity
Securities
(Fair
Value)
(Dollars in thousands)
Debt securities:
States and political
subdivisions .................... $
Corporate securities........
U.S. Treasury
obligations and direct
obligations of U.S
Government agencies .....
Mortgage-backed
securities:
Residential - U.S.
government-sponsored
entities ("GSEs") ............
Residential - Non-
government sponsored
entities ("Non-GSEs") ....
Commercial - U.S. GSEs
and agencies ...................
Commercial - Non-GSEs
Equity securities ................
— $ 122,018
$
— $
— $ 173,674
$
— $
— $ 179,781
$
—
30,529
—
40,381
—
677,822
37,191
81,225
137,817
—
—
—
—
—
—
—
—
—
—
—
54,849
—
32,574
83,436
717,052
—
41,118
65,072
—
—
51,483
134,728
—
—
—
—
—
—
—
826
826
—
74,278
—
25,510
100,279
800,683
—
46,763
91,474
—
—
39,725
137,326
—
$
191,753
$1,304,066
$
—
—
—
—
—
—
—
825
825
Total................................... $
— $1,126,983
$
1,127
$
148,508
$1,205,478
$
—
1,127
Investment securities totaled $1.13 billion at December 31, 2019, decreasing by $226.7 million, or 16.7%, from the $1.35
billion held at December 31, 2018, which decreased by $141.8 million, or 9.5%, from the $1.50 billion at year-end 2017.
In the third quarter of 2019, $53.9 million in lower-yielding available-for-sale securities were sold as part of an investment
portfolio repositioning strategy designed to enhance potential prospective earnings and improve net interest margin. We
received $53.9 million in gross proceeds and reinvested the proceeds in $52.5 million in higher-yielding, longer duration
investment securities with an average yield of 2.54% and a weighted average life of 6.6 years. The investment securities sold
had an average yield of 2.10% and a weighted average life of 3.2 years. Gross realized gains on the sale of the investment
securities were $36 thousand. The specific identification method was used as the basis for determining the cost of all securities
sold.
In the second quarter of 2017, $97.7 million in lower-yielding available-for-sale securities were sold as part of an investment
portfolio repositioning strategy designed to enhance potential prospective earnings and improve net interest margin. We
received $96.0 million in gross proceeds and reinvested the proceeds in $97.4 million in higher-yielding, longer duration
investment securities with an average yield of 2.57% and a weighted average life of 4.6 years. The investment securities sold
had an average yield of 1.91% and a weighted average life of 3.3 years. Gross realized losses on the sale of the investment
securities were $1.6 million. The specific identification method was used as the basis for determining the cost of all securities
sold.
62
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, 2019.
Table 15. Maturity Distribution of Investment Portfolio
Portfolio Type and Maturity Grouping
Available-for-sale portfolio:
Debt securities - States and political subdivisions:
Carrying
Value
Weighted
Average
Yield (1)
(Dollars in thousands)
Within one year ...........................................................................................................................................
$
After one but within five years....................................................................................................................
After five but within ten years.....................................................................................................................
After ten years .............................................................................................................................................
30,716
34,226
41,323
15,753
Total debt securities - States and political subdivisions ...........................................................................
122,018
2.89%
2.38
3.50
3.58
3.04
Debt securities - Corporate:
Within one year ...........................................................................................................................................
After one but within five years....................................................................................................................
After five but within ten years.....................................................................................................................
After ten years .............................................................................................................................................
19,966
10,563
—
—
Total debt securities - Corporate...............................................................................................................
30,529
Debt securities - U.S. Treasury obligations and direct obligations of U.S Government agencies:
Within one year ...........................................................................................................................................
After one but within five years....................................................................................................................
After five but within ten years.....................................................................................................................
After ten years .............................................................................................................................................
Total debt securities - U.S. Treasury obligations and direct obligations of U.S Government agencies...
Residential mortgage-backed securities - U.S. GSEs:
Within one year ...........................................................................................................................................
After one but within five years....................................................................................................................
After five but within ten years.....................................................................................................................
After ten years .............................................................................................................................................
Total residential mortgage-backed securities - U.S. GSEs.......................................................................
Residential mortgage-backed securities - Non-government sponsored entities ("Non-GSEs"):
Within one year ...........................................................................................................................................
After one but within five years....................................................................................................................
After five but within ten years.....................................................................................................................
After ten years .............................................................................................................................................
Total residential mortgage-backed securities - Non-GSEs.......................................................................
Commercial mortgage-backed securities - U.S. GSEs and agencies:
Within one year ...........................................................................................................................................
After one but within five years....................................................................................................................
After five but within ten years.....................................................................................................................
After ten years .............................................................................................................................................
63
—
2,468
22,371
15,542
40,381
366
2,346
71,715
603,395
677,822
—
—
—
37,191
37,191
—
—
44,918
36,307
2.90
2.65
—
—
2.81
—
3.24
2.88
3.08
2.98
2.95
2.60
2.12
2.53
2.49
—
—
—
3.39
3.39
—
—
2.87
2.54
Portfolio Type and Maturity Grouping
Carrying
Value
Weighted
Average
Yield (1)
(Dollars in thousands)
Total commercial mortgage-backed securities - U.S. GSEs and agencies ...............................................
81,225
2.72
Commercial mortgage-backed securities - Non-GSEs:
Within one year ...........................................................................................................................................
After one but within five years....................................................................................................................
After five but within ten years.....................................................................................................................
After ten years .............................................................................................................................................
21,999
95,157
20,661
—
Total commercial mortgage-backed securities - Non-GSEs.....................................................................
137,817
3.02
3.11
4.10
—
3.24
Total available-for-sale portfolio ...................................................................................................................
$
1,126,983
2.71%
Equity securities:
No stated maturity .......................................................................................................................................
Total equity securities...............................................................................................................................
Total investment securities.............................................................................................................................
$
$
$
1,127
1,127
—%
—%
1,128,110
2.71%
(1) Weighted average yields are computed on an annual basis, and yields on tax-exempt obligations are computed on a taxable-equivalent
basis using a federal statutory tax rate of 21%.
As of December 31, 2019, the weighted average yield of the investment portfolio of 2.71% decreased by 7 bp from 2.78% 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 exceptional 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.
64
Table 16. Deposits by Categories
December 31,
2019
2018
2017
2016
2015
(Dollars in thousands)
Noninterest-bearing demand deposits .......................... $
1,450,532
$
1,436,967
$
1,395,556
$
1,265,246
$
1,145,244
Interest-bearing demand deposits .................................
Savings and money market deposits.............................
Time deposits less than $100,000.................................
1,043,010
1,600,028
165,755
Core deposits..............................................................
4,259,325
Government time deposits ............................................
Other time deposits of $100,000 to $250,000 ..............
Other time deposits greater than $250,000...................
Total time deposits of $100,000 and greater..............
533,088
107,550
220,060
860,698
954,011
1,448,257
176,707
4,015,942
631,293
106,783
192,472
930,548
933,054
1,481,876
180,748
3,991,234
687,052
101,560
176,508
965,120
862,991
1,390,600
194,730
3,713,567
701,417
103,720
89,497
894,634
824,895
1,399,093
212,946
3,582,178
664,756
114,083
72,422
851,261
Total deposits................................................................ $
5,120,023
$
4,946,490
$
4,956,354
$
4,608,201
$
4,433,439
Total deposits of $5.12 billion at December 31, 2019 increased by $173.5 million, or 3.5%, from total deposits of $4.95 billion
at December 31, 2018. Total deposits at December 31, 2018 decreased by $9.9 million, or 0.2%, over the year-end 2017
balance of $4.96 billion. The increase in deposits in 2019 reflects net increases in savings and money market deposits of $151.8
million, interest-bearing demand deposits of $89.0 million, other time deposits greater than $100,000 (excluding government
time deposits) totaling $28.4 million, and noninterest-bearing demand deposits of $13.6 million. The net increases were
partially offset by decreases in government time deposits of $98.2 million and time deposits less than $100,000 of $11.0
million. In 2018 and 2019, FHLB advances were used to replace government time deposits and fund loan growth.
Core deposits totaled $4.26 billion at December 31, 2019 and increased by $243.4 million, or 6.1%, from December 31, 2018,
which increased by $24.7 million or 0.6% from December 31, 2017. Core deposits as a percentage of total deposits was 83.2%
at December 31, 2019, compared to 81.2% at December 31, 2018 and 80.5% at December 31, 2017. For additional information
regarding the contractual maturities of our time deposits, See Note 10 - 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 29 bp in 2019, while savings and money market deposit rates
increased by 20 bp. The average rate paid on all deposits increased 9 bp to 0.48% in 2019 from 0.39% in 2018, which increased
from 0.23% in 2017.
Table 17. Average Balances and Average Rates on Deposits
Year Ended December 31,
2019
2018
2017
Average
Balance
Average
Rate Paid
Average
Balance
Average
Rate Paid
Average
Balance
Average
Rate Paid
(Dollars in thousands)
Noninterest-bearing demand deposits ......... $ 1,375,903
—% $ 1,385,427
—% $ 1,325,583
—%
Interest-bearing demand deposits................
Savings and money market deposits ...........
Time deposits ..............................................
984,298
1,556,766
1,068,734
Total............................................................. $ 4,985,701
0.08
0.33
1.69
0.48
936,034
1,494,658
1,194,579
$ 5,010,698
0.08
0.13
1.40
0.39
901,171
1,449,379
1,173,020
$ 4,849,153
0.07
0.08
0.81
0.23
We expect overall deposit rates to hold relatively steady in 2020 based on the Federal Open Market Committee's recent
statements. 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.
65
Contractual Obligations
The following table sets forth contractual obligations (excluding deposit liabilities) as of December 31, 2019.
Table 18. Contractual Obligations
Payments Due By Period
Less Than
One Year
1-3 Years
3-5 Years
More Than
5 Years
Total
(Dollars in thousands)
Short-term borrowings ............................................... $
150,000
$
— $
Long-term debt ...........................................................
Pension plan and SERP obligations ...........................
Operating leases .........................................................
Purchase obligations...................................................
Other long-term liabilities ..........................................
25,000
2,098
6,216
27,989
6,873
25,000
4,180
11,379
30,537
4,504
— $
—
4,461
10,122
20,620
36
— $
51,547
22,835
40,920
946
49
150,000
101,547
33,574
68,637
80,092
11,462
Total............................................................................ $
218,176
$
75,600
$
35,239
$
116,297
$
445,312
Components of short-term borrowings and long-term debt are discussed in Note 11 - Short-Term Borrowings and Note 12 -
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. Other long-term liabilities represent expected payments for unfunded commitments related to our investments
in LIHTC partnerships.
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
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, the
need for raising additional capital (whether debt and/or equity) or returning capital to our shareholders, and the ability to
declare cash dividends or repurchase our securities.
Common and Preferred Equity
Shareholders' equity totaled $528.5 million at December 31, 2019, an increase of $36.8 million, or 7.5%, from the $491.7
million at December 31, 2018, which decreased by $8.3 million, or 1.7%, from December 31, 2017. When expressed as a
percentage of total assets, shareholders' equity was 8.8% at December 31, 2019, compared to 8.5% at December 31, 2018 and
8.9% at December 31, 2017.
The increase in shareholders' equity from December 31, 2018 to December 31, 2019 was primarily attributable to: 1) net
income of $58.3 million and 2) accumulated other comprehensive income of $27.6 million, partially offset by: 1) the
repurchase of 797,003 shares of our common stock for a total cost of $22.8 million, under our stock repurchase program, and 2)
cash dividends paid of $25.7 million. During 2019 we repurchased approximately 2.8% of our common stock outstanding at
December 31, 2018.
66
The decrease in shareholders' equity from December 31, 2017 to December 31, 2018 was primarily attributable to: 1) the
repurchase of 1,155,157 shares of our common stock for a total cost of $32.8 million, under our stock repurchase program, 2)
cash dividends paid of $24.1 million and 3) accumulated other comprehensive loss of $13.1 million, partially offset by net
income of $59.5 million. During 2018 we repurchased approximately 3.8% of our common stock outstanding at December 31,
2017.
Our tangible common equity ratio was 8.79% at December 31, 2019, compared to 8.47% at December 31, 2018 and 8.86% at
December 31, 2017. Our book value per share was $18.68, $16.97, and $16.65 at year-end 2019, 2018 and 2017, respectively.
The increase in our tangible common equity ratio in 2019 from 2018 was primarily attributable to the increase in common
equity due to net income recorded in 2019, partially offset by the reduction in our common equity due to common stock
repurchases , as well as the quarterly dividends paid in 2019. The increase in our book value per share from 2018 was primarily
attributable to net income recorded in 2019 of $58.3 million, combined with the reduction in common shares outstanding due to
the aforementioned common stock repurchases completed in 2019.
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).
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
December 31,
2019
2018
2017
(Dollars in thousands)
Total shareholders’ equity ...................................................................................... $
528,520
$
491,725
$
500,011
Less:
Other intangible assets (core deposit premium) ...............................................
—
Tangible common equity........................................................................................ $
528,520
Total assets............................................................................................................. $
6,012,672
Less: Other intangible assets (core deposit premium) ........................................
—
Tangible assets ....................................................................................................... $
6,012,672
—
491,725
5,807,026
—
5,807,026
$
$
$
(2,006)
498,005
5,623,708
(2,006)
5,621,702
$
$
$
Tangible common equity to tangible assets ...........................................................
8.79%
8.47%
8.86%
Trust Preferred Securities
As of December 31, 2019, we have two remaining statutory trusts, CPB Capital Trust IV ("Trust IV") and CPB Statutory Trust
V ("Trust V"), which issued a total of $50.0 million in floating rate trust preferred securities. Our obligations with respect to the
issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of the trusts' obligations
with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from time to time to
defer subordinated debenture interest payments, which would result in a deferral of dividend payments on the related trust
preferred securities, for up to 20 consecutive quarterly periods without default or penalty.
The Company determined that its investments in Trust IV and Trust V did not represent a variable interest and therefore the
Company was not the primary beneficiary of each of the trusts. As a result, consolidation of the trusts by the Company were not
required.
On December 17, 2018, the Company completed the redemption of $20.0 million in floating rate trust preferred securities of
Trust III bearing an interest rate of three-month LIBOR plus 2.85% and maturing on December 17, 2033. The redemption price
was 100% of the aggregate liquidation amount of the securities plus accumulated but unpaid distributions up to but not
including the redemption date. The Company also redeemed $0.6 million of common securities issued by Trust III and held by
67
the Company, as a result of the concurrent redemption of 100% of the principal assets of Trust III, or $20.6 million of the
Company's junior subordinated debentures with an identical interest rate and maturity as the Trust III trust preferred securities.
The redemption was pursuant to the optional prepayment provisions of the indenture. On January 9, 2019, Trust III was
canceled with the state of Connecticut.
On January 7, 2019, the Company completed the redemption of $20.0 million in floating rate trust preferred securities of Trust
II bearing an interest rate of three-month LIBOR plus 2.85% and maturing on October 7, 2033. The redemption price was
100% of the aggregate liquidation amount of the securities plus accumulated but unpaid distributions up to but not including
the redemption date. The Company also redeemed $0.6 million of common securities issued by Trust II and held by the
Company, as a result of the concurrent redemption of 100% of the principal assets of Trust II, or $20.6 million of the
Company's junior subordinated debentures with an identical interest rate and maturity as the Trust II trust preferred securities.
The redemption was pursuant to the optional prepayment provisions of the indenture. On January 22, 2019, Trust II was
canceled with the state of Delaware.
We also previously had CPB Capital Trust I ("Trust I"), which was canceled in August 2014.
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, 2019, on a stand-alone basis, CPF had
an available cash balance of approximately $10.6 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, 2019,
the bank had Statutory Retained Earnings of $66.6 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
the "Dividends — Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities" section.
Share Repurchases
We repurchase shares of our common stock when we believe such repurchases are in the best interests of the Company and our
shareholders. 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 replaced and superseded in its entirety the
share repurchase plan previously approved by the Company's Board of Directors.
In November 2017, the Board of Directors authorized an increase in the 2017 Repurchase Plan authority by an additional $50.0
million (known henceforth as the "Repurchase Plan"). In 2017, 864,483 shares of common stock, at a cost of $26.6 million,
were repurchased under the previous share repurchase plan and the Repurchase Plan combined.
In 2018, 1,155,157 shares of common stock, at a cost of $32.8 million, were repurchased under the Repurchase Plan.
In June 2019, the Company’s Board of Directors authorized the repurchase of up to $30 million of its common stock from time
to time in the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase program (the
"2019 Repurchase Plan"). The 2019 Repurchase Plan replaces and supersedes in its entirety the Repurchase Plan, which
had $6.8 million in remaining repurchase authority.
In 2019, 797,003 shares of common stock, at a cost of $22.8 million, were repurchased under the 2019 Repurchase Plan. A total
of $21.1 million remained available for repurchase under the 2019 Repurchase Plan at December 31, 2019.
In January 2020, the Company’s Board of Directors authorized the repurchase of up to $30 million of its common stock from
time to time in the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase
68
program. The new repurchase plan replaces and supersedes in its entirety the 2019 Repurchase Plan. Our ability to repurchase
shares is subject to the discretion of our Board of Directors and approval of our regulators, and there can be no assurance that
the Board will repurchase shares of our common stock in the future.
Cybersecurity
In recent years, cybersecurity has gained prominence within the financial services industry due to increases in the quantity and
sophistication of cyber-attacks, which include significant distributed denial-of-service and credential validation attacks,
malicious code and viruses and attempts to breach the security of systems, which, in certain instances, have resulted in
unauthorized access to customer account data.
The bank has a number of complex information systems used for a variety of functions by customers, employees and vendors.
In addition, third parties with which the bank does business or that facilitate business activities (e.g., vendors, exchanges,
clearing houses, central depositories and financial intermediaries) could also be sources of cybersecurity risk to the bank,
including with respect to breakdowns or failures of their systems, misconduct by the employees of such parties, or cyber-attacks
which could affect their ability to deliver a product or service to the bank.
As a regulated financial institution, we must adhere to the security requirements and expectations of the applicable regulatory
agencies, which include requirements related to data privacy, systems availability and business continuity planning, among
others. The regulatory agencies have established guidelines for the responsibilities of the Board of Directors and senior
management, which include establishing policy, appointing and training personnel, implementing review and testing functions
and ensuring an appropriate frequency of updates.
The Board of Directors overall, and its Compliance Committee more specifically, oversees cybersecurity risk. The Executive
Committee overall, and our Chief Legal Officer, our Risk Management Division Officer and our Chief Information Security
Officer more specifically, manages the cybersecurity risk at the operational level. Various reports on cybersecurity are provided
to our Executive Committee and a quarterly update is provided to the Compliance Committee and the Board of Directors.
As a complement to the overall cybersecurity infrastructure, the bank utilizes a number of internal training methods, both
formally through mandatory courses and informally through written communications and other updates. Internal policies and
procedures have been implemented to encourage the reporting of potential phishing attacks or other security risks. The bank
also uses third party services as part of its cybersecurity framework, and any such third parties are required to comply with the
bank’s policies regarding information security and confidentiality. In addition, the bank retains third party groups to assess and
supplement the bank’s cybersecurity needs. These cyber-attacks have not, to date, resulted in any material disruption to the
bank’s operations or harm to its customers and have not had a material adverse effect on the bank’s results of operations;
however, there can be no assurance that a sophisticated cyber-attack can be detected or thwarted.
Transaction Risk
Transaction risk is the risk to earnings or capital arising from problems in service, activity or product delivery. This risk is
significant within any bank and is interconnected with other risk categories in most activities throughout the Company.
Transaction risk is a function of internal controls, information systems, associate integrity, and operating processes. It arises
daily throughout the Company as transactions are processed. It pervades all divisions, departments and centers and is inherent
in all products and services we offer.
In general, transaction risk is defined as high, medium or low by the Company. The audit plan ensures that high risk areas are
reviewed annually. We utilize internal auditors and independent audit firms to test key controls of operational processes and to
audit information systems, compliance management programs, loan programs and trust services.
The key to managing transaction risk is in the design, documentation and implementation of well-defined procedures and
controls. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide
only reasonable, but not absolute, assurances of the effectiveness of these systems and controls, and that the objectives of these
controls have been met.
Compliance Risk
Compliance risk is the risk to earnings or capital arising from violations of, or non-conformance with, laws, rules, regulations,
prescribed practices, or ethical standards. Compliance risk also arises in situations where the laws or rules governing certain
products or activities of the bank’s customers may be ambiguous or untested. Compliance risk exposes us to fines, civil money
69
penalties, payment of damages, and the voiding of contracts. Compliance risk can also lead to a diminished reputation, reduced
business value, limited business opportunities, lessened expansion potential, and lack of contract enforceability. The Company
utilizes independent external firms to conduct compliance audits as a means of identifying weaknesses in the compliance
program.
There is no single or primary source of compliance risk. It is inherent in every activity. Frequently, it blends into operational
risk and transaction risk. A portion of this risk is sometimes referred to as legal risk. This is not limited solely to risk from
failure to comply with consumer protection laws; it encompasses all laws, as well as prudent ethical standards and contractual
obligations. It also includes the exposure to litigation from all aspects of banking, traditional and non-traditional.
Our risk management policies and codes of ethical conduct are cornerstones for controlling compliance risk. An integral part of
controlling this risk is the proper training and development of employees. The Corporate Compliance Division Manager is
responsible for developing and executing a comprehensive compliance training program. The Corporate Compliance Division
Manager, in consultation with our internal and external legal counsel, seeks to provide our employees with adequate training
commensurate to their job functions to ensure compliance with banking laws and regulations.
Our risk management policies and programs includes a risk-based audit program aimed at identifying internal control
deficiencies and weaknesses. We have in-depth audits performed by an independent audit firm under the direction of the
Director of Internal Audit and supplemented by independent external firms, and periodic monitoring performed by our risk
management personnel. Annually, an Audit Plan for the Company is developed and presented for approval to the Audit
Committee.
Our risk management team conducts periodic monitoring of our compliance efforts with a special focus on those areas that
expose us to compliance risk. The purpose of the periodic monitoring is to verify whether our employees are adhering to
established policies and procedures. Any material exceptions identified are brought forward to the appropriate department head,
the Audit Committee and the Compliance Committee.
We recognize that customer complaints can often identify weaknesses in our compliance program which could expose us to
risk. Therefore, we attempt to ensure that all complaints are given prompt attention. The Corporate Compliance Division
Manager reviews formal complaints to determine if a significant compliance risk exists and communicates those findings to our
Compliance Committee.
Strategic Risk
Strategic risk is the risk to earnings or capital arising from adverse decisions or improper implementation of strategic decisions.
This risk is a function of the compatibility between an organization’s goals, the resources deployed against those goals and the
quality of implementation.
Strategic risks are identified as part of the strategic planning process. Offsite strategic planning sessions, with members of the
Board of Directors and Executive Committee, are held annually. The strategic review consists of an economic assessment,
competitive analysis, industry outlook and legislative and regulatory review.
A primary measurement of strategic risk is peer group analysis. Key performance ratios are compared to peer groups consisting
of U.S. banks of comparable size and complexity and banks in the Hawaii market to identify any sign of weakness and potential
opportunities.
Another measure is the comparison of the actual results of previous strategic initiatives against the expected results established
prior to implementation of each strategy.
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
70
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.
The following table sets forth information regarding our interest rate sensitivity gap at December 31, 2019. 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)
Assets
Interest-bearing deposits in other
financial institutions ......................... $
24,554
$
— $
— $
— $
— $
— $
24,554
Investment securities ........................
103,490
75,941
101,279
357,448
488,825
1,127
1,128,110
Loans held for sale............................
9,071
—
—
—
—
12
9,083
Loans and leases ...............................
1,036,397
295,631
544,018
1,386,181
1,184,468
2,845
4,449,540
FHLB stock ......................................
14,983
Other assets.......................................
—
—
—
—
—
—
—
—
—
—
386,402
14,983
386,402
Total assets ..................................... $ 1,188,495
$
371,572
$
645,297
$ 1,743,629
$ 1,673,293
$ 390,386
$ 6,012,672
Liabilities and Equity
Noninterest-bearing deposits ............ $ 1,450,532
$
— $
— $
— $
— $
— $ 1,450,532
Interest-bearing deposits...................
3,041,493
287,600
262,156
56,044
22,198
— 3,669,491
FHLB advances and other short-
term borrowings................................
Long-term debt .................................
Lease liability ...................................
Other liabilities .................................
Equity................................................
150,000
51,547
—
—
—
—
—
—
—
—
—
—
25,000
25,000
—
—
—
—
—
—
—
—
—
—
—
—
—
52,632
59,950
150,000
101,547
52,632
59,950
528,520
528,520
Total liabilities and equity.............. $ 4,693,572
$
287,600
Interest rate sensitivity gap.................. $(3,505,077) $
83,972
$
$
287,156
$
81,044
$
22,198
$ 641,102
$ 6,012,672
358,141
$ 1,662,585
$ 1,651,095
$ (250,716) $
Cumulative interest rate sensitivity
gap ....................................................... $(3,505,077) $(3,421,105) $(3,062,964) $(1,400,379) $ 250,716
$
— $
71
—
—
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, 2019, over a one-year horizon, assuming
no balance sheet growth and given both a 100 bp upward and 100 bp downward parallel shift in interest rates.
Rate Change
Estimated Net Interest Income Sensitivity
+100bp ................................................................................................................................
-100bp .................................................................................................................................
2.45 %
(5.01)%
The table below 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 Financial Assets and Financial 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.
72
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 financial
institutions .......................................................... $
24,554
$
— $
— $
— $
— $
— $
24,554
$
24,554
Weighted average yields .................................
1.55%
0.00%
0.00%
0.00%
0.00%
0.00%
1.55%
Fixed-rate investment securities ......................... $
239,729
$
180,231
$
177,471
$
81,652
$
90,951
$
316,568
$ 1,086,602
$ 1,086,602
Weighted average yields .................................
2.56%
2.64%
2.76%
2.57%
2.80%
2.82%
2.70%
Variable-rate investment securities..................... $
3,634
$
3,307
$
3,010
$
2,739
$
4,012
$
23,679
$
40,381
$
40,381
Weighted average yields .................................
2.98%
2.98%
2.98%
2.98%
3.08%
2.96%
2.98%
Equity investment securities............................... $
— $
— $
— $
— $
— $
1,127
$
1,127
$
1,127
Weighted average yields .................................
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Fixed-rate loans and leases................................. $
671,390
$
528,489
$
392,882
$
270,393
$
199,572
$
481,084
$ 2,543,810
$ 2,512,865
Weighted average yields .................................
4.39%
4.39%
4.21%
4.15%
4.10%
3.87%
4.22%
Variable-rate loans and leases............................. $
737,445
$
389,019
$
285,417
$
208,022
$
126,566
$
165,487
$ 1,911,956
$ 1,888,695
Weighted average yields .................................
4.36%
3.78%
3.77%
3.62%
3.62%
3.59%
3.96%
Total - December 31, 2019 ................................. $ 1,676,752
$ 1,101,046
$
858,780
$
562,806
$
421,101
$
987,945
$ 5,608,430
$ 5,554,224
Total - December 31, 2018 ................................. $ 1,486,148
$
960,554
$
717,558
$
593,113
$
430,700
$ 1,270,825
$ 5,458,898
$ 5,317,220
Interest-sensitive liabilities
Interest-bearing demand and savings deposits ... $ 2,643,038
$
— $
— $
— $
— $
— $ 2,643,038
$ 2,643,038
Weighted average rates paid............................
0.21%
0.00%
0.00%
0.00%
0.00%
0.00%
0.21%
Time deposits...................................................... $
946,738
$
35,469
$
21,690
$
9,956
$
12,239
$
361
$ 1,026,453
$ 1,023,362
Weighted average rates paid............................
1.41%
0.75%
0.89%
1.28%
1.07%
0.33%
1.37%
FHLB advances and other short-term
borrowings.......................................................... $
150,000
$
— $
— $
— $
— $
— $
150,000
$
150,000
Weighted average rates paid............................
1.81%
0.00%
0.00%
0.00%
0.00%
0.00%
1.81%
Long-term debt ................................................... $
25,000
$
25,000
$
— $
— $
— $
51,547
$
101,547
$
97,827
Weighted average rates paid............................
3.17%
3.25%
0.00%
0.00%
0.00%
4.11%
3.67%
Total - December 31, 2019 ................................. $ 3,764,776
$
60,469
Total - December 31, 2018 ................................. $ 3,561,306
$
113,258
$
$
21,690
57,217
$
$
9,956
12,900
$
$
12,239
11,472
$
$
51,908
$ 3,921,038
$ 3,914,227
72,536
$ 3,828,689
$ 3,816,885
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.
73
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, 2019 was 86.9% compared to 82.4% at December 31, 2018. 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
$72.2 million in 2019, $103.5 million in 2018, and $96.8 million in 2017. 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 $129.0 million, $211.1 million and $296.1 million in 2019, 2018 and 2017,
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 2019, 2018 and 2017, net loan originations accounted for $237.5 million, $250.2 million and $166.1 million,
respectively, of cash used in investing activities. In addition, purchases of portfolio loans totaled $140.1 million, $58.6 million
and $83.8 million in 2019, 2018 and 2017, respectively. Net proceeds received from sales and maturities of investment
securities totaled $253.6 million and $111.2 million in 2019 and 2018, respectively, compared to net purchases of investment
securities of $47.6 million in 2017. Investing activities included proceeds from sales of foreclosed loans and other real estate of
$140 thousand, $46 thousand, and $0.3 million in 2019, 2018 and 2017, respectively. We did not sell any loans originated for
investment in 2019, 2018 and 2017.
Cash provided by financing activities totaled $57.6 million, $127.6 million, and $197.3 million in 2019, 2018 and 2017,
respectively. Deposit activities, borrowings and capital transactions represent the major components of financing activities. In
2019 and 2017, deposits increased by $173.5 million and $348.2 million, respectively, compared to a net decrease in deposits
of $9.9 million in 2018. Net cash outflows of short-term debt totaled $47.0 million in 2019 and $103.0 million in 2017,
compared to net cash inflows from short-term debt of $165.0 million in 2018. Repayments of long-term debt totaled $20.6
million in 2019. Proceeds from and repayments of long-term debt totaled $50.0 million and $20.6 million in 2018, respectively.
There were no net cash inflows or outflows from long-term debt in 2017. As with investment securities, the level of net
borrowings is impacted by the levels of loan and deposit growth or contraction during the period. Capital transactions,
primarily cash dividends and stock repurchases, totaled $48.3 million, $57.0 million and $47.9 million of cash used in 2019,
2018 and 2017, respectively.
Core deposits have historically provided us with a sizable source of relatively stable and low cost funds but are subject to
competitive pressure in our market. In addition to core deposit funding, we also have access to a variety of other short-term and
long-term funding sources, which include proceeds from maturities of our investment securities, as well as secondary funding
sources such as the FHLB, secured repurchase agreements and 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 $1.84 billion line of credit with the FHLB as of December 31, 2019, of which $1.57
billion remained available as of December 31, 2019. Short-term borrowings under this arrangement totaled $150.0 million and
$197.0 million at December 31, 2019 and 2018, respectively. Long-term debt with the FHLB as of December 31, 2019 and
2018 totaled $50.0 million. FHLB advances outstanding at December 31, 2019 were secured by certain real estate loans with a
carrying value of $2.48 billion in accordance with the collateral provisions of the Advances Pledge and Security Agreement
with the FHLB.
The FHLB provides standby letters of credit on behalf of the bank to secure certain public deposits. If the FHLB is required to
make a payment on a standby letter of credit, the payment amount is converted to an advance at the FHLB. The standby letters
of credit issued on our behalf by the FHLB totaled $78.9 million and $4.6 million at December 31, 2019 and 2018,
respectively.
74
The bank also maintained a line of credit with the Federal Reserve discount window of $65.3 million and $73.9 million as of
December 31, 2019 and 2018, respectively. There were no advances outstanding under this arrangement at December 31, 2019
and 2018. Advances under this arrangement would have been secured by certain commercial and commercial real estate loans
with a carrying value totaling $126.1 million. The Federal Reserve does not have the right to sell or repledge these loans. See
Note 11 - Short-Term Borrowings and Note 12 - Long-Term Debt to the Consolidated Financial Statements under "Part II, Item
8. Financial Statements and Supplementary Data" for additional information regarding our borrowings.
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 2019, net cash provided by operating activities amounted to $62.2 million.
The primary source of funds in operating activities included dividends received from the bank of $63.0 million. Net cash used
in financing activities amounted to $69.0 million. The primary use of funds in financing activities included the repurchases of
common stock totaling $22.8 million and cash dividends of $25.7 million paid to our common shareholders. In addition, junior
subordinated debentures issued by Trust II totaling $20.6 million were repaid in 2019.
In 2018, net cash provided by operating activities amounted to $79.8 million. The primary source of funds in operating
activities included dividends received from the bank of $82.0 million. Net cash used in financing activities amounted to $77.6
million. The primary use of funds in financing activities included the repurchases of common stock totaling $32.8 million and
cash dividends of $24.1 million paid to our common shareholders. In addition, junior subordinated debentures issued by Trust
III totaling $20.6 million were repaid in 2018.
In 2017, net cash provided by operating activities amounted to $42.3 million. The primary source of funds in operating
activities included dividends received from the bank of $43.0 million. Net cash used in financing activities amounted to $47.9
million. The primary use of funds in financing activities included the repurchases of common stock totaling $26.6 million and
cash dividends of $21.3 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.
75
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 Financial Assets and Financial Liabilities to the Consolidated Financial Statements under "Part II, Item 8.
Financial Statements and Supplementary Data."
76
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors of Central Pacific Financial Corp.
Honolulu, Hawaii
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Central Pacific Financial Corp. and subsidiaries (the "Company")
as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in equity, and
cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). We also have
audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control - Integrated Framework: (2013) issued by COSO.
We also have audited the adjustments to the 2017 consolidated financial statements to retrospectively apply the change in accounting
principle related to Low Income Housing Tax Credit investments, as described in Note 1. In our opinion, such adjustments are
appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2017 consolidated
financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or
any other form of assurance on the 2017 consolidated financial statements taken as a whole.
Change in Accounting Principle
As discussed above and in Note 1 to the financial statements, the Company changed the manner in which it accounts for Low
Income Housing Tax Credit investments in 2018.
Basis for Opinions
The Company’s management is responsible for these financial statements, 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
financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a
public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. Our audit of internal control over financial reporting 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 audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
77
Definition and Limitations of Internal Control Over Financial Reporting
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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are
material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Allowance for Loan and Lease Losses - Qualitative Adjustments
As described in Notes 1 and 5 to the consolidated financial statements, the Company’s consolidated allowance for loan and
lease losses balance was $47,971,000 at December 31, 2019, which consists of three basic elements: 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. The allowance for
loan and lease losses is the estimate of incurred credit losses inherent in the loan and lease portfolio at the balance sheet date.
The amount of the allowance for loan and lease losses is expected to be sufficient to absorb probable losses incurred in the loan
and lease portfolio. The determination of the allowance for loan and lease losses involves significant assumptions which require
a high degree of judgment relating to the Company’s loan and lease portfolio and the evaluation of the general economic
conditions and other qualitative factors and how those assumptions impact probable incurred losses inherent within the loan
and lease portfolio. Changes in these assumptions could have a material effect on the Company’s financial results.
Qualitative adjustments, which are added to the historical loss rates, are utilized 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 and lease portfolio, and provide for losses in the loan and lease portfolio that may not be reflected and/or captured in the
historical loss data. The Company primarily bases qualitative adjustments on the following factors including: lending policies,
economic conditions, loan profile, lending staff, problem loan trends, loan review, collateral, credit concentrations and other
internal and external factors. The evaluation of these factors results in qualitative adjustments, which contribute significantly to
the estimate of the allowance for loan and lease losses. We identified the estimate of the aggregate effect of the qualitative
adjustments on the allowance for loan and lease losses as a critical audit matter as it involved especially subjective auditor
judgement.
The primary procedures we performed to address this critical audit matter included:
• Testing the effectiveness of controls over the qualitative adjustments, including controls addressing:
The completeness and accuracy of the data used as the basis for the qualitative adjustments,
The mathematical accuracy of the qualitative adjustments calculation, and
Management’s judgments related to the data and assumptions used in the determination of qualitative
adjustments.
•
Substantively testing management’s process, including evaluating their judgments and assumptions, for determining the
qualitative adjustments, including:
Evaluation of the completeness and accuracy of the data used as a basis for the qualitative adjustments,
Evaluation of the mathematical accuracy of the qualitative adjustments calculation,
78
Evaluation of the reasonableness of management’s judgments related to the data and assumptions used in the
determination of qualitative adjustments,
Analytical evaluation of the directional consistency of the qualitative adjustments, with respect to the underlying
trends, and
Analytical evaluation of the overall adequacy of the allowance for loan and lease losses, including the qualitative
adjustments.
/s/ Crowe LLP
We have served as the Company's auditor since 2018.
Sacramento, California
February 25, 2020
79
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Central Pacific Financial Corp.:
Opinion on the Consolidated Financial Statements
We have audited, before the effects of the adjustments to retrospectively apply the change in accounting related to investments
in low income housing tax credit partnerships described in Note 1, the consolidated statements of income, comprehensive
income, changes in equity, and cash flows of Central Pacific Financial Corp. and subsidiaries (the Company) for the year ended
December 31, 2017, and the related notes (collectively, the consolidated financial statements). The 2017 consolidated financial
statements before the effects of the adjustments described in Note 1 are not presented herein. In our opinion, the consolidated
financial statements, before the effects of the adjustments to retrospectively apply the change in accounting related to
investments in low income housing tax credit partnerships described in Note 1, present fairly, in all material respects, the results
of the Company’s operations and its cash flows for the year ended December 31, 2017, in conformity with U.S. generally
accepted accounting principles.
We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the change in
accounting related to investments in low income housing tax credit partnerships described in Note 1 and, accordingly, we do
not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly
applied. Those adjustments were audited by other auditors.
Basis for Opinion
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 audit. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audit also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a
reasonable basis for our opinion.
/s/ KPMG LLP
We or our predecessor firms served as the Company’s auditor from 1975 to 2018.
Honolulu, Hawaii
February 28, 2018
80
CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2019
2018
(Dollars in thousands)
Assets
Cash and due from financial institutions ......................................................................................................................................... $
78,418
$
Interest-bearing deposits in other financial institutions ...................................................................................................................
24,554
Investment securities:
Available-for-sale debt securities, at fair value.............................................................................................................................
1,126,983
Held-to-maturity debt securities, fair value of: none at December 31, 2019 and $144,272 at December 31, 2018.....................
Equity securities, at fair value.......................................................................................................................................................
—
1,127
80,569
21,617
1,205,478
148,508
826
Total investment securities......................................................................................................................................................
1,128,110
1,354,812
Loans held for sale ...........................................................................................................................................................................
9,083
Loans and leases ..............................................................................................................................................................................
4,449,540
Allowance for loan and lease losses ................................................................................................................................................
(47,971)
Loans and leases, net of allowance for loan and lease losses .................................................................................................
4,401,569
Premises and equipment, net............................................................................................................................................................
Accrued interest receivable..............................................................................................................................................................
Investment in unconsolidated subsidiaries.......................................................................................................................................
Other real estate owned, net.............................................................................................................................................................
Mortgage servicing rights ................................................................................................................................................................
Bank-owned life insurance ..............................................................................................................................................................
Federal Home Loan Bank ("FHLB") stock .....................................................................................................................................
Right-of-use lease asset....................................................................................................................................................................
Other assets ......................................................................................................................................................................................
46,343
16,500
17,115
164
14,718
159,656
14,983
52,348
49,111
6,647
4,078,366
(47,916)
4,030,450
45,285
17,000
14,008
414
15,596
157,440
16,645
—
46,543
Total assets.............................................................................................................................................................................. $
6,012,672
$
5,807,026
Liabilities and Equity
Deposits:
Noninterest-bearing demand......................................................................................................................................................... $
1,450,532
$
1,436,967
Interest-bearing demand................................................................................................................................................................
Savings and money market ...........................................................................................................................................................
Time ..............................................................................................................................................................................................
Total deposits ..........................................................................................................................................................................
FHLB advances and other short-term borrowings...........................................................................................................................
Long-term debt.................................................................................................................................................................................
Lease liability...................................................................................................................................................................................
Other liabilities.................................................................................................................................................................................
1,043,010
1,600,028
1,026,453
5,120,023
150,000
101,547
52,632
59,950
954,011
1,448,257
1,107,255
4,946,490
197,000
122,166
—
49,645
Total liabilities ........................................................................................................................................................................
5,484,152
5,315,301
Contingent liabilities and other commitments (see Note 23)
Equity:
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding none at: December 31, 2019, and
December 31, 2018 .......................................................................................................................................................................
—
—
Common stock, no par value, authorized 185,000,000 shares; issued and outstanding: 28,289,257 at December 31, 2019
and 28,967,715 at December 31, 2018 .........................................................................................................................................
Additional paid-in capital .............................................................................................................................................................
Accumulated deficit ......................................................................................................................................................................
Accumulated other comprehensive income (loss) ........................................................................................................................
Total equity .............................................................................................................................................................................
447,602
91,611
(19,102)
8,409
528,520
470,660
88,876
(51,718)
(16,093)
491,725
Total liabilities and equity....................................................................................................................................................... $
6,012,672
$
5,807,026
See accompanying notes to consolidated financial statements.
81
CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2019
2018
2017
(Dollars in thousands, except per share data)
Interest income:
Interest and fees on loans and leases .......................................................................................... $
182,657
$
159,456
$
144,224
Interest and dividends on investment securities:
Taxable investment securities...............................................................................................
Tax-exempt investment securities ........................................................................................
Dividend income on investment securities...........................................................................
Interest on deposits in other financial institutions......................................................................
Dividend income on FHLB stock...............................................................................................
29,454
3,044
63
201
964
34,501
3,696
61
365
215
33,933
3,874
49
356
126
Total interest income ............................................................................................................
216,383
198,294
182,562
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 (loss) on sales of foreclosed assets ..............................................................................
Equity in earnings of unconsolidated subsidiaries .....................................................................
Fees on foreign exchange ...........................................................................................................
Loan placement fees...................................................................................................................
Net gains (losses) on sales of investment securities...................................................................
Other...........................................................................................................................................
Total other operating income................................................................................................
Other operating expense:
Salaries and employee benefits ..................................................................................................
Net occupancy ............................................................................................................................
Legal and professional services..................................................................................................
Computer software expense .......................................................................................................
Amortization of core deposit premium ......................................................................................
Communication expense ............................................................................................................
Equipment ..................................................................................................................................
Advertising expense ...................................................................................................................
Foreclosed asset expense............................................................................................................
Other...........................................................................................................................................
Total other operating expense...............................................................................................
Income before income taxes.................................................................................................
Income tax expense .......................................................................................................................
800
5,100
18,044
4,285
4,080
32,309
184,074
6,317
177,757
5,983
8,406
14,358
4,395
3,105
(145)
257
755
702
36
3,949
41,801
82,290
14,299
7,354
10,812
—
3,551
4,353
2,661
251
16,060
141,631
77,927
19,605
734
2,000
16,770
1,236
4,556
25,296
172,998
(1,124)
174,122
7,315
8,406
13,123
4,245
2,117
—
233
905
747
(279)
1,992
38,804
75,352
13,763
7,330
9,841
2,006
3,410
4,239
2,675
574
15,492
134,682
78,244
18,758
Net income ........................................................................................................................... $
58,322
$
59,486
$
Per common share data:
Basic earnings per share ............................................................................................................. $
Diluted earnings per share..........................................................................................................
Cash dividends declared.............................................................................................................
$
2.05
2.03
0.90
$
2.02
2.01
0.82
See accompanying notes to consolidated financial statements.
82
641
1,099
9,457
183
3,479
14,859
167,703
(2,674)
170,377
6,962
8,468
11,518
3,674
3,388
205
602
529
536
(1,410)
2,024
36,496
72,286
13,571
7,724
9,192
2,674
3,659
3,785
2,408
151
15,623
131,073
75,800
34,596
41,204
1.36
1.34
0.70
CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Net income.................................................................................................................... $
58,322
$
59,486
$
41,204
Other comprehensive income (loss), net of tax:
Net change in unrealized gain (loss) on investment securities ..................................
Defined benefit plans .................................................................................................
Total other comprehensive income (loss), net of tax....................................................
27,568
34
27,602
(14,122)
1,043
(13,079)
344
138
482
Comprehensive income ................................................................................................ $
85,924
$
46,407
$
41,686
See accompanying notes to consolidated financial statements.
83
CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Common
Shares
Outstanding
Preferred
Stock
Common
Stock
Additional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Non-
Controlling
Interest
(Dollars in thousands, except per share data)
Balance at December 31, 2016...................
30,796,243
$
— $
530,932
$
84,180
$
(108,941)
Net income ...................................................
Other comprehensive income.......................
Cash dividends declared ($0.70 per share) ..
12,020 net shares of common stock sold by
directors' deferred compensation plan..........
864,483 shares of common stock
repurchased and other related costs..............
Share-based compensation expense .............
Non-controlling interest expense .................
—
—
—
—
(864,483)
92,462
—
—
—
—
—
—
—
—
—
—
—
(385)
(26,559)
—
—
—
—
—
—
—
1,918
—
41,204
—
(21,299)
—
—
—
—
$
$
(1,521)
$
—
482
—
—
—
—
—
25
—
—
—
—
—
—
(1)
Total
$
504,675
41,204
482
(21,299)
(385)
(26,559)
1,918
(1)
Balance at December 31, 2017...................
30,024,222
$
— $
503,988
$
86,098
$
(89,036)
$
(1,039)
$
24
$
500,035
Impact of the adoption of new accounting
standards (1) .................................................
—
Adjusted balance at January 1, 2018........
30,024,222
Impact of the adoption of new accounting
standards (2) .................................................
Net income ...................................................
Other comprehensive loss ............................
Cash dividends declared ($0.82 per share) ..
16,950 net shares of common stock sold by
directors' deferred compensation plan..........
1,155,157 shares of common stock
repurchased and other related costs..............
Share-based compensation expense .............
Non-controlling interest expense .................
—
—
—
—
—
(1,155,157)
98,650
—
—
—
—
—
—
—
—
—
—
—
—
—
503,988
86,098
—
—
—
—
(504)
(32,824)
—
—
—
—
—
—
—
—
2,778
—
139
(88,897)
1,836
59,486
—
(24,143)
—
—
—
—
(139)
(1,178)
(1,836)
—
(13,079)
—
—
—
—
—
—
24
—
—
—
—
—
—
—
(24)
—
500,035
—
59,486
(13,079)
(24,143)
(504)
(32,824)
2,778
(24)
Balance at December 31, 2018...................
28,967,715
$
— $
470,660
$
88,876
$
(51,718)
$
(16,093)
$
— $
491,725
Impact of the adoption of new accounting
standards (3) .................................................
Adjusted balance at January 1, 2019............
Net income ...................................................
Other comprehensive income.......................
Cash dividends declared ($0.90 per share) ..
14,600 net shares of common stock sold by
directors' deferred compensation plan..........
797,003 shares of common stock
repurchased and other related costs..............
Share-based compensation expense .............
—
28,967,715
—
—
—
—
(797,003)
118,545
—
—
—
—
—
—
—
—
—
—
470,660
88,876
—
—
—
(416)
(22,793)
—
—
—
—
—
151
2,735
—
(51,718)
58,322
—
(25,706)
—
—
—
(3,100)
(19,193)
—
27,602
—
—
—
—
—
—
—
—
—
—
—
—
(3,100)
488,625
58,322
27,602
(25,706)
(416)
(22,793)
2,886
Balance at December 31, 2019...................
28,289,257
$
— $
447,602
$
91,611
$
(19,102)
$
8,409
$
— $
528,520
(1) Represents the impact of the adoption of Accounting Standards Update ("ASU") ASU 2016-01.
(2) Represents the impact of the adoption of ASU 2018-02.
(3) Represents the impact of the adoption of ASU 2017-12. See Note 1 to the consolidated financial statements for additional information
See accompanying notes to consolidated financial statements.
84
CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income ................................................................................................................................. $
58,322
$
59,486
$
41,204
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for loan and lease losses .............................................................................
Depreciation and amortization of premises and equipment ....................................................
Non-cash lease expense...........................................................................................................
Cash flows from operating leases............................................................................................
Amortization of mortgage servicing rights and core deposit premium...................................
Write down of other real estate, net of loss (gain) on sale ......................................................
Net amortization and accretion of premium/discounts on investment securities ....................
Share-based compensation expense ........................................................................................
Net loss (gain) on sales of investment securities.....................................................................
Net gain on sales of residential mortgage loans ......................................................................
Proceeds from sales of loans held for sale ..............................................................................
Origination of loans held for sale ............................................................................................
Equity in earnings of unconsolidated subsidiaries ..................................................................
Distributions from unconsolidated subsidiaries ......................................................................
Net increase in cash surrender value of bank-owned life insurance .......................................
Deferred income tax expense (benefit) ...................................................................................
Net tax benefits from share-based compensation....................................................................
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 available-for-sale investment securities....................
Proceeds from sales of available-for-sale investment securities ................................................
Purchases of available-for-sale investment securities ................................................................
Redemption of MasterCard Class B common stock ..................................................................
Proceeds from maturities of and calls on held-to-maturity investment securities .....................
Loan (originations) and payments, net .......................................................................................
Purchases of loan portfolios .......................................................................................................
Proceeds from sales of foreclosed loans and other real estate ...................................................
Proceeds from bank-owned life insurance death benefits ..........................................................
Purchases of premises and equipment........................................................................................
Distributions from unconsolidated subsidiaries .........................................................................
Contributions to unconsolidated subsidiaries.............................................................................
Proceeds from redemption (purchases) of FHLB stock .............................................................
6,317
6,139
284
(6,230)
2,460
252
9,271
2,735
(36)
(4,128)
207,686
(205,994)
(257)
246
(3,259)
(3,965)
253
2,096
72,192
252,079
53,935
(55,011)
2,555
—
(237,493)
(140,085)
140
1,043
(7,197)
622
(1,222)
1,662
(1,124)
6,288
—
—
3,865
431
10,907
2,778
279
(4,085)
240,137
(226,363)
(233)
685
(2,248)
7,874
144
4,665
103,486
143,876
10,014
(85,366)
—
42,722
(250,188)
(58,564)
46
1,101
(3,225)
622
(3,297)
(8,884)
(2,674)
6,441
—
—
4,962
(192)
11,674
1,918
1,410
(4,069)
319,556
(299,942)
(602)
—
(3,940)
32,206
544
(11,712)
96,784
169,472
114,536
(356,887)
—
25,237
(166,051)
(83,784)
286
3,240
(6,531)
658
(114)
3,811
Net cash used in investing activities..................................................................................
(128,972)
(211,143)
(296,127)
Cash flows from financing activities:
Net increase (decrease) in deposits ............................................................................................
Proceeds from long-term debt ....................................................................................................
Repayments of long-term debt ...................................................................................................
Net (decrease) increase in FHLB advances and other 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.........................................................................
173,533
—
(20,619)
(47,000)
(25,706)
(22,793)
151
57,566
(9,864)
50,000
(20,619)
165,000
(24,143)
(32,824)
—
127,550
348,153
—
—
(103,000)
(21,299)
(26,559)
—
197,295
85
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Net increase (decrease) in cash and cash equivalents ..........................................................
786
19,893
(2,048)
Cash and cash equivalents at beginning of year.........................................................................
102,186
82,293
Cash and cash equivalents at end of year............................................................................... $
102,972
$
102,186
$
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ..................................................................................................................................... $
33,072
$
23,943
$
Income taxes............................................................................................................................
24,101
23
Supplemental non-cash disclosures:
Net change in common stock held by directors' deferred compensation plan ........................... $
Net reclassification of loans to foreclosed loans and other real estate .......................................
Net transfer of investment securities from held-to-maturity to available-for-sale .....................
Right-of-use lease assets obtained in exchange for lease liabilities ...........................................
$
416
142
(149,042)
56,779
504
$
40
—
—
84,341
82,293
12,717
8,401
385
154
—
—
See accompanying notes to consolidated financial statements.
86
CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2019, 2018, and 2017
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 77 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, home equity
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, safe deposit boxes, international banking services,
night depository facilities, foreign exchange 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. and 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.
Accounting Policy Change and Reclassification
During the fourth quarter of 2018, we voluntarily changed our accounting policy for investments in low income housing tax
credit ("LIHTC") partnerships from the cost method to the proportional amortization method using the practical expedient
available under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 323,
"Investments - Equity Method and Joint Ventures", which permits an investor to amortize the initial cost of the investment in
proportion to only the tax credits allocated to the investor. We believe the proportional amortization method is preferable
because it better reflects the economics of an investment that is made for the primary purpose of receiving tax credits and other
tax benefits. In addition to a change in the timing of the recognition of amortization expense on LIHTC investments,
amortization expense on LIHTC investments is now reflected in the income tax expense line, which provides users a better
understanding of the nature of the returns of such investments, instead of in other operating expenses on the consolidated
statements of income. The change did not impact net income, the consolidated balance sheets and the consolidated statements
of cash flows.
87
As a result of this accounting policy change, the following presents the effect of the change on our consolidated statements of
income for periods prior to the fourth quarter of 2018 that were retrospectively adjusted:
(dollars in thousands)
Unadjusted
Adjusted
Change
Unadjusted
Adjusted
Change
Other operating expense ............................................................................. $
135,687
$ 134,682
$
(1,005) $
131,817
$ 131,073
$
(744)
Income tax expense.....................................................................................
Net income ..................................................................................................
17,753
59,486
18,758
59,486
1,005
—
33,852
41,204
34,596
41,204
744
—
December 31, 2018
December 31, 2017
Impact of
Impact of
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 met the consolidation requirements under Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC") 810, "Consolidation". The bank also concluded that the
entity met the definition of a variable interest entity and that we were the primary beneficiary of the variable interest entity.
Accordingly, the investment was consolidated into our financial statements as of December 31, 2017. One Hawaii HomeLoans,
LLC was terminated in 2017, and final payment of taxes and distributions to members was made in March 2018.
We have 50% ownership interests in three other mortgage loan origination and brokerage companies which are accounted for
using the equity method and are included in investment in unconsolidated subsidiaries: Gentry HomeLoans, LLC, Haseko
HomeLoans, LLC and Island Pacific HomeLoans, LLC. We also had a 50% ownership in Pacific Access Mortgage, LLC,
which was terminated in 2017, and final payment of taxes and distributions to members was made in March 2018.
As previously discussed we have LIHTC investments that are now accounted for under the proportional amortization method
and are included in investment in unconsolidated subsidiaries. We also have non-controlling equity investments in affiliates that
are accounted for under the cost method and are also included in investment in unconsolidated subsidiaries.
Our investments in unconsolidated subsidiaries accounted for under the equity, proportional amortization and cost methods
were $0.2 million, $15.3 million and $1.6 million, respectively, at December 31, 2019 and $0.2 million, $11.6 million and $2.2
million, respectively, at December 31, 2018. 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 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, mortgage servicing rights and the related amortization thereon,
pension liability and the fair value of certain financial instruments.
88
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from financial institutions, interest-bearing deposits in other financial
institutions, federal funds sold and all highly liquid investments with maturities of three months or less at the time of purchase.
Net cash flows are reported for customer loan and deposit transactions, interest-bearing deposits in other financial institutions,
and federal funds purchased and repurchase agreements.
Investment Securities
Investments in debt securities are designated as trading, available-for-sale ("AFS"), or held-to-maturity (HTM"). Investments in
debt securities are designated as HTM only if we have the positive intent and ability to hold these securities to maturity. HTM
securities are reported at amortized cost. Trading securities are reported at fair value, with changes in fair value included in net
income. Debt securities not classified as HTM or trading are classified as AFS and are reported at fair value, with net
unrealized gains and losses, net of applicable taxes, included in accumulated other comprehensive income (loss) ("AOCI").
Equity securities with readily determinable fair values are carried at fair value, with changes in fair value included in net
income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus
changes resulting from observable price changes in orderly transactions for the identical or a similar investment.
The Company classifies its investment securities portfolio into the following major security types: mortgage-backed securities
(“MBS”) and other debt securities. The Company’s MBS portfolio is comprised of primarily of residential MBS issued by
United States of America ("U.S.") government entities and agencies. These securities are either explicitly or implicitly
guaranteed by an agency of the U.S. government, are highly rated by major rating agencies and have a long history of no credit
losses. The remainder of the MBS portfolio are commercial MBS issued by U.S government entities and agencies (which shall
have a minimum credit rating of BBB) and non-agency residential and commercial MBS (which shall meet minimum internal
credit guidelines).
The Company’s other debt securities portfolio is comprised of obligations issued by U.S. government entities and agencies,
obligations issued by states and political subdivisions (which shall have a minimum credit rating of BBB), and corporate bonds
(which shall have a minimum credit rating of BBB-).
Interest income on investment securities includes amortization of premiums and accretion of discounts. We amortize premiums
to the earliest call date. We accrete discounts associated with investment securities using the interest method over the life of the
respective security instrument. Gains and losses on the sale of investment securities are recorded on the trade date and
determined using the specific identification method.
Management evaluates investment securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis, and
more frequently when economic or market conditions warrant such an evaluation, to determine whether the unrealized losses
on investment securities, or the decline in their value below amortized cost is "other-than-temporary." 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. In conducting this assessment, for debt securities in an unrealized loss position 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;
Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an
unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to
sell is met, the decline in value is determined to be other-than-temporary, the value of the security is reduced and a
corresponding impairment charge to earnings is recognized for anticipated credit losses.
For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as
follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors,
89
which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of
the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is
recognized through earnings.
The declines in market value of investment securities at December 31, 2019 and 2018 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.
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 that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the
principal amount outstanding, net of unamortized deferred loan origination fees and costs and unamortized purchase premiums
and discounts. Net deferred loan origination fees and costs are recognized over the life of the related loan as an adjustment to
yield and are amortized using the interest method over the contractual terms of the underlying loan, adjusted for actual
prepayments. Unamortized loan origination fees and costs on loans paid in full are recognized as a component of interest
income on loans. Purchase premiums and discounts are generally amortized into interest income using the interest method over
the contractual terms of the underlying loans.
Interest income on loans is accrued at the contractual rate of interest on the unpaid principal balance. Accrued interest
receivable on loans is reported together with accrued interest on investments in AFS debt securities on the consolidated balance
sheets.
90
Nonaccrual Loans
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 and the loan is restored
to accrual status. 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 reasonably assured.
Troubled Debt Restructuring (“TDR”)
A loan is accounted for and reported as a TDR when, for economic or legal reasons, the Company grants a concession to a
borrower experiencing financial difficulty that it would not otherwise consider. A restructuring that results in only an
insignificant delay in payment is not considered a concession. A delay may be considered insignificant if the payments subject
to the delay are insignificant relative to the unpaid principal or collateral value and the contractual amount due, or the delay in
timing of the restructured payment period is insignificant relative to the frequency of payments, the debt’s original contractual
maturity or original expected duration.
TDRs that are performing and on accrual status as of the date of the modification remain on accrual status. TDRs that are
nonperforming as of the date of modification generally remain as nonaccrual until the prospect of future payments in
accordance with the modified loan agreement is reasonably assured, generally demonstrated when the borrower maintains
compliance with the restructured terms for a predetermined period, normally at least six months. TDRs with temporary below-
market concessions remain designated as a TDR regardless of the accrual or performance status until the loan is paid off.
However, if the TDR loan has been modified in a subsequent restructure with market terms and the borrower is not currently
experiencing financial difficulty, then the loan may be de-designated as a TDR.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses (the "Allowance") is a valuation allowance 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 incurred credit losses inherent in our loan and lease portfolio at the balance sheet
date. 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. 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.
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.
91
General Allowance
In determining the general allowance component of the Allowance, the Company utilizes a comprehensive approach to segment
the loan portfolio into homogeneous groups. The Company's methodology segments the portfolio generally by FDIC Call
Report codes in eleven segments, and is consistent with general 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 and
auto dealer purchased 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 extends its look back period with each additional quarter passing.
As of December 31, 2019, the look back period was ten years.
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 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 and 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.
92
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.
Core Deposit Premium and Mortgage Servicing Rights
Our core deposit premium was amortized over 14 years which approximated the estimated life of the purchased deposits. 2018
was the final year of amortization. The carrying value of our core deposit premium was periodically evaluated to estimate the
remaining periods of benefit. If these periods of benefit were determined to be less than the remaining amortizable life, an
adjustment to reflect such shorter life would have been made.
Mortgage servicing rights are recorded when loans are sold to third-parties with servicing of those loans retained and we
classify and pool our mortgage servicing rights into buckets of homogeneous characteristics. We utilize the amortization
method to measure our mortgage servicing rights. Under the amortization method, we amortize our mortgage servicing rights in
proportion to and over the period of net servicing income. Income generated as the result of new mortgage servicing rights is
reported as gains on sales of loans and is a component of mortgage banking income in the other operating income section of
our consolidated statements of income. Amortization of the servicing rights is also reported as a component of mortgage
banking income. Ancillary income is recorded in other income.
Initial fair value of the servicing right is calculated by a discounted cash flow model prepared by a third-party service provider
based on market value assumptions at the time of origination and we assess the servicing right for impairment using current
market value assumptions at each reporting period. Critical assumptions used in the discounted cash flow model include
mortgage prepayment speeds, discount rates, costs to service and ancillary income. Variations in our assumptions could
materially affect the estimated fair values. Changes to our assumptions are made when current trends and market data indicate
that new trends have developed. Current market value assumptions based on loan product types (fixed-rate, adjustable-rate and
balloon loans) include average discount rates, servicing cost and ancillary income. Many of these assumptions are subjective
and require a high level of management judgment. Our mortgage servicing rights portfolio and valuation assumptions are
periodically reviewed by management.
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 mortgage servicing rights quarterly or 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
the 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.
Federal Home Loan Bank Stock
We are 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.
93
Non-Controlling Interest
Non-controlling interest was comprised of capital and undistributed profits of the member of One Hawaii HomeLoans, LLC,
other than the bank. One Hawaii HomeLoans, LLC was terminated in 2017, and final payment of taxes and distributions to
members was made in March 2018. As a result, non-controlling interest on our consolidated balance sheet totaled $0 at
December 31, 2019 and December 31, 2018.
Share-Based Compensation
Share-based compensation cost is measured at the grant date, based on the estimated fair value of the award. We use the Black-
Scholes option-pricing model to determine the fair-value of stock options, and the market price of the Company's common
stock at the grant date for restricted stock awards. Share-based compensation is recognized as expense over the employee's
requisite service period, generally defined as the vesting period. For awards with graded vesting, we recognize compensation
expense on a straight-line basis over their respective vesting period. The Company's accounting policy is to recognize
forfeitures as they occur. 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
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 awards. 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 needs 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.
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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.
Accounting Standards Adopted in 2019
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." 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 arrangements. The ASU establishes a right-of-use ("ROU") model that requires a lessee to recognize
a ROU lease asset and lease liability on the balance sheet for all leases with a term of longer than 12 months. The FASB has
also made available several practical expedients to assist entities with the adoption of ASU 2016-02. Among other things, these
practical expedients require no reassessment of whether existing contracts are or contain leases as well as no reassessment of
lease classification for current leases. In July 2018, the FASB released ASU 2018-11, "Leases (Topic 842): Targeted
Improvements," which adds an additional practical expedient that allows entities to elect not to recast comparative periods
presented when transitioning to Topic 842. The Company elected to adopt the practical expedient allowed under ASU 2018-11.
During the year ended December 31, 2018, the Company engaged a software vendor to assist in the implementation of ASU
2016-02. The Company adopted ASU 2016-02 effective January 1, 2019 using the modified retrospective approach and
recorded a ROU lease asset and corresponding lease liability on the Company's consolidated balance sheet of $55.9 million for
its operating leases where it is a lessee. There was no impact to the Company's financial statements for its leases where it is a
lessor. As of December 31, 2019, the ROU lease asset and lease liability was $52.3 million and $52.6 million, respectively. See
Note 19 - Operating Leases for required disclosures on this new standard.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting
for Hedging Activities." ASU 2017-12 was issued to better align an entity’s risk management activities and financial reporting
for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging
relationships and the presentation of hedge results. The FASB believes that such amendments will: 1) improve the transparency
of information about an entity’s risk management activities and 2) simplify the application of hedge accounting. The ASU
allows an entity that qualifies for the last-of-layer method a one-time opportunity to reclassify securities from the held-to-
maturity category to the available-for-sale category. The Company adopted ASU 2017-12 effective January 1, 2019 and
transferred its entire held-to-maturity investment securities portfolio with a fair value of $144.3 million at January 1, 2019 to
the available-for-sale portfolio. On the date of adoption, the Company recorded a cumulative effect adjustment related to the
unrealized loss on the investment securities transferred, which decreased available-for-sale investments by $4.2 million,
increased deferred tax assets by $1.1 million, and decreased opening accumulated other comprehensive income (loss) ("AOCI")
by $3.1 million. The ASU did not have a material impact on our current derivative activities.
In August 2018, the FASB issued ASU 2018-15, "Intangibles—Goodwill and Other— Internal-Use Software (Subtopic
350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service
Contract," which requires an entity in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to
follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or
expense as incurred. Capitalized implementation costs should be presented in the same line item on the balance sheet as
amounts prepaid for the hosted service, if any (generally as an “other asset”). The capitalized costs will be amortized over the
term of the hosting arrangement, with the amortization expense being presented in the same income statement line item as the
fees paid for the hosted service. ASU 2018-15 is effective for the Company's reporting period beginning January 1, 2020 and
early adoption is permitted. The Company early adopted ASU 2018-15 during the second quarter of 2019. The adoption of the
ASU did not have a material impact on our consolidated financial statements.
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Impact of Other Recently Issued Accounting Pronouncements on Future Filings
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments," and subsequent amendments to the guidance, ASU 2019-04 in April 2019 and ASU 2019-05 in May
2019. The standard significantly changes how entities will measure credit losses for most financial assets and certain other
instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism
that today’s “incurred loss” guidance delays the recognition of credit losses on loans, leases, held-to-maturity debt securities,
loan commitments, and financial guarantees, and instead provides for a current expected credit loss (“CECL”) approach to
determine the allowance for credit losses. CECL 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. In
addition, this guidance modifies the accounting treatment for other-than-temporary impairment for available-for-sale debt
securities. Organizations will continue to use judgment to determine which loss estimation methods are appropriate for their
circumstances. This guidance requires entities to record a cumulative effect adjustment to the consolidated balance sheet as of
the beginning of the first reporting period in which the guidance is effective. However, an organization may elect to phase in
the regulatory capital impact over a three-year transition period if adoption of the new standard results in a reduction of
retained earnings. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2019, with earlier adoption permitted. As such, the Company will implement CECL for the reporting period
beginning January 1, 2020 and intends to elect to phase in the regulatory capital impact over a three-year transition period. The
new guidance will require significant operational changes, particularly in existing processes, data collection and analysis.
The Company has formed a steering committee that is responsible for oversight of the Company’s implementation strategy for
compliance with provisions of the new standard. The Company has also established a project management governance process
to manage the implementation across affected disciplines. To date, the Company has established appropriate loan pools by
segment and sub-segment, developed internal loss driver models, and has leveraged a third-party software solution to measure
expected losses under CECL. As part of this process, the Company has also engaged an additional third party specializing in
economic forecasting to enable it to incorporate reasonable and supportable forecasts in its process. Finally, the Company has
developed and enhanced internal controls, had its CECL framework independently validated by a third-party expert, and has
performed parallel runs. While the CECL implementation effort is near completion, the Company is unable to determine the
final adoption impact on our consolidated financial statements as certain internal controls over the calculation and inputs have
not yet fully operated. Additional work will be completed on internal controls over significant assumptions utilized. However,
based on preliminary analyses completed thus far, management estimates its allowance for credit losses, including reserves for
unfunded commitments, to increase by roughly 0%-15%. The foregoing range is based on the Company's calculation models
and the underlying assumptions embedded in its methodology, including economic forecasts and sensitivity analyses. The final
calculation, including assumptions, economic forecasts and inputs are subject to change based on the final completion of all
internal controls and related testing.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to
the Disclosure Requirements for Fair Value Measurement." The ASU is part of the FASB's disclosure framework project to
improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the
information required by generally accepted accounting principles. The ASU modifies disclosure requirements on fair value
measurements in Topic 820 and is effective for the Company's reporting period beginning January 1, 2020. Early adoption is
permitted. Based on preliminary evaluation, the ASU will not have a material impact on disclosures in our consolidated
financial statements.
In August 2018, the FASB issued ASU 2018-14, "Compensation—Retirement Benefits—Defined Benefit Plans—General
(Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans." Like ASU
2018-13, this ASU is part of the FASB's disclosure framework project. This ASU modifies disclosure requirements for
employers that sponsor defined benefit pension or other postretirement plans. The ASU is effective for the Company's
reporting period beginning January 1, 2021. Early adoption is permitted. Based on preliminary evaluation, the ASU will not
have a material impact on disclosures in our consolidated financial statements.
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, 2019 and 2018 was $58.7 million and $62.9 million, respectively.
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3. INVESTMENT SECURITIES
A summary of our available-for-sale investment securities as of December 31, 2019 and 2018 are as follows:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in thousands)
Fair
Value
December 31, 2019
Available-for-Sale:
Debt securities:
States and political subdivisions............................................................... $
119,755
$
2,303
$
(40) $
122,018
Corporate securities ..................................................................................
30,277
U.S. Treasury obligations and direct obligations of U.S Government
agencies ....................................................................................................
40,769
Mortgage-backed securities:
Residential - U.S. GSEs .........................................................................
673,918
Residential - Non-government sponsored entities ("Non-GSEs").........
Commercial - U.S. GSEs and agencies..................................................
36,377
80,773
Commercial - Non-GSEs .......................................................................
134,676
252
10
6,003
830
1,198
3,141
—
30,529
(398)
40,381
(2,099)
(16)
(746)
—
677,822
37,191
81,225
137,817
Total available-for-sale investment securities .................................. $
1,116,545
$
13,737
$
(3,299) $
1,126,983
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in thousands)
Fair
Value
December 31, 2018
Held-to-Maturity:
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities ("GSEs")................... $
Commercial - U.S. GSEs..........................................................................
83,436
65,072
Total held-to-maturity investment securities .................................... $
148,508
$
$
19
—
19
$
$
(3,174) $
(1,081)
80,281
63,991
(4,255) $
144,272
Available-for-Sale:
Debt securities:
States and political subdivisions............................................................... $
174,114
$
1,035
$
(1,475) $
173,674
Corporate securities ..................................................................................
55,259
U.S. Treasury obligations and direct obligations of U.S Government
agencies ....................................................................................................
Mortgage-backed securities:
Residential - U.S. GSEs .........................................................................
Residential - Non-government sponsored entities ("Non-GSEs").........
Commercial - U.S. GSEs and agencies..................................................
Commercial - Non-GSEs .......................................................................
33,257
736,175
41,245
53,014
134,867
—
—
369
337
—
1,013
(410)
(683)
(19,492)
(464)
(1,531)
(1,152)
54,849
32,574
717,052
41,118
51,483
134,728
Total available-for-sale investment securities .................................. $
1,227,931
$
2,754
$
(25,207) $
1,205,478
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The amortized cost and fair value of our equity investment securities is as follows:
(dollars in thousands)
December 31, 2019
Equity securities .................................................................................................................................
December 31, 2018
Equity securities .................................................................................................................................
Amortized Cost
Fair Value
935
826
1,127
826
As discussed in Note 1 - Summary of Significant Accounting Policies, on January 1, 2019 in conjunction with the adoption of
ASU 2017-12, the Company transferred all of its held-to-maturity investment securities with an amortized cost of $148.5
million and fair value of $144.3 million to its available-for-sale investment securities portfolio.
The amortized cost and estimated fair value of our investment securities at December 31, 2019 by contractual maturity are
shown below. Actual maturities may differ from contractual maturities as issuers have the right to call or prepay obligations
with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
December 31, 2019
Amortized Cost
Fair Value
(Dollars in thousands)
Available-for-Sale:
Due in one year or less ................................................................................................................ $
50,356
$
Due after one year through five years .........................................................................................
Due after five years through ten years ........................................................................................
Due after ten years.......................................................................................................................
Mortgage-backed securities
Residential - U.S. GSEs .........................................................................................................
Residential - Non-government sponsored entities ("Non-GSEs").........................................
Commercial - U.S. GSEs and agencies..................................................................................
Commercial - Non-GSEs .......................................................................................................
46,846
62,562
31,037
673,918
36,377
80,773
134,676
Total available-for-sale investment securities .................................................................. $
1,116,545
$
50,681
47,258
63,695
31,294
677,822
37,191
81,225
137,817
1,126,983
In the third quarter of 2019, we sold six available-for-sale securities totaling $53.9 million at a net realized gain on sale of $36
thousand.
In the fourth quarter of 2018, we sold two available-for-sale corporate securities totaling $10.0 million at a net realized loss on
sale of $0.3 million.
Investment securities of $0.72 billion and $0.98 billion at December 31, 2019 and 2018, respectively, were pledged to secure
public funds on deposit and other long-term and short-term borrowings.
98
At December 31, 2019 and 2018, there were no holdings of securities of any one issuer, other than the U.S. Government and its
agencies, in an amount greater than 10% of shareholders' equity.
There were a total of 81 and 336 securities in an unrealized or unrecognized loss position at December 31, 2019 and 2018,
respectively. The following table summarizes securities which were in an unrealized or unrecognized loss position at
December 31, 2019 and 2018, aggregated by major security type and length of time in a continuous unrealized or unrecognized
loss position:
Description of Securities
December 31, 2019
Debt securities:
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(Dollars in thousands)
States and political subdivisions ............................ $
1,754
$
(9) $
801
$
(31) $
2,555
$
Corporate securities ...............................................
—
—
—
—
—
(40)
—
U.S. Treasury obligations and direct obligations
of U.S Government agencies .................................
18,882
(143)
19,031
(255)
37,913
(398)
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities
("GSEs") ................................................................
Residential - Non-government sponsored entities
("Non-GSEs"). .......................................................
Commercial - U.S. GSEs and agencies..................
54,335
(283)
214,295
(1,816)
268,630
(2,099)
8,206
32,067
(16)
(746)
—
—
—
—
8,206
32,067
(16)
(746)
Total temporarily impaired securities.................. $
115,244
$
(1,197) $
234,127
$
(2,102) $
349,371
$
(3,299)
Description of Securities
December 31, 2018
Debt securities:
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(Dollars in thousands)
States and political subdivisions ............................ $
38,099
$
(157) $
49,505
$
(1,318) $
87,604
$
(1,475)
Corporate securities ...............................................
49,729
U.S. Treasury obligations and direct obligations
of U.S Government agencies .................................
30,029
(250)
(613)
5,120
2,545
(160)
54,849
(70)
32,574
(410)
(683)
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities
("GSEs") ................................................................
Residential - Non-government sponsored entities
("Non-GSEs"). .......................................................
Commercial - U.S. GSEs and agencies..................
Commercial - Non-GSEs .......................................
88,957
(1,229)
666,685
(21,437)
755,642
(22,666)
—
13,973
33,847
—
(247)
(233)
24,515
101,500
46,680
(464)
(2,365)
(919)
24,515
115,473
80,527
(464)
(2,612)
(1,152)
Total temporarily impaired securities.................. $
254,634
$
(2,729) $
896,550
$
(26,733) $ 1,151,184
$
(29,462)
The unrealized losses on the Company's investment securities are primarily attributable to changes in interest rates and
volatility in the credit and financial markets. Investment securities are evaluated on at least a quarterly basis, and include
evaluating the changes in the investment securities' ratings issued by rating agencies and changes in the financial condition of
the issuer, and for mortgage related securities, delinquency and loss information with respect to the underlying collateral,
changes in levels of subordination for the Company's particular position within the repayment structure, and remaining credit
enhancement as compared to projected credit losses of the security. All of these investment securities continue to be investment
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grade rated by one or more major rating agencies. 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.
Visa and MasterCard Class B Common Stock
As of December 31, 2019, the Company owns 34,631 shares of Class B common stock of Visa, Inc. ("Visa"). These shares
were received in 2008 as part of Visa's initial public offering ("IPO"). These shares are transferable only under limited
circumstances until they can be converted into shares of the publicly traded Class A common stock. This conversion will not
occur until the resolution of certain litigation, which is indemnified by Visa members. Since its IPO, Visa has funded a
litigation reserve to settle these litigation claims. At its discretion, Visa may continue to increase the litigation reserve based
upon a change in the conversion ratio of each member bank’s restricted Class B common stock to unrestricted Class A common
stock. Due to the existing transfer restriction and the uncertainty of the outcome of the Visa litigation, the Company has
determined that the Visa Class B common stock does not have a readily determinable fair value and chooses to carry the shares
on the Company's consolidated balance sheets at zero cost basis.
During the first quarter of 2019, the Company converted the 11,170 shares of Class B common stock of MasterCard, Inc.
("MasterCard") it received during their initial public offering to an equal number of Class A common stock and sold the shares
for $2.6 million. The shares were carried on the Company's consolidated balance sheets at zero cost basis and the proceeds
received were recorded as a gain in other operating income - other in the Company's consolidated statements of income. The
Company no longer owns any shares of MasterCard Class B common stock.
4. LOANS AND LEASES
Loans and leases, excluding loans held for sale, consisted of the following as of December 31, 2019 and 2018:
December 31,
2019
2018
(Dollars in thousands)
Commercial, financial and agricultural .............................................................................................. $
570,089
$
581,177
Real estate:
Construction.....................................................................................................................................
Residential mortgage .......................................................................................................................
Home equity.....................................................................................................................................
Commercial mortgage .....................................................................................................................
Consumer............................................................................................................................................
Leases .................................................................................................................................................
Subtotal.......................................................................................................................................
Net deferred costs ............................................................................................................................
96,139
1,595,801
490,239
1,124,911
569,516
—
4,446,695
2,845
67,269
1,424,384
468,966
1,041,685
492,268
124
4,075,873
2,493
Total loans and leases ................................................................................................................. $
4,449,540
$
4,078,366
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, financial and agricultural (and
leases) segment's predominant risk characteristics are the cash flows of the business we lend to, the global cash flows and
liquidity of the guarantors of such losses, as well as economic and market conditions. The consumer segment's predominant
risk characteristics are employment and income levels as they relate to the consumer.
During the year ended December 31, 2019, we foreclosed on one portfolio loan with a carrying value of $142 thousand, and
recorded a gain on the transfer of $22 thousand. We did not transfer any loans to the held-for-sale category during the year
ended December 31, 2019. In addition, we did not sell any other portfolio loans during the year ended December 31, 2019.
In 2019, we purchased an auto loan portfolio totaling $30.2 million which included a $0.6 million premium over the $29.6
million outstanding balance. At the time of purchase, the auto loans had a weighted average remaining term of 56 months and a
weighted average yield, net of servicing costs, of 6.15%. In 2019, we also purchased unsecured consumer loan portfolios
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totaling $109.9 million which included a $2.3 million discount to the $112.2 million outstanding balance. At the time of
purchase, the unsecured consumer loan portfolios had a weighted average remaining term of 76 months and a weighted average
yield, net of servicing costs, of 6.24%.
In 2018, we purchased an auto loan portfolio totaling $20.6 million which included a $0.1 million premium over the $20.5
million outstanding balance. At the time of purchase, the auto loans had a weighted average remaining term of 63 months and a
weighted average yield, net of the premium paid and servicing costs, of 3.89%. In 2018, we also purchased an unsecured
consumer loan portfolio totaling $38.0 million, which represented the outstanding balance at the time of purchase. At the time
of purchase, the unsecured consumer loans had a weighted average remaining term of 41 months and a weighted average yield,
net of servicing costs, of 6.99%.
During the year ended December 31, 2018, we foreclosed on one portfolio loan with a carrying value of $40 thousand. We did
not transfer any loans to the held-for-sale category during the year ended December 31, 2018. In addition, we did not sell any
portfolio loans during the year ended December 31, 2018.
In the normal course of business, our bank makes loans to certain directors, executive officers and their affiliates. These loans
are made in the ordinary course of business at normal credit terms. As of December 31, 2019 and December 31, 2018, related
party loan balances were $36.3 million and $34.0 million, respectively.
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, 2019 and 2018:
Real Estate
Comml.,
Fin. & Ag.
Constr.
Resi.
Mortgage
Home
Equity
Comml.
Mortgage
Consumer
Leases
Total
(Dollars in thousands)
December 31, 2019
Allowance:
Individually evaluated for impairment... $
Collectively evaluated for impairment...
Total ending balance ........................... $
218
7,918
8,136
$
$
— $
— $
— $
— $
1,792
1,792
13,327
$
13,327
$
4,206
4,206
11,113
$
11,113
$
17
9,380
9,397
$
$
— $
—
— $
235
47,736
47,971
Loans and leases:
Individually evaluated for impairment... $
602
$
— $
6,516
$
92
$
1,839
$
17
$
— $
9,066
Collectively evaluated for impairment...
Subtotal ...............................................
Net deferred costs (income) ...................
569,487
570,089
215
96,139
96,139
1,589,285
1,595,801
490,147
490,239
1,123,072
1,124,911
569,499
569,516
(285)
4,000
495
(1,496)
(84)
— 4,437,629
— 4,446,695
—
2,845
Total ending balance ........................... $ 570,304
$
95,854
$ 1,599,801
$ 490,734
$ 1,123,415
$ 569,432
$
— $ 4,449,540
101
Real Estate
Comml.,
Fin. & Ag.
Constr.
Resi.
Mortgage
Home
Equity
Comml.
Mortgage
Consumer
Leases
Total
(Dollars in thousands)
December 31, 2018
Allowance:
Individually evaluated for impairment... $
— $
— $
— $
— $
— $
— $
Collectively evaluated for impairment...
Total ending balance ........................... $
8,027
8,027
$
1,202
1,202
14,349
$
14,349
$
3,788
3,788
13,358
$
13,358
$
7,192
7,192
$
— $
—
— $
—
47,916
47,916
Loans and leases:
Individually evaluated for impairment... $
220
$
2,273
$
10,075
$
275
$
2,348
$
— $
— $
15,191
Collectively evaluated for impairment...
Subtotal ...............................................
Net deferred costs (income) ...................
580,957
581,177
483
64,996
67,269
1,414,309
1,424,384
468,691
468,966
1,039,337
1,041,685
492,268
492,268
(342)
3,821
—
(1,407)
(62)
124
124
—
4,060,682
4,075,873
2,493
Total ending balance ........................... $ 581,660
$
66,927
$ 1,428,205
$ 468,966
$ 1,040,278
$ 492,206
$
124
$ 4,078,366
The following table presents by class, impaired loans as of December 31, 2019 and 2018:
December 31, 2019
December 31, 2018
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 and agricultural................................... $
246
$
135
$
— $
330
$
220
$
Real estate:
Construction.........................................................................
Residential mortgage ...........................................................
Home equity.........................................................................
Commercial mortgage..........................................................
Total impaired loans with no related Allowance recorded......
Impaired loans with an Allowance recorded:
Commercial, financial and agricultural...................................
Consumer ................................................................................
Total impaired loans with an Allowance recorded..................
—
7,230
92
1,839
9,407
467
17
484
—
6,516
92
1,839
8,582
467
17
484
Total impaired loans....................................................... $
9,891
$
9,066
$
—
—
—
—
—
218
17
235
235
3,076
11,019
275
2,348
17,048
—
—
—
2,273
10,075
275
2,348
15,191
—
—
—
$
17,048
$
15,191
$
—
—
—
—
—
—
—
—
—
—
102
The following table presents by class, the average recorded investment and interest income recognized on impaired loans
during the years ended December 31, 2019, 2018 and 2017:
Year Ended
Year Ended
Year Ended
December 31, 2019
December 31, 2018
December 31, 2017
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars in thousands)
Commercial, financial and agricultural ............ $
214
$
9
$
435
$
24
$
1,272
$
Real estate:
Construction...................................................
Residential mortgage .....................................
Home equity...................................................
Commercial mortgage....................................
Consumer..........................................................
1,018
8,322
277
2,098
3
62
905
13
86
—
2,436
12,681
482
3,368
—
111
662
—
179
—
2,760
17,122
1,213
4,893
—
24
99
1,843
69
313
—
Total .......................................................... $
11,932
$
1,075
$
19,402
$
976
$
27,260
$
2,348
For the years ended December 31, 2019, 2018 and 2017, the amount of interest income recognized on impaired loans within the
period that the loans were impaired were primarily related to loans modified in a troubled debt restructuring ("TDR") that were
on accrual status. For the years ended December 31, 2019, 2018 and 2017, the amount of interest income recognized using a
cash-based method of accounting during the period that the loans were impaired was not material.
Foreclosure Proceedings
The Company had $0.6 million and $0.7 million of residential mortgage loans collateralized by residential real estate property
that were in the process of foreclosure at December 31, 2019 and 2018, 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, 2019 and 2018:
Accruing
Loans
30 - 59
Days
Past Due
Accruing
Loans
60 - 89
Days
Past Due
Accruing
Loans
90+
Days
Past Due
Nonaccrual
Loans
Total
Past Due
and
Nonaccrual
Loans and
Leases Not
Past Due
Total
(Dollars in thousands)
December 31, 2019
Commercial, financial and agricultural.... $
476
$
865
$
— $
467
$
1,808
$
568,496
$
570,304
Real estate:
Construction..........................................
Residential mortgage ............................
Home equity..........................................
Commercial mortgage...........................
Consumer .................................................
643
1,830
759
—
3,223
—
589
207
397
943
—
724
—
—
286
—
979
92
—
17
643
4,122
1,058
397
4,469
95,211
95,854
1,595,679
1,599,801
489,676
490,734
1,123,018
1,123,415
564,963
569,432
Total ................................................ $
6,931
$
3,001
$
1,010
$
1,555
$
12,497
$
4,437,043
$
4,449,540
103
Accruing
Loans
30 - 59
Days
Past Due
Accruing
Loans
60 - 89
Days
Past Due
Accruing
Loans
90+
Days
Past Due
Nonaccrual
Loans
Total
Past Due
and
Nonaccrual
Loans and
Leases Not
Past Due
Total
(Dollars in thousands)
December 31, 2018
Commercial, financial and agricultural.... $
1,348
$
162
$
— $
— $
1,510
$
580,150
$
581,660
Real estate:
Construction..........................................
Residential mortgage ............................
Home equity..........................................
Commercial mortgage...........................
Consumer .................................................
Leases.......................................................
—
3,966
433
—
2,340
—
—
157
104
—
872
—
—
—
298
—
238
—
—
2,048
275
—
—
—
—
6,171
1,110
—
3,450
—
66,927
66,927
1,422,034
1,428,205
467,856
468,966
1,040,278
1,040,278
488,756
492,206
124
124
Total ................................................ $
8,087
$
1,295
$
536
$
2,323
$
12,241
$
4,066,125
$
4,078,366
Interest income totaling $3.1 million, $1.2 million, and $2.6 million was recognized on nonaccrual loans, including loans held
for sale, in 2019, 2018 and 2017, respectively. Additional interest income of $0.3 million, $0.4 million, and $0.4 million would
have been recognized in 2019, 2018 and 2017, respectively, had these loans been accruing interest throughout those periods.
Additionally, interest income of $0.3 million, $0.7 million, and $0.8 million was collected and recognized on charged-off loans
in 2019, 2018 and 2017, respectively.
Modifications
TDRs included in nonperforming assets at December 31, 2019 consisted of one Hawaii residential mortgage loan with a
principal balance of $0.3 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, 2018, TDRs included in nonperforming assets consisted of three loans with a
combined principal balance of $0.4 million.
There were $7.5 million of TDRs still accruing interest at December 31, 2019, none of which were more than 90 days
delinquent. At December 31, 2018, there were $12.9 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, 2019 and 2018.
104
The following table presents by class, information related to loans modified in a TDR during the years ended December 31,
2019, 2018 and 2017:
Real estate: Residential mortgage..................................................................
Total.............................................................................................................
Real estate: Residential mortgage..................................................................
Total.............................................................................................................
Real estate: Residential mortgage..................................................................
Total.............................................................................................................
Year Ended December 31, 2019
Number
of
Loans
Recorded
Investment
(as of period end)
Increase
in the
Allowance
(Dollars in thousands)
1
1
$
$
104
104
$
$
Year Ended December 31, 2018
Number
of
Loans
Recorded
Investment
(as of period end)
Increase
in the
Allowance
(Dollars in thousands)
3
3
$
$
575
575
$
$
Year Ended December 31, 2017
Number
of
Loans
Recorded
Investment
(as of period end)
Increase
in the
Allowance
(Dollars in thousands)
3
3
$
$
104
104
$
$
—
—
—
—
—
—
No loans were modified as a TDR within the previous twelve months that subsequently defaulted during the years ended
December 31, 2019, 2018 and 2017.
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.
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.
105
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, 2019 and 2018:
Pass
Special
Mention
Substandard
Loss
Subtotal
(Dollars in thousands)
Net
Deferred
Costs
(Income)
Total
December 31, 2019
Commercial, financial and agricultural ..... $
523,342
$
20,677
$
26,070
$
— $
570,089
$
215
$
570,304
Real estate:
Construction ...........................................
96,139
Residential mortgage..............................
1,593,072
Home equity ...........................................
490,147
Commercial mortgage ............................
1,094,364
Consumer...................................................
569,212
—
840
—
17,440
—
—
1,889
92
13,107
193
Total..................................................... $ 4,366,276
$
38,957
$
41,351
$
—
—
—
—
111
111
96,139
1,595,801
490,239
1,124,911
569,516
(285)
4,000
495
95,854
1,599,801
490,734
(1,496)
1,123,415
(84)
569,432
$ 4,446,695
$
2,845
$ 4,449,540
Pass
Special
Mention
Substandard
Loss
Subtotal
(Dollars in thousands)
Net
Deferred
Costs
(Income)
Total
December 31, 2018
Commercial, financial and agricultural ..... $
552,706
$
7,961
$
20,510
$
— $
581,177
$
483
$
581,660
Real estate:
Construction ...........................................
67,269
Residential mortgage..............................
1,422,240
Home equity ...........................................
468,394
—
—
—
Commercial mortgage ............................
1,029,581
10,412
Consumer...................................................
492,030
Leases ........................................................
124
—
—
—
2,144
572
1,692
80
—
—
—
—
—
158
—
67,269
1,424,384
468,966
1,041,685
492,268
124
(342)
3,821
—
66,927
1,428,205
468,966
(1,407)
1,040,278
(62)
—
492,206
124
Total..................................................... $ 4,032,344
$
18,373
$
24,998
$
158
$ 4,075,873
$
2,493
$ 4,078,366
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
Leases
Total
(Dollars in thousands)
Year ended December 31, 2019
Beginning balance...................................... $
8,027
$
1,202
$
14,349
$
3,788
$
13,358
$
7,192
$
— $
47,916
Provision (credit) for loan and lease losses
Charge-offs.................................................
Recoveries..................................................
Net charge-offs (recoveries) ...................
1,413
9,440
2,478
1,174
1,304
(20)
1,182
—
610
(610)
(1,546)
12,803
—
524
(524)
381
4,169
5
42
(37)
(2,270)
11,088
—
25
(25)
8,359
15,551
8,265
2,111
6,154
—
—
—
—
—
6,317
54,233
10,748
4,486
6,262
Ending balance........................................... $
8,136
$
1,792
$
13,327
$
4,206
$
11,113
$
9,397
$
— $
47,971
106
Real Estate
Commercial,
Financial &
Agricultural
Construction
Residential
Mortgage
Home
Equity
Commercial
Mortgage
Consumer
Leases
Total
(Dollars in thousands)
Year ended December 31, 2018
Beginning balance...................................... $
7,594
$
1,835
$
14,328
$
3,317
$
16,801
$
6,126
$
— $
50,001
Provision (credit) for loan and lease losses
Charge-offs.................................................
Recoveries..................................................
Net charge-offs (recoveries) ...................
2,082
9,676
2,852
1,203
1,649
(6,392)
(4,557)
—
5,759
(5,759)
(183)
14,145
—
204
(204)
444
3,761
—
27
(27)
(3,495)
13,306
—
52
(52)
6,420
12,546
7,323
1,969
5,354
—
—
—
—
—
(1,124)
48,877
10,175
9,214
961
Ending balance........................................... $
8,027
$
1,202
$
14,349
$
3,788
$
13,358
$
7,192
$
— $
47,916
Real Estate
Commercial,
Financial &
Agricultural
Construction
Residential
Mortgage
Home
Equity
Commercial
Mortgage
Consumer
Leases
Total
(Dollars in thousands)
Year ended December 31, 2017
Beginning balance...................................... $
8,637
$
4,224
$
15,055
$
3,502
$
19,104
$
6,109
$
— $
56,631
Provision (credit) for loan and lease losses
Charge-offs.................................................
Recoveries..................................................
Net charge-offs .......................................
(705)
7,932
1,704
1,366
338
(2,558)
1,666
—
169
(169)
(1,533)
13,522
73
879
(806)
(229)
3,273
—
44
(44)
(2,460)
16,644
—
157
(157)
4,811
10,920
6,294
1,500
4,794
—
—
—
—
—
(2,674)
53,957
8,071
4,115
3,956
Ending balance........................................... $
7,594
$
1,835
$
14,328
$
3,317
$
16,801
$
6,126
$
— $
50,001
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:
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Balance, beginning of year.............................................................................. $
Provision for loan and lease losses ...............................................................
Balance, end of year ........................................................................................ $
— $
235
235
$
— $
—
— $
—
—
—
At December 31, 2019 and 2018, 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.
107
6. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following as of December 31, 2019 and 2018:
December 31,
2019
2018
(Dollars in thousands)
Land.................................................................................................................................................... $
8,309
$
Office buildings and improvements ...................................................................................................
Furniture, fixtures and equipment ......................................................................................................
Gross premises and equipment ........................................................................................................
Accumulated depreciation and amortization.................................................................................
107,840
39,066
155,215
(108,872)
Net premises and equipment............................................................................................................ $
46,343
$
8,309
102,398
37,586
148,293
(103,008)
45,285
Depreciation and amortization of premises and equipment were charged to the following operating expenses:
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Net occupancy ................................................................................................. $
Equipment .......................................................................................................
Total .............................................................................................................. $
3,401
2,738
6,139
$
$
3,527
2,761
6,288
$
$
3,880
2,561
6,441
7. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
Investments in unconsolidated subsidiaries as of December 31, 2019 and 2018 consisted of the following components:
December 31,
2019
2018
(Dollars in thousands)
Investments in low income housing tax credit partnerships............................................................... $
15,322
$
Investments in common securities of statutory trusts ........................................................................
Investments in affiliates......................................................................................................................
Other...................................................................................................................................................
1,547
192
54
11,603
2,169
182
54
Total ................................................................................................................................................. $
17,115
$
14,008
The Company invests in low income housing tax credit ("LIHTC") partnerships. As of December 31, 2019 and 2018, the
Company had $11.5 million and $8.3 million, respectively, in unfunded commitments related to the LIHTC partnerships, which
is recorded in other liabilities in the Company's consolidated balance sheets. The expected payments for the unfunded
commitments as of December 31, 2019 are as follows (dollars in thousands):
Year Ending December 31:
2020 ....................................................................................................................................................................................... $
2021 .......................................................................................................................................................................................
2022 .......................................................................................................................................................................................
2023 .......................................................................................................................................................................................
2024 .......................................................................................................................................................................................
Thereafter ..............................................................................................................................................................................
6,873
1,494
3,010
10
26
49
Total commitments ............................................................................................................................................................. $
11,462
108
Prior to 2018, the Company's investments in LIHTC partnerships were accounted for using the cost method. In 2018, the
Company voluntarily changed its accounting policy for LIHTC partnerships from the cost method to the proportional
amortization method using the practical expedient available under ASC 323, "Investments - Equity Method and Joint Ventures",
which permits an investor to amortize the initial cost of the investment in proportion to only the tax credits allocated to the
investor. The Company believes the proportional amortization method is preferable because it better reflects the economics of
an investment that is made for the primary purpose of receiving tax credits and other tax benefits. In addition to a change in the
timing of the recognition of amortization expense on LIHTC investments, amortization expense on LIHTC investments is now
reflected in the income tax expense line, which provides users a better understanding of the nature of the returns of such
investments, instead of in other operating expenses on the consolidated statements of income.
The following table presents amortization expense and tax credits recognized associated with our investments in LIHTC
partnerships for the periods presented:
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Proportional amortization method:
Amortization expense recognized in income tax expense............................ $
Federal and state tax credits recognized in income tax expense ..................
$
681
803
1,005
$
759
744
919
8. CORE DEPOSIT PREMIUM AND MORTGAGE SERVICING RIGHTS
The following table presents changes in our core deposit premium and mortgage servicing rights for the periods presented:
Core
Deposit
Premium
Mortgage
Servicing
Rights
Total
(Dollars in thousands)
Balance as of December 31, 2016 ................................................................. $
4,680
$
15,779
$
Additions ......................................................................................................
Amortization.................................................................................................
—
(2,674)
2,352
(2,288)
Balance as of December 31, 2017 ................................................................. $
2,006
$
15,843
$
Additions ......................................................................................................
Amortization.................................................................................................
—
(2,006)
1,612
(1,859)
Balance as of December 31, 2018 ................................................................. $
— $
15,596
$
Additions ......................................................................................................
Amortization.................................................................................................
—
—
1,582
(2,460)
Balance as of December 31, 2019 ................................................................. $
— $
14,718
$
20,459
2,352
(4,962)
17,849
1,612
(3,865)
15,596
1,582
(2,460)
14,718
The gross carrying value, accumulated amortization, and net carrying value related to our core deposit premium and mortgage
servicing rights as of December 31, 2019 and 2018 are presented below:
December 31, 2019
December 31, 2018
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 .....
44,642
67,595
Total.................................... $
112,237
$
$
(44,642) $
(52,877)
— $
14,718
44,642
66,013
(97,519) $
14,718
$
110,655
$
$
(44,642) $
(50,417)
(95,059) $
—
15,596
15,596
109
Our core deposit premium was fully amortized as of December 31, 2018. Based on our mortgage servicing rights held as of
December 31, 2019, estimated amortization expense for the next five succeeding fiscal years and all years thereafter are as
follows (dollars in thousands):
Year Ending December 31:
2020.................................................................................................................................................................... $
2021....................................................................................................................................................................
2022....................................................................................................................................................................
2023....................................................................................................................................................................
2024....................................................................................................................................................................
Thereafter ...........................................................................................................................................................
2,407
1,964
1,635
1,382
1,154
6,176
Total ................................................................................................................................................................. $
14,718
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 $1.6 million, $1.6 million, and
$2.4 million in 2019, 2018 and 2017, 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 and pool our
mortgage servicing rights into buckets of homogeneous characteristics.
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.
The following table presents the fair market value and key assumptions used in determining the fair market value of our
mortgage servicing rights:
Year Ended December 31,
2019
2018
(Dollars in thousands)
Fair market value, beginning of period............................................................................... $
Fair market value, end of period.........................................................................................
Weighted average discount rate ..........................................................................................
Weighted average prepayment speed assumption ..............................................................
$
17,696
15,820
9.5%
14.2%
17,161
17,696
9.5%
14.5%
Loans serviced for others as of December 31, 2019 and 2018 totaled $1.89 billion and $2.01 billion, respectively. Loans
serviced for others are not reported as assets on the Company's consolidated balance sheets.
110
9. DERIVATIVES
We utilize various designated and undesignated derivative financial instruments to reduce our exposure to movements in
interest rates including interest rate swaps, interest rate lock commitments and forward sale commitments. We measure all
derivatives at fair value on our consolidated balance sheet. At each reporting period, we record the derivative instruments in
other assets or other liabilities depending on whether the derivatives are in an asset or liability position. For derivative
instruments that are designated as hedging instruments, we record the effective portion of the changes in the fair value of the
derivative in AOCI, net of tax, until earnings are affected by the variability of cash flows of the hedged transaction. We
immediately recognize the portion of the gain or loss in the fair value of the derivative that represents hedge ineffectiveness in
current period earnings. For derivative instruments that are not designated as hedging instruments, changes in the fair value of
the derivative are included in current period earnings. We had no derivative instruments designated as hedging instruments as
of December 31, 2019 and December 31, 2018.
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, 2019, we were a party to interest rate lock and forward sale
commitments on $0.6 million and $9.0 million of mortgage loans, respectively. At December 31, 2018, we were a party to
interest rate lock and forward sale commitments on $2.2 million and $8.5 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, 2019
December 31, 2018
December 31, 2019
December 31, 2018
Asset Derivatives
Liability Derivatives
(Dollars in thousands)
Interest rate lock and forward
sale commitments.......................
Other assets / other
liabilities
$
8
$
11
$
28
$
95
The following table presents the impact of derivative instruments and their location within the consolidated statements of
income for the periods presented:
Derivatives not in Cash Flow
Hedging Relationship
Location of Gain (Loss)
Recognized in
Earnings on Derivatives
Amount of Gain (Loss)
Recognized in
Earnings on Derivatives
(Dollars in thousands)
Year ended December 31, 2019
Interest rate lock and forward sale commitments ................................... Mortgage banking income
$
Year ended December 31, 2018
Interest rate lock and forward sale commitments ................................... Mortgage banking income
Year ended December 31, 2017
Interest rate lock and forward sale commitments ................................... Mortgage banking income
63
(70)
(156)
111
10. DEPOSITS
The Company had $1.03 billion and $1.11 billion of total time deposits as of December 31, 2019 and 2018, respectively.
Contractual maturities of total time deposits as of December 31, 2019 were as follows (dollars in thousands):
Year Ending December 31:
2020 ....................................................................................................................................................................................... $
946,738
2021 .......................................................................................................................................................................................
2022 .......................................................................................................................................................................................
2023 .......................................................................................................................................................................................
2024 .......................................................................................................................................................................................
Thereafter ..............................................................................................................................................................................
35,469
21,690
9,956
12,239
361
Total....................................................................................................................................................................................... $
1,026,453
Time deposits that meet or exceed the FDIC insurance limit of $250,000 totaled $766.4 million and $832.3 million at
December 31, 2019 and 2018, respectively.
Contractual maturities of time deposits of $250,000 or more as of December 31, 2019 were as follows:
(Dollars in thousands)
Three months or less.............................................................................................................................................................. $
Over three months through six months .................................................................................................................................
Over six months through twelve months...............................................................................................................................
2021 .......................................................................................................................................................................................
2022 .......................................................................................................................................................................................
2023 .......................................................................................................................................................................................
2024 .......................................................................................................................................................................................
Thereafter ..............................................................................................................................................................................
336,195
232,713
177,173
13,415
3,713
2,033
1,156
—
Total .................................................................................................................................................................................... $
766,398
At December 31, 2019 and 2018, overdrawn deposit accounts totaling $0.9 million and $0.9 million have been reclassified as
loans on the consolidated balance sheets.
11. SHORT-TERM BORROWINGS
The bank is a member of the FHLB and maintained a $1.84 billion line of credit, of which $1.57 billion remained available as
of December 31, 2019. At December 31, 2019, short-term borrowings under this arrangement totaled $150.0 million. At
December 31, 2018, short-term borrowings under this arrangement totaled $197.0 million.
The FHLB provides standby letters of credit on behalf of the bank to secure certain public deposits. If the FHLB is required to
make a payment on a standby letter of credit, the payment amount is converted to an advance at the FHLB. The standby letters
of credit issued on our behalf by the FHLB totaled $78.9 million and $4.6 million at December 31, 2019 and 2018,
respectively.
At December 31, 2019 and 2018, our bank had additional unused borrowings available at the Federal Reserve discount window
of $65.3 million and $73.9 million, respectively. As of December 31, 2019 and 2018, certain commercial real estate and
commercial loans with a carrying value totaling $126.1 million and $123.3 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 totaled $4.3 million, $1.2 million and $0.2 million in 2019, 2018 and 2017,
respectively.
112
A summary of our short-term borrowings as of December 31, 2019, 2018 and 2017 is as follows:
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Amount outstanding at December 31 ........................................................................... $
150,000
$
197,000
$
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 ..................................................................
185,909
334,500
1.81%
2.31%
50,630
197,000
2.59%
2.44%
32,000
15,531
69,000
1.63%
1.18%
12. LONG-TERM DEBT
Long-term debt, which is based on original maturity, consisted of FHLB advances and subordinated debentures totaling $101.5
million and $122.2 million at December 31, 2019 and 2018, respectively.
December 31,
2019
2018
(Dollars in thousands)
FHLB advances .................................................................................................................................. $
Subordinated debentures ....................................................................................................................
50,000
$
51,547
Total.................................................................................................................................................... $
101,547
$
50,000
72,166
122,166
At December 31, 2019, future principal payments on long-term debt based on redemption date or final maturity are as follows
(dollars in thousands):
Year Ending December 31:
2020 .................................................................................................................................................................................... $
2021 ....................................................................................................................................................................................
2022 ....................................................................................................................................................................................
2023 ....................................................................................................................................................................................
2024 ....................................................................................................................................................................................
Thereafter............................................................................................................................................................................
Total .................................................................................................................................................................................... $
25,000
25,000
—
—
—
51,547
101,547
FHLB Advances
FHLB long-term advances outstanding totaled $50.0 million as of December 31, 2019 and $50.0 million as of December 31,
2018. At December 31, 2019, our bank had FHLB advances available of approximately $1.57 billion, which was secured by
certain real estate loans with a carrying value of $2.48 billion in accordance with the collateral provisions of the Advances,
Pledge and Security Agreement with the FHLB. Interest expense on FHLB long-term advances was $1.6 million and $0.2
million in 2019 and 2018, respectively. There was no interest expense on long-term FHLB advances in 2017.
Subordinated Debentures
As of December 31, 2019 and December 31, 2018, the Company had the following junior subordinated debentures outstanding:
113
(dollars in thousands)
December 31, 2019
Name of Trust
Amount of
Subordinated
Debentures
Interest Rate
Trust IV .......................................................................................................... $
30,928 Three month LIBOR + 2.45%
Trust V............................................................................................................
20,619 Three month LIBOR + 1.87%
Total ............................................................................................................. $
51,547
Name of Trust
December 31, 2018
Amount of
Subordinated
Debentures
Interest Rate
Trust II ............................................................................................................ $
20,619 Three month LIBOR + 2.85%
Trust IV ..........................................................................................................
30,928 Three month LIBOR + 2.45%
Trust V............................................................................................................
20,619 Three month LIBOR + 1.87%
Total ............................................................................................................. $
72,166
In October 2003, we created two wholly-owned statutory trusts, CPB Capital Trust II, a Delaware statutory trust ("Trust II")
and CPB Statutory Trust III, a Delaware statutory trust ("Trust III"). Trust II issued $20.0 million in floating rate trust preferred
securities bearing an interest rate of three-month London Interbank Offered Rate ("LIBOR") plus 2.85% and maturing on
October 7, 2033. The principal assets of Trust II are $20.6 million of the Company's junior 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.
On November 13, 2018, the Company submitted a notice to the trustee and security holder to redeem, in whole and at par, the
$20.0 million of trust preferred securities issued by Trust II. The trust preferred securities were redeemed, along with the $0.6
million in common securities issued by Trust II and held by the Company, as a result of the concurrent redemption of 100% of
the Company's outstanding floating rate junior subordinated debentures held by Trust II, which underlay the trust preferred
securities. The redemption was pursuant to the optional prepayment provisions of the indenture and occurred on January 7,
2019. The redemption price for the floating rate junior subordinated debentures was equal to 100% of the principal amount plus
accrued interest, up to, but not including, the redemption date. The proceeds from the redemption of the floating rate junior
subordinated debentures was simultaneously applied to redeem all of the outstanding floating rate trust preferred securities at a
price of 100% of the aggregate liquidation amount of the securities plus accumulated but unpaid distributions up to but not
including the redemption date. The Company received all necessary regulatory approvals for the redemption. The redemption
was funded with excess cash currently available to the Company.
On December 17, 2018, the Company completed the redemption of $20.0 million in floating rate trust preferred securities of
Trust III bearing an interest rate of three-month LIBOR plus 2.85% and maturing on December 17, 2033. The redemption price
was price was 100% of the aggregate liquidation amount of the securities plus accumulated but unpaid distributions up to but
not including the redemption date. The Company also redeemed $0.6 million of common securities issued by Trust III and held
by the Company, as a result of the concurrent redemption of 100% of the principal assets of Trust III, or $20.6 million of the
Company's junior subordinated debentures with an identical interest rate and maturity as the Trust III trust preferred securities.
The redemption was pursuant to the optional prepayment provisions of the indenture.
On January 7, 2019, the Company completed the redemption of $20.0 million in floating rate trust preferred securities of Trust II
bearing an interest rate of three-month LIBOR plus 2.85% and maturing on October 7, 2033. The redemption price was price was
100% of the aggregate liquidation amount of the securities plus accumulated but unpaid distributions up to but not including the
redemption date. The Company also redeemed $0.6 million of common securities issued by Trust II and held by the Company, as
a result of the concurrent redemption of 100% of the principal assets of Trust II, or $20.6 million of the Company's junior
subordinated debentures with an identical interest rate and maturity as the Trust II trust preferred securities. The redemption was
pursuant to the optional prepayment provisions of the indenture. On January 22, 2019, Trust II was canceled with the state of
Delaware.
In September 2004, we created a wholly-owned statutory trust, CPB Capital Trust IV ("Trust IV"). Trust IV issued $30.0
million in floating rate trust preferred securities bearing an interest rate of three-month LIBOR plus 2.45% and maturing on
114
December 15, 2034. The principal assets of Trust IV are $30.9 million of the Company's junior 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 floating rate 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 junior 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 Company is not considered the primary beneficiary of Trusts II, III, IV and V, therefore the trusts are not considered a
variable interest entity and are not consolidated in the Company's financial statements. Rather the subordinated debentures are
shown as a liability on the Company's consolidated balance sheets. The Company's investment in the common securities of the
trusts are included in investment in unconsolidated subsidiaries in the Company's consolidated balance sheets.
The floating rate trust preferred securities, the junior subordinated debentures that are the assets of Trusts IV and V and the
common securities issued by Trusts IV and V are redeemable in whole or in part on any interest payment date on or after
December 15, 2009 for Trust IV and V, or at any time in whole but not in part within 90 days following the occurrence of
certain events. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional
guarantee by the Company of each trust's obligations with respect to its trust preferred securities. Subject to certain exceptions
and limitations, we may elect from time to time to defer interest payments on the subordinated debentures, which would result
in a deferral of distribution payments on the related trust preferred securities, for up to 20 consecutive quarterly periods without
default or penalty.
The subordinated debentures may be included in Tier 1 capital, with certain limitations applicable, under current regulatory
guidelines and interpretations.
13. EQUITY
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,
2019, the bank had Statutory Retained Earnings of $66.6 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.
We repurchase shares of our common stock when we believe such repurchases are in the best interests of the Company. In
January 2017, 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 "2017 Repurchase Plan"). The 2017 Repurchase Plan replaced and superseded in its entirety the share repurchase
plan previously approved by the Company's Board of Directors. In January 2017, prior to the 2017 Repurchase Plan being
approved, 1,750 shares of common stock, at a cost of $0.1 million, were repurchased under the previous share repurchase plan.
In November 2017, the Board of Directors authorized an increase in the share repurchase program authority by an additional
$50.0 million (known henceforth as the "Repurchase Plan"). In the year ended December 31, 2017, 862,733 shares of common
stock, at a cost of $26.5 million, were repurchased under the Repurchase Plan.
In the year ended December 31, 2018, 1,155,157 shares of common stock, at a cost of $32.8 million, were repurchased under
the Repurchase Plan.
In June 2019, the Company’s Board of Directors authorized the repurchase of up to $30.0 million of its common stock from
time to time in the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase
program (the "2019 Repurchase Plan"). The 2019 Repurchase Plan replaced and superseded in its entirety the Repurchase Plan
previously approved by the Company's Board of Directors, which had $6.8 million in remaining repurchase authority.
115
In the year ended December 31, 2019, a total of 797,003 shares of common stock, at a cost of $22.8 million, were repurchased
under the Company's existing share repurchase plans. A total of 488,700 shares of common stock, at a cost of $13.9 million,
were repurchased under the Repurchase Plan and a total of 308,303 shares of common stock, at a cost of $8.9 million, were
repurchased under the 2019 Repurchase Plan.
A total of $21.1 million remained available for repurchase under the 2019 Repurchase Plan at December 31, 2019.
14. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition
Accounting Standards Codification ("ASC") 606, "Revenue from Contracts with Customers", establishes principles for
reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's
contracts to provide goods or services to its customers. The core principle requires an entity to recognize revenue to depict the
transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in
exchange for those goods or services. Revenue is recognized as performance obligations are satisfied.
The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are
provided and collectability is reasonably assured. Our principal source of revenue is derived from interest income on financial
instruments, such as our loan and investment securities portfolios, as well as revenue related to our mortgage banking activities.
These revenue-generating transactions are out of scope of ASC 606, but are subject to other GAAP and discussed elsewhere
within our disclosures.
We also generate other revenue in connection with our broad range of banking products and financial services. Descriptions of
our other revenue-generating activities that are within the scope of ASC 606, which are presented in our consolidated
statements of income as components of other operating income are as follows:
Service charges on deposit accounts
Revenue from service charges on deposit accounts includes general service fees for monthly account maintenance and activity-
or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or
some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is
generally monthly for account maintenance services or when a transaction has been completed (such as stop payment fees).
Payment for such performance obligations are generally received at the time the performance obligations are satisfied.
Other Service Charges and Fees
Revenue from other service charges and fees includes cards and payments income, safe deposit rental income and other service
charges, commissions and fees.
Cards and payments income includes interchange fees from debit cards processed through card association networks, merchant
services, and other card related services. Interchange rates are generally set by the credit card associations and based on
purchase volumes and other factors. Interchange fees are recognized as transactions occur. Interchange expenses related to
cards and payments income are presented gross in other operating expense. Merchant services income represents account
management fees and transaction fees charged to merchants for the processing of card association network transactions.
Merchant services revenue is recognized as transactions occur, or as services are performed.
Other service charges, commissions and fees include automated teller machines ("ATM") surcharge and interchange fees, bill
payment fees, cashier’s check and money order fees, wire transfer fees, loan brokerage fees, and commissions on sales of
insurance, broker-dealer products, letters of credit, and travelers’ checks. Revenue from these fees and commissions is recorded
in a manner that reflects the timing of when transactions occur, and as services are provided.
Based on the nature of the commission agreement with the broker-dealer and each insurance provider, we may recognize
revenue from broker-dealer and insurance commissions over time or at a point-in-time as our performance obligation is
satisfied.
116
Income from Fiduciary Activities
Income from fiduciary activities includes fees from wealth management, trust, custodial and escrow services provided to
individual and institutional customers. Revenue is generally recognized monthly based on a minimum annual fee and/or the
market value of assets in custody. Additional fees are recognized for transactional activity.
Revenue from trade execution and brokerage services is earned through commissions from trade execution on behalf of clients.
Revenue from these transactions is recognized at the trade date. Any ongoing service fees are recognized on a monthly basis as
services are performed.
Net Gain (Loss) on Sales of Foreclosed Assets
The Company records a gain or loss on the sale of a foreclosed property when control of the property transfers to the Company,
which typically occurs at the time the deed is executed. The Company does not finance the sale of the foreclosed property.
Fees on Foreign Exchange
The Company provides foreign currency exchange services to customers, whereby cash can be converted to different foreign
currencies, and vice versa. As a result of the services, a gain or loss is recognized on foreign currency transactions, as well as
income related to commissions and fees earned on each transaction.
Revenue from the commissions and fees earned on the transactions fall within the scope of ASC 606, and is recorded in a
manner that reflects the timing of when transactions occur, and as services are provided. Realized and unrealized gains or losses
related to foreign currency are out of scope of ASC 606.
Loan Placement Fees
Loan placement fees primarily represent revenues earned by the Company for loan placement and underwriting. Revenues for
these services are recorded at a point-in-time, upon completion of a contractually identified transaction, or when an advisory
opinion is provided.
The following presents the Company's other operating income, segregated by revenue streams that are in-scope and out-of-
scope of ASC 606 for the periods presented:
(dollars in thousands)
Other operating income:
In-scope of ASC 606
Year Ended December 31,
2019
2018
Service charges on deposit accounts......................................................................................... $
Other service charges and fees..................................................................................................
Income on fiduciary activities ..................................................................................................
Net gain (loss) on sales of foreclosed assets.............................................................................
Fees on foreign exchange .........................................................................................................
Loan placement fees .................................................................................................................
In-scope other operating income.................................................................................................
Out-of-scope other operating income .........................................................................................
Total other operating income ...................................................................................................... $
8,406
$
12,435
4,395
(145)
101
702
25,894
15,907
41,801
$
8,406
11,078
4,245
—
110
747
24,586
14,218
38,804
117
15. MORTGAGE BANKING INCOME
Noninterest income from the Company's mortgage banking activities includes the following components for the periods
presented:
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Mortgage banking income:
Net loan servicing fees ................................................................................. $
4,252
$
5,159
$
Amortization of mortgage servicing rights...................................................
Net gain on sale of residential mortgage loans.............................................
Unrealized gain (loss) on interest rate locks.................................................
(2,460)
4,128
63
(1,859)
4,085
(70)
Total mortgage banking income................................................................. $
5,983
$
7,315
$
5,337
(2,288)
4,069
(156)
6,962
16. SHARE-BASED COMPENSATION
In accordance with ASC 718, compensation expense is recognized only for those shares expected to vest, based on the
Company's historical experience and future expectations. The following table summarizes the effects of share-based
compensation for options and awards granted under the Company's equity incentive plans for each of the periods presented:
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Salaries and employee benefits ....................................................................... $
4,289
$
3,787
$
Directors stock awards ....................................................................................
Income tax benefit...........................................................................................
96
(1,427)
255
(1,227)
Net share-based compensation effect ........................................................... $
2,958
$
2,815
$
3,266
150
(1,903)
1,513
Upon exercise or vesting of a share-based award, if the tax deduction exceeds the compensation cost that was previously
recorded for financial statement purposes, this will result in an excess tax benefit. Effective January 1, 2017, ASU 2016-09,
"Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" requires the
Company to recognize all excess tax benefits or tax deficiencies through the income statement as income tax expense/benefit.
Under previous GAAP, any excess tax benefits were recognized in additional-paid-in-capital to offset current-period and
subsequent-period tax deficiencies. During 2019, 2018 and 2017, the Company recorded an income tax benefit of $0.3 million,
$0.1 million and $0.5 million, respectively, as a result of restricted stock units vesting during the year.
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.
118
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.
As of December 31, 2019, 2018 and 2017, a total of 1,304,773, 1,468,137 and 1,567,912 shares, respectively, were available
for future grants under our 2013 Plan.
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, 2019:
Number
of Units
Weighted
Average
Exercise
Price
147,644
$
15.77
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
(in thousands)
Stock options outstanding as of January 1, 2019 .......................
Changes during the year:
Granted ....................................................................................
Exercised..................................................................................
Expired.....................................................................................
Forfeited...................................................................................
Stock options outstanding as of December 31, 2019 .................
—
(10,553)
(3,278)
—
133,813
Vested and exercisable as of December 31, 2019 ......................
133,813
—
14.31
80.08
—
14.31
14.31
2.3
$
2,043
3.3
2,043
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 as of December 31, 2019.
During the years ended December 31, 2019 and 2018, the aggregate intrinsic value of options exercised under our stock option
plan determined as of the date of exercise was $0.2 million and $0.2 million, respectively. There were no options exercised
during the year ended December 31, 2017.
As of December 31, 2019, all compensation costs related to stock options granted to employees under our stock option plans
have been recognized.
As of December 31, 2019, all shares have been vested. There were no shares that vested in 2019 and 2018. The total fair value
of options vested during the year ended December 31, 2017 was $0.5 million.
119
No stock options were granted during the years ended December 31, 2019, 2018 and 2017.
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 from the date of grant and are subject
to forfeiture until performance and employment targets are achieved. Compensation expense is measured as the market price of
the stock awards on the grant date, and is recognized over the specified vesting periods.
As of December 31, 2019, there was $6.5 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 2.0 years.
The table below presents the activity of restricted stock awards and units for each of the periods presented:
Number
of Units
Weighted
Average
Grant Date
Fair Value
Fair Value
of Restricted
Stock Awards
and Units That
Vested During
The Year
(in thousands)
Unvested as of December 31, 2016 .....................................................................
437,697
$
22.01
Changes during the year:
Granted ................................................................................................................
Forfeited...............................................................................................................
Vested...................................................................................................................
Unvested as of December 31, 2017 .....................................................................
Changes during the year:
Granted ................................................................................................................
Forfeited...............................................................................................................
Vested...................................................................................................................
Unvested as of December 31, 2018 .....................................................................
Changes during the year:
Granted..............................................................................................................
Forfeited ............................................................................................................
Vested ................................................................................................................
Unvested as of December 31, 2019 .....................................................................
126,204
(31,570)
(134,780)
397,551
118,846
(25,481)
(128,191)
362,725
181,431
(17,689)
(160,000)
366,467
31.35
24.89
19.81
$
25.49
29.47
27.39
24.59
26.98
28.89
29.10
24.55
28.89
4,224
3,763
3,927
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.
120
The following tables set forth information pertaining to the defined benefit retirement plan:
Year Ended December 31,
2019
2018
(Dollars in thousands)
Change in benefit obligation:
Benefit obligation at beginning of year ........................................................................................... $
20,746
$
Interest cost......................................................................................................................................
Actuarial (gains) losses....................................................................................................................
Benefits paid ....................................................................................................................................
Benefit obligation at end of the year................................................................................................
Change in plan assets, at fair value:
Fair value of plan assets at beginning of year..................................................................................
Actual return on plan assets.............................................................................................................
Benefits paid ....................................................................................................................................
Fair value of plan assets at end of year............................................................................................
828
1,677
(1,648)
21,603
19,874
3,083
(1,648)
21,309
23,471
796
(1,714)
(1,807)
20,746
22,832
(1,151)
(1,807)
19,874
Funded status at end of year ............................................................................................................ $
(294)
$
(872)
Amounts recognized in AOCI:
Net actuarial losses..................................................................................................................... $
(6,625)
$
(8,137)
Benefit obligation actuarial assumptions:
Weighted average discount rate .......................................................................................................
3.1%
4.2%
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Components of net periodic benefit cost:
Interest cost................................................................................................... $
828
$
796
$
Expected return on plan assets......................................................................
Amortization of net actuarial losses .............................................................
(996)
1,101
Net periodic benefit cost............................................................................... $
933
$
(1,206)
979
569
$
926
(1,036)
1,191
1,081
Net periodic cost actuarial assumptions:
Weighted average discount rate....................................................................
Expected long-term rate of return on plan assets .........................................
4.2%
5.3%
3.6%
5.5%
4.1%
5.5%
The unrecognized net actuarial losses included in AOCI expected to be recognized in net periodic benefit cost during 2020 is
approximately $0.8 million.
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.
121
The defined benefit retirement plan assets consist primarily of equity and debt securities. Our asset allocations by asset
category were as follows:
December 31,
2019
2018
Equity securities .................................................................................................................................
Debt securities ....................................................................................................................................
Other...................................................................................................................................................
Total....................................................................................................................................................
39.1%
57.5
3.4
100.0%
48.4%
46.9
4.7
100.0%
Equity securities included the Company's common stock in the amount of $0.1 million at December 31, 2019 and 2018.
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, 2019 and 2018 by asset category were as follows:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
Total
December 31, 2019
Money market accounts ............................................... $
727
$
— $
— $
Mutual funds ................................................................
Government obligations ...............................................
Common stocks............................................................
Preferred stocks............................................................
Corporate bonds and debentures ..................................
13,434
—
2,475
173
—
Total.............................................................................. $
16,809
$
—
2,587
—
—
1,913
4,500
$
—
—
—
—
—
— $
727
13,434
2,587
2,475
173
1,913
21,309
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
Total
December 31, 2018
Money market accounts ............................................... $
931
$
— $
— $
Mutual funds ................................................................
Government obligations ...............................................
Common stocks............................................................
Preferred stocks............................................................
Corporate bonds and debentures ..................................
10,537
—
4,122
146
—
Total.............................................................................. $
15,736
$
—
2,192
—
—
1,946
4,138
$
—
—
—
—
—
— $
931
10,537
2,192
4,122
146
1,946
19,874
We are not required by funding regulations or laws to make any contributions to our defined benefit retirement plan in 2020.
122
Estimated future benefit payments in each of the next five years and in the aggregate for the five years thereafter are as follows
(dollars in thousands):
Year Ending December 31:
2020 ............................................................................................................................................................................ $
2021 ............................................................................................................................................................................
2022 ............................................................................................................................................................................
2023 ............................................................................................................................................................................
2024 ............................................................................................................................................................................
2025-2029...................................................................................................................................................................
Total............................................................................................................................................................................ $
1,769
1,718
1,652
1,606
1,541
6,617
14,903
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:
Year Ended December 31,
2019
2018
(Dollars in thousands)
Change in benefit obligation
Benefit obligation at beginning of year ........................................................................................... $
10,355
$
11,219
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............................................................................................
430
1,517
(331)
11,971
—
331
(331)
—
389
(907)
(346)
10,355
—
346
(346)
—
Funded status at end of year ............................................................................................................ $
(11,971)
$
(10,355)
Amounts recognized in AOCI
Net transition obligation............................................................................................................. $
Prior service cost ........................................................................................................................
$
(64)
(14)
Net actuarial losses.....................................................................................................................
(2,583)
Total amounts recognized in AOCI ................................................................................................. $
(2,661)
$
(82)
(31)
(1,082)
(1,195)
Benefit obligation actuarial assumptions
Weighted average discount rate .......................................................................................................
3.0%
4.2%
123
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Components of net periodic benefit cost
Interest cost ..................................................................................................... $
430
$
Amortization of net actuarial (gains) losses....................................................
Amortization of net transition obligation ........................................................
Amortization of prior service cost...................................................................
Settlement........................................................................................................
16
18
18
—
$
389
174
18
18
—
Net periodic benefit cost ................................................................................. $
482
$
599
$
429
102
18
18
138
705
Net periodic cost actuarial assumptions
Weighted average discount rate.......................................................................
4.2%
3.5%
4.1%
The estimated amortization of components included in AOCI that will be recognized into net periodic benefit cost for 2020 is
as follows (dollars in thousands):
Amortization of net actuarial losses ...................................................................................................................................... $
Amortization of net transition obligation ..............................................................................................................................
Amortization of prior service cost.........................................................................................................................................
16
18
18
The SERP holds no plan assets other than employer contributions that are paid as benefits during the year. We expect to
contribute $0.3 million to the SERP in 2020.
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 (dollars in thousands):
Year Ending December 31:
2020 .................................................................................................................................................................................... $
2021 ....................................................................................................................................................................................
2022 ....................................................................................................................................................................................
2023 ....................................................................................................................................................................................
2024 ....................................................................................................................................................................................
2025-2029 ...........................................................................................................................................................................
Total .................................................................................................................................................................................... $
329
320
490
661
653
4,051
6,504
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 $2.3 million, $2.1 million and $2.1 million in 2019, 2018 and 2017,
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 2019, 2018 and 2017.
124
19. OPERATING LEASES
As discussed in Note 1 - Summary of Significant Accounting Policies, we adopted ASU 2016-02 effective January 1, 2019
using the modified retrospective approach and recorded a right-of-use ("ROU") lease asset and corresponding lease liability on
the Company's consolidated balance sheet of $55.9 million for operating leases where we are a lessee. We lease certain
property and equipment with lease terms expiring through 2045. In some instances, a lease may contain renewal options for
periods ranging from five to 15 years. All renewal options are likely to be exercised and therefore have been recognized as part
of our right-of-use assets and lease liabilities in accordance with ASC 842, "Leases". Certain leases also contain variable
payments that are primarily determined based on common area maintenance costs and Hawaii state tax rates. All leases are
operating leases and we do not include any short-term leases in the calculation of the right-of-use assets and lease liabilities.
The most significant assumption related to the Company’s application of ASC 842 was the discount rate assumption. As most
of the Company’s lease agreements do not provide for an implicit interest rate, the Company uses the collateralized interest rate
that the Company would have to pay to borrow over a similar term to estimate the Company’s lease liability.
Total lease cost, cash flow information, weighted-average remaining lease term and weighted-average discount rate is
summarized below for the period indicated:
(dollars in thousands)
Lease cost:
Year Ended December 31,
2019
Operating lease cost........................................................................................................................................... $
Variable lease cost .............................................................................................................................................
Less: sublease income .......................................................................................................................................
Total lease cost .................................................................................................................................................. $
6,514
2,637
(44)
9,107
Other information:
Operating cash flows from operating leases...................................................................................................... $
Weighted-average remaining lease term - operating leases ...............................................................................
Weighted-average discount rate - operating leases............................................................................................
(6,230)
13.51 years
3.92%
The following is a schedule of annual undiscounted cash flows for our operating leases and a reconciliation of those cash flows
to the operating lease liabilities for the next five succeeding fiscal years and all years thereafter (dollars in thousands):
Year Ending December 31,
Undiscounted Cash Flows
Lease Liability Expense
Lease Liability Reduction
2020..................................................... $
6,216
$
1,965
$
2021.....................................................
2022.....................................................
2023.....................................................
2024.....................................................
Thereafter ............................................
Total ..................................................... $
5,907
5,472
5,175
4,947
40,920
68,637
$
1,808
1,659
1,519
1,385
7,669
16,005
$
4,251
4,099
3,813
3,656
3,562
33,251
52,632
In addition, the Company, as lessor, leases certain properties that it owns. All of these leases are operating leases. The
following represents lease income related to these leases that was recognized for the period indicated:
(dollars in thousands)
Year Ended December 31,
2019
Total rental income recognized ......................................................................................................................... $
2,098
125
Based on the Company's leases as lessor as of December 31, 2019, estimated lease payments for the next five succeeding fiscal
years and all years thereafter are as follows (dollars in thousands):
Year Ending December 31,
2020 ................................................................................................................................................................... $
2021 ...................................................................................................................................................................
2022 ...................................................................................................................................................................
2023 ...................................................................................................................................................................
2024 ...................................................................................................................................................................
Thereafter ..........................................................................................................................................................
Total ................................................................................................................................................................... $
Net rent expense for all operating leases for the years ended December 31, 2018 and 2017 is summarized as follows:
(dollars in thousands)
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................................................................................. $
20. INCOME TAXES
Year Ended December 31,
2018
2017
8,578
$
(41)
8,537
12
8,549
$
Components of income tax expense (benefit) for the years ended December 31, 2019, 2018 and 2017 were as follows:
2,133
2,137
1,614
641
165
262
6,952
8,318
(43)
8,275
15
8,290
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Current expense:
Federal........................................................................................................................ $
23,359
$
10,812
$
State............................................................................................................................
Total current ............................................................................................................
Deferred expense:
Federal........................................................................................................................
State............................................................................................................................
Total deferred ..........................................................................................................
211
23,570
(8,970)
5,005
(3,965)
72
10,884
2,137
5,737
7,874
Provision for income taxes ........................................................................................... $
19,605
$
18,758
$
2,471
(81)
2,390
27,263
4,943
32,206
34,596
On December 22, 2017, H.R.1, commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform”) was signed into law making
significant changes to the U.S. federal tax code. The most impactful, as related to the Company, included a decrease in the
current U.S. federal corporate tax rate from 35% to 21% for the year beginning January 1, 2018. In the year ended December
31, 2017, the Company recorded additional income tax expense of $7.4 million related to the estimated impact of Tax Reform
on the Company's net deferred tax assets ("DTA"). In 2018, the Company recorded an income tax benefit of $1.5 million
related to the finalization of the impact of Tax Reform, which also included the impact of a tax method change for software
development and prepaid expenses that was filed in 2018.
126
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 21% for the years ended December 31, 2019 and December 31, 2018 and 35% for the year
ended December 31, 2017, to income (loss) before income taxes) for the following reasons:
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Computed "expected" tax expense (benefit) ................................................................ $
16,365
$
16,430
$
26,270
Increase (decrease) in taxes resulting from:
Tax-exempt interest income.......................................................................................
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..................................................
Impact of Tax Reform on net deferred tax assets.......................................................
Other, net....................................................................................................................
(675)
(652)
(182)
4,345
(41)
—
445
(808)
(445)
35
4,756
140
(1,542)
192
(1,387)
(1,186)
(594)
3,348
570
7,440
135
Total .............................................................................................................................. $
19,605
$
18,758
$
34,596
See Note 1 - Summary of Significant Accounting Policies for discussion of the accounting policy change in 2018 from the cost
method to the proportional amortization method for our LIHTC investments, the effects of which are now reported on the
income tax expense line in the consolidated statements of income and are included in the low-income housing and energy tax
credits line above.
127
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax
liabilities were as follows:
December 31,
2019
2018
(Dollars in thousands)
Deferred tax assets
Lease liability................................................................................................................................... $
Allowance for loan and lease losses ................................................................................................
Accrued expenses ............................................................................................................................
Employee retirement benefits ..........................................................................................................
Federal and state tax credit carryforwards.......................................................................................
State net operating loss carryforwards.............................................................................................
Restricted stock and non-qualified stock options ............................................................................
Premises and equipment ..................................................................................................................
Other ................................................................................................................................................
14,095
$
10,136
1,795
2,847
1,821
3,181
954
3,365
2,488
—
10,112
1,517
2,595
7,728
3,291
1,001
3,157
3,485
Total deferred tax assets...................................................................................................................
40,682
32,886
Deferred tax liabilities
Right-of-use lease asset ...................................................................................................................
Intangible assets...............................................................................................................................
Other ................................................................................................................................................
Total deferred tax liabilities.............................................................................................................
14,019
3,941
2,761
20,721
Less: Deferred tax valuation allowance..........................................................................................
3,420
—
4,189
3,698
7,887
3,461
Net deferred tax assets ..................................................................................................................... $
16,541
$
21,538
In assessing the realizability of our net 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, 2019, the valuation allowance on our net DTA totaled $3.4 million, of which $3.2 million related to our
DTA from net apportioned net operating loss ("NOL") carryforwards for California state income tax purposes as we do not
expect to generate sufficient income in California to utilize the DTA. The remaining $0.2 million relates to a valuation
allowance on a Hawaii capital loss carry forward balance of $6.2 million that we do not expect to be able to utilize. The net
change in the valuation allowance was a decrease of $41 thousand in 2019, compared to an increase of $0.1 million in 2018.
Net of this valuation allowance, the Company's net DTA totaled $16.5 million as of December 31, 2019, compared to a net
DTA of $21.5 million as of December 31, 2018.
At December 31, 2019, the Company had NOL carryforwards for California state income tax purposes of $37.1 million, which
are available to offset future state taxable income. California NOL carryforwards will expire if not utilized beginning in 2028.
The Company does not have any NOL carryforwards for U.S. federal or Hawaii state income tax purposes. In addition, we have
gross Hawaii state tax credit carryforwards of $2.5 million that do not expire. In 2018, we utilized the remainder of our federal
tax credit carryforwards.
At December 31, 2019, we have no material 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.
128
We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Taxable years through 2015 are
closed.
21. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the components of other comprehensive income (loss) for the years ended December 31, 2019,
2018 and 2017, by component:
Before Tax
Tax Effect
Net of Tax
(Dollars in thousands)
Year ended December 31, 2019
Net unrealized gains on investment securities:
Net unrealized gains arising during the period .......................................... $
37,696
$
10,102
$
Less: Reclassification adjustment for losses realized in net income .........
Net unrealized gains on investment securities ........................................
Defined benefit plans:
Net actuarial losses arising during the period ............................................
Amortization of net actuarial losses...........................................................
Amortization of net transition obligation...................................................
Amortization of prior service cost .............................................................
Defined benefit plans, net........................................................................
(36)
37,660
(1,106)
1,117
18
18
47
(10)
10,092
(296)
299
5
5
13
27,594
(26)
27,568
(810)
818
13
13
34
Other comprehensive income ....................................................................... $
37,707
$
10,105
$
27,602
Before Tax
Tax Effect
Net of Tax
(Dollars in thousands)
Year ended December 31, 2018
Net unrealized losses on investment securities:
Net unrealized losses arising during the period ......................................... $
(19,063) $
(5,145) $
Less: Reclassification adjustment for losses realized in net income .........
Net unrealized losses on investment securities .......................................
(279)
(19,342)
(75)
(5,220)
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........................................................................
264
1,153
18
18
1,453
71
329
5
5
410
(13,918)
(204)
(14,122)
193
824
13
13
1,043
Other comprehensive loss............................................................................. $
(17,889) $
(4,810) $
(13,079)
129
Before Tax
Tax Effect
Net of Tax
(Dollars in thousands)
Year ended December 31, 2017
Net unrealized gains on investment securities:
Net unrealized losses arising during the period ......................................... $
(838) $
(333) $
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 .............................................................
Settlement ..................................................................................................
Defined benefit plans, net........................................................................
1,410
572
(1,318)
1,293
18
18
138
149
561
228
(518)
460
7
7
55
11
Other comprehensive income ....................................................................... $
721
$
239
$
(505)
849
344
(800)
833
11
11
83
138
482
The following table presents the changes in each component of AOCI, net of tax, for the years ended December 31, 2019, 2018
and 2017:
Investment
Securities
Defined
Benefit
Plans
Accumulated
Other
Comprehensive
Income (Loss)
(Dollars in thousands)
Year ended December 31, 2019
Balance at beginning of period..................................................................... $
(9,643) $
(6,450) $
Impact of adoption of new accounting standards ......................................
Adjusted balance at beginning of period ......................................................
Other comprehensive income (loss) before reclassifications .......................
Amounts reclassified from AOCI.................................................................
Net other comprehensive income (loss).....................................................
(3,100)
(12,743)
27,594
(26)
27,568
—
(6,450)
(810)
844
34
Balance at end of period ............................................................................... $
14,825
$
(6,416) $
(16,093)
(3,100)
(19,193)
26,784
818
27,602
8,409
130
Investment
Securities
Defined
Benefit
Plans
Accumulated
Other
Comprehensive
Income (Loss)
(Dollars in thousands)
Year ended December 31, 2018
Balance at beginning of period..................................................................... $
5,073
$
(6,112) $
Impact of adoption of new accounting standards
Adjusted balance at beginning of period
(139)
4,934
—
(6,112)
(1,039)
(139)
(1,178)
Impact of adoption of new accounting standards
(455)
(1,381)
(1,836)
Other comprehensive income (loss) before reclassifications.....................
Amounts reclassified from AOCI ..............................................................
Net other comprehensive income (loss).....................................................
(13,918)
(204)
(14,122)
193
850
1,043
Balance at end of period ............................................................................... $
(9,643) $
(6,450) $
(13,725)
646
(13,079)
(16,093)
Investment
Securities
Defined
Benefit
Plans
Accumulated
Other
Comprehensive
Income (Loss)
(Dollars in thousands)
Year ended December 31, 2017
Balance at beginning of period..................................................................... $
4,729
$
(6,250) $
(1,521)
Other comprehensive income (loss) before reclassifications.....................
Amounts reclassified from AOCI ..............................................................
Total other comprehensive income (loss) ..................................................
(505)
849
344
(800)
938
138
Balance at end of period ............................................................................... $
5,073
$
(6,112) $
(1,305)
1,787
482
(1,039)
131
The following table presents the amounts reclassified out of each component of AOCI for the years ended December 31, 2019,
2018 and 2017:
Details about AOCI Components
2019
2018
2017
Year ended December 31,
Statement Where Net
Income is Presented
Amount Reclassified from AOCI
Affected Line Item in the
Sale of available-for-sale investment securities:
Realized gains (losses) on available-for-sale
investment securities .............................................. $
Tax effect ................................................................
Net of tax ................................................................ $
Defined benefit plan items:
(Dollars in thousands)
36
(10)
26
$
$
279
(75)
204
$
$
(1,410)
Net gains (losses) on sales of
investment securities
561
Income tax benefit (expense)
(849)
Amortization of net actuarial losses ....................... $
(1,117) $
(1,153) $
(1,293) Salaries and employee benefits (1)
Amortization of net transition obligation ...............
Amortization of prior service cost..........................
Settlement...............................................................
Total before tax.......................................................
Tax effect ................................................................
(18)
(18)
—
(1,153)
309
(18)
(18)
—
(1,189)
339
(18) Salaries and employee benefits (1)
(18) Salaries and employee benefits (1)
(138) Salaries and employee benefits (1)
(1,467)
529
Income tax expense
Net of tax ................................................................ $
(844) $
(850) $
(938)
Total reclassifications, net of tax ............................ $
(818) $
(646) $
(1,787)
(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).
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, 2019, 2018 and 2017:
Year Ended December 31,
2019
2018
2017
(In thousands, except per share data)
Net income ...................................................................................................... $
58,322
$
59,486
$
41,204
Weighted average shares outstanding for basic earnings per share.................
Add: Dilutive effect of employee stock options and awards ..........................
Weighted average shares outstanding for diluted earnings per share..............
28,495,699
181,401
28,677,100
29,409,683
200,224
29,609,907
30,400,511
237,629
30,638,140
Basic earnings per share.................................................................................. $
Diluted earnings per share............................................................................... $
2.05
2.03
$
$
2.02
2.01
$
$
1.36
1.34
There were no potentially dilutive securities that have been excluded from the dilutive share calculation for the years ended
December 31, 2019, 2018, and 2017.
132
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 and items held for collections, 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 counter-party 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. 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. 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 counter-party. 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
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. 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. 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 counter-parties 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. 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. Risks arise from the possible inability of counter-parties 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 counter-parties. At December 31, 2019 and 2018, we did not have any forward foreign exchange
contracts.
133
At December 31, 2019 and 2018, financial instruments with off-balance sheet risk were as follows:
December 31,
2019
2018
(Dollars in thousands)
Notional amount of:
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit.................................................................................................................. $
1,089,135
$
1,030,322
Standby letters of credit and financial guarantees written........................................................................
10,526
13,377
Notional amount of:
Financial instruments whose contract amounts exceed the amount of credit risk:
Interest rate options ..................................................................................................................................
Forward interest rate contracts .................................................................................................................
625
8,968
2,158
8,530
25. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
Disclosures about Fair Value of Financial Instruments
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 financial institutions, interest-bearing deposits in other financial
institutions, accrued interest receivable, the majority of FHLB advances and other short-term borrowings, and accrued interest
payable.
Investment Securities
The fair value of investment securities is based on market price quotations received from third-party pricing services. The third-
party pricing services utilize pricing models supported with timely market data information. 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. In accordance with ASU 2016-01, the fair value of loans as of December 31, 2019 and 2018 are
based on the notion of exit price. The fair value of loans as of December 31, 2017 was measured based on the notion of entry
price.
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, if any, net of applicable selling costs on our
consolidated balance sheets.
FHLB Stock
It is not practical to determine the fair value of FHLB stock due to the restrictions placed on its transferability.
134
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.
Derivatives
The fair values of derivative financial instruments are based upon current market 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.
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.
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 and liabilities
and premises and equipment.
135
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, 2019
Financial assets:
Cash and due from financial institutions ............................... $
78,418
$
78,418
$
78,418
$
Interest-bearing deposits in other financial institutions .........
24,554
Investment securities..............................................................
1,128,110
Loans held for sale .................................................................
9,083
24,554
1,128,110
9,083
Loans and leases, net of Allowance .......................................
4,401,569
4,392,477
FHLB stock............................................................................
Accrued interest receivable....................................................
14,983
16,500
N/A
16,500
Financial liabilities:
Deposits:
Noninterest-bearing deposits ..............................................
Interest-bearing demand and savings deposits....................
Time deposits ......................................................................
FHLB advances and other short-term borrowings.................
Long-term debt.......................................................................
Accrued interest payable (included in other liabilities) .........
1,450,532
2,643,038
1,026,453
150,000
101,547
4,288
1,450,532
2,643,038
1,023,362
150,000
97,827
4,288
24,554
1,127
—
—
N/A
16,500
1,450,532
2,643,038
—
—
—
4,288
— $
—
1,115,728
9,083
—
N/A
—
—
—
—
150,000
97,827
—
—
—
11,255
—
4,392,477
N/A
—
—
—
1,023,362
—
—
—
Notional
Amount
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, 2019
Off-balance sheet financial instruments:
Commitments to extend credit ................. $
1,089,135
$
1,230
$
1,230
$
— $
1,230
$
Standby letters of credit and financial
guarantees written ....................................
10,526
158
158
Derivatives:
Interest rate lock commitments.............
Forward sale commitments ...................
625
8,968
8
(28)
8
(28)
—
—
—
158
8
(28)
—
—
—
—
136
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, 2018
Financial assets:
Cash and due from financial institutions ............................... $
80,569
$
80,569
$
80,569
$
Interest-bearing deposits in other financial institutions .........
21,617
Investment securities..............................................................
1,354,812
Loans held for sale .................................................................
6,647
21,617
1,350,576
6,647
Loans and leases, net of Allowance .......................................
4,030,450
3,938,380
FHLB stock............................................................................
Accrued interest receivable....................................................
16,645
17,000
N/A
17,000
Financial liabilities:
Deposits:
Noninterest-bearing deposits ..............................................
Interest-bearing demand and savings deposits....................
Time deposits ......................................................................
FHLB advances and other short-term borrowings.................
Long-term debt.......................................................................
Accrued interest payable (included in other liabilities) .........
1,436,967
2,402,268
1,107,255
197,000
122,166
5,051
1,436,967
2,402,268
1,099,560
197,000
118,057
5,051
21,617
826
—
—
N/A
17,000
1,436,967
2,402,268
—
—
—
5,051
— $
—
1,338,581
6,647
—
N/A
—
—
—
—
197,000
118,057
—
—
—
11,169
—
3,938,380
N/A
—
—
—
1,099,560
—
—
—
Notional
Amount
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, 2018
Off-balance sheet financial instruments:
Commitments to extend credit ................. $
1,030,322
$
1,205
$
1,205
$
— $
1,205
$
Standby letters of credit and financial
guarantees written ....................................
13,377
201
201
Derivatives:
Interest rate lock commitments................
Forward sale commitments ......................
2,158
8,530
11
(95)
11
(95)
—
—
—
201
11
(95)
—
—
—
—
Fair Value Measurements
We group our financial assets and liabilities at fair value into three levels based on the markets in which the financial assets and
liabilities are traded and the reliability of the assumptions used to determine fair value as follows:
•
•
Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities traded in active
markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to
measure fair value whenever available.
Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical
or similar instruments in markets that are not active, and model-based valuation techniques for which all significant
assumptions are observable in the market.
137
•
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.
We use fair value measurements to record adjustments to certain financial assets and liabilities and to determine fair value
disclosures. Available-for-sale investment 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, 2019.
The following table below presents the fair value of assets and liabilities measured 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, 2019
Available-for-sale investment securities:
Debt securities:
States and political subdivisions...................................... $
122,018
$
— $
110,763
$
11,255
Corporate securities .........................................................
U.S. Treasury obligations and direct obligations of U.S
Government agencies.......................................................
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities
("GSEs") ..........................................................................
Residential - Non-government sponsored entities
("Non-GSEs") ..................................................................
Commercial - U.S. GSEs and agencies ...........................
Commercial - Non-GSEs.................................................
Equity securities .................................................................
Derivatives: Interest rate lock and forward sale
commitments.........................................................................
30,529
40,381
677,822
37,191
81,225
137,817
1,127
(20)
—
—
—
—
—
—
1,127
—
30,529
40,381
677,822
37,191
81,225
137,817
—
(20)
—
—
—
—
—
—
—
—
Total ...................................................................................... $
1,128,090
$
1,127
$
1,115,708
$
11,255
138
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, 2018
Available-for-sale investment securities:
Debt securities:
States and political subdivisions...................................... $
173,674
$
— $
162,505
$
11,169
Corporate securities .........................................................
U.S. Treasury obligations and direct obligations of U.S
Government agencies.......................................................
Mortgage-backed securities:
Residential - U.S. Government-sponsored entities
("GSEs") ..........................................................................
Residential - Non-government sponsored entities
("Non-GSEs") ..................................................................
Commercial - U.S. GSEs and agencies ...........................
Commercial - Non-GSEs.................................................
Equity securities .................................................................
Derivatives: Interest rate lock and forward sale
commitments.........................................................................
54,849
32,574
717,052
41,118
51,483
134,728
826
(84)
—
—
—
—
—
—
826
—
54,849
32,574
717,052
41,118
51,483
134,728
—
(84)
—
—
—
—
—
—
—
—
Total ...................................................................................... $
1,206,220
$
826
$
1,194,225
$
11,169
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
Available-for-Sale
Debt Securities -
States and
Political
Subdivisions
(Dollars in thousands)
Balance as of December 31, 2017 ............................................................................................................................ $
Principal payments received ....................................................................................................................................
Purchases .................................................................................................................................................................
Unrealized net loss included in other comprehensive loss ......................................................................................
Balance as of December 31, 2018 ............................................................................................................................ $
Principal payments received ....................................................................................................................................
Purchases .................................................................................................................................................................
Unrealized net gain included in other comprehensive loss .....................................................................................
Balance as of December 31, 2019 ............................................................................................................................ $
11,794
(373)
—
(252)
11,169
(400)
—
486
11,255
Within the state and political subdivisions debt securities category, the Company holds four mortgage revenue bonds issued by
the City and County of Honolulu with an aggregate fair value of $11.3 million and $11.2 million at December 31, 2019 and
2018, 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, 2019, the weighted average discount rate utilized was 4.08%, 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.
139
The following table presents the fair value of assets measured on a nonrecurring basis and 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)
(Dollars in thousands)
Fair Value
164
$
— $
164
$
414
$
— $
414
$
Total
Losses
— $
$
— $
$
—
—
—
—
December 31, 2019
Other real estate (1) ...................... $
Total ............................................
December 31, 2018
Other real estate (1) ...................... $
Total ............................................
(1) Represents other real estate that is carried at 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.
140
Segment net income (loss) and total assets are provided in the following table for the periods indicated:
Banking
Operations
Treasury
All Others
Total
(Dollars in thousands)
Year ended December 31, 2019
Net interest income...................................................................... $
171,716
$
12,358
$
— $
184,074
Intersegment net interest income (expense) ................................
Credit (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...............................................
Equity in earnings of unconsolidated subsidiaries ...................
Fees on foreign exchange .........................................................
Investments securities gains (losses) ........................................
Income from bank-owned life insurance ..................................
Loan placement fees .................................................................
Net gain (loss) sale of foreclosed assets ...................................
Other .........................................................................................
Total other operating income...............................................
Total other operating expense .....................................................
Administrative and overhead expense allocation........................
Income before taxes..................................................................
Income tax (expense) benefit ......................................................
22,907
(6,317)
4,191
8,406
5,685
4,395
257
91
—
—
702
—
632
24,359
(64,940)
(69,039)
78,686
(19,796)
(11,448)
(11,459)
—
—
—
—
—
—
664
36
3,105
—
—
2,585
6,390
(1,487)
(841)
4,972
(1,251)
—
1,792
—
8,673
—
—
—
—
—
—
(145)
732
11,052
(75,204)
69,880
(5,731)
1,442
Net income (loss)...................................................................... $
58,890
$
3,721
$
(4,289) $
—
(6,317)
5,983
8,406
14,358
4,395
257
755
36
3,105
702
(145)
3,949
41,801
(141,631)
—
77,927
(19,605)
58,322
Banking
Operations
Treasury
All Others
Total
(Dollars in thousands)
Balance as of December 31, 2019
Investment securities ................................................................... $
— $
1,128,110
$
— $
1,128,110
Loans and leases (including loans held for sale).........................
4,458,623
Other............................................................................................
24,813
—
251,151
—
149,975
4,458,623
425,939
Total assets................................................................................ $
4,483,436
$
1,379,261
$
149,975
$
6,012,672
141
Banking
Operations
Treasury
All Others
Total
(Dollars in thousands)
Year ended December 31, 2018
Net interest income ...................................................................... $
153,314
$
19,684
$
— $
172,998
Intersegment net interest income (expense) ................................
Credit (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 ...............................................
Equity in earnings of unconsolidated subsidiaries....................
Fees on foreign exchange..........................................................
Investments securities gains (losses).........................................
Income from bank-owned life insurance ..................................
Loan placement fees..................................................................
Other..........................................................................................
Total other operating income..................................................
Total other operating expense......................................................
Administrative and overhead expense allocation ........................
Income before taxes ..................................................................
Income tax (expense) benefit.......................................................
28,691
1,124
4,015
8,406
5,154
4,245
233
98
—
—
747
981
23,879
(63,649)
(60,636)
82,723
(19,832)
(18,284)
(10,407)
—
—
—
23
—
—
807
(279)
2,117
—
65
2,733
(1,472)
(874)
1,787
(428)
—
3,300
—
7,946
—
—
—
—
—
—
946
12,192
(69,561)
61,510
(6,266)
1,502
Net income (loss) ...................................................................... $
62,891
$
1,359
$
(4,764) $
—
1,124
7,315
8,406
13,123
4,245
233
905
(279)
2,117
747
1,992
38,804
(134,682)
—
78,244
(18,758)
59,486
Banking
Operations
Treasury
All Others
Total
(Dollars in thousands)
Balance as of December 31, 2018
Investment securities ................................................................... $
— $
1,354,812
$
— $
1,354,812
Loans and leases (including loans held for sale).........................
4,085,013
Other............................................................................................
36,905
—
256,652
—
73,644
4,085,013
367,201
Total assets................................................................................ $
4,121,918
$
1,611,464
$
73,644
$
5,807,026
Banking
Operations
Treasury
All Others
Total
(Dollars in thousands)
Year ended December 31, 2017
Net interest income ...................................................................... $
140,077
$
27,626
$
— $
167,703
Intersegment net interest income (expense) ................................
Credit (provision) for loan and lease losses.................................
Total other operating income.......................................................
Total other operating expense......................................................
Administrative and overhead expense allocation ........................
Income before taxes ..................................................................
Income taxes ................................................................................
32,977
2,674
22,511
(60,939)
(61,082)
76,218
(34,376)
(25,000)
—
2,448
(1,433)
(972)
2,669
(1,204)
(7,977)
—
11,537
(68,701)
62,054
(3,087)
984
Net income (loss) ...................................................................... $
41,842
$
1,465
$
(2,103) $
—
2,674
36,496
(131,073)
—
75,800
(34,596)
41,204
142
27. PARENT COMPANY AND REGULATORY RESTRICTIONS
At December 31, 2019, the accumulated deficit of the parent company, Central Pacific Financial Corp., included $415.0 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,
2019, the bank had Statutory Retained Earnings of $66.6 million. For further information, see Note 13 - Equity.
The Company and the bank are subject to various regulatory capital requirements administered by federal banking agencies.
Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate
regulatory action.
The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks ("Basel III rules")
became effective for the Company on January 1, 2015, and were fully phased in on January 1, 2019. Under the Basel III rules,
the Company must hold a "capital conservation buffer" above the adequately capitalized risk-based capital ratios. The capital
conservation buffer was phased in at the rate of 0.625% per year from 0.625% in 2016 to 2.50% on January 1, 2019. The
capital conservation buffer for 2019, 2018 and 2017 was 2.50%, 1.875% and 1.25%, respectively. The net unrealized gain or
loss on available-for-sale securities is not included in computing regulatory capital. Management believes as of December 31,
2019, the Company and bank meet all capital adequacy requirements to which they are subject.
Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, under-capitalized,
significantly under-capitalized, and critically under-capitalized, although these terms are not used to represent overall financial
condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If under-capitalized, capital
distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year-end 2019 and
2018, the most recent regulatory notifications categorized the bank as "well-capitalized" under the regulatory framework for
prompt corrective action. There are no conditions or events since that notification that management believes have changed the
institution’s category.
143
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.
Actual
Minimum required for
capital adequacy purposes
Minimum required to
be well-capitalized
Amount
Ratio
Amount
Ratio (1)
Amount
Ratio
(Dollars in thousands)
Company
As of December 31, 2019
Tier 1 capital to avg. assets (leverage ratio)... $
568,529
9.5% $
238,630
4.0%
Tier 1 capital to risk-weighted assets.............
Total capital to risk-weighted assets ..............
Common equity tier 1 ("CET1") capital to
risk-weighted assets .......................................
As of December 31, 2018
Tier 1 capital to avg. assets (leverage ratio)...
Tier 1 capital to risk-weighted assets.............
Total capital to risk-weighted assets ..............
CET1 capital to risk-weighted assets.............
568,529
617,772
518,529
570,260
570,260
619,419
500,260
12.6
13.6
11.5
9.9
13.5
14.7
11.9
271,788
362,384
203,841
230,847
252,921
337,228
189,691
6.0
8.0
4.5
4.0
6.0
8.0
4.5
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Central Pacific Bank
As of December 31, 2019
Tier 1 capital to avg. assets (leverage ratio)... $
556,077
9.3% $
238,342
4.0% $
297,928
5.0%
Tier 1 capital to risk-weighted assets.............
Total capital to risk-weighted assets ..............
CET1 capital to risk-weighted assets.............
556,077
605,320
556,077
As of December 31, 2018
Tier 1 capital to avg. assets (leverage ratio)...
Tier 1 capital to risk-weighted assets.............
Total capital to risk-weighted assets ..............
CET1 capital to risk-weighted assets.............
533,166
533,166
582,325
533,166
12.3
13.4
12.3
9.3
12.7
13.8
12.7
271,350
361,800
203,512
230,638
252,667
336,889
189,500
6.0
8.0
4.5
4.0
6.0
8.0
4.5
361,800
452,250
293,962
288,298
336,889
421,111
273,722
8.0
10.0
6.5
5.0
8.0
10.0
6.5
(1) Under the Basel III Capital Rules, the Company and the bank must also maintain the required Capital Conservation Buffer ("CCB") to
avoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to management. The CCB is
calculated as a ratio of CET1 capital to risk-weighted assets, and effectively increases the required minimum risk-based capital ratios. The
CCB requirement was phased in over a three-year period that began on January 1, 2016. The phase-in period ended on January 1, 2019, and
the CCB is now at its fully phased-in level of 2.5%.
144
Condensed financial statements of the parent company are as follows:
CENTRAL PACIFIC FINANCIAL CORP.
CONDENSED BALANCE SHEETS
December 31,
2019
2018
(Dollars in thousands)
Assets
Cash and cash equivalents ........................................................................................................................ $
10,634
$
Equity investment securities, at fair value................................................................................................
Investment in subsidiary bank ..................................................................................................................
Other assets...............................................................................................................................................
1,127
564,460
8,354
Total assets .......................................................................................................................................... $
584,575
$
Liabilities and Equity
Long-term debt ......................................................................................................................................... $
51,547
$
Other liabilities .........................................................................................................................................
Total liabilities.....................................................................................................................................
Total shareholders’ equity.........................................................................................................................
Total equity..........................................................................................................................................
4,508
56,055
528,520
528,520
16,743
826
519,978
30,312
567,859
72,166
3,968
76,134
491,725
491,725
Total liabilities and equity ................................................................................................................... $
584,575
$
567,859
145
CENTRAL PACIFIC FINANCIAL CORP.
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Income:
Dividends from subsidiary bank ................................................................................ $
42,008
$
103,001
$
43,000
Interest income from subsidiary bank........................................................................
Other income..............................................................................................................
5
92
5
160
Total income.......................................................................................................
42,105
103,166
Expense:
Interest expense on long-term debt ............................................................................
Other expenses ...........................................................................................................
Total expenses....................................................................................................
Income before income taxes and equity in undistributed income of subsidiaries ........
Income tax expense (benefit)........................................................................................
Income before equity in undistributed income of subsidiaries.....................................
2,453
2,599
5,052
37,053
(1,289)
38,342
4,338
1,617
5,955
97,211
(1,261)
98,472
Equity in undistributed income (loss) of subsidiary bank ............................................
19,980
(38,986)
Net income ......................................................................................................... $
58,322
$
59,486
$
6
150
43,156
3,479
2,002
5,481
37,675
(1,781)
39,456
1,748
41,204
146
CENTRAL PACIFIC FINANCIAL CORP.
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Cash flows from operating activities:
Net income ................................................................................................................. $
58,322
$
59,486
$
41,204
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax expense (benefit) ...................................................................
Net change in dividends receivable from subsidiary bank......................................
Equity in undistributed loss (income) of subsidiary bank.......................................
Share-based compensation expense ........................................................................
Net change in other assets and liabilities ................................................................
Net cash provided by operating activities.............................................................
3,055
21,004
(19,980)
2,735
(2,900)
62,236
450
(21,004)
38,986
2,778
(920)
79,776
Cash flows from investing activities:
Distributions from unconsolidated subsidiaries ......................................................
Net cash provided by investing activities .............................................................
622
622
622
622
Cash flows from financing activities:
Net proceeds from issuance of common stock and stock option exercises.............
Repayments of long-term debt ................................................................................
Repurchases of common stock................................................................................
Cash dividends paid on common stock ...................................................................
Net cash used in financing activities ....................................................................
151
(20,619)
(22,793)
(25,706)
(68,967)
—
(20,619)
(32,824)
(24,143)
(77,586)
(442)
—
(1,748)
1,918
1,357
42,289
—
—
—
—
(26,559)
(21,299)
(47,858)
Net increase (decrease) in cash and cash equivalents...........................................
(6,109)
2,812
(5,569)
Cash and cash equivalents at beginning of year ...........................................................
16,743
13,931
Cash and cash equivalents at end of year ..................................................................... $
10,634
$
16,743
$
19,500
13,931
147
28. UNAUDITED QUARTERLY FINANCIAL INFORMATION
As discussed in Note 1 - Summary of Significant Accounting Policies and Note 7 - Investments in Unconsolidated Subsidiaries,
during the fourth quarter of 2018, the Company voluntarily changed its accounting policy for its investments in LIHTC
partnerships. As a result, financial information for the periods prior to the fourth quarter of 2018 was revised to reflect the
reclassification of amortization of investments in LIHTC partnerships from total other operating expense to income tax
expense, which provides users a better understanding of the nature of the returns of such investments, in connection with the
change in accounting policy:
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full Year
(Dollars in thousands, except per share data)
2019
Total interest income........................................................... $
53,141
$
54,105
$
53,980
$
55,157
$
216,383
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..........................................................................
8,028
45,113
1,283
43,830
—
21,155
16,037
8,727
45,378
1,404
43,974
—
17,961
13,534
8,331
45,649
1,532
44,117
36
19,449
14,554
7,223
47,934
2,098
45,836
—
19,362
14,197
Basic earnings per share ..................................................... $
Diluted earnings per share ..................................................
$
0.56
0.55
$
0.47
0.47
$
0.51
0.51
$
0.50
0.50
32,309
184,074
6,317
177,757
36
77,927
58,322
2.05
2.03
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full Year
(Dollars in thousands, except per share data)
2018
Total interest income ........................................................... $
47,310
$
48,509
$
50,136
$
52,339
$
198,294
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 ..........................................................................
4,988
42,322
(211)
42,533
—
18,083
14,277
5,837
42,672
532
42,140
—
18,159
14,224
6,811
43,325
(59)
43,384
—
20,179
15,193
7,660
44,679
(1,386)
46,065
(279)
21,823
15,792
Basic earnings per share...................................................... $
Diluted earnings per share...................................................
$
0.48
0.48
$
0.48
0.48
$
0.52
0.52
$
0.54
0.54
25,296
172,998
(1,124)
174,122
(279)
78,244
59,486
2.02
2.01
148
29. SUBSEQUENT EVENTS
In January 2020, the Board of Directors authorized the repurchase of up to $30.0 million of its common stock from time to time
of the open market or in privately negotiated transactions, pursuant to a newly authorized share repurchase program. The share
repurchase program replaced and superseded in its entirety the 2019 Repurchase Plan. The 2019 Repurchase Plan had 21.1
million in remaining repurchase authority as of December 31, 2019.
149
ITEM 9.
FINANCIAL DISCLOSURE
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
On May 16, 2018, the Audit Committee of the Company’s Board of Directors (the "Audit Committee") concluded a
competitive review process of independent registered public accounting firms. As a result of this process and following careful
deliberation, the Audit Committee approved the dismissal of KPMG LLP ("KPMG") as the Company's independent registered
public accounting firm, effective May 16, 2018. The Company provided KPMG with formal notice of such dismissal on May
16, 2018.
For further information regarding our change in accounting firm, please see Item 4.01 of our Report on Form 8-K filed on May
17, 2018, which information is incorporated herein by reference.
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, 2019. Based on that evaluation, the
principal executive officer and principal financial officer concluded that, as of December 31, 2019, the Company’s disclosure
controls and procedures are effective.
(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, 2019, 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, 2019 is effective.
The Company’s internal control over financial reporting as of December 31, 2019 has been audited by Crowe 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) 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, 2019 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
150
ITEM 9B.
OTHER INFORMATION
None.
151
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 2020 Annual Meeting of Shareholders (the "2020 Proxy Statement") to be filed with the SEC within 120 days
of the fiscal year ended December 31, 2019. Information concerning the Company’s Code of Conduct & 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 2020 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 2020 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 2020 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 2020 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 2020 Proxy Statement.
The following table provides information as of December 31, 2019 regarding securities issued under our equity compensation
plans that were in effect during fiscal 2019.
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))
133,813
$
—
133,813
14.31
—
14.31
1,304,773
—
1,304,773
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 2020 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 2020 Proxy Statement.
152
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 3—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 2020 Proxy Statement.
153
PART IV
ITEM 15.
EXHIBITS, 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, 2019 and 2018
Consolidated Statements of Income for the Years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the Years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Changes in Equity for the Years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years ended December 31, 2019, 2018 and 2017
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.
154
(b) Exhibits
Exhibit
Number
3.1
Restated Articles of Incorporation of the Registrant (1)
Description
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
Bylaws of the Registrant, as amended through January 25, 2012 (2)
Description of Securities of the Registrant Registered Pursuant to Section 12 of the Exchange Act (*)
Form of Registrant's Common Stock Certificate (*)
Central Pacific Bank Supplemental Executive Retirement Plan (3) (4)
The Registrant’s Directors’ Deferred Compensation Plan (3) (5)
The Registrant’s 2004 Stock Compensation Plan (3) (6)
Form of Restricted Share Grant Agreement to Non-Employee Director under 2004 Stock Compensation Plan (3)
(6)
Supplemental Executive Retirement Agreement for Blenn A. Fujimoto, effective July 1, 2005 (3) (9)
Amendment No. 1 to the Supplemental Executive Retirement Plan between the Registrant and Blenn A. Fujimoto,
effective December 31, 2008 (3) (8)
The Registrant’s Long-Term Executive Incentive Plan, effective January 1, 2005 (3) (10)
Amendment No. 2008-1 to the Registrant’s Long-Term Executive Incentive Plan (3) (8)
The Registrant’s 2004 Annual Executive Incentive Plan (3) (6)
Amendment No. 2008-1 to the Registrant’s 2004 Annual Executive Incentive Plan dated December 31, 2008 (3)
(8)
Amendment No. 2011-1 to the Registrant’s 2004 Stock Compensation Plan (3) (11)
Amendment No. 2012-1 to the Registrant's 2004 Stock Compensation Plan (12)
Form of Stock Option Grant Agreement for the Registrant's 2004 Stock Compensation Plan (12)
Form of Restricted Stock Unit Grant Agreement for the Registrant's 2004 Stock Compensation Plan (12)
The Registrant’s 2013 Stock Compensation Plan (13)
Form of Stock Option Grant Agreement for the Registrant's 2013 Stock Compensation Plan (14)
Form of Restricted Stock Grant Agreement for the Registrant's 2013 Stock Compensation Plan (14)
Form of Restricted Stock Unit Agreement for the Registrant's 2013 Stock Compensation Plan (14)
Form of Stock Appreciation Rights Grant Agreement for the Registrant's 2013 Stock Compensation Plan (14)
Form of Key Employee Restricted Stock Unit Grant Agreement for the Registrant's 2013 Stock Compensation
Plan (14)
10.21
Employment Agreement with Paul Yonamine, dated September 25, 2018 (3) (7)
14.1
14.2
21
23.1
23.2
31.1
The Registrant's Code of Conduct & Ethics (10)
The Registrant's Code of Conduct & Ethics for Senior Financial Officers (10)
Subsidiaries of the Registrant *
Consent of Independent Registered Public Accounting Firm (KPMG) *
Consent of Independent Registered Public Accounting Firm (Crowe) *
Rule 13a-14(a) Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley
Act of 2002 *
155
Exhibit
Number
31.2
Description
Rule 13a-14(a) Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act
of 2002 *
32.1
32.2
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 *
104
Cover Page Interactive Data File (formatted as Inline XBRL and included within the Exhibit 101 attachments)
*
**
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.
156
(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.
Denotes management contract or compensation plan or arrangement.
Incorporated herein by reference to Exhibit 10.8 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, respectively, 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 10.1 to the Registrant’s Current Report on Form 8-K, filed with the
Securities and Exchange Commission on September 26, 2018.
Incorporated herein by reference to Exhibits 10.15, 10.19 and 10.21, respectively, 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 Exhibit 99.1 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, respectively, 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, respectively, 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 Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission on February 27,
2019.
Incorporated herein by reference to Exhibits 10.2, 10.3, 10.4, 10.5 and 10.6, respectively, to the Registrant’s
Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 1, 2013.
(c) Financial Statement Schedules
All financial statement schedules have been omitted as the information is not required under the related instructions or
is inapplicable.
157
ITEM 16.
FORM 10-K SUMMARY
Not applicable.
SIGNATURES
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.
Dated: February 25, 2020
CENTRAL PACIFIC FINANCIAL CORP.
(Registrant)
/s/ Paul K. Yonamine
Paul K. Yonamine
Chairman 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.
158
Signature
Title
/s/ Paul K. Yonamine
Paul K. Yonamine
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ David S. Morimoto
David S. Morimoto
Executive Vice President and Chief
Financial Officer (Principal Financial and
Accounting Officer)
Date
February 25, 2020
February 25, 2020
/s/ A. Catherine Ngo
A. Catherine Ngo
/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
/s/ Christopher T. Lutes
Christopher T. Lutes
President, Director
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
159
Exhibit 4.1
Description of Central Pacific Financial Corp.’s Securities Registered Pursuant to Section 12 of the Securities Exchange
Act of 1934
The following is a summary description of Central Pacific Financial Corp’s Common Stock. This description is not complete
and is qualified in its entirety by reference to the provisions of our Restated Articles of Incorporation and Amended Bylaws,
each of which is incorporated herein by reference as an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.1 is
a part, and the applicable provisions of the Hawaii Business Corporation Act (the "HBCA").
Common Stock
Our authorized Common Stock consists of 185,000,000 shares of Common Stock, no par value per share, of which 28,289,257
shares are outstanding as of December 31, 2019. The issued Common Stock represent non-withdrawable capital and are not
federally insured.
Dividend Rights
Holders of our Common Stock are entitled to receive dividends if, as and when declared by the Board of Directors out of any
funds legally available for dividends. The ability to pay dividends depends on the amount of dividends paid to the Company by
Central Pacific Bank (the “Bank”), a wholly-owned subsidiary of the Company. As further described in Part I, Item 1 of the
Form 10-K of which this Exhibit 4.1 is a part, the Company’s payment of dividends, and the Bank’s payment of dividends to
the Company, are subject to extensive government regulation, in that regulatory authorities may invoke their authority to
prohibit banks and their holding companies from paying dividends for a number of reasons, including, for example, a
determination that such payments would constitute an unsafe or unsound banking practice or a determination that such
payments would reduce the amount of either entity’s capital below that necessary to meet minimum applicable regulatory
capital requirements. Our ability to pay dividends is also subject to restrictions set forth under Hawaii law and restrictions and
covenants set forth in various agreements we are a party to, including covenants set forth in our subordinated debentures. The
Bank, in addition to obtaining approval from the Federal Deposit Insurance Corporation and Hawaii Division of Financial
Institutions, if required, is not permitted under Hawaii law to pay dividends except out of retained earnings as defined under
Hawaii banking law.
Liquidation and Dissolution
In the event of our liquidation or dissolution, the holders of Common Stock are entitled to receive proportionately all assets
available for distribution to shareholders after the payment of all debts and other liabilities and subject to the prior rights of any
outstanding preferred stock. Holders of Common Stock are not entitled to a liquidation preference in respect of those shares.
No Preemptive or Conversion Rights
Holders of Common Stock generally do not have preemptive rights to purchase additional Common Stock or conversion or
redemption rights under our Restated Articles of Incorporation or the HBCA.
Voting Rights
Holders of our Common Stock are entitled to one vote for each share held on all matters submitted to a vote of shareholders
and do not have cumulative voting rights. An election of directors by our shareholders shall be determined by a plurality of the
votes cast by the shareholders entitled to vote on the election.
Restrictions on Ownership-Bank Regulatory Restrictions
Federal law prohibits a person or group of persons “acting in concert” from acquiring “control” of a bank holding company
unless the Federal Reserve Board has been given prior written notice of such proposed acquisition and within that time period
the Federal Reserve has not issued a notice disapproving the proposed acquisition or extending for up to another statutory
period during which such a disapproval may be issued. An acquisition may be made prior to the expiration of the disapproval
period if the Federal Reserve issues written notice of its intent not to disapprove the action. Whether or not a party is presumed
to have acquired control or have a controlling influence over a bank holding company depends on, among other things, its
percentage of voting ownership, the number of director representatives such party has and overall business relationships with
the bank holding company. Similarly, the Hawaii Commissioner of Financial Institutions is required to approve any acquisition
of control of the Bank or Central Pacific Financial Corp.
Anti-Takeover Effects of Hawaii Law
The Hawaii Control Share Acquisitions Act (the "CSA Act") is applicable to the Company and is designed to inhibit hostile
acquisitions by restricting Control Share Acquisitions. A Control Share Acquisition is the acquisition of shares of an issuer
resulting in beneficial ownership of a new range of voting power (with thresholds for the ranges starting at 10% and set at 10%
intervals up to a majority) for the election of directors. Certain acquisitions are exempt from the CSA Act, including
acquisitions from the issuer or where the issuer's prior approval has been obtained. The CSA Act prohibits the consummation of
a Control Share Acquisition unless each such acquisition is separately approved by a majority of the corporation's outstanding
shares (excluding shares beneficially owned by the acquiring person) and imposes certain state law disclosure and timing
requirements. If a Control Share Acquisition is made without the requisite shareholder approval, then, for a period of one year
after the acquisition, the shares acquired by the acquiring person will (i) be denied voting rights, (ii) be non-transferable, and
(iii) be subject to redemption at the option of the corporation either at the price at which the shares were acquired or at book
value per share as of the last day of the fiscal quarter ended prior to the date of the call for redemption.
Thus, under certain circumstances, the CSA Act may make it more difficult for an acquiring person to exercise control over the
Company due to the limitations placed on that person's ability to vote the shares so acquired and the right of the Company to
acquire the subject shares.
In addition, the HBCA requires mergers and share exchanges to be approved by the affirmative vote of the holders of 3/4 of all
the issued and outstanding shares having voting power.
Anti-Takeover Provisions in our Restated Articles and Amended Bylaws
The following discussion is a general summary of certain provisions of the Restated Articles of Incorporation, and Amended
Bylaws of the Company which may be deemed to have an "anti-takeover" effect.
Advance Notice Requirement for Director Nominations. Our Amended Bylaws provide that shareholder nominations for the
election of directors may not be brought before a meeting of shareholders unless the shareholder has given timely written notice
in proper form of such nomination to the Secretary of the Company at the principal executive office. Such proposals or
nominations may be made only by persons who are shareholders of record on the date on which such notice is given and on the
record date for determination of shareholders entitled to vote at that meeting. To be timely, a shareholder's notice shall be
delivered to or mailed and received at the executive office of the corporation not less than 90 calendar days nor more than 120
calendar days prior to the first anniversary date of the annual meeting for the preceding year; provided, however, if and only if
the annual meeting is not scheduled to be held within a period that commences 30 days before such anniversary date and ends
30 days after such anniversary date, the shareholder's notice shall be given in the manner provided herein by the later of (i) the
close of business on the date 90 days prior to the meeting date or (ii) the tenth day following the date the meeting is first
publicly announced or disclosed, and (iii) in the case of a special meeting of shareholders called for the purpose of electing
directors, not later than the close of business on the tenth day following the day on which the date of the special meeting and of
the nominees proposed by the Board of Directors to be elected at such meeting is publicly announced or disclosed.
No person nominated by a shareholder is eligible for election to the Board of Directors unless nominated in accordance with
the foregoing procedures, and thus such procedures could make it more difficult for dissident shareholders to nominate and
elect their candidates.
Supermajority Shareholder Vote to Call a Special Shareholders Meeting to Amend Bylaws. Subject to repeal or change at any
regular meeting of the shareholders, or at any special meeting called for that purpose by the vote of the holders of eighty
percent (80%) of the outstanding shares entitled to vote at such meeting, the power to alter, amend or repeal our Amended
Bylaws or adopt new bylaws is vested in the Board of Directors. The supermajority vote required to call a special meeting of
shareholders to amend the bylaws could have the effect of discouraging a tender offer or other takeover attempt where the
ability to make fundamental changes through bylaw amendments adopted by the shareholders at a special meeting is an
important element of the takeover strategy.
Fair Price Provisions Involving Business Combinations. Our Restated Articles of Incorporation contain a "fair price"
provision that applies to certain business combination transactions involving any interested shareholder, which is (i) any person
that beneficially owns more than 10% of our voting stock or (ii) any affiliate of the Company that within the past five years
beneficially owned more than 10% of our voting stock. This provision requires the affirmative vote of the holders of at least
75% of our voting stock to approve specified transactions between an interested shareholder or its affiliate and us or our
subsidiaries, including:
•
•
•
•
•
any merger or consolidation;
any sale, lease, license, exchange, pledge, transfer or other disposition of assets (in one transaction or a series of
transactions) having a fair market value of $2 million or more;
the issuance or transfer of any of our securities or any of our subsidiaries' securities by us or any of our subsidiaries to
an interested shareholder or its affiliates having a fair market value of $2 million or more;
the adoption of a plan or proposal for our liquidation or dissolution proposed by or on behalf of an interested
shareholder or its affiliate; and
any reclassification of securities (including any reverse stock split), recapitalization, merger or consolidation of our
company with any of our subsidiaries or other transaction (whether or not involving an interested shareholder) that has
the effect of increasing the proportionate share of the outstanding shares of any class of our equity or convertible
securities or those of our subsidiaries owned by an interested shareholder or its affiliate.
This voting requirement will not apply to any particular transaction approved by a majority vote of the directors who are
unaffiliated with the interested shareholder and who were members of the Board of Directors before the latter of the first public
announcement of the terms of the proposed business combination and the day the interested shareholder became a shareholder
and any successor to such directors who were unaffiliated with the interested shareholder and recommended to the Board of
Directors by a majority of such directors. This voting requirement will also not apply to any transaction involving the payment
of consideration to holders of our outstanding Common Stock in which certain minimum "fair price" and procedural
requirements are met.
This "fair price" provision could have the effect of delaying or preventing a change in control of our company in a transaction
of series of transactions that does not satisfy the stated criteria.
Preferred Stock. Our Restated Articles of Incorporation allow the Board of Directors to issue up to 1,000,000 shares of
preferred stock, no par value per share. The Board of Directors also has the authority to designate the rights, preferences,
privileges and restrictions of such preferred stock, including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series. The issuance
of preferred stock may have the effect of delaying, deterring or preventing a change of control of our company without further
action by the shareholders. The issuance of preferred stock with voting and conversion rights may also adversely affect the
voting power of the holders of Common Stock. In certain circumstances, an issuance of preferred stock could have the effect of
decreasing the market price of our Common Stock.
The Tax Benefits Preservation Plan
expired on February 18, 2016.
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, 2019:
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
Gentry HomeLoans, LLC
Haseko HomeLoans, LLC
Island Pacific HomeLoans, LLC
(1) Terminated in January 2019.
Hawaii
Delaware
Connecticut
Delaware
Delaware
Hawaii
Hawaii
Hawaii
Percent
Owned
100%
100% (1)
100% (1)
100%
100%
50%
50%
50%
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
Central Pacific Financial Corp.:
We consent to the incorporation by reference in the registration statements (Nos. 333 141232, 333 188445, 333 119538,
333 196873, and 333 211155) on Form S 8 of Central Pacific Financial Corp. of our report dated February 28, 2018, with
respect to the Central Pacific Financial Corp. and subsidiaries consolidated statements of income, comprehensive income,
changes in equity, and cash flows for the year ended December 31, 2017, and the related notes, before the effects of the
adjustments to retroactively apply the change in accounting related to investments in low income housing tax credit
partnerships described in Note 1, which report appears in the December 31, 2019 annual report on Form 10 K of Central
Pacific Financial Corp.
/s/ KPMG LLP
Honolulu, Hawaii
February 25, 2020
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-141232, No. 333-188445, No. 333-119538, No.
333-196873, and No. 333-211155 on Form S-8 of Central Pacific Financial Corp. of our report dated February 25, 2020 relating
to the financial statements and effectiveness of internal control over financial reporting, appearing in this Annual Report on Form
10-K.
Exhibit 23.2
/s/ Crowe LLP
Sacramento, California
February 25, 2020
Exhibit 31.1
CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(a)
I, Paul K. Yonamine, Chairman and Chief Executive Officer of Central Pacific Financial Corp. (the “Company”), certify that:
1.
I have reviewed this Annual Report on Form 10-K of the Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 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: February 25, 2020
By:
/s/ Paul K. Yonamine
Paul K. Yonamine
Chairman 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: February 25, 2020
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, Paul K. Yonamine, Chairman and 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, 2019, 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: February 25, 2020
By:
/s/ Paul K. Yonamine
Paul K. Yonamine
Chairman 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, 2019, 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: February 25, 2020
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.
BR154760-0320-10K