Mortgage banking income powers Central Pacific Bank earnings

Central Pacific Bank, fresh off the unveiling of its newly renovated downtown headquarters building, continued its momentum by trouncing analysts’ fourth-quarter earnings estimates as its mortgage banking income soared.

The state’s fourth-largest bank said an increase in refinancings, and fees collected from mortgage sales, more than tripled its mortgage banking income from the year-earlier quarter to a record $5.4 million from $1.4 million. It gained 25.1% from $4.3 million in the third quarter.

“It was a record quarter for mortgage banking income for the company,” Central Pacific Chief Financial Officer David Morimoto said in a phone interview ahead of the company’s earnings report due out today. “We looked as far back as the financial crisis. It is attributed to the hard work of the mortgage banking team working very long hours seven days a week to help customers with refinancings to reduce our customers’ mortgage loan rates and improve their financial position.”

He said the results were a function of the hard work of the team combined with the lower market interest rates.

“We make about $6-7 million in a normal year, and in the fourth quarter we made $5.4 million,” Morimoto said. “So that kind of puts it in perspective. The biggest driver of the $5.4 million was gains on sales of mortgages to Fannie Mae and Freddie Mac.”

Parent company Central Pacific Financial Corp.’s net income fell 14.3% to $12.2 million, or 43 cents a share, to easily beat analysts’ forecast of 35 cents a share. A year earlier Central Pacific earned $14.2 million, or 50 cents a share. The fourth-quarter earnings were nearly double the $6.9 million earned in the third quarter.

The bank set aside $4.5 million for potential loan losses to bring the amount added to its reserve for the year to $39.1 million. But the loan-loss provision by the bank was the smallest of any of its four quarters in 2020. In the fourth quarter of 2019, the bank recorded a loan-loss provision of just $2.1 million.

“It was a strong quarter and a strong year, given COVID and given that 2020 was a year of investment for us,” Central Pacific President Catherine Ngo said in an interview. “Our credit quality metrics continue to be strong, and in the quarter we saw a further decline on loan forbearances or deferrals, which is an indicator of credit quality.”

Ngo said a significant component in calculating the amount of the loan-loss provision is the economic forecast.

“Per the economic forecast, we’re cautiously optimistic we’ll see improvement in the coming year, but it might be in the latter half of the year,” she said. “With the rollout of the vaccine and herd immunity, we’ll see an uptick in visitor arrivals, and, as we know, a significant component of our economy is the level of visitor spending.”

For the year, Central Pacific ‘s net income fell 36.1% to $37.3 million, or $1.32 a share, from $58.3 million, or $2.03 a share, in 2019.

Loans rose 11.6% to $4.96 billion from $4.45 billion, driven by the origination of Paycheck Protection Program loans that totaled a net $416.4 million. The bank said loans on forbearance or deferral declined by 58.7% to $120.2 million, or 2.4% of the total loan portfolio, as of Dec. 31, compared with $290.8 million, or 5.8% of the total loan portfolio, as of Sept. 30.

Deposits rose 13.2% to $5.8 billion.

Assets rose 9.7% to $6.59 billion.

The bank also approved a new share repurchase authorization of up to $25 million following a year in which nearly all banks across the country suspended their stock buyback programs due to the COVID-19 pandemic. The bank’s existing $30 million authorization expired Dec. 31.

In addition, Central Pacific declared a quarterly dividend of 23 cents a share that will be payable March 15 to shareholders of record at the close of business Feb. 26.

On Tuesday the bank unveiled its $40 million RISE2020 renovation and modernization project, which features a new plaza, refreshed brand, new community spaces and improved digital products for online, mobile apps and ATMs.

“The Company ended the 2020 year strong and with great positive momentum, despite the challenges of the operating environment,” Central Pacific Chairman and CEO Paul Yonamine said in a statement. “We are optimistic for improvements to the local economy in 2021 and are actively pushing forward with our strategies to position the Company for the future.”

The fourth quarter included nonrecurring expenses totaling $5.9 million primarily related to employee incentives and other benefit programs of $2 million, branch consolidation costs of $1.3 million and litigation settlements of $800,000.

Central Pacific’s net interest income, which is the difference between what it generates from loans and pays out in deposits, rose 7.4% to $51.5 million, primarily due to growth in its loan portfolio, including loans originated under PPP. The bank’s net interest margin fell to 3.32% from 3.43% in the year-earlier quarter but improved from 3.19% in the third quarter, primarily due to growth in its loan portfolio.

Noninterest income, which includes charges and fees, jumped 43.9% to $14.1 million, primarily due to the strong mortgage banking activity.

Central Pacific’s stock fell 54 cents, or 2.7%, to $19.53 Tuesday.