Central Pacific Bank profit falls, but higher rates boost margins

Central Pacific Bank showed strong improvement from the previous three months due to rising interest rates but saw its net income slip 6% last quarter from a year ago after accounting for one-time items, as well as less fee and interest income generated from Paycheck Protection Program loans.

The state’s fourth-largest bank was due to report before the market opened today that it generated earnings of $17.6 million, or 64 cents a share, compared with $18.7 million, or 66 cents a share, in the year-earlier quarter. Last quarter’s net income included an $8.5 million gain on the sale of the company’s Class B common stock of Visa, but that was partially offset by a $4.9 million noncash settlement charge related to the termination and settlement of the company’s defined benefit pension plan that had been frozen since 2002.

In addition, the bank set aside $989,000 for potential loan losses because of an increase in its loan portfolio. In the year-earlier quarter, Central Pacific boosted its income by releasing $3.4 million from its loan-loss reserve.

“(The loan-loss provision) is primarily a result of a strong net loan growth, and this was expected,” Central Pacific Financial Corp. Chief Financial Officer David Morimoto said. “The normal provision number running through the income statement is a debit provision, but all banks, including Central Pacific, have been been reporting credit provisions because we’ve built up our allowances during the early days of the pandemic in anticipation of credit losses that never materialized.

“As a result, over the last year or so, we’ve been reporting credit provisions as we normalize the allowance. But we knew that would eventually run its course, and the second quarter was where it actually normalized. So the provision will likely be a small debit provision going forward, which is the normal case.”

Morimoto said that similar to other financial institutions, the early portion of the rising-rate environment has been beneficial as net interest margins have widened.

”It has slowed some loan activity, primarily in the residential mortgage area, but our demand still remains strong in most other loan categories, which has been good for CPB,” he said.

Morimoto said a year ago that the bank was largely benefiting from PPP fee income and received $7.9 million in the second quarter of 2021, compared with just $900,000 last quarter.

“We did what we needed to do to support the marketplace at that time, but that’s in the rearview area,” President and Chief Operating Officer Arnold Martines said. “We’re certainly pleased with this quarter’s performance because of solid loan growth and expansion of net interest margin from normalized operations, opposed to the PPP effort from a couple years ago.”

Martines said the state’s improving economy is helping the bank and its customers.

“Economic conditions have improved dramatically,” Martines said. “We’re clearly seeing traction in better economic results, and that’s showing in the bank’s results. Our loan growth was solid for the quarter, which really drove an increase in net interest income (the difference between what the bank pays out in deposits and generates from loans).

”Obviously, the interest rate environment helped us with extending our net interest margin, and that supported our profitability in the quarter. But the real good news is we’re starting to see our customers … get back to normal and start to thrive again in economic conditions.”

The bank’s loans rose at an annualized 10% rate from the first quarter to $5.30 billion, and its net interest margin improved by 8 basis points to 3.05% from the previous quarter.

Central Pacific kept its quarterly dividend at 26 cents a share. It will be payable Sept. 15 to shareholders of record at the close of business Aug. 31.

Central Pacific’s stock closed Tuesday up 3 cents at $23.06 ahead of today’s release of earnings.