10-Q 1 a15-7140_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2015

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to

 

Commission file number 001-31567

 

 

CENTRAL PACIFIC FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

Hawaii

 

99-0212597

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

220 South King Street, Honolulu, Hawaii 96813

(Address of principal executive offices) (Zip Code)

 

(808) 544-0500

(Registrant’s telephone number, including area code)

 

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 x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The number of shares outstanding of registrant’s common stock, no par value, on April 28, 2015 was 31,537,681 shares.

 

 

 



Table of Contents

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

 

Table of Contents

 

Part I.

Financial Information

 

3

 

 

 

 

Item I.

Financial Statements (Unaudited)

 

 

 

 

 

 

 

Consolidated Balance Sheets
March 31, 2015 and December 31, 2014

 

4

 

 

 

 

 

Consolidated Statements of Income
Three months ended March 31, 2015 and 2014

 

5

 

 

 

 

 

Consolidated Statements of Comprehensive Income
Three months ended March 31, 2015 and 2014

 

6

 

 

 

 

 

Consolidated Statements of Changes in Equity
Three months ended March 31, 2015 and 2014

 

7

 

 

 

 

 

Consolidated Statements of Cash Flows
Three months ended March 31, 2015 and 2014

 

8

 

 

 

 

 

Notes to Consolidated Financial Statements

 

9

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

35

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

54

 

 

 

 

Item 4.

Controls and Procedures

 

55

 

 

 

 

Part II.

Other Information

 

56

 

 

 

 

Item 1A.

Risk Factors

 

56

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

56

 

 

 

 

Item 6.

Exhibits

 

57

 

 

 

 

Signatures

 

 

58

 

 

 

 

Exhibit Index

 

 

59

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Forward-Looking Statements

 

This document may contain forward-looking statements concerning projections of revenues, income/loss, earnings/loss per share, capital expenditures, dividends, capital structure, net interest margin or other financial items, concerning plans and objectives of management for future operations, concerning future economic performance, or concerning any of the assumptions underlying or relating to any of the foregoing. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts, and may include the words “believes,” “plans,” “intends,” “expects,” “anticipates,” “forecasts,” “hopes,” “should,” “estimates” or words of similar meaning. 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 materially differ from projections for a variety of reasons, to include, but not be limited to: an increase in inventory or adverse conditions in the Hawaii and California real estate markets and deterioration in the construction industry; adverse changes in the financial performance and/or condition of our borrowers and, as a result, increased loan delinquency rates, deterioration in asset quality, and losses in our loan portfolio; the impact of local, national, and international economies and events (including natural disasters such as wildfires, tsunamis, storms and earthquakes) on the Company’s business and operations and on tourism, the military, and other major industries operating within the Hawaii market and any other markets in which the Company does business; deterioration or malaise in domestic economic conditions, including any further 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, changes in capital standards, other regulatory reform, including but not limited to regulations promulgated by the Consumer Financial Protection Bureau, government-sponsored enterprise reform, and any related rules and regulations on our business operations and competitiveness; the costs and effects of legal and regulatory developments, including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews; 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; inflation, interest rate, securities market and monetary fluctuations; negative trends in our market capitalization and adverse changes in the price of the Company’s common 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; technological changes; 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 and other accounting standard setters; our ability to attract and retain key personnel; changes in our organization, compensation and benefit plans; and our success at managing the risks involved in the foregoing items. For further information on factors that could cause actual results to materially differ from projections, please see the Company’s publicly available Securities and Exchange Commission filings, including the Company’s Form 10-K for the last fiscal year and, in particular, the discussion of “Risk Factors” set forth therein. The Company does not update any of its forward-looking statements except as required by law.

 

3



Table of Contents

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(Dollars in thousands)

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

74,743

 

$

72,316

 

Interest-bearing deposits in other banks

 

10,478

 

13,691

 

Investment securities:

 

 

 

 

 

Available for sale, at fair value

 

1,298,487

 

1,229,018

 

Held to maturity, at amortized cost (fair value of $256,357 at March 31, 2015 and $235,597 at December 31, 2014)

 

255,592

 

238,287

 

Total investment securities

 

1,554,079

 

1,467,305

 

 

 

 

 

 

 

Loans held for sale

 

7,206

 

9,683

 

 

 

 

 

 

 

Loans and leases

 

2,967,772

 

2,932,198

 

Allowance for loan and lease losses

 

(71,433

)

(74,040

)

Net loans and leases

 

2,896,339

 

2,858,158

 

 

 

 

 

 

 

Premises and equipment, net

 

48,768

 

49,214

 

Accrued interest receivable

 

13,420

 

13,584

 

Investment in unconsolidated subsidiaries

 

6,840

 

7,246

 

Other real estate

 

3,349

 

2,948

 

Other intangible assets

 

28,230

 

29,697

 

Bank-owned life insurance

 

153,251

 

152,283

 

Federal Home Loan Bank stock

 

43,442

 

43,932

 

Other assets

 

125,780

 

132,930

 

Total assets

 

$

4,965,925

 

$

4,852,987

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest-bearing demand

 

$

1,042,781

 

$

1,034,146

 

Interest-bearing demand

 

806,555

 

788,272

 

Savings and money market

 

1,247,266

 

1,242,598

 

Time

 

1,092,040

 

1,045,284

 

Total deposits

 

4,188,642

 

4,110,300

 

 

 

 

 

 

 

Short-term borrowings

 

70,000

 

38,000

 

Long-term debt

 

92,785

 

92,785

 

Other liabilities

 

41,573

 

43,861

 

Total liabilities

 

4,393,000

 

4,284,946

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Preferred stock, no par value, authorized 1,100,000 shares, issued and outstanding none at March 31, 2015 and December 31, 2014, respectively

 

 

 

Common stock, no par value, authorized 185,000,000 shares, issued and outstanding 34,797,133 and 35,233,674 shares at March 31, 2015 and December 31, 2014, respectively

 

632,867

 

642,205

 

Surplus

 

80,545

 

79,716

 

Accumulated deficit

 

(150,815

)

(157,039

)

Accumulated other comprehensive income

 

10,328

 

3,159

 

Total equity

 

572,925

 

568,041

 

Total liabilities and equity

 

$

4,965,925

 

$

4,852,987

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Amounts in thousands, except per share data)

 

2015

 

2014

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

Interest and fees on loans and leases

 

$

28,602

 

$

26,883

 

Interest and dividends on investment securities:

 

 

 

 

 

Taxable interest

 

8,150

 

9,496

 

Tax-exempt interest

 

998

 

994

 

Dividends

 

9

 

1

 

Interest on deposits in other banks

 

11

 

7

 

Dividends on Federal Home Loan Bank stock

 

11

 

12

 

Total interest income

 

37,781

 

37,393

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

Interest on deposits:

 

 

 

 

 

Demand

 

95

 

90

 

Savings and money market

 

223

 

224

 

Time

 

548

 

630

 

Interest on short-term borrowings

 

43

 

17

 

Interest on long-term debt

 

637

 

636

 

Total interest expense

 

1,546

 

1,597

 

 

 

 

 

 

 

Net interest income

 

36,235

 

35,796

 

Provision (credit) for loan and lease losses

 

(2,747

)

(1,316

)

Net interest income after credit for loan and lease losses

 

38,982

 

37,112

 

 

 

 

 

 

 

Other operating income:

 

 

 

 

 

Service charges on deposit accounts

 

1,968

 

1,993

 

Loan servicing fees

 

1,423

 

1,444

 

Other service charges and fees

 

3,105

 

2,943

 

Income from fiduciary activities

 

834

 

1,062

 

Equity in earnings of unconsolidated subsidiaries

 

96

 

52

 

Fees on foreign exchange

 

128

 

114

 

Income from bank-owned life insurance

 

674

 

670

 

Loan placement fees

 

147

 

143

 

Net gain on sales of residential loans

 

1,594

 

1,239

 

Net gain on sales of foreclosed assets

 

33

 

162

 

Other

 

1,188

 

322

 

Total other operating income

 

11,190

 

10,144

 

 

 

 

 

 

 

Other operating expense:

 

 

 

 

 

Salaries and employee benefits

 

17,165

 

17,434

 

Net occupancy

 

3,501

 

3,590

 

Equipment

 

909

 

796

 

Amortization of other intangible assets

 

2,105

 

1,240

 

Communication expense

 

824

 

894

 

Legal and professional services

 

2,219

 

1,812

 

Computer software expense

 

2,096

 

1,358

 

Advertising expense

 

635

 

686

 

Foreclosed asset expense

 

72

 

105

 

Other

 

4,492

 

4,015

 

Total other operating expense

 

34,018

 

31,930

 

 

 

 

 

 

 

Income before income taxes

 

16,154

 

15,326

 

Income tax expense

 

5,759

 

5,518

 

Net income

 

$

10,395

 

$

9,808

 

 

 

 

 

 

 

Per common share data:

 

 

 

 

 

Basic earnings per share

 

$

0.30

 

$

0.23

 

Diluted earnings per share

 

0.29

 

0.23

 

Cash dividends declared

 

0.12

 

0.08

 

 

 

 

 

 

 

Shares used in computation:

 

 

 

 

 

Basic shares

 

34,827

 

41,915

 

Diluted shares

 

35,479

 

42,477

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

Net income

 

$

10,395

 

$

9,808

 

Other comprehensive income, net of tax

 

 

 

 

 

Net change in unrealized gain on investment securities

 

6,909

 

9,576

 

Minimum pension liability adjustment

 

260

 

187

 

Other comprehensive income, net of tax

 

7,169

 

9,763

 

Comprehensive income

 

$

17,564

 

$

19,571

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

Other

 

Non-

 

 

 

 

 

Shares

 

Preferred

 

Common

 

 

 

Accumulated

 

Comprehensive

 

Controlling

 

 

 

 

 

Outstanding

 

Stock

 

Stock

 

Surplus

 

Deficit

 

Income (Loss)

 

Interests

 

Total

 

 

 

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

35,233,674

 

$

 

$

642,205

 

$

79,716

 

$

(157,039

)

$

3,159

 

$

 

$

568,041

 

Net income

 

 

 

 

 

 

10,395

 

 

 

10,395

 

Other comprehensive income

 

 

 

 

 

 

7,169

 

 

7,169

 

Cash dividends ($0.12 per share)

 

 

 

 

 

(4,171

)

 

 

(4,171

)

12,559 net shares of common stock purchased by directors’ deferred compensation plan

 

 

 

(50

)

 

 

 

 

(50

)

473,829 shares of common stock repurchased and other related costs

 

(473,829

)

 

(9,288

)

 

 

 

 

(9,288

)

Share-based compensation

 

37,288

 

 

 

 

829

 

 

 

 

829

 

Non-controlling interests

 

 

 

 

 

 

 

 

 

Balance at March 31, 2015

 

34,797,133

 

$

 

$

632,867

 

$

80,545

 

$

(150,815

)

$

10,328

 

$

 

$

572,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

42,107,633

 

$

 

$

784,547

 

$

75,498

 

$

(184,087

)

$

(15,845

)

$

61

 

$

660,174

 

Net income

 

 

 

 

 

9,808

 

 

 

9,808

 

Other comprehensive income

 

 

 

 

 

 

9,763

 

 

9,763

 

Cash dividends ($0.08 per share)

 

 

 

 

 

(3,370

)

 

 

(3,370

)

3,368 net shares of common stock sold by directors’ deferred compensation plan

 

 

 

34

 

 

 

 

 

34

 

3,405,888 shares of common stock repurchased and other related costs

 

(3,405,888

)

 

(68,873

)

 

 

 

 

(68,873

)

Share-based compensation

 

21,505

 

 

 

928

 

 

 

 

928

 

Non-controlling interests

 

 

 

 

 

 

 

 

 

Balance at March 31, 2014

 

38,723,250

 

$

 

$

715,708

 

$

76,426

 

$

(177,649

)

$

(6,082

)

$

61

 

$

608,464

 

 

See accompanying notes to consolidated financial statements.

 

7



Table of Contents

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(Dollars in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

10,395

 

$

9,808

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision (credit) for loan and lease losses

 

(2,747

)

(1,316

)

Depreciation and amortization

 

1,479

 

1,463

 

Write down of other real estate, net of gain on sale

 

 

(65

)

Amortization of other intangible assets

 

2,105

 

1,240

 

Net amortization of investment securities

 

1,918

 

2,191

 

Share-based compensation

 

829

 

928

 

Net gain on sales of residential loans

 

(1,594

)

(1,239

)

Proceeds from sales of loans held for sale

 

96,788

 

84,989

 

Originations of loans held for sale

 

(92,717

)

(82,627

)

Equity in earnings of unconsolidated subsidiaries

 

(96

)

(52

)

Increase in cash surrender value of bank-owned life insurance

 

(968

)

(670

)

Deferred income taxes

 

5,339

 

5,535

 

Net change in other assets and liabilities

 

(5,020

)

(1,169

)

Net cash provided by operating activities

 

15,711

 

19,016

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from maturities of and calls on investment securities available for sale

 

35,942

 

32,639

 

Purchases of investment securities available for sale

 

(95,716

)

(18,923

)

Proceeds from maturities of and calls on investment securities held to maturity

 

4,807

 

3,171

 

Purchases of investment securities held to maturity

 

(22,249

)

 

Net loan originations

 

(36,803

)

(66,567

)

Proceeds from sale of other real estate

 

968

 

771

 

Purchases of premises and equipment

 

(1,033

)

(416

)

Distributions from unconsolidated subsidiaries

 

214

 

354

 

Contributions to unconsolidated subsidiaries

 

 

(60

)

Proceeds from redemption of FHLB stock

 

490

 

601

 

Net cash used in investing activities

 

(113,380

)

(48,430

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

78,342

 

49,594

 

Repayments of long-term debt

 

 

(4

)

Net increase in short-term borrowings

 

32,000

 

93,985

 

Cash dividends paid on common stock

 

(4,171

)

(3,370

)

Repurchases of common stock and other related costs

 

(9,288

)

(68,873

)

Net cash provided by financing activities

 

96,883

 

71,332

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(786

)

41,918

 

Cash and cash equivalents at beginning of period

 

86,007

 

49,348

 

Cash and cash equivalents at end of period

 

$

85,221

 

$

91,266

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

1,599

 

$

1,654

 

Income taxes

 

100

 

 

Cash received during the period for:

 

 

 

 

 

Income taxes

 

 

79

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

Net change in common stock held by directors’ deferred compensation plan

 

$

50

 

$

(34

)

Net reclassification of loans to other real estate

 

1,369

 

372

 

 

See accompanying notes to consolidated financial statements.

 

8



Table of Contents

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.   BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements of Central Pacific Financial Corp. and Subsidiaries (herein referred to as the “Company,” “we,” “us” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements and notes should be read in conjunction with the Company’s consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended December 31, 2014. In the opinion of management, all adjustments necessary for a fair presentation have been made and include all normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.

 

Certain prior period amounts in the consolidated financial statements and the notes thereto have been reclassified to conform to the current period presentation. Such reclassifications had no effect on net income or shareholders’ equity for any periods presented.

 

2.   RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-01, “Investments — Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects.” The provisions of ASU 2014-01 provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The ASU permits entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The Company did not elect the use of the proportional amortization method of ASU 2014-01 on January 1, 2015 which has no material impact on our consolidated financial statements.

 

In January 2014, the FASB issued ASU 2014-04, “Receivables — Troubled Debt Restructurings by Creditors — Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The provisions of ASU 2014-04 provide guidance on when an in substance repossession or foreclosure occurs, which is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized. Additionally, the amendments in this update require interim and annual disclosure of both: 1) the amount of foreclosed residential real estate property held by the creditor and 2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The Company adopted the prospective transition method of ASU 2014-04 on January 1, 2015 and the adoption did not have a material impact on our consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-11, “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” ASU 2014-11 requires two accounting changes. First, the amendments change the accounting for repurchase-to-maturity transactions to secured borrowings. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. ASU 2014-11 requires disclosures for certain transactions comprising a transfer of a financial asset accounted for as a sale, and an agreement with the same transferee entered into in contemplation of the initial transfer which results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. ASU 2014-11 also requires additional disclosures for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. The adoption of ASU 2014-11 on January 1, 2015 did not have a material impact on our consolidated financial statements.

 

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Table of Contents

 

In August 2014, the FASB issued ASU 2014-14, “Receivables — Troubled Debt Restructurings by Creditors Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.”  ASU 2014-14 requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: 1) the loan has a government guarantee that is not separable from the loan before foreclosure; 2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and 3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.  Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance expected to be recovered from the guarantor. The adoption of ASU 2014-14 on January 1, 2015 did not have a material impact on our consolidated financial statements.

 

3.   INVESTMENT SECURITIES

 

A summary of available for sale and held to maturity investment securities are as follows:

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(Dollars in thousands)

 

At March 31, 2015:

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

Mortgage-backed securities - U.S. Government sponsored entities

 

$

255,592

 

$

1,446

 

$

(681

)

$

256,357

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

189,961

 

$

3,380

 

$

(863

)

$

192,478

 

Corporate securities

 

98,847

 

2,480

 

 

101,327

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

U.S. Government sponsored entities

 

776,750

 

12,912

 

(2,616

)

787,046

 

Non-agency collateralized mortgage obligations

 

208,455

 

8,412

 

(81

)

216,786

 

Other

 

747

 

103

 

 

850

 

Total

 

$

1,274,760

 

$

27,287

 

$

(3,560

)

$

1,298,487

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2014:

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

Mortgage-backed securities - U.S. Government sponsored entities

 

$

238,287

 

$

196

 

$

(2,886

)

$

235,597

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

191,280

 

$

2,054

 

$

(1,689

)

$

191,645

 

Corporate securities

 

99,237

 

1,492

 

(125

)

100,604

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

U.S. Government sponsored entities

 

744,527

 

11,064

 

(4,033

)

751,558

 

Non-agency collateralized mortgage obligations

 

180,905

 

4,456

 

(1,027

)

184,334

 

Other

 

757

 

120

 

 

877

 

Total

 

$

1,216,706

 

$

19,186

 

$

(6,874

)

$

1,229,018

 

 

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Table of Contents

 

The amortized cost and estimated fair value of investment securities at March 31, 2015 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

March 31, 2015

 

 

 

Amortized
Cost

 

Estimated Fair
Value

 

 

 

(Dollars in thousands)

 

Held to Maturity

 

 

 

 

 

Mortage-backed securities

 

$

255,592

 

$

256,357

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

Due in one year or less

 

$

 

$

 

Due after one year through five years

 

70,129

 

71,798

 

Due after five years through ten years

 

103,461

 

105,207

 

Due after ten years

 

115,218

 

116,800

 

Mortage-backed securities

 

985,205

 

1,003,832

 

Other

 

747

 

850

 

Total

 

$

1,274,760

 

$

1,298,487

 

 

We did not sell any available for sale securities during the first quarter of 2015 and 2014.

 

Investment securities of $944.4 million and $900.5 million at March 31, 2015 and December 31, 2014, respectively, were pledged to secure public funds on deposit and other long-term and short-term borrowings.

 

Provided below is a summary of the 121 and 195 investment securities which were in an unrealized loss position at March 31, 2015 and December 31, 2014, respectively.

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

Description of Securities

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

 

 

(Dollars in thousands)

 

At March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

34,821

 

$

(257

)

$

23,447

 

$

(606

)

$

58,268

 

$

(863

)

Corporate securities

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored entities

 

143,680

 

(1,298

)

176,086

 

(1,999

)

319,766

 

(3,297

)

Non-agency collateralized mortgage obligations

 

31,664

 

(81

)

 

 

31,664

 

(81

)

Total temporarily impaired securities

 

$

210,165

 

$

(1,636

)

$

199,533

 

$

(2,605

)

$

409,698

 

$

(4,241

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

23,591

 

$

(145

)

$

68,622

 

$

(1,544

)

$

92,213

 

$

(1,689

)

Corporate securities

 

23,938

 

(125

)

 

 

23,938

 

(125

)

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored entities

 

119,210

 

(521

)

403,926

 

(6,398

)

523,136

 

(6,919

)

Non-agency collateralized mortgage obligations

 

20,857

 

(100

)

47,539

 

(927

)

68,396

 

(1,027

)

Total temporarily impaired securities

 

$

187,596

 

$

(891

)

$

520,087

 

$

(8,869

)

$

707,683

 

$

(9,760

)

 

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Table of Contents

 

Other-Than-Temporary Impairment (“OTTI”)

 

Unrealized losses for all investment securities are reviewed to determine whether the losses are deemed “other-than-temporary.” Investment securities are evaluated for OTTI on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value below amortized cost is other-than-temporary. In conducting this assessment, we evaluate a number of factors including, but not limited to:

 

·                  The length of time and the extent to which fair value has been less than the amortized cost basis;

·                  Adverse conditions specifically related to the security, an industry, or a geographic area;

·                  The historical and implied volatility of the fair value of the security;

·                  The payment structure of the debt security and the likelihood of the issuer being able to make payments;

·                  Failure of the issuer to make scheduled interest or principal payments;

·                  Any rating changes by a rating agency; and

·                  Recoveries or additional declines in fair value subsequent to the balance sheet date.

 

The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized for anticipated credit losses.

 

Because we have no intent to sell securities in an unrealized loss position and it is not more likely than not that we will be required to sell such securities before recovery of its amortized cost basis, we do not consider our investments to be other-than-temporarily impaired.

 

4.   LOANS AND LEASES

 

Loans and leases, excluding loans held for sale, consisted of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

$

500,251

 

$

463,070

 

Real estate:

 

 

 

 

 

Construction

 

113,137

 

115,023

 

Mortgage - residential

 

1,298,076

 

1,280,089

 

Mortgage - commercial

 

702,113

 

704,099

 

Consumer

 

350,344

 

365,662

 

Leases

 

2,885

 

3,140

 

 

 

2,966,806

 

2,931,083

 

Net deferred costs

 

966

 

1,115

 

Total loans and leases

 

$

2,967,772

 

$

2,932,198

 

 

During the three months ended March 31, 2015, we transferred the collateral in three portfolio loans with a carrying value of $1.4 million to other real estate. We did not transfer any portfolio loans to the held-for-sale category and no portfolio loans were sold or purchased during the three months ended March 31, 2015.

 

During the three months ended March 31, 2014, we transferred one loan with a carrying value of $0.4 million to other real estate. We did not transfer any portfolio loans to the held-for-sale category and no portfolio loans were sold or purchased during the three months ended March 31, 2014.

 

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Table of Contents

 

Impaired Loans

 

The following table presents by class, the balance in the allowance for loan and lease losses and the recorded investment in loans and leases based on the Company’s impairment measurement method as of March 31, 2015 and December 31, 2014:

 

 

 

Commercial,

 

Real Estate

 

 

 

 

 

 

 

 

 

Financial &
Agricultural

 

Construction

 

Mortgage -
 Residential

 

Mortgage -
Commercial

 

Consumer

 

Leases

 

Total

 

 

 

(Dollars in thousands)

 

March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

772

 

$

 

$

 

$

 

$

 

$

 

$

772

 

Collectively evaluated for impairment

 

8,019

 

14,305

 

17,057

 

20,161

 

7,119

 

 

66,661

 

 

 

 8,791

 

14,305

 

17,057

 

20,161

 

7,119

 

 

67,433

 

Unallocated

 

 

 

 

 

 

 

 

 

 

 

 

 

4,000

 

Total ending balance

 

$

8,791

 

$

14,305

 

$

17,057

 

$

20,161

 

$

7,119

 

$

 

$

71,433

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

13,727

 

$

4,606

 

$

28,514

 

$

22,601

 

$

 

$

 

$

69,448

 

Collectively evaluated for impairment

 

486,524

 

108,531

 

1,269,562

 

679,512

 

350,344

 

2,885

 

2,897,358

 

 

 

 500,251

 

113,137

 

1,298,076

 

702,113

 

350,344

 

2,885

 

2,966,806

 

Net deferred costs (income)

 

432

 

(416

)

2,228

 

(857

)

(421

)

 

966

 

Total ending balance

 

$

500,683

 

$

112,721

 

$

1,300,304

 

$

701,256

 

$

349,923

 

$

2,885

 

$

2,967,772

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

1,533

 

$

 

$

 

$

 

$

 

$

 

$

1,533

 

Collectively evaluated for impairment

 

7,421

 

14,969

 

17,927

 

20,869

 

7,314

 

7

 

68,507

 

 

 

 8,954

 

14,969

 

17,927

 

20,869

 

7,314

 

7

 

70,040

 

Unallocated

 

 

 

 

 

 

 

 

 

 

 

 

 

4,000

 

Total ending balance

 

$

8,954

 

$

14,969

 

$

17,927

 

$

20,869

 

$

7,314

 

$

7

 

$

74,040

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

13,369

 

$

4,888

 

$

30,893

 

$

23,126

 

$

 

$

 

$

72,276

 

Collectively evaluated for impairment

 

449,701

 

110,135

 

1,249,196

 

680,973

 

365,662

 

3,140

 

2,858,807

 

 

 

 463,070

 

115,023

 

1,280,089

 

704,099

 

365,662

 

3,140

 

2,931,083

 

Net deferred costs (income)

 

693

 

(469

)

2,235

 

(826

)

(518

)

 

1,115

 

Total ending balance

 

$

463,763

 

$

114,554

 

$

1,282,324

 

$

703,273

 

$

365,144

 

$

3,140

 

$

2,932,198

 

 

13



Table of Contents

 

The following table presents by class, impaired loans as of March 31, 2015 and December 31, 2014:

 

 

 

Unpaid Principal 
Balance

 

Recorded 
Investment

 

Allowance 
Allocated

 

 

 

(Dollars in thousands)

 

March 31, 2015

 

 

 

 

 

 

 

Impaired loans with no related allowance recorded:

 

 

 

 

 

 

 

Commercial, financial & agricultural

 

$

5,178

 

$

3,599

 

$

 

Real estate:

 

 

 

 

 

 

 

Construction

 

10,951

 

4,606

 

 

Mortgage - residential

 

31,161

 

28,514

 

 

Mortgage - commercial

 

29,723

 

22,601

 

 

Total impaired loans with no related allowance recorded

 

77,013

 

59,320

 

 

Impaired loans with an allowance recorded:

 

 

 

 

 

 

 

Commercial, financial & agricultural

 

12,660

 

10,128

 

772

 

Total impaired loans with an allowance recorded

 

12,660

 

10,128

 

772

 

Total

 

$

89,673

 

$

69,448

 

$

772

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

Impaired loans with no related allowance recorded:

 

 

 

 

 

 

 

Commercial, financial & agricultural

 

$

738

 

$

738

 

$

 

Real estate:

 

 

 

 

 

 

 

Construction

 

11,275

 

4,888

 

 

Mortgage - residential

 

34,131

 

30,893

 

 

Mortgage - commercial

 

30,249

 

23,126

 

 

Total impaired loans with no related allowance recorded

 

76,393

 

59,645

 

 

Impaired loans with an allowance recorded:

 

 

 

 

 

 

 

Commercial, financial & agricultural

 

16,630

 

12,631

 

1,533

 

Total impaired loans with an allowance recorded

 

16,630

 

12,631

 

1,533

 

Total

 

$

93,023

 

$

72,276

 

$

1,533

 

 

The following table presents by class, the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2015 and 2014:

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

 

 

Average 
Recorded 
Investment

 

Interest Income 
Recognized

 

Average 
Recorded 
Investment

 

Interest Income 
Recognized

 

 

 

(Dollars in thousands)

 

Commercial, financial & agricultural

 

$

13,646

 

$

5

 

$

8,417

 

$

5

 

Real estate:

 

 

 

 

 

 

 

 

 

Construction

 

4,699

 

86

 

6,822

 

32

 

Mortgage - residential

 

28,954

 

1

 

36,407

 

163

 

Mortgage - commercial

 

22,751

 

164

 

16,045

 

39

 

Leases

 

 

 

 

 

 

 

Total

 

$

70,050

 

$

256

 

$

67,691

 

$

239

 

 

The Company had $3.9 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at March 31, 2015.

 

14



Table of Contents

 

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 table presents by class, the aging of the recorded investment in past due loans and leases as of March 31, 2015 and December 31, 2014:

 

 

 

Accruing 
Loans 30 - 59 
Days Past Due

 

Accruing 
Loans 60 - 89 
Days Past Due

 

Accruing Loans
Greater Than 90
Days Past Due

 

Nonaccrual
Loans

 

Total
Past Due and
 Nonaccrual

 

Loans and
Leases Not
Past Due

 

Total

 

 

 

(Dollars in thousands)

 

March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial & agricultural

 

$

290

 

$

225

 

$

 

$

13,377

 

$

13,892

 

$

486,791

 

$

500,683

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

146

 

146

 

112,575

 

112,721

 

Mortgage - residential

 

1,945

 

 

 

11,430

 

13,375

 

1,286,929

 

1,300,304

 

Mortgage - commercial

 

 

 

 

12,468

 

12,468

 

688,788

 

701,256

 

Consumer

 

895

 

212

 

5

 

 

1,112

 

348,811

 

349,923

 

Leases

 

 

 

 

 

 

2,885

 

2,885

 

Total

 

$

3,130

 

$

437

 

$

5

 

$

37,421

 

$

40,993

 

$

2,926,779

 

$

2,967,772

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial & agricultural

 

$

183

 

$

85

 

$

 

$

13,007

 

$

13,275

 

$

450,488

 

$

463,763

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

310

 

310

 

114,244

 

114,554

 

Mortgage - residential

 

3,078

 

379

 

 

13,048

 

16,505

 

1,265,819

 

1,282,324

 

Mortgage - commercial

 

68

 

 

 

12,722

 

12,790

 

690,483

 

703,273

 

Consumer

 

1,500

 

417

 

77

 

 

1,994

 

363,150

 

365,144

 

Leases

 

 

 

 

 

 

3,140

 

3,140

 

Total

 

$

4,829

 

$

881

 

$

77

 

$

39,087

 

$

44,874

 

$

2,887,324

 

$

2,932,198

 

 

Modifications

 

Troubled debt restructurings (“TDRs”) included in nonperforming assets at March 31, 2015 consisted of 33 Hawaii residential mortgage loans with a combined principal balance of $6.6 million, 11 Hawaii commercial mortgage loans to the same borrower with a combined principal balance of $0.9 million, a Hawaii commercial loan of $0.4 million, and a Hawaii construction and development loan of $0.04 million. Concessions made to the original contractual terms of these loans consisted primarily of the deferral of interest and/or principal payments due to deterioration in the borrowers’ financial condition. The principal balances on these TDRs had matured and/or were in default at the time of restructure and we have no commitments to lend additional funds to any of these borrowers. There were $19.8 million of TDRs still accruing interest at March 31, 2015, none of which were more than 90 days delinquent. At December 31, 2014, there were $29.5 million of TDRs still accruing interest, none of which were more than 90 days delinquent.

 

Some loans modified in a TDR may already be on nonaccrual status and partial 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 for loan and lease losses (the “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 for loan and lease losses (the “Provision”) and the Allowance during the three months ended March 31, 2015.

 

15



Table of Contents

 

The following table presents by class, information related to loans modified in a TDR during the three months ended March 31, 2015 and 2014.

 

 

 

Number 
of 
Contracts

 

Recorded
Investment
(as of Period End)

 

Increase 
in the 
Allowance

 

 

 

(Dollars in thousands)

 

Three Months Ended March 31, 2015

 

 

 

 

 

 

 

Real estate mortgage - commercial

 

11

 

$

910

 

$

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2014

 

 

 

 

 

 

 

Real estate mortgage - residential

 

9

 

$

613

 

$

 

 

The following table presents by class, loans modified as a TDR within the previous twelve months that subsequently defaulted during the three months ended March 31, 2015 and 2014.  The following table presents, by class, loans modified as a TDR within the previous twelve months that subsequently defaulted during the three months ended March 31, 2015 and 2014.

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

 

 

Number of 
Contracts

 

Recorded
Investment
 (as of Period End)

 

Number of 
Contracts

 

Recorded
Investment
 (as of Period End)

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage -construction

 

 

 

1

 

175

 

 

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