Press Release

HONOLULU, Oct. 28, 2020 /PRNewswire/ -- Central Pacific Financial Corp. (NYSE: CPF) (the "Company"), parent company of Central Pacific Bank, today reported net income in the third quarter of 2020 of $6.9 million, or fully diluted earnings per share ("EPS") of $0.24, compared to net income in the third quarter of 2019 of $14.6 million, or EPS of $0.51, and net income in the second quarter of 2020 of $9.9 million, or EPS of $0.35. Our operating results continue to be impacted by a higher provision for credit loss expense that was driven by the economic forecast under the current COVID-19 pandemic. During the third quarter of 2020, the Company recorded a provision for credit loss expense of $14.7 million, compared to $1.5 million in the third quarter of 2019 and $10.6 million in the second quarter of 2020.

"Central Pacific Financial Corp. continues to perform well with solid pre-tax, pre-provision earnings, strong mortgage banking income and the achievement of our RISE2020 milestones on digital banking," said Paul Yonamine, Chairman and Chief Executive Officer.

"We are actively managing the risks related to the COVID-19 pandemic, including building our credit loss reserves and raising Tier 2 capital through a recent issuance of subordinated debt. The Company is well positioned to continue to be a source of strength and liquidity for our customers, employees and shareholders as we all navigate this difficult economic environment," said Catherine Ngo, President.

On October 20, 2020, the Company completed a $55 million private placement of ten-year fixed-to-floating rate subordinated notes, which will be used to support regulatory capital ratios and for general corporate purposes. The Notes bear a fixed interest rate of 4.75% for the first five years and will reset quarterly thereafter for the remaining five years to the then current three-month Secured Overnight Financing Rate, as published by the Federal Reserve Bank of New York, plus 456 basis points.

On October 27, 2020, the Company's Board of Directors declared a quarterly cash dividend of $0.23 per share on its outstanding common shares. The dividend will be payable on December 15, 2020 to shareholders of record at the close of business on November 30, 2020.

Earnings Highlights
Net interest income for the third quarter of 2020 was $49.1 million, compared to $45.6 million in the year-ago quarter and $49.3 million in the previous quarter. Net interest margin for the third quarter of 2020 was 3.19%, compared to 3.30% in the year-ago quarter and 3.26% in the previous quarter. The increase in net interest income from the year-ago quarter was primarily due to growth in the loan portfolio, including loans originated under the PPP program, combined with lower rates paid on interest-bearing liabilities, partially offset by lower yields earned on the loan and investment securities portfolios. Net interest income for the third quarter of 2020 included $3.4 million in PPP net interest income and net loan fees, which are accreted into income over the term of the loans and accelerated when the loans are forgiven or paid-off. No PPP loans were forgiven during the third quarter. The declines in net interest margin, yields earned on the loans and investment securities portfolios and rates paid on interest-bearing liabilities from the year-ago and sequential quarters are primarily attributable to the historically low interest rate environment. During the third quarter of 2020, the Company had an average PPP loan balance of $544.7 million, which earned approximately 2.48% in net interest income and net loan fees. PPP loans accounted for approximately 2 basis points of the sequential quarter decrease in net interest margin.

Other operating income for the third quarter of 2020 totaled $11.6 million, which increased from $10.3 million in the year-ago quarter and $10.7 million in the previous quarter, primarily due to strong mortgage banking activity. Mortgage banking income increased by $2.4 million and $0.8 million from the year-ago and previous quarters, respectively. The increase in other operating income from the year-ago quarter was also attributable to higher income from bank-owned life insurance of $0.5 million. These increases were partially offset by lower service charges on deposit accounts of $0.7 million and lower other service charges and fees of $0.5 million, which were primarily attributable to lower transactional activity due to the pandemic. The Company also sold certain investment securities during the quarter at a loss of $0.4 million. The increase in other operating income from the previous quarter was primarily due to the aforementioned higher mortgage banking income, combined with higher other service charges and fees of $0.4 million and higher service charges on deposit accounts of $0.3 million. During the quarter, we reinstated certain service charges that were temporarily suspended in the previous quarter due to the pandemic. These increases were partially offset by the aforementioned loss on the sale of investment securities, combined with lower income from bank-owned life insurance of $0.2 million. The changes in income from bank-owned life insurance compared to the year-ago and previous quarters were primarily attributable to volatility in the equity markets.

Other operating expense for the third quarter of 2020 totaled $37.0 million, which increased from $34.9 million in the year-ago quarter and $36.4 million in the previous quarter. The increase from the year-ago quarter was primarily due to higher FDIC insurance assessment of $0.6 million (included in other), higher computer software expense of $0.4 million, and higher legal and professional services and advertising expenses of $0.3 million each. In addition, the Company recorded a provision for off-balance sheet credit exposures of $0.2 million, compared to a credit for off-balance sheet credit exposures of $0.5 million in the year-ago quarter. The Company also recognized costs totaling $0.3 million (included in other) related to the consolidation of three in-store branches with other existing nearby branches. These in-store branches had a small square footage which did not allow for adequate social distancing and have been closed since March 2020 due to the COVID-19 pandemic. A traditional branch is expected to be consolidated during the fourth quarter of 2020. The increase in other operating expense from the previous quarter was primarily due to higher equipment expense of $0.2 million and higher net occupancy expense of $0.2 million. These increases were partially offset by a lower provision for off-balance sheet credit exposures of $0.4 million and a lower net change in the directors' deferred compensation plan obligation of $0.3 million.

The efficiency ratio for the third quarter of 2020 was 60.93%, compared to 62.48% in the year-ago quarter and 60.76% in the previous quarter.

In the third quarter of 2020, the Company recorded income tax expense of $2.2 million, compared to $4.9 million in the year-ago quarter and $3.0 million in the previous quarter. The effective tax rate for the third quarter of 2020 was 24.3%, compared to 25.2% in the year-ago quarter and 23.0% in the previous quarter.

Balance Sheet Highlights
Total assets at September 30, 2020 of $6.65 billion increased by $671.4 million, or 11.2% from September 30, 2019, and increased by $15.2 million, or 0.2% from June 30, 2020.

Total loans at September 30, 2020 of $5.03 billion increased by $662.8 million, or 15.2%, and $27.2 million, or 0.5% from September 30, 2019 and June 30, 2020, respectively. The year-over-year increase in total loans was driven by the origination of PPP loans totaling $528.6 million, net of deferred fees and costs, combined with increases in residential mortgage loans of $121.3 million, home equity loans of $58.5 million, construction loans of $21.6 million and commercial mortgage loans of $7.4 million, partially offset by decreases in the other commercial and consumer loan portfolios of $48.5 million and $26.0 million, respectively. The sequential quarter increase in total loans was primarily due to increases in home equity loans of $23.1 million, residential mortgage loans of $22.5 million, construction loans of $14.7 million and commercial mortgage loans of $11.1 million, partially offset by decreases in the consumer and other commercial loan portfolios of $26.6 million and $19.8 million, respectively. During the third quarter of 2020, the Company transferred $6.6 million in commercial and commercial real estate loans to a single borrower to loans-held-for-sale. In October 2020, the Company sold the loans at a loss of less than $0.1 million.

Total deposits at September 30, 2020 of $5.68 billion increased by $641.3 million, or 12.7% from September 30, 2019, and decreased by $115.8 million, or 2.0% from June 30, 2020. The deposit of PPP funds into both new and existing deposit accounts largely contributed to the increase in total deposits year-over-year. The sequential quarter decrease in total deposits was primarily attributable to the decreases in noninterest-bearing demand deposits of $88.5 million, savings and money market deposits of $64.6 million and total time deposits of $9.2 million, as some PPP funds were spent by clients during the current quarter. The decrease was offset by an increase in interest-bearing demand deposits of $46.6 million. Core deposits, which include demand deposits, savings and money market deposits, and time deposits less than $100,000, totaled $4.91 billion at September 30, 2020. This represents an increase of $758.1 million, or 18.2% from September 30, 2019, and a decrease of $109.2 million, or 2.2% from June 30, 2020. The Company's loan-to-deposit ratio was 88.6% at September 30, 2020, compared to 86.7% at September 30, 2019 and 86.4% at June 30, 2020.

Asset Quality
Nonperforming assets at September 30, 2020 totaled $13.2 million, or 0.20% of total assets, compared to $1.4 million, or 0.02% of total assets at September 30, 2019, and $4.7 million, or 0.07% of total assets at June 30, 2020. During the third quarter of 2020, the Company had $8.4 million in net additions to nonperforming assets, of which $7.6 million were to two borrowers consisting of commercial and commercial real estate loans that the Company believes are well-secured.

Loans delinquent for 90 days or more still accruing interest totaled $0.9 million at September 30, 2020, compared to $0.2 million and $1.2 million at September 30, 2019 and June 30, 2020, respectively.

Loans on payment forbearance or deferrals granted to borrowers impacted by the COVID-19 pandemic declined significantly to $290.8 million or 5.78% of the total loan portfolio (or 6.46% excluding PPP loans), as of September 30, 2020, compared to $567.9 million or 11.35% of the total loan portfolio (or 12.68% excluding PPP loans), as of June 30, 2020.

Net charge-offs in the third quarter of 2020 totaled $1.3 million, compared to net charge-offs of $1.6 million in the year-ago quarter, and net charge-offs of $2.9 million in the previous quarter.

In the third quarter of 2020, the Company recorded a provision for credit losses on loans of $14.7 million, compared to a provision of $1.5 million in the year-ago quarter and a provision of $10.6 million in the previous quarter. The higher provision for credit losses from the year-ago and sequential quarters was driven by models that utilize Hawaii-specific economic projections from a third party economic forecast. The allowance for credit losses, as a percentage of total loans at September 30, 2020 was 1.60%, compared to 1.10% at September 30, 2019 and 1.35% at June 30, 2020. Excluding the PPP loans, the allowance for credit losses, as a percentage of total loans at September 30, 2020 was 1.79%, compared to 1.50% at June 30, 2020.

Capital
Total shareholders' equity was $543.9 million at September 30, 2020, compared to $525.2 million and $544.3 million at September 30, 2019 and June 30, 2020, respectively.

The Company maintained its strong capital position and its capital ratios continue to exceed the levels required to be considered a "well-capitalized" institution for regulatory purposes under Basel III. At September 30, 2020, the Company's leverage capital, tier 1 risk-based capital, total risk-based capital, and common equity tier 1 ratios were 8.8%, 12.8%, 13.9%, and 11.6%, respectively, compared to 8.9%, 12.5%, 13.6%, and 11.4%, respectively, at June 30, 2020.

On October 20, 2020, the Company completed a $55 million private placement of ten-year fixed-to-floating rate subordinated notes, which have been structured to qualify initially as tier 2 capital for the Company for regulatory capital purposes.

Non-GAAP Financial Measures
This press release contains certain references to financial measures that have been adjusted to exclude certain expenses and other specified items. These financial measures differ from comparable measures calculated and presented in accordance with accounting principles generally accepted in the United States of America ("GAAP") in that they exclude unusual or non-recurring charges, losses, credits or gains. This press release identifies the specific items excluded from the comparable GAAP financial measure in the calculation of each non-GAAP financial measure. Management believes that financial presentations excluding the impact of these items provide useful supplemental information that is important to a proper understanding of the Company's core business results by investors. These presentations should not be viewed as a substitute for results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures presented by other companies.

Conference Call
The Company's management will host a conference call today at 1:00 p.m. Eastern Time (7:00 a.m. Hawaii Time) to discuss the quarterly results. Individuals are encouraged to listen to the live webcast of the presentation by visiting the investor relations page of the Company's website at http://ir.centralpacificbank.com. Alternatively, investors may participate in the live call by dialing 1-877-505-7644. A playback of the call will be available through November 28, 2020 by dialing 1-877-344-7529 (passcode: 10149191) and on the Company's website. Information which may be discussed in the conference call is provided in an earnings supplement presentation on the Company's website at http://ir.centralpacificbank.com.

About Central Pacific Financial Corp.
Central Pacific Financial Corp. is a Hawaii-based bank holding company with approximately $6.6 billion in assets.  Central Pacific Bank, its primary subsidiary, operates 32 branches (four of which remain temporarily closed to protect the health and well-being of the Company's employees and customers from COVID-19) and 75 ATMs in the state of Hawaii, as of September 30, 2020.  For additional information, please visit the Company's website at http://www.cpb.bank.

Forward-Looking Statements
This document may contain forward-looking statements concerning: projections of revenues, expenses, income or loss, earnings or loss per share, capital expenditures, the payment or nonpayment of dividends, capital position, credit losses, net interest margin or other financial items; 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; statements of future economic performance including anticipated performance results from our RISE2020 initiative; or any statements of the 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 statements or projections for a variety of reasons, including, but not limited to: the adverse effects of the COVID-19 pandemic virus on local, national and international economies, including, but not limited to, the adverse impact on tourism and construction in the State of Hawaii, our borrowers, customers, third-party contractors, vendors and employees as well as the effects of government programs and initiatives in response to COVID-19; the impact of our participation in the Paycheck Protection Program ("PPP") and fulfillment of government guarantees on our PPP loans; the 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 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, including COVID-19) 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" or 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; 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;  pandemic virus and disease, including COVID-19; 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 consequence 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 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 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. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Form 8-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 statements are made, or to reflect the occurrence of unanticipated events except as required by law.

The following table sets forth the components of other operating income - other for the periods indicated:

The following table sets forth the components of other operating expense - other for the periods indicated: